From blueprint to implementation: “Made in China 2025” is here to stay
Four years ago, China launched an ambitious plan to become a leading global technological superpower by 2049. Party and state leader Xi Jinping himself made the strategy “Made in China 2025” (MIC25) his signature project, reflecting how crucial it is to China’s future development. The strategy defines ten core industries, such as robotics, power equipment and next-generation IT, in which China wants to achieve major breakthroughs and create globally competitive companies.
Backed by industrial policy, massive financing, and subsidies in the hundreds of billions of US dollars, both state and private companies aim to build the technological foundations of the “China Dream,” a revitalization of the nation the Chinese Communist Party (CCP) has been promoting vigorously under Xi ahead of two important centenaries. For the party’s 100th birthday in 2021, China aims to become a moderately prosperous nation, while for the 100th anniversary of the People’s Republic of China in 2049, it aspires to become a “global manufacturing”, “cyber”, and “science and technology innovation superpower”.
In Western industrialized countries, China’s ambition has caused considerable irritation. Businesses and experts assessed that China was using unfair business practices and stealing technology in its efforts to become the world’s tech superpower. MIC25 has fueled concerns that foreign competitors would be pushed out of the lucrative Chinese market and face fierce competition in third markets, while China becomes not only more competitive in innovative sectors of its own domestic economy, but also as the market shares of Chinese companies abroad grow.
China has responded to this criticism from abroad by toning down its references to the plan. Beijing directed media coverage and official statements on MIC25 to be dialed back. Even the name “MIC25” and trigger words such as “self sufficiency rate”, considered indicative of China’s efforts to replace foreign products and tech, were largely dropped from policy papers. Xi did not mention “Made in China 2025” at this year’s Central Economic Work Conference, nor did Premier Li Keqiang in the Government Work Report for the annual National People’s Congress – two key events Chinese leaders traditionally use for setting strategic directives.
Dropping the rhetoric of MIC25 is strategic
This is a tactical move: China has not at all abandoned its economic – and strategic – goal of catching up with Western industrialized countries and gaining a competitive edge in high-tech and emerging technologies. Four years after its official launch, the strategy has moved from blueprint to implementation. The MIC25 program is here to stay and, just like the GDP targets of the past, represents the CCP’s official marching orders for an ambitious industrial upgrading. Advanced economies around the globe will have to face this strategic offensive.
In the last decade, China’s growth has continuously slowed. In 2018, the economy expanded by 6.6 percent, the weakest pace since 1990. The country also risks being caught in the middle-income trap, a problem many developing countries faced when rising wages eroded their comparative advantage, making them unable to compete with the productivity and innovation of advanced economies. For China’s leadership, there is no alternative to substantially upgrading its industrial and economic base. It has to keep growth levels between six and seven percent to fulfill its promise of prosperity and maintain its legitimacy.
MIC25 is rooted in East Asian development approaches and constantly adjusted to changing realities
To some extent, China and MIC25 follow the blueprint of Japan, South Korea, Singapore and Taiwan in breaking through the ceiling of low-tech and labor-intensive manufacturing that restricts the growth of developing and emerging economies. This “East Asian development model” is characterized by industrial policies that target strategic sectors, and a strong government that effectively aligns business interests (state-owned as well as private) with national targets. Using this template, China hopes to successfully overcome the middle- income trap and reduce its reliance on foreign technology.
Taking the Asian Tiger nations – South Korea, Taiwan, Singapore and Hong Kong – as an example, MIC25 aims to move more sophisticated parts of the value chain and high-caliber research and development into China. If successful, it would replicate achievements of the electronics industry in other high-tech sectors. In electronics and ICT, companies like Haier, Lenovo, Huawei, or DJI have today become international household names.
Because of its comprehensive and adaptive nature, the efficiency and success of MIC25 are difficult to evaluate. Since 2015, there have been setbacks due to planning mistakes that resulted in overcapacities and inefficient allocation of funds.
But its implementation gained momentum two years ago in response to a slowdown of GDP growth and the unfolding trade dispute with the United States. The strategy is constantly being adjusted to newly emerging challenges. By the end of 2018, the Chinese government had issued a total of 445 authoritative documents detailing implementation measures. Local governments continue to be highly active translating Beijing’s national vision into local directives.
Chinese policy makers have also constantly readjusted the ambitious targets for increasing domestic market share in certain innovative sectors. According to the Technology Roadmap 2017, specifying the implementation of MIC25, China wants to reach a 90 percent market share for new energy vehicles (NEV) and an 80 percent share for IT products for vehicles by 2025. Other targets include a certain number of patents per 100 million CNY in revenue, and the development of quality brands.
China is determined to dominate smart and emerging technologies
Chinese companies from more traditional high-tech sectors like aerospace, machine tools, or software engineering face the challenge of catching up with foreign competitors. They do not prioritize the development of top-notch products and global leadership and are content to overcome existing technology gaps by building up sufficient (as opposed to state-of-the-art) domestic expertise.
This is completely different for sectors crucial to the fourth industrial revolution currently unfolding worldwide. In smart manufacturing, digitalization and emerging technologies, China wants to leapfrog and leave foreign competitors behind. Technology gaps in these fields are more fluid, and China sees the opportunity to assume a leading position right from the start. The tables have already started to turn: Today, China is setting the pace in many emerging technologies – and watches as the world tries to keep pace.
China has forged ahead in fields such as next-generation IT (companies like Huawei and ZTE are set to gain global dominance in the roll-out of 5G networks), high-speed railways and ultra-high voltage electricity transmissions. More than 530 smart manufacturing industrial parks have popped up in China. Many focus on big data (21 percent), new materials (17 percent) and cloud computing (13 percent). Recently, green manufacturing and the creation of an “Industrial Internet” were given special emphasis in policy documents, underpinning President Xi Jinping’s vision of creating an “ecological civilization” that thrives on sustainable development.
China has also secured a strong position in areas such as Artificial Intelligence (AI), new energy and intelligent connected vehicles. The electric vehicle (EV) battery market is a powerful example of how quickly such dynamics may unfold and global value chains are absorbed. In 2017, seven of the top ten EV battery companies were Chinese, accounting for 53 percent of the global market share. The expansion of China’s battery manufacturing capacities is in the pipeline and could amount to three times that planned in the rest of the world.
Foreign tech dependency is China’s achilles heel
The Chinese government pushes the development of future technologies by providing financial support and by creating demand through, for instance, beneficial regulations or tax incentives to quickly turn ideas from niche industries into products suitable for mass consumption.
However, dependency on foreign core components is still a major bottleneck for China’s national tech ambitions. Its industry has considerable weaknesses in mastering foundational technologies essential for developing an advanced high-tech sector in certain areas, especially for the digital economy. This vulnerability is most evident in the fields of new materials, semiconductors and key components for advanced machinery and machine tools. Chinese tech firms have already experienced considerable difficulties when cut off from access to chips or other high-tech components from abroad, as US trade measures against companies like ZTE and Huawei recently illustrated.