By Catherine Bolgar
China’s latest Five-Year Plan, dubbed “Made in China 2025,” aims to modernize its manufacturing sector, transforming it into an innovative, high-quality, high-technology global competitor within a decade.
“China is losing international competitiveness right now,” says Helmut Wagner, professor of economics and president of the Center for East Asia Macroeconomic Studies at the University of Hagen, Germany. Foreign direct investment (FDI) has shifted to other countries, such as Vietnam and Cambodia, because Chinese wages have risen faster than productivity, he says.
To avoid the middle-income trap, China needs to advance from being the “world’s workbench,” making cheap products, to providing higher-level products and services that eventually can compete with those from highly developed countries, he says.
“So they will try to build an ambitious initiative to restructure the whole of Chinese manufacturing by 2025. They want to be in the mid-range by 2035 and the world’s leader in manufacturing by 2049,” the 100th anniversary of the founding of the People’s Republic, Prof. Wagner adds.
The gradual process reflects how much Chinese manufacturing needs to change if it wants to compete on quality and not just on price, the way Japan and then South Korea evolved to become high-quality manufacturing powerhouses.
China’s government identified 10 key manufacturing sectors to focus on: information technology; numerical control tools and robotics; aerospace equipment; ocean engineering and high-tech ships; railway equipment; energy-saving and new-energy vehicles; power equipment; new materials; biological medicine and medical devices; and agricultural machinery.
The government is taking a top-down approach to improve quality, Premier Li Keqiang said. “We will formulate high standards to spur the upgrade of ‘made in China’ goods,” Mr. Li was quoted as saying in one of China’s daily newspapers. The government also will funnel investment into the key sectors.
“They have always thrown money at this issue, and a lot of engineering talent as well,” says Scott Kennedy, director, Project on Chinese Business and Political Economy at the Center for Strategic and International Studies (CSIS), a Washington think tank.
If China were a small country, this would be an extremely risky way to try to approach things,” Dr. Kennedy says. “But their view is that ‘we’ve got millions of companies, a large market and even if only one in a thousand yields a substantial technological or commercial breakthrough, that might be good enough…’ If they continue on this path, they are more likely to be a very inefficient high-tech power.”
While most other countries have climbed the income ladder by moving into services, China doesn’t want to give up manufacturing. Instead it aims to follow the German example and shift toward a high-end industry, Dr. Wagner says. “Germany was successful by focusing on manufacturing and industry, even after having become a developed country.”
Germany’s relative economic health in the 2008 global financial crisis made China look again at the German model, called Industry 4.0. China wants to do much the same by integrating the Internet into industry to improve efficiency, and by increasing automation.
“But if they totally move toward automation, they will create a labor problem,” Dr. Kennedy says. “The right mix for China isn’t the same as for a country with fewer workers.”
Investment is just one part of the equation. Innovation also requires an educated workforce and protection of intellectual property.
However, Dr. Wagner says, “when you don’t learn to think creatively but just to repeat, then maybe you will be a good engineer—but it’s hard to be as creative as the Americans.” The challenge, he adds, is to allow enough free thinking for innovation in technology while limiting it to avoid political unrest, which the leadership fears.
“You cannot order innovation,” he says. “You have to create an environment for people to jump up and do what is necessary.”
Innovation comes not only from companies but also from the military and research institutes, where people are pursuing such goals as national security or pushing the bounds of knowledge, such as in pure science, Dr. Kennedy says. China is entirely comfortable fostering military-based and research institute-based innovation while also proactively guiding commercial innovation.
Institution-led innovation may be necessary in a place where the legal framework for intellectual property protection—while stronger than in the past—remains weaker than in much of the world. “The risks of a business model based on innovating and filing your intellectual property, licensing it and building a business off it are still higher than manufacturing and assembling something [that] someone else invented,” Dr. Kennedy says.
Intellectual property rights and investor protections will be key to attracting foreign investors.
“Nothing will happen without foreign investment,” Dr. Wagner says. “Foreign investors have been the most important factor in China’s success in the past 20 years. Will there be enough foreign investors willing to give away their technological know-how to future Chinese competitors? Success will depend on how restrictive the Chinese government will be with foreign investors.”
Catherine Bolgar is a former managing editor of The Wall Street Journal Europe, now working as a freelance writer and editor with WSJ. Custom Studios in EMEA. For more from Catherine Bolgar, along with other industry experts, join the Future Realities discussion on LinkedIn.
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