The Chinese government recently released implementation guidelines for the “Made in China 2025” strategy. The guidelines outline the Chinese manufacturing sector refurbishment, emphasising innovations-based production, which should lift the country into a higher value-added economy. The strategy, which is in essence similar to Germany’s economy digitisation “Industrie 4.0” programme, creates one of the largest rivalries to Germany’s efforts.
This article is part of the global briefing Industry 4.0: The Future Impact of the Fourth Industrial Revolution, which analyses implications for the adoption of the fourth industrial revolution.
The slowing Chinese economy motivates the reforms
Chinese economy was growing intensively over the last decade, thanks to surging investments in the country’s manufacturing sector. Over 2006-2016, Chinese manufacturing turnover in real terms was expanding at a CAGR of 10%, production of intermediate and high-tech goods being the major contributors to growth. However, today, the manufacturing sector’s growth pace is slowing dramatically. In 2016 the rate decelerated to just 5%, compared to over 20% per year a decade ago.
Rapidly rising wages in China, coupled with maturing domestic market and mediocre global economic expansion, are the main drivers of the change. The average wage in manufacturing in China posted a 10% increase per year over 2006-2016 in real terms, which ended in Chinese labour being at least twice as expensive as in other low-cost countries in the region. As a result, some foreign investors start eyeing opportunities abroad and the country must find new growth engines to drive growth in the post-cheap costs era.
China’s manufacturing sector turnover growth rate over 2006-2020
Source: Euromonitor International from national statistics
The three pillars China to challenge the German programme
Given the current trends, reforms are inevitable, or China becomes at risk of finding itself in the middle income trap, when production costs rise strongly, but the country cannot deliver enough economic growth to ensure sustainable development. The “Made in China 2025” strategy provides the correct incentives to cope with the country’s deteriorating competitive strength, such as low value-added operations, lack of innovation and rising labour costs, as well as combats the country’s other problems, like pollution.
First of all, China’s manufacturing sector mainly remains low technology based. Value added as a share of total manufacturing turnover stands at 19% in China as of 2016, while developed countries enjoy significantly higher figures – 34% in Germany and 33% in the US. Raising this sector’s effectiveness is an area, where the “Made in China 2025” strategy can deliver the most. However, unlike the German “Industrie 4.0”, which emphasises digitisation activities, the Chinese strategy primarily prioritises spheres the Germans have already sorted out, such as production of domestic-origin parts, growing usage of local content and own brands.
Secondly, the strategy is connected to the expansion of the R&D capacity. R&D activities in China are still relatively weak, as core design centres for products China manufactures usually remain based in developed countries. In the strategy, China outlined 40 new R&D centres to be deployed in order to boost innovations in the manufacturing sector. These centres will be competing with the developed countries, which already have well-established R&D capabilities and innovation-minded companies ready to respond to the Chinese efforts.
Thirdly, China is at risk of being squeezed from two sides – the low costs countries, where production of consumer products, like consumer electronics, increasingly reside, and the developed ones, where higher value added products should return thanks to the fourth industrial revolution. Having an effective digitalised production structure might assist China in keeping foreign companies pinned to the country, as labour costs would play a lesser role, while the foreign firms would also have to retain local production facilities in order to achieve overall costs efficiency, promoted by the Industry 4.0.
Source: Euromonitor International from national statistics
Chinese programme’s viability yet to be tested
While the Chinese strategy is ambitious, there are a number of problems that China will have to deal with if it wants to embrace the fourth industrial revolution and compete with Germany, which already has an edge over China.
The Chinese strategy includes prioritisation of domestic products, which is already causing some stress among the foreign investors in the country. European Union Chamber of Commerce in China expressed concerns that the strategy prioritises domestic manufacturers, which would eventually reduce activities of the foreign companies. The strategy, therefore, might lead to some discomfort among foreign investors and pose a threat to the investment flow into the country.
What is more, the Chinese strategy takes up all the economy’s rearrangement, while Germany’s promotes digital technology usage in current industries, which already produce high value-added products. The mix of the Chinese output might have to be changed according to the strategy and disposal of low value-added operations, like consumer electronics assembly, might be hurtful for the economy, where a significant part of the population is employed.
Finally, data protection, cyber security, net neutrality and related topics will have to be resolved in China, if it is to implement Industry 4.0. The fourth industrial revolution includes massive amounts of data, which buyers, suppliers, manufacturers, logistics service providers and others agree to share in order to achieve high efficiency. However, in China this area is still very poorly managed and the country lags in most ratings regarding areas like cloud computing readiness, whereas Germany places among the leaders in line with the US and Japan.
You can find out more about the fourth industrial revolution in the global briefing Industry 4.0: The Future Impact of the Fourth Industrial Revolution.