Made in China 2025 BACKGROUNDER - June 2018
Introduction Summary Made in China (MIC) 2025, originally an- • MIC 2025 is an initiative which strives nounced back in 2015, has shot back into focus to secure China's position a global pow- recently. Trade wars and U.S. tariffs on China erhouse in high-tech industries. have made it even more important three years later. Praised domestically but shunned inter- • The aim is to reduce China’s reliance on nationally due to perceived intellectual prop- foreign technology imports and invest erty abuses, and discrimination against foreign heavily in its own innovations in order to companies, MIC will have huge consequences create Chinese companies that can com- for most industrialized countries going forward. pete both domestically and globally. But what exactly is MIC and how will it affect the global economy? This backgrounder discuss- • China sees MIC 2025 as a chance to ful- es these issues and more. ly integrate into the global manufactur- ing chain and more effectively cooperate What is it? with industrialized economies. In 2015, Prime Minister Li Keqiang launched • Chinese officials have claimed that lead- “Made in China”, (MIC 2025) an initiative ing economies with high-tech industries which sets to modernize China’s industrial capa- such as the EU, Germany and the Unit- bility. This 10-year, comprehensive strategy fo- ed States have expressed their hostility cuses heavily on intelligent manufacturing in 10 to the initiative due to the fact that it strategic sectors (see Figure 1) and has the aim of would move China from a low-cost securing China’s position as a global powerhouse manufacturer to a direct added-value in high-tech industries such as robotics, aviation, competitor. and new energy vehicles such as electric and bio- gas. This research and development driven plan
Institute for Security & Development Policy – www.isdp.eu 1 is seen as a critical element in China’s sustained where the technology that is difficult to replicate growth and competitiveness for the coming de- via reverse engineering. Smart manufacturing cades as it transitions into a developed economy. involves combining the internet with wireless It also seeks to ensure Chinese manufacturers re- sensors and robotics to improve its manufactur- main competitive with emerging low-cost pro- ing efficiency, quality, and productivity. If suc- ducers such as Vietnam. cessful, China would move up the value-added The plan involves replacing China’s reliance on chain, repositioning itself from a low-cost man- foreign technology imports with its own inno- ufacturer to a direct competitor to nations like vations and creating Chinese companies that South Korea, Japan, and Germany. can compete both domestically and globally. Therefore, there is a strong emphasis on its do- MIC 2025 & Germany’s mestic manufacturing process where it wishes to Industry 4.0 increase production, not only on the essential MIC 2025 is inspired by Germany’s “Indus- components, but on the final product as well. try 4.0” (I40) and is broadly in line with the With a focus on quality, the investment is to- German and Japanese approaches to economic wards technological innovation and smart man- development and innovation. I40 is a pub- ufacturing in areas such as machine learning, lic-driven national strategy launched in 2013 to “consolidate German technological leadership MIC 2025 - The Four Advantages in mechanical engineering”. I40 is based on the German government’s High Tech 2020 Strategy and is one of 10 key projects within the 2020 Strategy. Over a 10 to 15-year period, the plan is to “drive digital manufacturing forward by increasing digitization and the interconnection of products.” This involves adopting informa- tion technology and the internet of things to The Ten Key Sectors connect its small and medium-sized companies to global production networks, in turn making them more efficient and competitive. How did MIC 2025 Come About? MIC 2025 is a departure from the 2006 ini- tiative “Strategic Emerging Industries” (SEI), which is smaller in scope, centered on upgrading advanced technologies to secure the position of strategic emerging industries such as renewables and alternative fuels and with those industries Figure 1: The key sectors that will initially expected to make up 8 percent of the benefit from MIC 2025 Chinese economy by 2015 and 15 percent by
Institute for Security & Development Policy – www.isdp.eu 2 2020. Both public and private research and de- velopment initiatives would allow Chinese com- panies to develop cutting-edge technologies in key sectors, accumulate intellectual property and gain access to foreign intellectual property in exchange for access to the Chinese market. China has separately maintained the “SEI Cata- logue”, identifying next-generation information technology as its priority. Such technology in- cludes artificial intelligence, cybersecurity ser- Figure 4: The city of Schenzhen in the Guang- vices, integrated circuits and network equipment dong Province, often hailed as China's Silicon and software. Other SEI’s include biotechnolo- Valley gy, energy efficient and environmental technol- ogies and high-end equipment manufacturing. self-sufficiency, reaching a secure and control- The SEI is a narrower in scope, state-driven ini- lable standard, and expanding the state’s role tiative, featuring regulatory scrutiny over foreign in the market.” Further, China’s “Strategy Out- investments in the strategic industries, mergers, line” also corresponds to MIC, with the goal of joint ventures, access to foreign IP, and agree- achieving self-sufficiency in critical high-end ments between the government and foreign en- materials, high-end medical devices, and pat- tities for “strategic assets to remain in China or ented pharmaceuticals. under the control of a Chinese company.” MIC 2025 Goals MIC 2025 is broader in scope, targeting the entire manufacturing process rather than only China seeks to end its reliance on international technical innovations, promoting traditional technology and upgrade its industrial capabil- industries and services and introducing “specif- ity and smart manufacturing by ensuring that ic measures for innovation, quality, intelligent innovation, product quality, efficiency, and manufacturing, and green production”. Despite integration drive manufacturing across 10 key public involvement, the project ultimately re- industries. Those industries include advanced quires market forces to achieve the desired up- information technology; automated machine grades and adopt international technical stan- tools and robotics; aerospace and aeronauti- dards and benchmarks. cal equipment; ocean engineering equipment and high-tech shipping; modern rail transport Although there is an overall departure from the equipment; energy saving and new energy vehi- SEI initiative, MIC does fall in line with Chi- cles; power equipment; new materials; medicine na’s 13th Five-Year Plan (FYP) by seeking “to and medical devices; and agricultural equip- advance indigenous innovation and build global ment. champions through linkages with other plans”. There is an overlap between MIC and FYP in Further aims involve developing brand aware- industry focus and overarching policy direction, ness of companies and meeting green develop- with FYP highlighting the “critical importance ment targets. Green development will prove to the government’s leadership in advancing in- important to the government’s strategies to digenous innovation, achieving technological combat climate change and address the health
Institute for Security & Development Policy – www.isdp.eu 3 Made in China 2025 Industry Aims
Figure 3:
% Figure 2: Semi-official targets for the domestic market share of Chinese products and environmental impact of China’s industri- fully integrate into the global manufacturing alization. The focus on branding and product chain and more effectively cooperate with in- quality is with a view to international expansion dustrialized economies. Even if key targets are and competitiveness. For example, in the agri- not achieved, the initiative will improve China’s culture sector, the goal is to establish up to three “overall economic governance’” and strengthen recognizable brands and up to five internation- its financial, education, healthcare, and manu- ally competitive companies. facturing sectors. Reducing reliance on foreign technologies in- How will MIC 2025 be volves creating and developing companies that achieved? can innovate through research and develop- ment, dominate domestically, and produce com- Beijing is implementing regulatory changes and petitive exports. The “goal of raising domestic introducing standards for key industries while content of core components and materials to 40 setting a policy direction to pursue innovation percent by 2020 and 70 percent by 2025” will and development. These standards potentially contribute to self-sufficiency and the end goal of restrict foreign competition in China and pro- localizing the manufacturing process; however, vide access to technology from abroad by, for such targets violate WTO rules. example, requiring banks to reveal their source code and use domestic IP and encryption to While China is aiming to move up the value-add- meet Beijing’s “secure and controllable” stan- ed chain, it also sees MIC 2025 as a chance to
Institute for Security & Development Policy – www.isdp.eu 4 dards. Standardizing practices across entire in- Leading companies have responded to those dustries is a priority, with the National Cyber Se- demands, focusing on technologies of the fu- curity Strategy and Cyber Security Law creating ture. Intellectual property and capacity appears a legal framework for the future implementation to have been developed in telecommunica- and update of information technology products tions, “wireless-sensor networks, 3D printing, and services. Testing and certificate systems will industrial e-commerce, cloud computing, and be introduced to raise the quality of products to big data”. Permits and licenses are being grant- meet international benchmarks in all key indus- ed to Baidu and other companies to test their tries, from medical patents to fuel consumption. self-driving vehicles, while Baidu itself launched Central and provincial governments, and state- “Project Apollo”, a platform that provides hard- run entities are cooperating to implement sup- ware and open source code for other manufac- ply-side policies to allow companies to better turers to develop their own vehicles. Further- develop their manufacturing processes. This more, the government is facilitating access to includes the creation of 40 national and 48 materials and providing subsidies for companies provincial innovation centers 2025 to facilitate pursuing electric batteries. partnerships and innovations. The government has also instructed businesses The most substantial tool is financial support to develop their international brand awareness for key initiatives, including a semiconductor and become “more familiar with overseas cul- fund for “Xiaomi to develop the company’s first tures and markets” and “strengthen investment smartphone processor”. Funding from state operation risk management”, with the aim of banks naturally leads to preferential treatment encouraging international investments and ac- for Chinese businesses. quisitions. Between 2005 and 2016, Chinese companies invested $13.6 billion in Germany State-owned banks are distributing subsidies, and $135 billion in the U.S., giving them access low-interest loans, and bonds, especially for to IP and joint ventures with businesses that small and medium-sized enterprises. Various have already achieved the desired automation agencies and funds also offer direct financial and innovation. This, however, involves direct support. For example, $3 billion is available state funding of private equity, which is used to from the Advanced Manufacturing Fund to facilitate the investments. In the information upgrade technology in key industries, while the technology industry, takeover offers surpassed National Integrated Circuit Fund has access to $35 billion in 2015. International partnerships $21 billion. Importantly, funding is linked to and acquisitions, with significant public fund- the use of indigenous IP to push companies to ing, are the primary tool for accessing foreign replace foreign IP. intellectual property, which is then used to fur- The government has also introduced various tar- ther enhance the capabilities of Chinese com- gets for companies, including an increase in re- panies. search and development as a percentage of sales Ocean engineering developments are linked to from 0.95 percent to 1.68 percent, a 7.5 percent Beijing’s security concerns in the South China labor productivity increase by 2020, and a 35 Sea, while advancements in aerospace are borne percent decline in energy and water consump- from their pursuit of space exploration and sat- tion per unit of added value by 2025. ellite engineering. In 2017, China’s first com-
Institute for Security & Development Policy – www.isdp.eu 5 MIC 2025 Key Performance Indicators
Figure 4: MIC Key Performance Indicators mercial passenger jet, the C-919, was complet- exports for Chinese companies. ed, having been developed as part of long term In the pharmaceutical industry, the long-term ambitions to compete with Boeing and Airbus. goal is to reduce China’s reliance on foreign pro- In 2017, China bought 300 Boeing planes for ducers. With the Chinese health market second $37 billion. only to the U.S., in addition to the national China’s rail industry has already generated ex- health and security risk that its large and age- ports to Asian neighbors, while innovations and ing population poses, government backing for expansion are set to be pursued via the One developers will prove crucial. It would give do- Belt initiative. This is a strategy it pursed with mestic companies a better opportunity to devel- the creation of the China-Community of Latin op into industry leaders, create new medicines, American and Caribbean States Forum. Invest- receive more patents, and eventually dominate ments of over $100 billion in South America in the Chinese market. Requirements to register the 10 key industries have led to joint ventures IP with local entities will give Chinese compa- and generated manufacturing and service-based nies access to patents they do not have.
Institute for Security & Development Policy – www.isdp.eu 6 Attracting foreign investment and liberalizing tionals already implementing the government’s the market is the current priority, as confirmed development strategy will help with the creation by the introduction of global testing bench- of national champions that can more effectively marks and the permissibility of using drug tri- compete with international multinationals. al data from outside China for distribution re- quests. However, market consolidation appears What are the Risks to MIC to be the outcome as smaller companies are in- 2025? creasingly priced out of the market. The main difficulty for China is the pressure its MIC is leading to an expansion of the govern- manufacturing industry faces from two sides; ment control of the key industries as it dictates the more industrialized economies of Japan policy and incentivizes research and develop- and Germany and the low-cost manufacturers ment and the modernization of manufacturing. in India, Brazil, and others. This makes an Beijing is changing the traditional business re- effective strategy difficult to implement, partic- lationship of Chinese companies, encouraging ularly one of this scale. State officials recognize investment, consolidation, and access to foreign that even a successful MIC 2025 would only IP. State-owned entities, particularly with those partially develop Chinese industry relative to that overlap with MIC 2025 sectors, have begun Germany and Japan’s level of industrialization. to merge. This, combined with large multina- The scale of ambition could lead to market
Potential Exposure of Select Countries' Exposure to MIC 2025
Figure 3: Vulnerability of Seclect Industrialized Countries to Mic 2025
Institute for Security & Development Policy – www.isdp.eu 7 consolidation by larger firms and government American companies will lose their competi- entities. In the pharmaceutical industry for ex- tiveness because MIC 2025 provides “prefer- ample the new safety and testing standards are ential access to capital to domestic companies sufficiently costly for smaller companies mean- in order to promote their indigenous research ing that mergers and acquisitions are highly and development capabilities, support their likely. Fewer competitors and the proliferation ability to acquire technology from abroad, and of smart manufacturing may place strains on enhance their overall competitiveness”. Wash- employment, potentially creating the condi- ington is especially concerned with apparent tions for social and political unrest. advantages gained in pursuit of new energy, In any case, most of China’s companies are “not self-driving vehicles, and aerospace equipment. prepared for such a deep and sudden techno- Political backing in Beijing and access to bil- logical transformation”, which means that only lions in funding to support industrial upgrades a select few companies will be able to meet the in various sectors are likely to reduce the com- government’s targets. Those companies will petitive advantages companies and sectors in expand their international presence and com- developed economies enjoy. In contrast to the petitiveness while facing limited competition in billions made available by Beijing, Germany, China. Nevertheless, the increased likelihood for example, has only contributed €400 mil- of poor management of risk and failed ventures lion in research and development funding. could result in considerable problems for those Donald Trump’s decision to impose tariffs on that overextend. $50 billion of Chinese goods imports, and the potential targeting of an additional $100 The International billion is aimed at neutralizing the advantag- Community's Reaction es enjoyed by Chinese companies and pun- Fears over Chinese expansion and dominance ishing the “unfair competition” China is en- in strategically important industries has inevi- gaged in, particularly as the U.S. attempts tably led to strains between Beijing and west- to revive its own manufacturing industries. ern governments, increasing the likelihood The Trump administration is now considering of retaliation. Chinese officials have claimed expanding those sanctions to specifically target that leading economies with high-tech indus- China’s 10 key industries. Imposing 25 per- tries such as the EU, Germany and the United cent tariffs would punish Chinese companies States have expressed their hostility to the ini- for “IP theft” and slow down IP transfers via tiative due to the fact that it would move China market access and partnerships. Restrictions from a low-cost manufacturer to a direct add- on Chinese investments in U.S. technology ed-value competitor, while shutting out inter- companies are also planned. As made clear in national competition in the Chinese market. the 2018 National Security Strategy (NSS), The European Union Chamber of Commerce the U.S. sees China as a revisionist state that in China described the plan as a regression to directly threatens American security and pros- “top-down decision-making” while the U.S. perity. Under Trump, the U.S. appears willing Chamber of Commerce suggested it was a to contain “China’s ascent in advanced indus- “strategy to use state resources to alter and cre- tries”. In response, China is willing to grant ate comparative advantage in these sectors on further market access for American companies. a global scale”. For the U.S., the fear is that
Institute for Security & Development Policy – www.isdp.eu 8 Endnotes
Scott Kennedy, ‘Made in China 2025’ (Centre for Strate- ‘China’s C919 Passenger Jet Completes First Long-Haul gic & International Studies, 1 June 2015)
Institute for Security & Development Policy – www.isdp.eu 9