Selling to Made in China 2025: Opportunities & Challenges Selling to Made in China 2025 Opportunities and challenges presented by China’s initiative to become a global leader in quality manufacturing October 2018 Accelerating Adoption of the IoT ONE Limited | www.iotone.com | Accelerating the Industrial Internet of Things Industrial Internet of Things0 Selling to Made in China 2025: Opportunities & ChallengesChallenges Table of Contents Industrial IoT market potential in China . .. 2 Digitized manufacturing in China: Why now? . 3 Current climate of Industrial IoT in China . 4 Industrial IoT trends in China . 5 China’s 13th Five-Year Plan . 6 Made in China 2025 Overview . 7 Priorities by region . 8 Pilot projects (2015 – 16) . 9 China Intelligent Manufacturing Solutions Vendor Alliance . 12 Evaluating Made in China 2025 . 14 Organizations supporting industrial upgrading . 15 Industrial IoT companies in China . .. 16 Featured Case Studies . .17 Summary . 22 About IoT ONE . 23 IoT ONE Limited | www.iotone.com | Accelerating the Industrial Internet of ThingsThings 1 Selling to Made in China 2025: Opportunities & Challenges Industrial IoT market potential in China The Government of China was the first to launch a China is already the world’s second largest market for Industrial comprehensive Industrial Internet of Things (IoT) strategy, IoT technologies, despite initially-low adoption rates compared announced in the ‘12th Five-Year Plan’ in 2011. According to IoT to North America and Europe. Deloitte reports that China Analytics, the industry will start to see some of the early outnumbers the amount of Smart City projects being piloted investments pay-off in 2018. than all other countries combined. China’s IoT market has been growing at an annual rate of 20%. Pilot projects will be scaled on the back of an expansive IoT The market exceeded 900 billion RMB in 2016 and is expected infrastructure roll-out that aims to meet market demand and to exceed 1.5 trillion RMB by 2020. IDC forecasts overall deliver on national strategic priorities, such as innovation, market in China for IoT equipment will increase from 193 billion efficient water management, urban mobility and cyber security. USD in 2015 to 361 billion USD in 2020 – with Chinese Such projects are being complemented by the ‘Made in China manufacturers spending $128 billion on industrial IoT alone. 2025’ manufacturing and ‘Internet+’ strategies. As opposed to prior investment in Chinese industry, software and services will be the key driver, contributing to over 60% of the market value. Figure 1: China IoT Overall Kit and $361 bn IIoT Manufacturing Market Sizes in Accenture reports that by embracing IoT in manufacturing, 2020 $128 bn China could add up to $736 billion to it’s GDP by 2030. Sources: IoT Analytics (2018), CEIS (2017), The Economist (2016), China Daily (2018) An important step in the future IoT ecosystem development in China will be an accelerating shift from “ market fragmentation to market integration, and from vertical industry convergence to horizontal platform agglomeration. - Antonio Liu, Senior Market Analyst, IDC China ” Market demand for Industrial IoT applications in the Chinese Manufacturing Industry Figure 3: Biggest Painpoints for Companies Figure 4: How Companies Applying Industrial IoT Technologies Intend to Increase Revenue (% of companies) (no. of companies) 0 10 20 30 40 50 0 20 40 60 80 100 Lack of interoperability/standards CX improvement Ownership/security of data New products/services Underqualified operators New biz models Data quality New markets Lack of capability to carry out data… Coordination inside the company Improvement in core biz Cyber security Better pricing Inadequate budget Sources: Deloitte Research (2016) IoT ONE Limited | www.iotone.com | Accelerating the Industrial Internet of Things 2 Selling to Made in China 2025: Opportunities & Challenges Digitalized manufacturing in China: Why now? Since 1990, China’s global manufacturing output has Figure 5: Robot-to-Employee Ratio in surged from less than 4% of global value to more than Manufacturing 631 25% today. It has become the ‘World’s Factory’. 600 However, China’s manufacturing sector has exhausted Robot Density 488 the growth strategies of the last three decades. China 500 World Average has saturated the market for low quality and low cost goods, and many industries are overcapitalized yet 400 inefficient due to limited adoption of industrial software. Furthermore, China’s competitiveness on the global 309 303 300 arena is weakened by labor costs that are rising faster than labor productivity. Today, China’s robot density 223 189 ranks 23rd worldwide but the government intends to 200 Robots per 10,000 employees 10,000 per Robots 145 make it into the top 10 most intensively automated 132 nations by 2020. 100 71 74 58 34 To overcome these challenges, an industry-wide move 0 towards digitalization and industrial automation has been prioritized by the national government. China must increase both productivity and output quality in order to sustain GDP growth and move up the value chain. Source: International Federation of Robotics (2017) Chinese manufacturing value-add is not keeping pace with labor costs Figure 6: Labor Cost vs Industry Value-add in Manufacturing 70,000 30,000 60,000 14% CAGR 25,000 50,000 20,000 12.7% RMB)* (billion add - 40,000 CAGR 15,000 30,000 Average Annual Wage (RMB)* Wage Annual Average 10,000 20,000 Manufacturing value Manufacturing 5,000 10,000 0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Average manufacturing worker annual wage Manufacturing value-add *2015 prices Source: China Statistical Yearbook 2017 IoT ONE Limited | www.iotone.com | Accelerating the Industrial Internet of Things 3 Selling to Made in China 2025: Opportunities & Challenges Current climate of Industrial IoT in China Figure 7: Industrialization Status of Chinese Companies, by Use Case Figure 8: Barriers to Industrial IoT Adoption for Chinese Companies Many Chinese manufacturers have yet to begin investing in Industry 4.0 technology, and many Uncertain ROI (business case) continue to use Industry 2.0 technologies (labor employed on simple production lines). They Legacy equipment possess huge potential to improve operational efficiencies through implementing smart Lack of interoperability or standards manufacturing techniques in their processes. Security concerns However, many Chinese companies also note: uncertainty in ROI, legacy equipment, technology Technology immaturity immaturity, and the lack of skilled labor as key factors that significantly hinder their adoption of Lack of skilled workers smart manufacturing technologies. Much needs to North America be done to address these obstacles, which the Privacy concerns Europe Chinese Government has recognized and China implemented strategic measures that aim to boost Societal concerns the development of smart capabilities in the 0% 20% 40% 60% 80% 100% manufacturing sector. Source: World Economic Forum Industrial Internet Survey, IoT ONE Industrial Survey (2016) IoT ONE Limited | www.iotone.com | Accelerating the Industrial Internet of Things 4 Selling to Made in China 2025: Opportunities & Challenges Industrial IoT trends in China China is rapidly catching up in smart manufacturing Chinese companies are ramping up efforts to innovation and ownership of key intellectual properties in acquire foreign know-how smart manufacturing. There is rapid growth in both the rate of innovation in technology fields and in the Figure 9: Chinese Outbound M&A acquisition of foreign enterprises. Despite a slowdown of 250 20 activity in 2017, due to government restrictions aimed at managing financial risk, Chinese M&A grew 33% on average for 5 years and accounts for 39% market share 200 16 of all M&A activity in countries along the New Silk Road, known as the Belt and Road Initiative (BRI). 150 12 Innovation activities are more intensive for traditional hardware, given that there is strong political support. 100 8 Conversely, high-tech innovation in the areas of cloud M&A global of% computing, big data, and advanced robotics are relatively weak. Chinese companies generally acquire 50 4 Outbound M&A Value (billion USD) (billionValue M&A Outbound such technologies through M&A of foreign companies with inherent advantages in high technology and 0 0 expertise. However, as government policy rewards the registration Outbound M&A Value % of Global M&A of patents regardless of its quality, the actual value that these patents bring remain questionable. Source: Thomson Reuters (2018) Domestic R&D is heavily concentrated in robotics and sensor technologies Figure 10: National Patent Families (Priority Applications) by Technology (Process and Use Patents Not Included) 0 200 400 600 800 1000 1200 1400 Traditional industrial robots Wireless sensor networks Smart sensors, embedded systems Information security China United States Cloud & big data Germany Advanced robots Source: Mercator Institute for China Studies (2016) IoT ONE Limited | www.iotone.com | Accelerating the Industrial Internet of Things 5 Selling to Made in China 2025: Opportunities & Challenges China’s 13th Five-Year Plan Since 1957, China has based its social and 5-Year Goals 2015 2020 economic development planning on a series of Growth th Five-Year initiatives. The 13 and latest 5-year GDP >6.5 67.7 >92.7 plan was laid out for the period of 2016-2020 (trillion RMB, %) (YOY) and focuses on seven development priorities, Services sector value-add including the acceleration of industrial upgrading (% of GDP) 50.5 56 5.5 and transformation in both the emerging R&D spending/GDP industries and advanced services, as well as (%) 2.1 2.5 0.4 traditional industrial and service sectors. Internet penetration: 40 70 30 Fixed broadband (% households) In particular, the plan encourages the integration Internet penetration: 77 85 28 between initiatives such as ‘Made in China Mobile broadband (% households) 2025’, ‘Internet+’, the BRI, and mass Invention patents entrepreneurship and innovation, with an (per 10,000 people) 6.3 12 5.7 emphasis on craftsmanship. The strategy of ‘Made in China 2025’ and The following is a summary of the plan, with “ relevance to the Industrial IoT space in China.