MADE IN CHINA 2025 – Industry 4.0

The Chinese government recently unveiled the implementation guidelines for its “Made in China 2025” strategy.

The guidelines essentially outline the reform of the Chinese manufacturing sector, placing great emphasis on innovation-based production to move the country toward a higher value-added economy. The strategy, which is fundamentally similar to the one followed by Germany and its “Industrie 4.0” project, will create one of the most significant rivalries to the efforts applied by Germany.

Motivation? The slowdown of the Chinese economy.

The Chinese economy grew intensely over the last decade, thanks to increasing investments in the country’s manufacturing sector. Between 2006 and 2016, the turnover of the Chinese manufacturing industry expanded in real terms, with the production of intermediate goods and technology becoming the main contributors to growth. However, today, the growth rate of the manufacturing sector is decreasing drastically. In 2016, the rate slowed to just 5%, compared to more than 20% per year a decade ago.

Rapid wage increases in China, coupled with the maturation of the domestic market and mediocre global economic expansion, are the main drivers of change. The average wage in the manufacturing industry in China recorded an annual increase of 10% in real terms during the 2006-2016 period, resulting in a Chinese workforce that is at least twice as expensive as in other low-cost countries in the region. As a result, some foreign investors have begun to look for opportunities abroad, and the country is seeking new growth engines to drive development after the era of cheap costs, which appears to be coming to an end.

GROWTH VOLUME OF CHINA’S MANUFACTURING SECTOR BETWEEN 2006-2016

China challenges the German program.

Given current trends, reforms are inevitable, or China will be unable to provide sufficient economic growth to ensure sustainable development. The “Made in China 2025” strategy provides the right incentives to address the country’s deteriorating competitiveness—such as low value-added operations, lack of innovation, and rising labor costs—as well as other national issues like pollution.

Firstly, China’s manufacturing sector remains primarily low-tech. Value added as a proportion of total manufacturing turnover stood at 19% in China as of 2016, while developed countries enjoy significantly higher figures: 34% in Germany and 33% in the United States. Increasing the efficiency of this sector is an area where the “Made in China 2025” strategy has the most to offer. However, unlike the German “Industrie 4.0” industry, which emphasizes digitalization activities, the Chinese strategy prioritizes areas that the Germans have already addressed, such as the production of domestically sourced parts and the increasing use of local content and proprietary brands.

Secondly, the strategy is related to the expansion of R capacity. R activities in China remain relatively weak, as the central design centers for China’s manufactured products often remain in developed countries. In the strategy, China outlined 40 new R centers to be deployed to drive innovation in the manufacturing sector. These centers will be competing with developed countries that already have well-established R capabilities and innovative companies ready to respond to China’s efforts.

Thirdly, China risks being squeezed from two sides: low-cost countries, where the production of consumer products like electronics takes place, and developed countries, where higher value-added products should return thanks to the fourth industrial revolution. Having an effective digitalized production structure could help China keep foreign companies in the country, as labor costs would play a smaller role, while foreign companies would also need to retain local production facilities to achieve the overall cost efficiency promoted by Industry 4.0.

LEADING COUNTRIES WITH HIGHEST MANUFACTURING RATES READY TO ADOPT INDUSTRY 4.0

Feasibility of the Chinese program.

While the Chinese strategy is ambitious, China will have to face a series of problems if it wants to embrace the fourth industrial revolution and compete with Germany, which already has an advantage over China.

The Chinese strategy includes the prioritization of domestic products, which is already causing some stress among foreign investors in the country. The European Union Chamber of Commerce in China expressed concern that the strategy prioritizes domestic manufacturers, which would eventually reduce the activities of foreign companies. The strategy, therefore, could lead to some unease among foreign investors and pose a threat to the flow of investment into the country.

Furthermore, the Chinese strategy involves a complete reorganization of the economy, whereas Germany promotes the use of digital technology in current industries that already produce high value-added products. China’s production mix may have to be changed according to the strategy, and the elimination of low value-added operations, such as the assembly of consumer electronics, could be detrimental to the economy when it employs a significant portion of the population.

Finally, data protection, cybersecurity, net neutrality, and related issues will need to be resolved in China if Industry 4.0 is to be implemented. The fourth industrial revolution involves massive amounts of data that buyers, suppliers, manufacturers, logistics service providers, and others agree to share to achieve high efficiency. However, in China, this area remains very poorly managed, and the country lags in most rankings regarding areas such as cloud computing readiness, while Germany ranks among the leaders alongside the United States and Japan.

You can find more information about the fourth industrial revolution on our blog and in our section on Industry 4.0.