The world’s factory to move up the global value chain through Made in China 2025
Article 4 minute read

The world’s factory to move up the global value chain through Made in China 2025

21 July 2015

China presented a game-changing 10 years plan to upgrade its manufacturing capability. Our local expert examines the impact it would bring to the country.

For the past 30 years, China sustained a period of breakneck economic development with no historical precedent. However, the demographic dividend that propelled the country’s three decades of economic boom is now depleting due to an aging population, shrinking workforce and rising wages. The diminishing cost competitiveness in China has driven a growing number of labour-intensive manufacturers to relocate their production to the neighbouring Southeast Asia. Rising costs have also reduced foreign direct investments in the manufacturing sector and weakened the demand for Chinese-made products (export growth dropped from 7.9% in 2013 to 6.1% in 2014).

China is at the crossroads of national development. The country is facing competition from both the developed countries and emerging economies. To avoid falling into the Middle-Income Trap, China has to transform its current export-based and resource-driven growth model to one being fueled by technology, higher value-added services and domestic consumption. It can no longer rely on the low-skill, low-cost and labour-intensive manufacturing jobs like it used to. The country has to come out of the lower-end of the global production chain to compete with developed economies by emphasizing productivity and innovation.

In order to upgrade China’s manufacturing capability, the country’s State Council introduced a 10 years’ industrial blueprint - “Made in China 2025”. The initiative aims to integrate the domestic production with the global supply chains, trade partners and consumers through the Internet of Things to form a smart and efficient manufacturing network. It is meant to help China to move up the value chain by strengthening the innovation, technology, structure and quality control of its manufacturing sector. The 10 key sectors outlined in Made in China 2025 are:

  • new information technology
  • numerical control tools and robotics
  • aerospace equipment
  • ocean engineering equipment and high-tech ships
  • railway equipment
  • energy saving and new energy vehicles
  • power equipment
  • new materials
  • biological medicine and medical devices
  • agricultural machinery.

Manufacturing is an important driver in Chinese economy as it contributes to more 40% of the country’s GDP. Made in China 2025 is the first action plan that has its lime light entirely on the sector with clear objective to transform it into a world class leader. It aims to increase the local content of core technology and components to 70% by 2025. Under the plan, proposals have also been made to restructure the manufacturing industry in an effort to eliminate the overcapacity in some of the strategic industries such as steel production and coal mining.

Today, China produce approximately 20% of the world’s total manufacturing output but most of its products are associated with low-cost and poor quality. Made in China 2025 would facilitate the development of products with the innovative features and high quality. In the next 10 years, China will shift the focus of its manufacturing industry to building global Chinese brand. Also, the country hopes to leverage on green technology to increase the efficiency in energy and resources consumption and reduce the environmental damages brought by the manufacturing industry.

To ensure the plan works, China has to step up its effort in market liberalisation and structural reforms. Sustainable technology development and innovation have to be driven by the market with limited interference from the government. China could encourage private companies to take the lead in technological research & development (R&D) by introducing financial incentives and start-ups friendly policies. Continuous liberalisation would enable higher foreign participation and cooperation rate in R&D activities thus spurring technology transfers.

At the moment, only 30% of the R&D projects in China are being developed into finished products as compared to nearly 70% in developed nations. This is due to the insufficient regulations in intellectual property (IP) protection in the country. The government has to implement a set of stringent regularity framework to reinforce IP protection and encourage innovation.

Made in China 2025 is only the first phase of a 30 years master plan in transforming China into a leading global manufacturing powerhouse by 2049 (the 100th anniversary of the establishment of People's Republic of China). The game-changing plan presented massive investment opportunities that could rival the Chinese economic reform in the late 70’s. Like three decades ago, China is again calling out for investments. But this time, instead of capitals, it is inviting foreign investors to provide the knowledge, technology and services that it needs in its journey to become the world’s largest economy.

Read more about doing business in China

Written by

Wandy Chan

Managing Director, Market Practice Leader, HR & Payroll Services, China & Taiwan, HR & Payroll

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