Will “Made in China 2025” Create a New Economic Boost?

Almost five years after the industry development plan was announced, growth in GDP and development are needed both for China, and investors into this country. Will “Made in China 2025” will be able to create this boost?

The capabilities of “Made in China 2025” to create a GDP boost depend on the execution of the plan. The main parts of the plan are: digitalization of manufacturing, increase of efficiency, and innovation. The main goal of “Made in China 2025” is to push all Chinese manufacturing into one, producing more technical and higher-value products.

The plan will respond to increasing worries about China’s competitiveness beyond simple manufacturing, the growing labour costs, and the competition with cheaper labour countries.

Almost five years after the reveal of the plan, the execution of it has centred around the establishment of manufacturing innovation centres, initiatives for intelligent manufacturing and quality management.

Assessment of the success of “Made in China 2025”, will only be possible a few decades into the future and only when it will be finally realised (according to the same plan). Yet, the past five years of the execution of the plan, have made it possible to analyse some parts of the plan. Particularly, the establishment of new, high tech manufacturing zones.

These zones, each focused on manufacturing a different subset of high tech products are not a new idea. Industrial zones developed with the support of governments have been used by many governments to boost manufacturing. Yet, China’s innovation centres are approaching this idea a bit differently. Promotion of “[…] cooperation and profit-sharing between centres” should boost productivity. Nonetheless, the better know-how of older manufacturing countries, and patents numbers by companies in China still trailing behind, will outweigh this different approach for a long time.

The subsets of the manufacturing industry chosen to be developed in “Made in China 2025” show a move in the right direction. Additional investment into the medical devices subset, is a fitting response to both worldwide trends in health, and trends in the medical sector. As people all over the world are living longer, more health problems are bound to appear. With this, increases on all spending in medicine are due to follow.

Spending in the medical sector shows increases fuelled not only by the increasing life expectancy; increases in spending are also partly caused by spending on medical technology – good news for a country that is working to develop this subset of an industry.

For any industry to enter a stage of growth, an adequate number of workers with the right skills, or willingness to be trained, have to be present. China’s labour force has adapted to work in factories. Yet, the stringent tertiary education admissions could block the growth of an industry, which requires more technical skills.

To meet the demands of a new direction in manufacturing, either more students will have to be accepted into tertiary education institutions, or the number of places intended for non-technical subjects will have to be lowered. The repercussions of these decisions very likely could be the lower value of university diplomas, or a shortage of workers intended for non-technical roles.

China has chosen a bit of an unconventional path to transforming the education of its workforce. By supporting the transformation of universities into applied technology universities, promoting the activities of key businesses in education institutions, and encouraging the establishment of foreign research institutions in China, PRC will largely avoid the devaluation of tertiary education.

The main possible shortcoming of this plan is its more optimistic, than realistic, view of Chinese manufacturing landscape. Movement of both foreign, and domestic manufacturing businesses away from China, because of rising wages, shows that one of the selling points of Chinese manufacturing is its labour costs.

A decision to increase China’s production of more expensive and technical products would appear, at first glance, a good solution to combat this trend. However, this will only work if Chinese businesses will be able to repeat the success that low-cost manufacturing has brought. Will this happen? Time and the ability to attract and develop original ideas will tell.

>Even with perfect execution of the plan, changes in worldwide manufacturing can decrease the probability of this plan succeeding. Manufacturing businesses moving back to developed countries, and the movement of simpler manufacturing to emerging countries, will present a challenge to new high tech manufacturing in China. Both shortly, and a few decades later.

It’s easy to fall into the trap of thinking that only the increase of manufacturing firms can deliver sustained growth. If a new factory means more jobs and even higher incomes, then more factories should be the right choice for growth. However, Brandt and Zhu in Accounting for China’s growth have found out that an increase in efficiency, rather than growth in numbers, has delivered growth in China.

It’s impossible to deny that manufacturing, even its most basic operations, has lifted out many lowest-income countries out of poverty. Moving away from agriculture, and onto manufacturing-based economy, leads to production of higher added-value products and a lower dependence on volatile commodities prices.

Following this type of thinking, a development of Chinese manufacturing onto one specialising in the production of high tech products should lead to even higher development. After all, if manufacturing is the way out of poverty, a “higher” level out of manufacturing should bring even higher incomes. This is a very likely possibility, if the role of work culture, know-how, and innovation is forgotten. Without them, a highly advanced businesses simply will struggle to succeed.

Manufacturing is often dependent on natural resources and their extraction. A movement into high tech manufacturing of machines and equipment, still hinges on world commodities prices. Especially, the prices of metals. Since metals prices are volatile even in the context of commodities, China’s sustained growth could be threatened by this volatility.

Manufacturing of high tech goods in the industries that “Made in China 2025” aims to target, has only been a temporary fix for economic growth in developed countries. Instead, many countries, or trade and economics blocks, are moving towards an even greater opening of trade.

China’s free trade potential is limited, and its FTAs are geographically oriented towards Asia. The low western penetration makes trading less geographically and economically diverse – a challenge for growth.

As any other industry, advanced manufacturing can create sustained GDP growth, if constant innovation and competition is present. Competition in this sector is high both in China and in the world. As for constant innovation, it will be a challenge at least in the next few decades. Mainly because of China having to catch up to countries with more advanced high tech manufacturing industries.

The development of the manufacturing industry has been credited with helping China to become a more prosperous and globally competitive country. A new plan for the largest industry of PRC can deliver a similar success story. Nevertheless, the skills and knowledge gap, and a labour force which would have to change, could make this plan less successful.