Chapter 12. China and the next production revolution1

Dai Qian
Programme Officer, Department of International Co-operation, Ministry of Science and Technology of China, and Consultant, Directorate for Science, Technology and Innovation, OECD

The People’s Republic of China (hereafter “China”) is the largest contributor to global value-added in manufacturing. In recent years many Chinese companies have made great progress in creating and using new production technologies. For example, China is now the world’s largest user of industrial robots. These developments have been accompanied by a series of major policy initiatives and related public investments, an overarching aim of which is to advance the use of digital technologies in manufacturing. China’s goal of increasing the knowledge content of domestic production will expand the range of markets in which China competes. But upgrading manufacturing in China faces complex challenges. Technological capabilities remain highly uneven across the business sector. Challenges exist not only in increasing government investment in science and innovation, but also in commercialising research, improving infrastructures, making markets work more efficiently, and encouraging private sector innovation. Policy also needs to cope with a range of related developments, such as labour-market disruption, the growing importance of cyber security and the need for improved policy co-ordination.

  

Introduction

This chapter examines the development and use of a set of new and emerging technologies in manufacturing in the People’s Republic of China (hereafter “China”). The focus is on five technologies: information and communication technologies (ICTs), industrial robotics, 3D printing, biotechnology and nanotechnology. These technologies are central to what is here termed the “next production revolution”. As well as reviewing the development and use of these technologies, the chapter examines recent government initiatives to facilitate upgraded manufacturing, such as “Made in China 2025” and “Internet Plus”. Also described are public policies towards each of the technologies in question. The description of these policies is juxtaposed with recent OECD technology-specific policy suggestions. The final section of this chapter examines key challenges for Chinese businesses and policymakers in upgrading manufacturing.

This chapter shows that in recent years many Chinese companies have made great strides in creating and using new production technologies. China is now the world’s largest user of industrial robots, and the world’s largest market for machine-to-machine services. By April 2015, China ranked third in the global number of 3D printing patents. And by 2010 China ranked first in the number of Science Citation Index publications in nanotechnology. Such developments have been accompanied by extraordinarily broad and ambitious government initiatives and investments, the overarching aim of which is to achieve excellence in applying digital technologies in manufacturing.

While progress has been rapid, upgrading in manufacturing faces complex challenges. For example, technological capabilities in the business sector remain highly uneven. Challenges exist not only in increasing government investment in science, research and innovation, but also in commercialising research, improving infrastructures, making markets work more efficiently, and encouraging private sector innovation. While many policies promote the technologies necessary to upgrade manufacturing, policy also needs to cope with a range of related developments, such as labour-market disruption and the growing importance of cyber security. At the same time, attention must be given to issues of governance, as it relates e.g. to co-ordination between government departments, as well as between central and regional public bodies.

Chinese manufacturing: Key technologies and recent developments

This section considers progress in Chinese manufacturing in developing and using a variety of digital technologies, robotics, 3D printing, biotechnology, nanotechnology and new materials. For each of these technologies, the text describes the OECD’s suggestions as to what good policy requires. The text then outlines the policy measures being adopted in China. Gaps in the Chinese policy offering are identified in a number of places. Measures adopted in OECD countries are also referenced, for comparative purposes.

China’s weight in global manufacturing has many implications for itself and for production elsewhere in the world. Manufacturing is a foundation of China’s economy. In 2014, manufacturing in China accounted for 19% of global manufacturing value-added and 35.9% of China’s gross domestic product (GDP) (Chinese Academy of Engineering, 2015), leading the world for the fifth consecutive year. Furthermore, across China’s main export sectors, recent decades have seen an increase in domestic value-added in gross exports (Figure 12.1). The Chinese premier recently stressed that upgrading traditional and new sectors of manufacturing is essential for China’s long-term development (Li K., 2015).

Figure 12.1. Change in sectoral export value and shares of domestic value-added in gross export value
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NEC = not elsewhere classified.

Source: OECD (2017e), TiVA database, https://stats.oecd.org/index.aspx?queryid=66237 (accessed January 2017).

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Under the government’s innovation-driven development strategy, China is also trying to gain ground in high-tech manufacturing. Manned space flights, manned deep-sea submersibles, high-speed rail and the world’s fastest supercomputer are all examples of China’s manufacturing-related achievements. Furthermore, these achievements are associated with progress in research, education and infrastructure (Ministry of Industry and Information Technology, 2015c). China’s gross expenditure on research and development was slightly over 2% of GDP in 2014, surpassing that of the European Union and well above countries with a similar level of GDP per capita (OECD, 2017a). And in 2014, manufacturing-led invention patent applications in China (Figure 12.2).

China’s goal of increasing the knowledge content of domestic production will expand the range of markets in which China competes and contributes to the development of production technologies in those markets. Among 25 economies in a recent study, China’s share of high-tech exports increased from 6% in 2000 to 37% in 2013, and it is now the largest exporter of high-tech goods (HSBC, 2014).

But manufacturing in China also faces multiple challenges. Much of China’s manufacturing industry does not use state-of-the-art technology (Figure 12.3), and while China’s labour productivity has risen over the past decade, it is still much lower than in the United States (and other developed countries) (OECD, 2015a). The competitiveness of China in global value chains (GVCs) is still concentrated in processing and assembly (OECD, 2013), based in many instances on low-cost labour and raw materials. However, salaries for employees in manufacturing in 2014 had increased by 66%, relative to 2010. This exceeded the economy-wide average increase of 54% (National Bureau of Statistics of China, 2014). Product quality and brand awareness are still lacking for “Made in China”. New demands for greener manufacturing have arisen, as air, water and soil pollution from industrial production have worsened. And in spite of significantly increased research and development (R&D), China still relies heavily on imports for advanced manufacturing. In 2013, imported semiconductors exceeded oil as China’s largest import item (Ministry of Industry and Information Technology, 2015c).

Figure 12.2. Change in invention patent applications, 2000-14
Top ten sectors with most invention patent applications in 2014
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Note: Time series data by industrial sector in China are only available for enterprises above a certain turnover. But not all qualified enterprises are required to report their data. Furthermore, there have been several changes which reduce the consistency of the time series. For the period covered by this figure there have been three major adjustments: i) 2000-06, the reporting enterprises include non-state-owned enterprises (SOEs) with more than CNY 5 million turnover and all SOEs; ii) 2007-10, the reporting enterprises are those with more than CNY 5 million turnover; and iii) 2011-14, the reporting enterprises are those with a turnover of more than CNY 20 million.

The number of reporting enterprises greatly increased from 41 002 in 2010 to 301 630 in 2011 after the adjustment of methodology in 2010, which explains the obvious uptick shown since 2010.

Source: National Bureau of Statistics of China (2015), China Statistics on Science and Technology Activities of Industrial Enterprises.

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Sizeable parts of Chinese manufacturing experience shortcomings in management and digital capability. The private sector’s role in some areas of R&D is also limited, due to lack of resources or proper incentives. Technological change is also raising demand for skilled managers, researchers and technicians, which is not easily met. Information security is also a growing concern. Meanwhile, global competition has intensified as advanced manufacturing becomes a strategic priority for many developed countries, and some multinational firms are moving high-end manufacturing back home.

Figure 12.3. Progression in the use of different types of ICT by stage of industrial development
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Note: The symbols next to the vertical axis indicate the degree of co-ordination. Most Chinese factories operate with Industry 2.0-3.0.

Source: STM Stieler and IoT ONE (2016), “Growing from big to strong”, www.stm-stieler.de/files/558:A_Pragmatic_Assessment_of_Chinese_ Industrial_Automation_2016_08_22.pdf.

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China is following a two-pronged approach to manufacturing. Chinese manufacturers are, on the one hand, aiming to maintain competiveness in traditional fields, such as processing and assembly, by increasing efficiency and product quality and reducing costs. On the other hand, many manufacturers are also engaged in product innovation in the hope of seizing opportunities in new sectors. Against this background, as discussed below, enabling technologies are being more widely adopted in industry.

Digital technologies

The importance of ICTs – such as the Internet of Things (IoT), cloud computing and big data – is recognised by leading figures in Chinese industry. Jack Ma, founder and executive chairman of the Alibaba Group, which owns many highly successful Internet-based brands in China, asserted that “The most important source of energy for future manufacturing is not oil, but data” (Li Q., 2015). ICTs are being employed across manufacturing processes, from logistics to production, management and services.

In 2014, the IoT market in China reached over CNY 600 billion (USD 94 billion), growing at a compound annual rate of over 30% since 2011.2 China is expected to become one of the leading markets globally, with nearly one out of every five industrial units (e.g. machines, tools and components) connected by 2020 (IDC, 2015). In 2014, the market for public cloud services reached CNY 7.02 billion (around USD 1.1 billion), growing by 47.5% with respect to 2013 (China Academy of Information and Communication Technology, 2015b). The market for big data was approximately CNY 8.4 billion (USD 1.3 billion) in 2014. China’s big-data market is expected to grow by around 40% a year over 2016-18 (China Academy of Information and Communication Technology, 2015a). Meanwhile, sales from China’s electronic information industry exceeded CNY 14 trillion (USD 2.2 trillion) in 2014 (Ministry of Industry and Information Technology, 2015b).3 The R&D capabilities in China are also catching up with global leaders (Figure 12.4).

Figure 12.4. Leading countries in Internet of Things (IoT) and big-data technologies (2005-07 and 2010-12)
Economies’ share of IP5 patent families filed at US Patent Office and the European Patent Office selected ICT
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Note: Data refer to IP5 patent families filed at the European Patent Office (EPO) or the US Patent Office (USPTO), by first filing date and according to the applicant’s residence using fractional counts. The United Kingdom’s Intellectual Property Office (IPO) has allocated patent documents to technology fields. BRIICS = Brazil, the Russian Federation, India, Indonesia, China and South Africa.

Source: OECD calculations based on IPO (2014), “Eight Great Technologies: the Patent Landscapes”, www.gov.uk/government/uploads/system/uploads/attachment_data/file/360986/Eight_Great_Technologies.pdf and OECD (2015c), STI Micro-data Lab: Intellectual Property database, http://oe.cd/ipstats (accessed June 2015).

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The Internet of Things (IoT)

It has been estimated that applying the IoT in Chinese manufacturing could add USD 196 billion to GDP over the next 15 years (Accenture, 2015). The industrial IoT in China has seen most success in machinery equipment manufacturing, the automotive sector, iron and steel (CCID Consulting, 2015a). The IoT has mostly been applied to supply chain management, processes optimisation, and equipment and energy consumption monitoring (China Academy of Telecommunication Research, 2014b). Machine-to-machine (M2M) services have flowered in China. By the end of 2014, there were 74 million domestic connections between machines, making China the largest M2M market globally (GSMA, 2015).

Wuxi City, a municipality in Jiangsu Province, has been a part of the Institute of Electrical and Electronics Engineers’ (IEEE) Smart Cities Initiative. And Wuxi No. 1 Cotton Mill, one of the city’s largest textile manufacturers (dating back to 1919), is considered an example of success in upgrading through the IoT. The company updated its production line with over 90 000 sensors and 28 systems to monitor production, quality control and energy consumption. The number of workers per 10 000 spindles was reduced from more than 100 to 25, and the energy saved per year amounts to over CNY 8 million (USD 1.6 million) (Su, 2014).

Besides optimising manufacturing processes, the IoT can also enable the creation of new services and businesses for manufacturers. For example, since 2007, Sany Heavy Industry, a heavy machinery manufacturer, has developed an enterprise control system which retrieves data and monitors operations through sensors and controllers pre‐installed in products. Based on these data, feedback and recommendations are provided to customers using real-time monitoring, corrective maintenance and debugging support. The data also facilitate in‐house R&D. Over 200 000 machines now run on this platform according to the company.

Cloud computing

Chinese manufacturers principally use cloud computing to improve the utilisation of information technology (IT) infrastructures and reduce the costs of enterprise resource planning (ERP). In 2014, the major industrial cloud computing services offered in China were infrastructure-as-a-service (IaaS), such as cloud hosting, cloud storage and cloud network services, and software-as-a-service (SaaS) (CCID Consulting, 2015b) (Box 12.1).

Enabled by cloud computing, the idea of intelligent cloud manufacturing has also been proposed in China, in which manufacturing resources and capabilities are provided as cloud services, available to end users through the Internet or cloud manufacturing platforms. Shenyang Machine Tool Group (SMTCL), the world’s second largest machine tool manufacturer in 2014 (Statista, 2014), introduced its i5 intelligent machine tool based on this idea. Each machine is connected to a cloud platform. A dedicated application is provided to end users, allowing them to create designs and models to be uploaded to the platform and manufactured by available machines. To further facilitate its vision of “idea to shape”, the company established another platform that analyses data from customers, designers and the company’s machines, and promotes collaborations in areas ranging from demand identification to design and production. In this way, SMTCL aims to shift from being a pure manufacturer to being an industrial productivity service provider, and to profit by charging for machine running hours, instead of simply selling machines (OFweek, 2015).

Big data

Growing use of digital technologies creates expanding volumes of data. Indeed, in the platform-as-a-service sector, big-data analysis is the most popular service among industrial users in China (China Academy of Information and Communication Technology, 2015b). The year 2014 is considered the beginning of the industrial big-data market in China (China Academy of Information and Communication Technology, 2015a).

In manufacturing, more than 75% of big-data applications are intended to establish closer connections with customers, mainly by attracting customers and improving the customer experience. Only 10% of applications aim to track products or analyse the operation of equipment (Minglamp Consulting, 2015). This corresponds with the general pattern of big-data use in China, in which big data, generated mainly from within companies and analysed using traditional procedures, is then used for Internet-based marketing or for improving existing products and services (China Academy of Telecommunication Research, 2014a).

Empowered by big data, Motorola Mobility can predict customer preferences regarding the colour and materials of mobile telephones and prepare production accordingly. The company introduced Moto Maker, offering over 2 000 combinations for customers to choose from for their telephones. Haier Group, China’s leading manufacturer of home appliances and consumer electronics, is also working with the Alibaba Group, owner of the largest online sales platform in China, to use consumer preferences data from Alibaba and provide more customised end products.

Domestic manufacturers also play an important role in supplying infrastructure for digital technologies. Most of China’s server market is supplied by domestic manufacturers, and the top four companies (Inspur Eletronics, Lenovo, Huawei and Sugon) have grown their combined revenues by 19.5% a year due to a robust home market in 2015 (IDC, 2016).

Digital technologies have opened manufacturing to Chinese Internet companies

Chinese Internet companies not only lead the domestic market in cloud computing (Box 12.1), the IoT and big data, they are also extending their influence over traditional industries, including manufacturing. For example, at the beginning of 2015, Baidu Inc., China’s largest Internet search company, introduced its cross platform system, CarLife, which will connect its online map service with car manufacturers and customers. The company also finished testing a driverless vehicle system in December 2016, claiming a top speed of 100 kilometres per hour during the test (Baidu, 2015). Alibaba, after investing CNY 6 billion (USD 944 million) in its AliCloud business, is ambitiously promoting a shift from IT to data technology (DT) (AliResearch, 2015). With its huge data resources, the company aims to implement cross-industry applications in sectors ranging from robotics, the IoT and biotech, to financing and infrastructure. For this purpose, the company now hosts an annual computing conference in Hangzhou City. In April 2016, the core development team of BMW’s i3 and i8 electric vehicle line joined the Future Mobility Corp, a Chinese start-up backed by Tencent Holdings, another major Chinese Internet company (Boston, 2016).

Box 12.1. Cloud computing and the Chinese New Year

In recent years, as the Chinese new year approaches, many Chinese go through three major events linked to cloud computing: shopping online in the Double 11 Festival, buying Spring Festival train tickets on 12306.cn and offering hongbao (gift money) on social applications on the eve of the lunar new year. As described below, these three instances show how the size of China’s market demand has stimulated and shaped the application of cloud computing, and how, in turn, cloud computing has created market demand.

For China’s youth, 11 November is known as Single’s Day, a day on which young singles celebrate their singleness. On this day in 2009 Alibaba initiated an online promotional event, yielding CNY 52 million sales. By 2013, Alibaba’s sales on 11 November were twice those of online sales in the United States on Black Friday and Cyber Monday combined (Yan, 2014). A hybrid cloud computing structure has been used since 2015, in which the trade and payment systems are hosted by the public cloud, while the other businesses are hosted by the private cloud. This has helped the site to handle surging visits over a short period without having to buy extra servers. In 2016, Alibaba alone registered sales worth CNY 120.7 billion. The company’s website handled 120 000 transactions per second at the peak of demand and over 1 billion transactions in a single day (Xinhua, 2016).

If there is anything harder to obtain than half-price limited version items for the Double 11 Festival, it is a train ticket to go home at the Spring Festival holiday. 12306.cn, China’s official online train ticket sales portal, fared badly when it premiered in 2012 and crashed under an unexpected peak of 1.4 billion hits in a single day (Caijing, 2012). Managing the sale of Spring Festival train tickets is difficult not only because the site is subject to surging concurrent visits, but also because such ticket sales are complicated. Where the available number of certain online goods can be calculated by using stock numbers minus numbers sold, this is not the case with the number of available train tickets. For a route with stops from A to E, when one buys a ticket from B to D, this changes the availability of tickets for all the overlapping journeys (such as A to C), while also taking account of different types of seats and co-ordination with sales from offline channels. 12306.cn started using cloud computing in 2014 and has collaborated with Alibaba since 2015. The cloud handles over 75% of inquiries for available tickets and has helped 12306.cn avoid major site crashes (Li X., 2016). The site handled a peak of 29.7 billion page visits a day for the 2015 Spring Festival, and boasted a 30% efficiency increase, and a mere 1.8 seconds of online queueing, in 2016 (Nandu Daily, 2015).

When Chinese return home for the Spring Festival – with tickets from 12306.cn and gifts from Double 11 – they will probably also prepare hongbao for the family. Traditionally these are gifts of money packed in red envelopes given and received with ceremonial reverence. But now hongbao are available in the form of social applications. In 2015, WeChat, China’s most popular messaging application, developed by Tencent, collaborated with China Central TV (CCTV) in the most watched lunar new year’s gala ever, in which at certain times the hosts asked the audience to shake their mobile telephones to receive hongbao. Over 1 billion hongbao were sent and received. An application of such scale would not be possible without cloud computing, to address surging use and financial security (Teng, 2016). Such developments have also brought the technologies much closer to the ordinary citizen. A recent survey found that 75% of mobile payment users in China use mobile payments in physical stores daily (Alvin Wu, 2016).

Policy settings in China on digital technologies

To support the development and industrial use of digital technologies, Chapter 2, on digital technologies and production, suggests that governments need to develop coherent data governance frameworks, promote open standards and responsible use of personal data. Governments are also advised to develop an innovation policy mix that encourages investments in data (its collection, curation, and reuse) and R&D in fields including big-data analytics, cloud and high-performance computing, IoT, and security- and privacy-enhancing technologies. Barriers for data reuse and sharing, market competition, and the adoption of ICT need to be examined and addressed if necessary. Demand-side policies can be considered to encourage the adoption of key enabling ICTs, especially by small and medium-sized enterprises (SMEs). It is also advised to support a culture of digital risk management, and develop ICT-related skills, especially in collaboration with the business.

Data policies recently discussed in China largely concern big data

The Action Plan to Promote the Development of Big Data, released by the Chinese State Council in August 2015, identified three major tasks for developing big data in China: open access and better governance of public data, innovative business models within and across industries, and data security. China has begun ten key projects, ranging from data sharing among government departments to cross-industry data use (in manufacturing, services and agriculture).

China’s 13th Five-Year Plan, released in March 2016, considers big data to be a strategic resource and formulated a National Big Data Strategy, focusing on open access to government data, R&D and application of big data technologies. An inter-ministerial mechanism will co-ordinate different government bodies, led by Ministry of Industry and Information Technology, National Development and Reform Commission and Cyberspace Administration of China, with emphases on cross-government data sharing, industrial innovation and data formats and standards.

A standardisation system for data is being developed, covering data collection, categorisation, exchange, formatting, trade and security. Demonstration projects will be implemented for data trading and standards evaluation (the approach is one of top-down opening up of government data, instead of bottom-up non-discriminatory data access.)

The Made in China 2025 and Internet Plus initiatives discussed later in this chapter aim to build an Industrial Internet system and create more open and synchronised data flows across stages of manufacturing.

Many regions, such as Beijing, Shanghai, Zhejiang, Guangdong and Guizhou, have released plans to support big data. Among them, Guizhou released China’s first regional regulation on big data, which outlined key measures for the application, sharing and security of big data. In an effort to promote data flow and exchange, the Global Big Data Exchange was set up in 2015 in Guiyang City, the capital of Guizhou. This exchange includes data from sectors such as finance, education, energy and logistics. Such exchanges are also being set up in Beijing, Shanghai and other cities across China.

Key national research projects have been set up on ICTs and technology adoption is being encouraged

The central government allocated around USD 58 million for cloud computing and big data in the 2016 National Key Technology R&D Program, and USD 46 million was earmarked for high-performance computing. An IoT development fund was set up by the Ministry of Finance and Ministry of Industry and Information Technology in 2011, with an initial annual budget of up to USD 75 million. Following the 2013 State Council’s Opinions concerning Promoting the Co-ordinated Development of the Internet of Things, an action plan was initiated across various ministries to cover national strategy, standards, applications, business models, security, law and regulations, and the required human resources.

The Integration of Industrialisation and Informatisation is a key initiative begun in 2007. Government funds have promoted the application of numerical control and digital design in traditional sectors such as steel, ship building, textiles and mining. A national management system standard (GB/T23000-23999) is being developed. This will help guide companies seeking to further adopt ICTs.

By opening selected markets to the private sector, the government has sought to address barriers to ICT adoption, such as high prices and lack of competition. Since 2013, mobile network operators have been able to enter markets previously dominated by SOEs. Since 2015, providing broadband services is also open to the private sector. Regulations on setting up a business have been streamlined, e.g. by reducing the number of required licences, and policies have been implemented to facilitate Internet-based financing and new services, such as Internet ride-hailing services.

Policies in China focus on providing wider Internet access, improving Internet speed, building the Industrial Internet, and encouraging Internet related start-ups

The State Information Strategy (2006-20), aims to build a national information infrastructure covering most of the population by 2020. The 2013 Broadband China initiative aims to provide broadband coverage for 70% of families and mobile broadband service for 85% of households by 2020. The speed and pricing of Internet access were also addressed in State Council guiding opinions in 2015. These recommended free upgrading of threshold broadband speed (up to 4 megabytes per second), as well as lower mobile data pricing.

The July 2016 State Information Technology Strategic Outline sets targets to 2025 for fibre broadband access in rural areas, national 4G network coverage, and an international Internet bandwidth of 48 Tbps. By June 2016, 710 million people had Internet access, 92.5% of which have access to mobile Internet. However, a large gap remains between urban and rural areas (67.3% coverage compared to 31.7% respectively).

The government is also examining how to ensure cybersecurity

In November 2016 China’s first law on national cybersecurity was approved by the Standing Committee of the National People’s Congress. The law sets out regulations on cyber sovereignty, the responsibilities of cyber service providers and network operators, protection of personal information and infrastructures, and cross-border data transmission. There is as yet no dedicated national law on personal privacy protection in China.

In June 2016, the second US-China High-Level Joint Dialogue on Cybercrime was held in Beijing, with outcomes on information sharing, case co-operation and network protection. Around USD 31 million is allocated for cyberspace security in the 2016 National Key Technology R&D Programme.

Measures to develop digital skill are also being taken

In 2000, the Chinese Ministry of Education released guidelines for ICT education in primary and middle schools. ICT courses became mandatory in 2005 in all middle schools, as well as in primary schools in more developed regions. In 2013 the Ministry of Education initiated a national training project to develop ICT skills among teachers in middle and primary schools (including kindergartens). The aim is to cover 10 million schools by the end of 2017. This is a part of China’s ten-year plan for IT in education (2011-20). The Ministry of Education is now developing teaching guidelines for robotics in primary and middle schools.

In higher education and career education, courses are to be created on ICT application. The Action Plan to Promote the Development of Big Data encourages colleges to set up programmes in data science and data engineering.

Industrial robotics

The application of robotics, especially industrial robots (IRs), is a direct response to labour shortages and the demand for higher quality output in China. Over 2008-13, the supply of IRs increased by about 36% per year on average in China. China was the world’s largest market for IRs in 2013 and 2014, and by 2017 is expected to have up to 428 000 units, the largest number of industrial robots in use in any country (International Federation of Robotics, 2015). Among the 56 000 IRs sold in China in 2014, domestic robot manufacturers supplied 16 000 units, with the rest coming from foreign firms such as ABB, Kuka, Yaskawa and FANUC (Reuters, 2015). In R&D, China was among the top five countries in robotics first patent filings during the period 2005-11 (World Intellectual Property Organization, 2015). Meanwhile, other related technologies, such as artificial intelligence (AI), are developing fast (Box 12.2).

Box 12.2. Creating new hardware for artificial intelligence (AI)

In the field of artificial intelligence, machine learning has created huge and specific demands for computing power and efficiency. The DianNao (the Chinese word for computer) hardware family and Cambricon-1A chip are among the latest to seize this unique and potentially high-value opportunity.

Machine learning is already widely used, in applications ranging from speech recognition in Google assistant and Siri, to face identification in image applications, to autonomous driving. Presently convolutional and deep neural networks (CNNs and DNNs) are among the state-of-the-art and most extensively used deep learning algorithms, but both are computationally and memory intensive. Conventionally, these algorithms are run on general-purpose processors (such as CPU and GPU), which are often not the most efficient options, as these processors are not tailored for such tasks (Keutzer, 2016). For example, to train a DNN to identify a cat’s face, it took the Google research team 1 000 machines, 16 000 cores and 3 days (Le et al., 2012). Consequently, machine-learning applications are becoming major drivers of high-performance computing (Chen et al., 2014).

The DianNao project was born in this context. The project started as an international collaboration between the State Key Laboratory of Computer Architecture and the French Institute for Research in Computer Science and Automation, and developed the DianNao family, a series of hardware accelerators specially designed for machine learning. On a DaDianNao system (the term means a big computer with a DianNao family multi-chip architecture), it is possible to operate 450.6 times faster than a GPU, and reduce energy by 150.3 times on average (Chen et al., 2016). This research has received two best paper awards in the field of computer hardware (ASPLOS 2014 and MICRO 2014).

Based on the initial research, the Chinese team further developed Cambricon, a more versatile instruction set architecture for neural networks, started as a spin-off under the same name. Cambricon has released the Cambricon-1A, which is claimed by the company to be the first chip dedicated for high-performance neural networks applications (Gu, 2016). The Cambricon-1A was also selected as one of the 15 Leading Internet Scientific & Technological Achievements at the third World Internet Conference (CCTV, 2016).

In spite of rapid growth in the use of IRs, robot density in China in 2014 was 36 units per 100 000 employees, below the global average of 66. In the automotive industry, robot density was 305, while density in key automotive manufacturing countries (such as Japan, Germany, the United States and Korea) is above 1 000 (International Federation of Robotics, 2016).

While industrial robots have become a key feature of the automotive sector, the application of IRs in the electronics sector is also advancing. Since 2010, Hon Hai Precision Industry, a leading Chinese manufacturer best known for making iPhones for Apple, has used IRs developed in-house in its Kunshan City factory in the Yangzi River Delta. The company reduced employees in the factory from 110 000 to 50 000, while revenue reportedly increased (Zhu, 2015). The company aims to achieve 30% automation in its factories in China by 2020. Together with Alibaba, Hon Hai holds a 20% share of Japan’s SoftBank Robotics Corp. Since June 2015, the latter makes and sells Pepper, a robot able to understand some human emotions (Inagaki, 2015).

While most of the IR market is supplied by foreign suppliers, rapid development and application of IRs in China has led domestic companies to manufacture their own IRs. Sales of domestic IRs increased 77% in 2014, relative to 2013 (Shen, 2015).

SIASUN Robot & Automation, affiliated to the Chinese Academy of Sciences, is a leading domestic robotics company. Three-quarters of the company’s 1 600 workers are reportedly employed in R&D, with only around 200 working on the assembly line (Liu, 2015). The company introduced a digital smart factory in 2014. This factory uses robots to produce robots, integrating SIASUN’s in-house robotic capabilities in logistics, assembly and quality inspection, and is able to produce 5 000 IRs annually (He, 2015).

Chinese manufacturers which intend to enter the IR market without previous experience are also using acquisitions. For example, in May 2016, the Chinese consumer appliance company Midea made a EUR 4.5 billion offer for Kuka, a leading German robotics company. It was announced in August 2016 that 81% of Kuka’s shares had been tendered for an offer made by Midea (Thompson, 2016). The deal is now in a process of regulatory approval.

Policy settings in China on robotics

In the National Development Plan for Robotics (2016-20), the government focuses on developing a robotics industry system capable of producing IRs with technical specifications and qualities on a par with international competitors, and aims to achieve a 45% market share for domestic companies in high-end robotics by 2020 (Ministry of Industry and Information Technology, 2015d). Besides IRs, the government also aims to facilitate mass production and application of service robots for seniors, health and medical care.

A technology roadmap for robotics was issued as a follow-up to Made in China 2025. The roadmap identifies the key technologies and components for developing IRs and service robots, and suggests strengthening co-ordination between research and application, standardisation, and quality assessment and certification at national level. In November 2016, China announced a robot certification mark and issued the first certificates to around 20 manufacturers.

Regions in China with traditional strengths in manufacturing mechanical and electrical products, including the Yangzi River Delta and the Pearl River Delta, have initiated large-scale “robot replaces humans” programmes. For example, from 2015-17, Guangdong province aims to promote the programmes in over 1 950 enterprises with annual revenues of CNY 20 million (USD 3.1 million) or more (Government of Guangdong, 2015).

3D printing

3D printing, more commonly referred to in China as additive manufacturing, is another technology which China’s State Council considers key to advanced manufacturing.

3D printing is developing rapidly in China. From 1988-2014, 79 602 industrial 3D printers were installed worldwide. During this period, in the world market for 3D printers costing USD 5 000 or more, China ranked 3rd, accounting for 9.2% of the total units in use, behind the United States (38.1%) and Japan (9.3%) (Parker, 2015). From 2013-14 the market for 3D printers in China increased from CNY 2 billion (USD 315 million) to CNY 3.7 billion (USD 582 million) (Huang, 2015), and is expected to reach CNY 10 billion (USD 1.6 billion) by 2016, according to the China 3D Printing Technology Industry Alliance. By April 2015, China ranked third in the global number of 3D printing patents, behind the United States and Japan (Feng F., 2015). Industrial 3D printing in China is under way in such sectors as space and aviation, biomedicine and the automotive industry.

The Commercial Aircraft Corporation of China (COMAC) has used 3D printing in making the ARJ 21 regional jet, and 3D printing will be used in manufacturing the C919, China’s first domestically designed commercial aircraft. With 3D printing, making the hyperboloid cockpit window frames of the C919 will take around 55 days and cost less than USD 200 000 a unit, compared to two years and USD 2 million if done traditionally (Ren, 2014).

Announced in September 2015, and approved by the Chinese Food and Drug Administration, China’s first 3D printed hip replacement has been made available to the public. This hip replacement offers high customisation, but is only half to one-third the cost of the previously imported replacements (Xinhua, 2015).

In consumer manufacturing, 3D printing has seen growing use in jewellery design and personalised applications, such as 3D printing for personal portraits and toys. Around 50% of jewellery makers in Guangzhou City use 3D printing in jewellery design (Cui and Liu, 2015). Claiming the highest standard of precision globally, a 3D printing service centre began operating in July 2015 in Foshan City, Guangdong Province. The largest of its kind in China, and using up to 1 000 Stratasys Solidscape printers, this centre aims to serve China’s domestic jewellery industry, among other customers (China South Daily, 2015).

However, at present, most industrial 3D printers in China are used in sectors such as research, education, aviation and design, which focus on R&D applications, especially the manufacturing of prototypes (Min, 2015). Restricted by the lack of standardisation with respect to the quality of 3D printed objects, the higher price of key 3D printing materials, and limited market demand for flexible and customised production, 3D printing is taking time to shift from small-scale, high-precision technology and design-centred production to industrial scale production.

Domestic manufacturers using 3D printing in China are usually supported by, or initially spin off from, major national universities and research institutes. For example, in industrial 3D printing, Shaanxi Hengtong Intelligent Machines, which is also hosting the first National Engineering Research Centre for Rapid Manufacturing, originated from Xi’an Jiaotong University. And Wuhan Binhu Mechanical & Electrical, the manufacturer of China’s first 3D printer with independent intellectual property, came out of Huazhong University of Science and Technology.

Desktop 3D printing is also booming in China. Tiertime, which began as a start-up out of Tsinghua University, is now the largest manufacturer of 3D printers in Asia, and 70% of its sales are to overseas markets (Li H., 2015). Also from Tsinghua University, AOD 3D Printing was created by a PhD graduate and was supported by the Tsinghua X-lab incubator. The company raised nearly CNY 5 million (USD 787 000) in 24 hours through WeChat-based crowd funding (WeChat is the most popular instant messaging application in China) (X-lab, 2014). The company’s main product, the AOD Artist 3D printer, which is tailored for artists and designers, is sold online at JD.com, one of China’s largest online direct sales platforms.

Policy settings in China on 3D printing

Chapter 5, on 3D printing and its environmental impacts, suggests that to encourage sustainability in 3D printing, policy should primarily encourage low-energy printing processes and low-impact materials (such as compostable biomaterials) that have useful end-of-life characteristics. Intellectual property barriers may need to be removed for potential applications of 3D printing, such as the making of repair parts for legacy products that lack existing supply chains.

In China, a national plan for promoting additive manufacturing (2015-16) was released in 2015, focusing on research directions including feedstock (metal, non-metal and specific materials for medical purposes), process technologies (both melting and chemical processes), and key devices (such as melting and feeding devices and high-precision sprinklers). The plan also aims to develop an industrial standard system and to initiate demonstration projects. Aerospace and aviation, automobile engine, industrial prototyping and high-precision medical devices are among the industrials targeted for application and commercialisation.

In 2016, a national research project, with a budget of CNY 400 million, was started for additive manufacturing and laser manufacturing. Among the seven priorities of the former, five aim at commercialisation and must be led by enterprises. A standards technology committee and an industrial alliance for additive manufacturing were also established in 2016. A project supported by the Chinese Academy of Social Sciences was initiated in 2014 to study the development of 3D printing and the changes it could require in the intellectual property system.

At regional level, voluntary certifications exist for additive manufacturing (e.g. from the Additive Manufacturing Products Supervision and Inspection Center of Jiangsu Province). These mostly focus on quality, rather than sustainability.

Biotechnology

Biotechnology is listed as one of eight “frontier” technologies in the Guidelines on National Medium- and Long-term Program for Science and Technology Development (2006-20). From 2010-13, China ranked seventh in the global share of biotechnology patents (Figure 12.5) (OECD, 2015b). Bioindustry output in China reached CNY 3.16 trillion (USD 497 billion) in 2014, equivalent to 4.6% of GDP (Fu and Feng, 2015). In Made in China 2025, biomedicine and bio‐based materials are specifically considered parts of advanced manufacturing.

Figure 12.5. Country shares in biotechnology patents, 2010-13
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Note: Data refer to patent families filed within the Five Intellectual Property Offices (IP5), with members filed at the EPO or at the USPTO, by the first filing date, the inventor’s residence using fractional counts. BRIICS = Brazil, the Russian Federation, India, Indonesia, China and South Africa. Data from 2013 are estimates.

Source: OECD (2016b), STI Micro-data Lab: Intellectual Property database, http://oe.cd/ipstats (accessed October 2016).

 http://dx.doi.org/10.1787/888933473920

Production of biomedicines is the leading sector in China’s bioindustry

In 2009, production of biomedicines reached CNY 1.04 trillion (some USD 164 billion) (overall bioindustry output in the same year was CNY 1.4 trillion) (Ministry of Science and Technology, 2011). For the period 2013-15 the government established three major policy aims: development and industrialisation of biologic medicine; quality improvement in chemical medicine; and, standardisation of traditional Chinese medicine (State Council, 2013).

The government is implementing stricter standards for drug production, while implementing policies to attract talent and encourage drug development. Chinese companies are trying to catch up in biomedicine, both in manufacturing and in drug development. Entrepreneurs with an overseas education and business background are playing a major role. For example, WuXi AppTec, founded by a Chinese returnee, is a leading pharmaceutical contract research company and manufacturer. The company produces the compound IMP321 (for the French drugmaker Immutep), a biologic cancer treatment in late-stage development. Frederic Triebel, Immutep’s scientific and medical director, noted that “Five years ago, no one would have been talking about manufacturing in China. But now, it’s accepted that it’s the place to go.” (Deng, 2014). AppTec also produces Ibalizumab, a biologic to treat HIV, for Chinese Taipei’s TaiMed Biologics. Ibalizumab received “breakthrough therapy” designation from the US Food and Drug Administration (FDA) in 2015 (Chizkov and Million, 2015). AppTec claims that if the FDA approves Ibalizumab, it would be the first biologic medicine manufactured in China to be launched in the United States.

In December 2014, Chidamide, a chemical medicine developed by Chipscreen Ltd., was approved by China’s FDA for the treatment of peripheral T-cell lymphoma. Chidamide is considered the first medicine entirely developed in China, and has been cited as an example of China’s pharmaceuticals industry shifting from copying to innovation (Peng, Feng and Bai, 2015). Lu Xianping, co-founder of the company, and another returned entrepreneur, estimates the cost of research to develop chidamide at about USD 70 million, around one-tenth what it would have cost to develop in the United States (Wang, S., 2015).

Biomedical engineering in China

Acornea, jointly developed by China Regenerative Medicine International (CRMI) and the Tissue Engineering R&D Centre of the Fourth Military Medical University, is a bioengineered cornea, the research for which has been supported by the government (the cornea received approval from China’s FDA in April 2015). Now in wide production, this product is expected to relieve the acute shortage of corneas in China (Chen, 2015). “It is the world’s first bioengineered artificial cornea that completed clinical trials and obtained a medical certificate,” reported the chief executive of CRMI (Yang Jing, 2015).

BGI, one of China’s leading companies in gene sequencing and genetic tests, aims to provide precision medical services by combining its strengths in genomics, big data and AI. BGI works with local partners, including Huawei and the National Super Computer Centre, on big-data storage and processing. BGI has established an online gene test platform, GeneBook, which provides prenatal gene diagnosis, gene diagnoses for breast cancer and dementia, and genetic assessment of tolerance to alcohol.

Sales of bio-based materials were projected in 2012 to reach CNY 750 billion in 2015 (USD 118 billion), and to play an increasingly important role in replacing petrochemical materials and chemical processing technologies (State Council, 2013). China is active in industrial production of and research on polyhydroxyalkanoates (PHAs) (an eco-friendly bio-based material used for producing bioplastics) and increasingly active in the area of industrial fermentation, biofuels and bioimplants (Chen and Wang, 2015).

Around 700 million tonnes of straw biomass is generated annually in China (Ministry of Science and Technology, 2015a). Pilot projects have been implemented to produce industrial sugar and biofuel, and biorefineries are expected to make further use of the straw biomass. A second-generation biorefinery, with an estimated capacity to take 970 000 to 1.3 million tonnes of straw biomass feedstock a year, is being built in Anhui Province in eastern China, through a joint venture between China’s Anhui Guozhen Group and Italy’s M&G Chemicals (Voegele, 2014).

Synthetic biology – including bio-based material manufacturing using synthetic biology – has been supported since 2011 by China’s National Basic Research Programme. BluePHA, a start-up from Tsinghua University, is developing a seawater-based fermentation process that produces PHA at low cost (Yue, Ling and Yang, 2014). One of the targeted applications for the PHA will be as a material to be used in 3D printing.

Policy settings in China on biotechnology

Chapter 3, on biotechnology and future production, suggests that policy to support innovation in bio-based chemicals should help to create sustainable supply chains for bio-based production and recognise the need for demonstrator- and commercial-scale biorefineries. Governments often also need to fill gaps in research and training, improve the regulatory environment, and lead in market-making through public procurement policies.

Starting from the 11th Five-Year Plan (FYP), China has issued policies and plans for developing its bioindustry. National projects were dedicated to the bio-based material industry in the 12th Five-Year period (2011-15), with support for basic research and key bio-based materials and chemicals. By the end of 2012, the State Council released a National Strategy for the Bioindustry, which among other things initiated demonstration projects for bio-based materials and chemicals. By 2015, bio-based chemicals ranked third in patent applications in China’s bioindustry, following biomedicine and biomedical devices.

By regulation, bio-based production in China must be based on non-grain crops. An action plan was initiated under the 2012 National Strategy for the Bioindustry to build a supply system for non-grain crops that included five to ten production areas of non-cropland and multiple biosources, such as sweet sorghum and cassava. However, stable and sustainable feedstock supply for bio-based production remains a key challenge.

While demonstration projects are under construction, there are as yet no policies in China concerning biorefineries.

In terms of human resources, a mid- and long-term national talent development plan for biotechnology (2010-20) was published in 2011. This aims to develop researchers and research teams through national projects, and through research institutions such as national labs and engineering centres. The plan also focused on industry by utilising national high-tech parks to start demonstration projects and to increase the number of experienced industrial workers. Managers will also be trained through national training programmes.

A technology committee for the standardisation of bio-based material and biodegradable products was established in 2008, and was included in the Guidelines for the Standard System of Green Manufacturing. However, further national standards on bio-based materials are needed. At regional level, many provinces (e.g. Jiangsu, Shangdong) have issued regulations on the circular economy (for example, promoting bio-based and biodegradable products, e.g. by banning non-degradable plastic bags).

Biomass waste constitutes 11% of China’s industrial solid wastes and less than 10% of those were recycled in 2010 (Ministry of Environment Protection, 2012). A national project for utilising such waste was initiated in the 12th FYP. Among its technology goals was a 90% utilisation rate of industrial biomass waste in fuel gas generation. Similar approaches were also taken to domestic waste.

A 2009 State Council document considered promoting the bioindustry through public procurement. Implementation occurred at regional levels. For example, Shenzhen City issued a green procurement list and included the use of bio-based and degradable materials in the system for assessing the quality of hotels and restaurants.

Nanotechnology

China began research in nanotechnology in the middle of the 1980s. By the end of the 11th FYP (2006-10), China ranked first in Science Citation Index publications in nanotechnology and second in total citations (Ministry of Science and Technology, 2012a). During 2010-13 China ranked fourth in the global share of nanotechnology patents and increased its revealed technological advantage in nanotechnologies (Figure 12.6) (OECD, 2015b). With its achievements in research, China now aims to translate research to commercial use. Successful industrial applications of nanotechnology in China have seen frequent collaborations among research institutes, universities and industry.

Figure 12.6. Revealed technological advantage in nanotechnologies, 2000-03 and 2010-13
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Note: Data refer to patent families filed within the Five Intellectual Property (IP) Offices (IP5), with members filed at the EPO or at the USPTO, by the first filing date, the inventor’s residence using fractional counts. The revealed technological advantage index is calculated as the share of the country (or economy) in nanotechnology patents relative to the share of the country (or economy) in total patents. Only countries and economies with more than 100 patents in the two periods are included in the figure.

Source: OECD (2016b), STI Micro-data Lab: Intellectual Property database, http://oe.cd/ipstats (accessed October 2016).

 http://dx.doi.org/10.1787/888933473936

Nanomaterial accounts for the largest share of China’s patents in nanotechnology. The concept of new materials covers a very wide spectrum of materials. The 12th FYP listed over 400 key materials (across metallic, semi-conducting, composite, polymer, inorganic and “frontier” materials). According to the latest data, production in the new material industry increased from CNY 600 billion in 2010 to CNY 2 trillion in 2015.

Among nanomaterials in China, research on, and application of, carbon nanotubes (CNT) have grown particularly fast. Currently, the touch screen market is dominated by indium tin oxide (ITO) film and glass technology. However, constrained by limited screen size and the high price of indium, ITO is being challenged by other technologies, including CNTs (Heo, 2013). CNTouch, jointly established by Tsinghua University and the Foxconn Group, can replace ITO with CNT in touch screens, which in turn reduces production costs and the thickness of the panels. CNTouch collaborates with major Chinese mobile telephone manufacturers including Huawei, ZTE and Lenovo, and had revenues of around CNY 400 million (USD 63 million) in 2013 (Tianjin Municipal Science and Technology Commission, 2014).

Chinese manufacturers are also key players in the global market for CNTs. Cnano Technology Limited, with a CNT production capacity of 500 tonnes per year, and TimesNano, which is affiliated with the Chinese Academy of Sciences and has a capacity of 200 tonnes per year, are expected to lead the global CNT market as their output increases (Johnson, 2014). The two companies are also major manufacturers of CNT conductive pastes, which are used to increase performance in lithium-ion batteries.

Besides CNT, nanocomposites are increasingly used as a coating material, and industrial application has occurred in electrical engineering. China is building a national ultra-high-voltage electricity transmission system. Climate conditions and air pollution pose challenges for this system, which requires high-performance coatings in electrical insulation to prevent pollution-related flashovers (Zhang et al., 2013). To respond to this need, a nanocomposite coating is being developed jointly by State Grid and the Chinese Academy of Sciences, and has been applied in anti-pollution coating projects in a number of 500 kilovolt (kV) and 220 kV booster substations.

Nanoscale catalysts have been applied in China in coal-based ethylene glycol production. Nanocatalysts developed by the Fujian Institute of Research on the Structure of Matter (a part of the Chinese Academy of Sciences) are considered essential for such glycol production. The Fujian Institute of Research now works with Danhua Chemical Technology and Shanghai Gem Chemicals Hi-tech in industrialised production, and aims to reach a capacity of 3 million tonnes per year (Hanhua Technology, 2013). The institute is also co‐operating with Guizhou Province to implement its second generation of coal-based ethylene glycol production. Due to ethylene glycol’s wide application in the chemical industry, and China’s rich coal resources, industrialised coal-based ethylene glycol production is considered an important breakthrough in China (Ministry of Science and Technology, 2012b).

A research team at the Dalian Institute of Chemical Physics has achieved direct and non-oxidative conversion of methane to ethylene, aromatics and hydrogen (Guo, 2014). This development was listed as one of the top ten scientific achievements in China in 2014 (Sciencenet, 2015). Industrialisation of such technology, if successful, has great potential to more effectively utilise natural gas and shale gas.

Nano-printing technology, combined with metal nanomaterials, promises industrial applications in the production of printed electronics, such as radio-frequency identification (RFID) circuits, electronic tickets, antennae, flexible displays and lighting. NanoTop Electronic Technology, a company jointly supported by the Beijing municipal government, Lenovo Group and the Chinese Academy of Sciences, produces electronic tickets using nano-printing and nano silver composite paste. A pilot project of 200 000 RFID tickets has been implemented in the Beijing Metro. The tickets, which are 97% recyclable and fully compliant with the Restriction of the Use of Certain Hazardous Substances (RoHS) standard, are more eco-friendly than those produced using traditional methods (Science China, 2013).

Policy settings in China on nanotechnology

To support nanotechnology’s development and industrial use, Chapter 4, on nanotechnology and future production, suggests that policy should support institutional collaboration and develop multidisciplinary networks, particularly collaborations on nanotechnology R&D infrastructures. Governments should also support innovation and commercialisation in small companies, as well as developing transparent and timely guidelines for assessing the risk of nanotechnology-enabled products.

Chapter 6 draws attention to related policy issues raised by developments in the area of new materials, suggesting that governments should monitor possible concerns raised by new materials (such as the possibility of new cybersecurity risks raised by materials created using simulation techniques), and ensure effective policy in a variety of areas that are often important for pre-existing reasons (frequently relating to the science-industry interface and such issues as open data, open science and the quality of the IP regime). Support for interdisciplinary research and education may also be necessary.

International co-operation in nanotechnology was identified as key in the 12th FYP for nanotechnology. From 2000-09 there was an almost ten-fold increase of co-authored papers between China and the United States (from 126 to 1 238 papers). In 2012, the China-Finland Nano Innovation Centre was established in the Nanopolis in Suzhou City. An international conference on nanoscience and nanotechnology has been held biannually since 2005, with the most recent meeting, in 2015, attracting over 1 300 participants from over 40 countries and regions. However, the share of co-authored nanotechnology papers is still below the share of internationally co-authored papers in all fields of science in China.

A National Steering Committee for Nanoscience and Nanotechnology was created to co-ordinate key government departments, funding agencies and research institutes. Nanotechnology was listed as a key technology in China’s mid- and long-term science and technology (S&T) development plan (2006-20). Nanotechnology has subsequently received significant funding from all major Chinese funding agencies. In 2016, the Ministry of Science and Technology invested over CNY 600 million (USD 87 million) in nanotechnology research.

SMEs working with nanotechnology can apply for financing from the national SME technology innovation fund, as well as general tax refund and procurement support. A national initiative to open publicly funded key research infrastructures and equipment to the public (including universities, companies and social research organisations) began in 2015. Detailed implementation policies are yet to follow.

In China, new materials have received support in both the 12th and 13th FYPs for S&T. In the 13th FYP, a long-term project, Innovation 2030, focuses on the production and application of important new materials such as carbon fibre, composites, high-temperature compound metal, and new display materials. The interdisciplinary nature of new materials development is acknowledged in the National Mid- and Long-term Talent Development Plan for New Materials, which aims to train over 1 000 interdisciplinary scientists, engineers and managers by 2020. However, specific policies are not yet evident.

Government strategies and policies

A number of high-level government initiatives have been put in place to promote technology development and the upgrading of manufacturing in China. The overarching government initiatives (and the years of their announcement) include:

  • the Guidelines on National Medium- and Long-term Program for Science and Technology Development (2006-20) – 2006

  • Decision on Accelerating the Fostering and Development of Emerging Industries of Strategic Importance – 2010

  • the 12th FYP for National Economic and Social Development – 2011

  • Made in China 2025 – 2015

  • Internet Plus – 2015

  • the 13th FYP for National Economic and Social Development – 2016.

These initiatives are important as they set key goals, directions, specific priorities and frameworks. Being highly general and concise, they are usually followed by more detailed and implementation-oriented action plans. The plans utilise tools and measures such as government investments, R&D programmes, demonstration projects, tax incentives, financing support and human resources policies.

When viewed chronologically, these initiatives also reflect how priorities have changed over the past decade. The increasing importance of manufacturing upgrading is the most obvious example, comprising just chapters in the earlier initiatives to becoming the major subject of Made in China 2025. At the same time, the focus on enabling technologies, which used to be heavily R&D-oriented, is being progressively oriented to commercialisation and industrial application.

The integration of manufacturing and digital technologies, especially ICT and the Internet, is considered the key driver for upgrading manufacturing, while innovations and developments in strategic priorities, such as biotechnologies, new materials and new forms of energy, provide critical additional impetus.

The government’s policy approaches and instruments are also changing. As the enabling technologies move from laboratories to industry, government investments and incentives, which used to be the foremost tools, are giving way to system reform and measures to improve the business environment, with markets expected to play a more prominent role. Policies on international co-operation, open infrastructure and data access, and SMEs, are also gaining in importance.

Local governments have also encouraged manufacturing upgrading. Matching funds, tailored incentive policies and industrial parks are among the measures they use.

Overarching government initiatives

The Guidelines on National Medium- and Long-term Program for Science and Technology Development (2006-20) (hereafter “the Guidelines”) emphasise the strategic importance of innovation. The Guidelines seek to support a comprehensive system of implementation by co-ordinating policies on R&D investment, tax incentives, financial support, public procurement, IP and education (Table 12.1).

The Decision on Accelerating the Fostering and Development of Emerging Industries of Strategic Importance (hereafter “the Decision”) positions itself as coming at an important moment in the upgrading of China’s industrial structure and establishes seven emerging industries of strategic importance.4 These seven industries are expected to represent around 15% of GDP by 2020. To reach its goals, the Decision tries to combine public support with the market, and promotes the involvement of both large companies and SMEs.

The National FYPs cover every important sector of China’s economic and social development, and include a focus on enhancing the core competitiveness of China’s industry. Following the 12th FYP more detailed plans have been drafted, including the FYP for Industrial Transformation and Upgrading, the 12th FYP for Emerging Industries of Strategic Importance and the 12th FYP for Science and Technology.

Table 12.1. The implementation system for the Guidelines

Policy target

Institutions and measures

R&D investments

Funding management policies for national high-tech, basic research, and enabling technologies programmes; policies for R&D for public welfare.

Tax

Import tax redemption for equipment for R&D and teaching; policies for start-ups; tax incentives for corporate R&D.

Finance

SME credit guarantee; investment fund for S&T in SMEs; export credit insurance for high-tech companies; financing for key national R&D projects from business banks.

Public procurement

Public procurement management policies for S&T products.

Technology acquisition

List of technologies encouraged for acquisition.

Human resources

Attracting overseas talent; guiding opinions for employment in R&D institutes; human resources policies in national R&D projects; 11th FYP for post-doctorates.

Intellectual property

National programme to support key technology standards and application; opinions to strengthen public IPR services.

Education

National key disciplines; government overseas scholarship; part-work, part-study education in vocational colleges; open universities and R&D institute.

Innovation platforms

National engineering research centre; national engineering laboratories; state certified corporate R&D centre.

Source: Author’s analysis.

Made in China 2025 is a milestone in the sense that it is the first of a series of national ten-year strategic initiatives covering the long-term comprehensive development of China’s manufacturing industry. Made in China 2025 has established indicators for industry on innovation, quality, digitalisation and greenness. For example, by 2025, the percentage of R&D spending relative to manufacturing sales is targeted to reach 1.68%; labour productivity is expected to increase by 7.5% annually to 2020, and thereafter by 6.5% to 2025; broadband coverage should rise from 50% in 2015 to 82% in 2025; and energy consumption per unit of added value should fall by 34% by 2025 (Box 12.3).

Until now, implementation has focused on technologies, and has taken the form of central government funding for projects. The government established a CNY 20 billion (USD 2.9 billion) Modern Manufacturing Industry Investment Fund, CNY 6 billion of which comes from the government budget. Besides demonstrational pilot projects, the central government has also started a scheme of experimental cities, under Made in China 2025, in which selected cities are encouraged to identify and develop their comparative advantages in manufacturing. Ningbo and Wuhan are among the first cities selected (He, 2016). However, the paths and directions of Made in China 2025 have raised demand for a more comprehensive approach to implementation, going beyond the particular needs of individual technologies.

Published two months after Made in China 2025, the Internet Plus initiative seeks to better integrate the Internet with industry. Internet Plus promotes digitalisation in 11 sectors,5 and aims by 2025 to see China with an interconnected service-oriented industrial ecosystem. In manufacturing, integrating the Internet means first developing so-called “intelligent factories” by promoting cloud computing, the IoT, industrial robotics and additive manufacturing. Large-scale customised manufacturing is another priority, in which the Internet and flexible forms of manufacturing will help to supply more diversified customer needs. A further priority is to increase the services content of manufacturing output.

Box 12.3. Made in China 2025

Made in China 2025 identifies nine paths to achieving its ambitions:

  1. Enhancing innovation capability. The aim is to create a national innovation system in which enterprises lead, government provides services and support for key technology R&D, and research outcomes from academia can be efficiently commercialised.

  2. Promoting digitalisation. Digitalised manufacturing is the aim, and this covers not only equipment, such as computer numerical control machine tools and robotics, but also intelligent manufacturing processes and related infrastructures.

  3. Focusing on the basics. Four “basics”, as they are called in Made in China 2025, are: basic components, basic processing technologies, basic materials, and basic industrial services.

  4. Boosting quality and building brands. Quality management, inspection and standards will be introduced to address quality issues. Also addressed are efforts to raise awareness of branding and support to agencies for brand management and marketing.

  5. Making manufacturing greener. This consists of applying green technologies to traditional manufacturing sectors while developing low-carbon industries such as new materials and biotechnology, promoting resource recycling, creating green supply chains and logistics, and reinforcing greener standards and environmental inspections.

  6. Targeting priority technologies and products. These priorities include ICTs, numerical control tools and robotics, aerospace equipment, ocean engineering equipment and high-tech ships, railway equipment, energy-saving vehicles, power equipment, agricultural machinery, new materials, biological medicine and medical devices.

  7. Restructuring industry. This path aims to deal with applications of new technologies in enterprises, overcapacity, co-ordination between large enterprises and SMEs, and industrial planning at regional level.

  8. Developing manufacturing as a service and services for manufacturing. This path aims to help manufacturing extend the value chain and develop and sell both products and services. Services for manufacturing range from logistics and human resources to IP services and after-sales services. Services for adopting ICTs and mobile Internet business are emphasised.

  9. Opening for international co-operation. This path seeks to help Chinese companies invest and do business abroad, while attracting to China more foreign investments in high-tech industries and global research centres.

For these nine paths, Made in China 2025 identifies eight directions for implementation. These relate to system reform, fair market competition, finance, tax, human resources, SMEs, international openness, and co-ordination mechanisms. A technology roadmap for the priority technologies and products was published in October 2015. In August 2016, Implementation Guidelines for Five Key Projects (the first implementation policies for Made in China 2025) were issued to start projects for innovation centres, intelligent manufacturing, industry basics, green manufacturing and high-end equipment (addressing paths 1, 2, 3, 5 and 6, respectively).

Internet Plus is implementation-oriented. Each priority has a designated government department responsible for follow-up. But Internet Plus does not rely heavily on government investments. Emphasis is laid on better public infrastructures, capacity building for innovation, and a more flexible regulatory environment. Openness is also emphasised, with goals established to advance open-source communities, open data, and open infrastructures and facilities.

Complementary measures and policies

Besides government-funded programmes, which are the key measure for implementing the initiatives described above, China has also introduced complementary policies that address systemic reform, finance and tax, IP and human resources. These are briefly described here.

Systemic reform

The government’s role is increasingly shifting to strategic planning, policy implementation and improvement of public services. A major reduction of items requiring government administrative approval started in 2013. Over 700 administrative approval items are reported to have been cancelled or handed down to lower tiers of government, many of which are approvals for industrial investments (State Council, 2016). To accelerate administrative simplification, the government is resorting to a “negative list” approach for sectors and economic activities. Other than the listed sectors, the rest, including new sectors and businesses, such as myriad forms of Internet financing and shared-economy ventures, can proceed without going through governmental approval procedures (State Council, 2015a).

Industry has long been promoted as the leading force in technological innovation. To this end, many national R&D programmes are designed to be led by industry. Industrial laboratories and technology centres are eligible for tax incentives and exemptions. Technological innovation is also used as a performance indicator for state-owned enterprises. There is also a growing focus on enabling and promoting technological upgrading and innovation in SMEs, along with better framework conditions, such as access to loans.

The Mass Innovation and Entrepreneurship initiative marks a recent shift in China’s innovation policy, towards grassroots innovation and mass entrepreneurship. This initiative entails a significant change from “picking winners” towards more general forms of support for entrepreneurship and innovation (Liu et al., 2017). Policies are also being tailored to the needs of different types of entrepreneur. For example, researchers will be given three years to develop their research into a business while their jobs are preserved in universities or research institutes.

Government is also investing in the infrastructures needed to use new technologies, especially in the fields of ICT and new energy sources. National standards and labels, such as the National Energy Label, have also been created to encourage and guide consumer choices.

Efforts have likewise been made to strengthen an integrated national market by eliminating incompatible and overlapping regional policies. Other systemic reforms have also been implemented to promote autonomy in research institutes, academia-industry collaboration, regional innovation and the reform of state-owned enterprises.

Finance and tax

Financial support and tax are used to guide private investments and encourage R&D in priority areas. Central government financing is increasingly used to help mobilise resources from regional governments and private actors, and is changing in form from direct subsidies for buying hardware to performance-based incentives. On tax incentives, the government recently modified eligibility criteria and strengthened supervision, with the goal of increasing policy effectiveness and efficiency. In 2013, China, together with the United States and France, provided the largest absolute volume of tax support for R&D (Figure 12.7).

Figure 12.7. Direct government funding of business R&D and tax incentives for R&D, 2014 (as a percentage of GDP)
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Note: Data on China refer to 2009 and 2013. For other country specific notes see sources.

Source: OECD (2017b), R&D Tax Incentive Indicators, http://oe.cd/rdtax (accessed February 2017); OECD (2017c), Main Science and Technology Indicators, http://oe.cd/msti (accessed February 2017).

 http://dx.doi.org/10.1787/888933473941

Since 2006, 150% of the costs of technological innovation and of R&D have been deducted from the calculation of corporate income tax. In 2014, total deducted corporate income taxes reached CNY 237 billion (State Administration of Taxation, 2015). In 2015, this policy was widened, to be more accessible to SMEs. A 15% rate of corporate income tax is applied to high-tech enterprises in national high-tech industrial parks (the standard rate of corporate income tax is 25%), with tax exemption for the first two years (Ministry of Finance, 2006). Import tax is exempted for articles used in S&T R&D (Ministry of Finance, 2007a). Import tax is also refunded for key components and materials used in manufacturing critical equipment (Ministry of Finance, 2007b). Incentives also include exemption of value-added tax for technology transfer (introduced in 2010) (Ministry of Finance, 2010), and accelerated depreciation of fixed assets in industries including biomedicine and ICT (in 2014) (Ministry of Finance, 2014).

With respect to equity finance, the first national public Fund of Funds (FoF) was set up in 2006. This FoF helps to establish venture capital funds investing in high-tech start-ups and SMEs. Starting with CNY 100 million in 2007, the FoF reached a capitalisation of CNY 1.3 billion in 2014 (Ministry of Science and Technology, 2014). Following this model, more government venture funds were set up after 2010. Some of these funds aim to promote technology transfer and commercialisation (Box 12.4), while others support emerging industries, especially in ICT, biotechnology, advanced manufacturing and new materials. In 2015, a CNY 40 billion government venture fund for emerging industries was founded. This fund will introduce further market-based management mechanisms and give fund managers more autonomy (State Council, 2015c).

Box 12.4. National Fund for Technology Transfer and Commercialization

Established in 2014, the National Fund for Technology Transfer and Commercialization (NFTTC) aims to promote research transfer and commercialisation, especially for research projects supported by government investments. In 2015, it invested around CNY 1 billion (USD 145 million) in setting up three venture capital funds with a total capital of CNY 4.2 billion (USD 610 million).The NFTTC has four key features:

  • A national database that includes all outcomes and findings from the research projects.

  • A venture capital function. NFTTC sets up a venture capital fund, in partnership with selected investment agencies. The agencies will invest in transferring and commercialising technologies in the database.

  • Loan risk compensation for banks. Compensation not exceeding 2% of the loan will be available to banks that support SMEs engaged in transferring or commercialising technologies.

  • Performance incentives. A one-time incentive would be available for enterprises, research institutes, higher education institutions or agencies that have outstanding performance.

Large items of technological equipment developed by Chinese manufactures usually need time to build user trust. After Made in China 2025, a pilot programme was set up to provide government insurance subsidies for manufacturers. If manufacturers can reach a deal with insurance companies and sell equipment to customers (the beneficiaries of the insurance), 80% of the cost of insurance will be subsidised for the initial sale. A guiding list was issued in 2015. The Harbin Y-12 turboprop utility aircraft is among first products to be insured in this way.

Intellectual property (IP)

To co-ordinate China’s IP strategy with the major initiatives described above, policies have been adopted to address IP application, services and protection. This is occurring in a context of rapidly growing and subsidised patenting, but low patent quality overall, a significant incidence of infringement and a widespread perception in business that patents do not properly protect innovation (OECD, 2017a).

A list of key ICT technologies and products in the information industry has been issued to guide and encourage domestic IP development (Ministry of Science and Technology, 2007). For IP issues in strategic emerging industries, policies have sought to increase IP quality by issuing national guidelines for IP assessment and facilitating IP application through fast-track procedures (State Council, 2012). Measures have also been designed to develop the potential of IP-based business financing, such as IP-backed loans (China Banking Regulatory Commission, 2013). Domestic enterprises and research institutes are likewise encouraged to develop IP overseas.

Since the release of Made in China 2025, pilot projects for industrial patent consultancy have been initiated by the State Intellectual Property Office (State Intellectual Property Office, 2015). These projects provide IP analysis and strategic recommendations in certain industries. A first series of projects has been undertaken in nanomanufacturing, mobile Internet and super-hard materials.

Measures will also be taken to implement more strict protection of IP rights by building a more streamlined and co-ordinated national IP service, management and enforcement system (State Council, 2015b). Strengthened IP protection is being planned in new fields such as big data, crowd sourcing and crowd funding.

Human resources

“Talent is the foremost resource for China’s social and economic development,” according to the document “Outline of National Medium-and Long-term Program for Talent Development (2010-20)”. As China’s first long-term talent development initiative, the outline aims to raise the percentage of highly skilled workers to 28% and the ratio of human capital investment to GDP to 15% by 2020. Among others, equipment manufacturing, ICT, biotechnology and new materials, are specified as priority areas for skills development (State Council, 2010).

To develop skills in these priority sectors, sub-initiatives will enhance the capabilities of business managers and highly skilled workers. In addition, 12 national human resource development projects are being implemented, streaming national investments to the training of young researchers and technicians, to the use of overseas talent, and to skills development among managers and technicians.

Made in China 2025 has emphasised the importance of a comprehensive skills system in areas ranging from R&D, research translation and application, to production and management. A growing number of general undergraduate colleges are being transformed into vocational colleges to strengthen vocational and continuing education. Pilot projects for modern apprenticeships are also being developed.

As a response to Made in China 2025 and Internet Plus, modifications have been made to the National Catalogue of Disciplines and Specialties for Vocational and Technical College Education (which serves as the guideline for course setting). The modifications include new disciplines such as industrial robotics, IoT engineering, 3D printing for aviation, cloud computing and big data. Further educational initiatives are also under way. For example, while ICTs have long been integrated in primary and middle schools, a national programme for teaching robotics is now under consideration (Ren, 2016).

Besides basic education, measures will be taken to provide more overseas training opportunities and attract skilled individuals from overseas. To these ends, the Talent Development Programme for Manufacturing Industry (2016-20) is being developed by the Ministry of Education. Policies are also being tailored to the needs of researchers and academics. For example, their jobs will be preserved in universities or research institutes for up to three years if they develop their research into a business. Services and incubators will be provided in universities to support student start-ups, which will also enjoy preferential tax status.

Regional initiatives

China’s regions vary greatly in terms of industrial development (Figure 12.8). Made in China 2025 became one of the most frequently mentioned initiatives in regional government reports in 2016, as provinces began to follow up with their own initiatives (Ma, 2016). This also raises challenges of overlapping investments and competition among regions, and calls for better co-ordination and governance at both central and regional levels.

Some regions, especially the more developed coastal and eastern provinces, have initiatives to develop industries in robotics, the IoT and drones, such as the Robots Replace Humans programmes. Other regions focus on upgrading existing industries with new technologies. For example, Hebei province, challenged by overcapacity in steel, cement and glass production, aims to advance industry reform and green growth through Made in China 2025.

Figure 12.8. R&D spending across regions in China 2015
picture

Source: Ministry of Science and Technology (2015c), “2015年全国科技经费投入统计公报” [R&D expenditure 2015], www.most.gov.cn/kjbgz/201611/P020161118627899534071.doc.

 http://dx.doi.org/10.1787/888933473954

New technologies have also provided opportunities for regions in inner China. For example, Sichuan is among the first provinces to create a long-term Roadmap for Additive Manufacturing (2014-23), and has set specific priorities for 3D printing in the aviation and precision machinery industries (Wu, 2014). Guizhou, a less-developed province in mid-western China, aims to become the data centre of China and has issued China’s first regional regulation on big data.

China presently has over 145 national high-tech parks. These are considered important for regional governments in promoting technological advances. Besides high-tech parks, Smart City is another government initiative taken up by many Chinese cities. By 2015 there were around 300 pilot Smart City projects in China (Ministry of Housing and Urban-Rural Development, 2015). These aim to apply the IoT, big data, cloud computing and mobile Internet to infrastructure, public governance, transportation, health care and industrial production.

Key challenges and policy considerations

Upgrading manufacturing in China faces complex challenges. The upgrading process is not just about developing the latest technologies. It also requires a greatly increased use of those technologies, as well as upgrading and restructuring a vast productive capacity that still operates at the level of industry 2.0 (or even, in many cases, 1.0) (Yang Jun, 2015). Major challenges exist not only in increasing government investment in science, research and innovation, but also commercialising research and encouraging proactive private sector innovation. Hardware must be enhanced, such as ICT infrastructure, along with software and skills. The challenge also spans central and local governments, as well as research institutes and universities, SOEs and SMEs. While policies and programmes are promoting the technologies necessary to upgrade manufacturing, policy also needs to cope with a range of related developments and impacts, such as the growing importance of cyber security, and disruption in the labour market. At the same time, attention must be paid to issues of governance, such as co-ordination among government departments and between central and regional governments.

Polarisation of technology capabilities

Chinese manufacturing is highly polarised. Examples have been given in this paper of cutting-edge technological development and use among Chinese firms. But in many sectors extensive gaps exist in basic manufacturing capabilities, such as the mastery of key processing technologies and the ability to produce necessary materials. Indeed, most of Chinese manufacturing lags in terms of management and digital capabilities. In the words of Miao Wei, Minister for Industry and Information Technology, “Chinese manufacturing is still at a stage where industry 2.0 and 3.0 is happening together and has to develop to simultaneously finalise industry 2.0, popularise 3.0 and demonstrate 4.0.” (Feng B., 2015) Firm surveys confirm this observation (Figure 12.2). Such uneven development, combined with an industry structure in which resource and energy-intensive sectors are still large, creates complex challenges.

At the higher end of manufacturing, challenges include a heavy reliance on imports of core capabilities, such as advanced equipment, system software and critical components such as servomotors for IRs and certain high-quality steel products (Box 12.5); insufficient investment from research institutes in basic research and a low intensity of business spending on R&D (relative to sales, for example); and, a lack of synergy between research institutes and industry, resulting in inefficient technology commercialisation. In the mid-range of manufacturing capabilities, challenges include a need to raise product quality; overall inefficiency; weak brands; and a need for further technological innovation so as to climb value chains. Challenges are particularly large and complex for upgrading in resource and energy-intensive sectors, which is also intertwined with issues of overcapacity, low levels of industrial sophistication and environmental pollution.

Box 12.5. A ballpoint pen Made in China

In a recent meeting to address overcapacity in the steel and coal industries, held in Taiyuan, capital city of Shanxi province, a region rich in coal but now facing challenges of stalled development, the Chinese Premier Li Keqiang observed that despite great overcapacity in steel production China still needs to import certain high-quality steel products, including those used to produce the tips of ballpoint pens.

This problem was observed back in 2011 by Wan Gang, the Chinese Minister for science and technology, who pointed out that for the 38 billion pens made in China 90% of ballpoint pen tips are imported. In 2012, a national research project on key materials and equipment in pen-making was initiated. CNY 60 million was invested by the government, with twice this amount invested by the principal investigators, making it the largest research project in China’s pen-making industry to date. This project studied three sub-themes, around ink, tips and tip-ink matching. Three companies – one SOE and two private companies – took part. The project was finalised in 2015, with a successful demonstration in producing 1 000 metric tonnes of steel per year for the tips of ballpoint pens (Ministry of Science and Technology, 2015b).

Premier Li’s observation, when combined with this project, is a reflection of the polarisation of Chinese manufacturing. It also illustrates the government’s strategy to address this problem, with industry taking the lead in both R&D and investment, while government acts in a support role.

Making markets work for industrial upgrading

Improving the efficiency with which human and financial resources are allocated is essential. Aligning framework policies that promote product market competition, reduce rigidities in labour markets, and remove disincentives for firm exit and barriers to growth for successful firms is critical. Resources used in production need to flow at low cost to firms that can develop and use new technologies effectively. Creating a context of efficient resource allocation will also help firms invest in the business processes, skills and other intangible assets which can amplify the impacts of digital and other technologies (OECD, 2013). However, excessive administration and direct public intervention have often damaged market mechanisms. Some policies have hindered competition by giving targeted support for specific enterprises, technologies and products. Public intervention in how businesses are managed has also happened from time to time (Zhao, 2016). In ways detrimental to competition, policies have sometimes varied according to enterprise ownership and size. While barriers to business creation have been reduced in recent years, significant scope remains to enable entrepreneurship (OECD, 2017a).

In part because of the sorts of policy weaknesses outlined above, industrial policy in China has yielded mixed results. For example, industrial policy for the automobile industry failed to encourage significant domestic private capital investment (Development Research Centre, 2011). On the contrary, industrial policy hindered private investment in the automobile industry and led to a small, scattered and weak sector with little innovation activity. In the automotive sector, China’s brands are generally weak, the key technical areas lack independent IP, R&D personnel are scarce and as a result R&D is inadequate (Jiang, 2016).

The easing of administrative burdens on start-ups and streamlining of procedures have reduced overall barriers to entrepreneurship (Figure 12.9). Nevertheless, there is ample room to make the business environment more entrepreneurship-friendly. For the market to function to its full potential, rigid economic regulations should be loosened, discriminatory policies abolished and entry and exit barriers reduced (including making bankruptcy procedures quicker and clearer) (OECD, 2017a). These steps will also create a fairer environment for all actors. At the same time, it is important to take measures that prevent market leaders taking advantage of their technology or market power in order to set barriers for newcomers. There is also a need to fully assess the impacts of present tax policy in the light of the ambitions of Made in China 2025 and Internet Plus, and to simplify tax procedures (State Administration of Taxation, 2016). Measures may also be needed to build diversified financial services able to support firms working in next production revolution-related fields (particularly with respect to mid- to long-term loans and equity finance) (People’s Bank of China, 2016). There is also a need to improve patent quality (from both businesses and universities), in part by streamlining the system of patent subsidy, and ensuring effective enforcement of IP rights (especially for smaller enterprises), with fines for violators set at levels which have a deterrent effect (OECD, 2017a). More strategic policies may also be needed in the area of standards, with current plans for standards development better accounting for the needs of industry (e.g. by developing a system of standards for big data). A more active role in international standard-setting could also be valuable.

Figure 12.9. Barriers to entrepreneurship
OECD Product Market Regulation indicator, 2008, 2013 and 2016
picture

Note: The value of the indicator ranges from 0 to 6, with 6 being the most restrictive.

Source: OECD (2017d), Product Market Regulation database (accessed February 2017).

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“Zombie companies” is a term used to describe Chinese companies, often in sectors with large overcapacity, with large debts, a history of losses and which are only sustained by bank loans or government support. Such companies produce continuously, regardless of increasing costs and falling prices. These companies are not only unable to upgrade by themselves, they also absorb scarce resources and create fierce competition for companies that invest in new technologies. In February 2016, the State Council published Opinions on Resolving the Overcapacity Problem of the Coal Industry and the Steel Industry. Among measures to close or reduce production, intelligent manufacturing is being promoted in the upgrading of the steel industry to create a new production mode that is more flexible and customised. In this reform, emerging challenges include policy enforcement and how to deal with job losses (an estimated 1.8 million jobs are at risk in this process) (Zhong, 2016).

Improving innovation and innovation policy

The Chinese domestic market is still price-sensitive. Businesses usually achieve lower prices through imitation and lower material quality, or even counterfeiting, which is especially discouraging for companies which might otherwise invest in innovation and technology upgrading. Lower output quality also damages the reputation of Made in China 2025 as a whole.

The ballpoint pen story outlined in Box 12.5 also illustrates the challenge of how to provide effective incentives for companies, especially private companies, to engage in technology upgrading and R&D. The efficiency of private sector R&D is low (OECD, 2017a). Many domestic private companies hesitate to apply the latest technologies, either because of the scale of the investments required, or because of uncertainties in technology trends and standards. Compared to research institutes or central SOEs, the private sector’s role in research is also limited. For example, over 70% of nanotechnology patents and 50% of robotics patents are filed by the academic and public sectors (World Intellectual Property Organization, 2015). An efficient commercial translation of research outcomes is needed for these patents. The business sector, both private and public, also tends to spend relatively little on R&D, as a share of revenues, compared to other countries (Table 12.2).

Table 12.2. R&D intensities of manufacturing and high-tech industries in selected countries (%)

China 2012

US 2007

Japan 2008

Germany 2007

France 2006

UK 2006

Korea 2006

Total manufacturing

1.1

 3.4

 3.4

2.3

2.5

2.4

1.9

High-tech industries

1.8

16.9

10.5

6.9

7.7

11.1

5.9

Note: China’s R&D intensity is calculated as R&D expenditure as a percentage of revenue from the principal business.

Source: Ministry of Science and Technology (2013), China High-Tech Industry Data Book, based on data from the National Bureau of Statistics’ China Statistics Yearbook on High Technology Industry (2013) and the OECD STAN database on R&D intensity of manufacturing sectors 1995-09 (http://stats.oecd.org/Index.aspx?DataSetCode=STANI4#).

Even for leading innovators, challenges arise when they try to bring new technologies into business. In the 2016 National People’s Congress (NPC) and National People’s Congress and Chinese People’s Political Consultative Conference (CPPCC) sessions – China’s highest national consultation mechanism, in which chief executive officers (CEOs) are called to give suggestions and recommendations for policy making – many proposals were made relating to new technologies. These mostly focused on the need for technology-related standards, smarter government regulation for new forms of business generated by new technologies (e.g. ride-hailing services by Uber and Didi became legal in July 2016), and amendments to existing laws and regulations to better encourage individual innovation.

Globalisation also creates new opportunities and challenges for Chinese manufacturing. For example, Chinese companies increasingly consider mergers and acquisitions as a path to upgrading (Deloitte and CMIF, 2015). At present, major Chinese overseas investments are concentrated in industries such as mining, oil and gas. But potential also exists in fields of ICT, high-end equipment manufacturing and new materials. The largest Chinese outbound mergers and acquisition (M&A) deal in 2015 – ChemChina’s acquisition of Italian tyre maker Pirelli – will enable ChemChina to manufacture premium tyres and move up the value chain (KPMG, 2016). However, weak operational capabilities, such as inadequate human resources and understanding of local regulations, could hinder overseas expansion. According to Bloomberg, USD 47.5 billion in acquisition attempts by Chinese companies failed in 2015 (Gopalan and Langner, 2016). As China’s overseas M&A activity targets more advanced sectors, the challenges may grow. For example, in January, Go Scale, a Chinese private equity firm, was blocked from buying Philips’ lighting business (Lumileds) by the United States, citing security grounds (Sterling, 2016). The sale of Aixtron, a German chip maker, to Fujian Grand Chip Investment Fund was also blocked (Chazan, 2016).

OECD (2017a) suggests reforms in aspects of policy which affect innovation. Various of these – such as reducing the patent subsidy – have already been referenced. Other relevant steps are also needed to address low rates of inter-firm collaboration on innovation, and low collaborative innovation between firms and research institutions; ensure consistent treatment across regions in how support for new and high-technology firms is allocated; update the services offered by high-tech parks; and, improve screening procedures in order to make support for R&D more efficient.

Employment and skills

Across the Chinese labour market, from immigrant workers to engineers and managers, the impacts of upgrading in manufacturing are being felt. Xin Changxing, vice minister at the Ministry of Human Resources and Social Security, asserted early in 2013 that structural unemployment is likely to increase (Wang, 2013). The issue has two parts: a lack of workers with suitable skills, and a lack of jobs for the unskilled. The number of migrant workers in China reached 166 million in 2013, 60% of whom are under 30 and have an average educational attainment of 9.8 years (it takes 9 years to finish junior middle school). Migrant workers’ wages increased 12% a year during the period 2011-13 (Cai and Zhang, 2015). Against this background, the Robots Replace Humans initiatives in regional provinces are a response to the lack of suitable labour and the escalating costs of better educated workers (Bai, 2014).

As ICTs and other technologies become more integrated in manufacturing, demand for human resources with interdisciplinary capabilities and skills is forecast to rise. Data from the OECD’s 2015 Programme for International Student Assessment (PISA) show that China’s students rank among the top ten globally in science and maths. But in terms of skills, programming as well as management and other soft skills were found to be scarce (OECD, 2015a). More generally, there is ample room to increase overall levels of education in China (Figure 12.10). Industrial upgrading also creates new demands on senior management’s understanding of technology and its implications for business development. Continuing education and training is important for upgrading this segment of management.

Figure 12.10. Percentage of 25-64 year-olds with tertiary education, by level of tertiary education (2015)
picture

1. Refer to the source table for more details.

2. The reference year differs from 2015 (refer to the source table for more details).

Countries are ranked in descending order of the percentage of 25-64 year-olds with tertiary education, regardless of the level of tertiary attainment. See Annex 3 of the source for additional notes.

Source: OECD (2016a), Education at a Glance: OECD Indicators, http://dx.doi.org/10.1787/888933396600.

 http://dx.doi.org/10.1787/888933473972

Meanwhile, new education, health care and social security policies are called for, to address not only the needs of internal migrant workers, but also the needs of a new wave of self-employed entrepreneurs. Expansion of the numbers of self-employed is expected following the national Massive Entrepreneurship and Innovation initiatives that encourage citizens, especially researchers and college students, to start their own business.

Infrastructure

China scored 4.2 in the Network Readiness Index, ranking 62nd among the 143 countries covered (Dutta, Geiger and Lanvin, 2015). The relatively higher price and lower speed of China’s Internet have been openly criticised by Premier Li Keqiang, and have room to improve. Major gaps in infrastructure capacity also exist among different regions and manufacturing sectors (Ministry of Industry and Information Technology, 2015a). New industrial infrastructure, such as distributed energy systems, IoT, mobile Internet, industry cloud and industrial big data, is important for the next generation of production and is yet to be fully developed.

Cybersecurity

China ranked 14th of 29 countries in the 2015 Global Cybersecurity Index prepared by the International Telecommunication Union. The average number of detected information security incidents in China over the 12 months before December 2015 reached 1 245, a 417% rise on the previous year (PwC, 2015). As ICT becomes critical to key industries, and the IoT has greatly expanded the number and variety of connected devices, cybersecurity challenges and their financial implications increase. Hangzhou Xiongmai Technology, a manufacturer of Internet-connected cameras, recalled over 10 000 webcams after the large-scale Dyn attack in the United States, which disrupted major Internet services such as Twitter, Paypal and Amazon. The devices may have been hijacked by malware for Internet attacks (Hern, 2016). In this connection, China’s first law on national cybersecurity was approved by the Standing Committee of the NPC in November 2016. China may need to strengthen long-term studies relevant to cybersecurity and biotechnology laws and regulations, especially with regard to business confidentiality, privacy and IP (Development Research Centre, 2016).

Governance

As summarised above, China has begun many initiatives to upgrade manufacturing. However, there is scope for optimisation. On the one hand, despite the breadth of recent government initiatives, policy might not be systematic enough. In any modern economy, the policies that affect production are many. They touch on issues ranging from scientific discovery to technology development, technology transfer and internationalisation. Policy must also involve and influence enterprises, universities, research institutions, financial institutions, central government, local government and other bodies. Accordingly, the policy instruments used are scattered across different parts of government.

Nevertheless, the relevant policies in China could be better systematised. The overarching initiatives do not yet cover the whole value chain, all the actors involved, or the different spatial aspects of the issue. Government departments often act in isolation. For example, the management of policy towards biological medicine belongs to different departments. Some of these focus on the social aspect of policy (health). Others focus on the economic dimension of policy (industry). These goals can involve trade-offs, which means that a higher-level body, such as the State Council, should make and co-ordinate overall policy. Similarly, the objectives of fiscal and taxation policy, trade policy, financial policy, investment policy, industrial policy, competition policy, innovation policy, education policy, social security policy and regional policy vary. Complementary policy design or co‐ordination has not yet occurred in the context of Industry 4.0.

In a related way, the problem of duplicated construction is serious. For example, by the end of 2012, in 31 Chinese provinces, cities and autonomous regions preferential support had been given to develop the photovoltaics sector. Some 300 cities have formulated plans to develop the photovoltaics industry and more than 100 have built infrastructure for this purpose. The photovoltaics industry has received preferential access to land, credit and other production inputs. These incentives have attracted too much capital investment into the industry (Fu, 2014).

Similarly, after the introduction of Made in China 2025, provinces and cities released their own action programmes and plans to develop ten strategic industries. Across the country, border towns and mega-cities have launched robotics, big data and other projects and constructed similar industrial parks. This may well lead to overcapacity and wasteful competition. Indeed, in the past, duplicative actions have led to the waste of construction land, human and other resources. Redundant construction has also brought huge losses for the long-term development of local economies and enterprises. To give an example, Qinhuangdao City in Hebei Province, Guian New District in Guizhou, Chongqing Liangjiang New Area, Lanzhou New Area, Hangzhou and other districts propose to build big-data industry clusters. Among these, Guian New District in Guizhou, Chongqing Liangjiang New Area and Lanzhou New Area treat big data as the city’s principal industry and emphasise its development in new city planning (Chen, 2014).

China’s three major telecom operators have also constructed large data or cloud computing centres. China Telecom has constructed more than 330 Internet data centres. At present, redundant construction around so-called “cloud computing centres” is significant (Wang, 2016). Some areas have built many data storage centres and ancillary facilities (Ma, 2014). As another example, revitalisation policies brought excessive investment in some heavy industries in 2009 and may be one reason for current excess capacity (Zhao, 2016).

Lastly, from the earlier description of policies towards key technologies, it is evident that a number of gaps exist. For example, with respect to digital technologies, the transfer and translation of research to industry appears to receive little attention; infrastructure readiness is lacking; competition in Internet infrastructure services is weak; the cybersecurity law has raised concerns among foreign companies (especially technology-based companies); and personal privacy protection and digital risks (other than those bearing on national security) seem to receive limited emphasis. The efficiency of some government support is also questionable. Local governments, for example, tend to subsidise the sale of robots instead of investing in robotics R&D. And in biotechnology, issues of biomass sustainability appear not to be addressed by policy; there are no policies for biorefineries; standards development is weak (if existent); and policy implementation varies across regions. And in this, as in many other specific fields, it is rare to see systematic assessments of the outcome of policies.

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Notes

← 1. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

← 2. The IoT market here includes chips and components, equipment, software, systems, telecom and networking services.

← 3. Including ICT manufacturing, software and IT services.

← 4. Energy-saving and environment-protection technologies, next-generation ICTs, biotechnology, advanced equipment manufacturing, new sources of energy, new materials, and new energy vehicles.

← 5. These sectors are: entrepreneurship and innovation, synchronised manufacturing, modern agriculture, intelligent energy, inclusive financing, welfare services, efficient logistics, e-commerce, transportation, green ecology and artificial intelligence (AI).