China has unveiled a ten-year strategic plan aimed at catapulting the country up the value chain and transforming it into an advanced manufacturing powerhouse. Despite having a vast workforce, the country has fallen behind other industrialized nations in terms of manufacturing high-quality, high-technology items. Given increased competition from both emerging and mature economies, the Chinese leadership feels there is a need to strengthen the country's industrial capabilities. The plan intends to modernize the sector by increasing innovation and the use of digital technologies, boosting manufacturing quality and efficiency, and creating Chinese brands while supporting green construction (UK Trade and Investment 2). The Chinese economic growth has slowed to 6.7% annual growth in recent years compared to the double-digit growth it experienced in the last decade. Considered to have the world's second-largest economy, China has to reinvent itself from time to time to keep up with the industrialized world. In its 30-year extraordinary growth period, the Chinese economy aided by the meticulous five-year plans that have laid the groundwork for economic strategy. This transition has been remarkable considering the Government of China dictates a great number of factors in the economic and social environment (Heilmann and Shih 4).
This paper looks at various macroeconomic dimensions of the Chinese economy - past, present, and future, - evaluates the impact that Made in China 2025 Initiative is likely to have on the manufacturing sector and how it is being influenced by other economic policies, both domestic and abroad namely, The 13th Five-Year Plan (China) and the Industry 4.0 (Germany).
China Economy before Reforms
Mao Zedong was the leader of China in 1953-1978. China had a command economy in which almost every sector of the economy was controlled by the state (Cheremukhin 11). The state was responsible for a number of activities in the economy such as allocating resources, setting production goals, and controlling the prices of commodities in the economy. Private enterprises and foreign direct investment were barred. The central government set out to boost China's industrial capacity through large-scale investments in human and physical capital, and by 1978, China's State-Owned Enterprises accounted for 75% of total industrial output.
The goal of the pre-reform era was to make China economically self-sufficient as was the purpose of Soviet Industrialization. The state policies, as set out at this time, were mostly ineffective, being the five-year plans and "the Great Leap Forward"'. This period is marked with market distortions as a result of low labor productivity. Farmers in the rural areas and large chunks of the labor force were not motivated due to lack of incentives and focused on meeting the national production goals.
The TPF growth was 2.4% a year for the agricultural sector and 1.9% for the non-agricultural sector. Real GDP was 5.2% annually.
China's Economic Rise after the Reforms
Reforms to the Chinese economy were launched in 1979 after the death of Chairman Mao. The Chinese government at the time wanted to open up the markets to foreign trade, gradually reform the manufacturing sector and raise the living standards of the Chinese people. During this period, the Chinese economy was still largely agrarian and closely modeled on the Soviet industries. Consequently, the Chinese government allowed individuals to start their businesses without intervention by the state. The Chinese leadership also set up development zones and went about rapidly urbanizing the country (Heilmann and Shih 6).
The reforms provided the Chinese manufacturing industry access to international markets. Access to global markets boosted Chinese manufacturing and was the key component in China's economic growth. The reforms were also crucial in raising the living standards of the people by creating many jobs in the manufacturing sector. This shift in policy resulted in GDP growth levels of 9.4% between 1978-2012 compared to 6% between 1953 and 1978. The 1978 reforms have been the basis of the modern Chinese economy. The Chinese government appreciates the importance of market liberalization in fostering economic growth and building competitive industries, and that is why it has gone a step further in freeing the markets whenever it launches its Five-Year Plans.
Chinese Real GDP Growth: 1979-2016 (Percent)
Source: Morrison, Wayne. China's Economic Rise: History, Trends, Challenges, and Implications for the United States. PDF file. September 15, 2017. pp. 10.
The reforms of 1979 were designed to move the economy away from the Soviet-style economic principles by gradually liberalizing the markets, enhancing trade primarily with the western countries and attracting foreign investment. Among the reforms were also to allow farmers to sell some of their products on the free market and the establishment of four economic zones to encourage foreign investment to boost exports and accelerate the import of high-technology merchandise into China. Additional reforms were to decentralize policy-making in various sectors such as trade. Control of many enterprises was given to the local authorities who encouraged free market competition, unlike the state which favored economic planning and in-depth protectionist policies. Removing excessive trade barriers was also a significant component of the Chinese financial success. Liberalization encouraged competition and foreign direct investment inflows.
To better understand the impact of national policies on the economy of China after the reforms of 1978, we need to take into account the total capital and labor productivity- what is known as total-factor productivity (TFP). It is estimated that the growth in TFP contributed roughly 40% of overall GDP growth. Factor accumulation (capital and labor) account for 70% of total GDP growth (U.S. Chamber of Commerce 22). Improvements in productivity can be attributed mainly to the decrease in the level of involvement of the government in sectors such as agriculture, trade, and services. The rise in the number of privately-owned businesses also impacted productivity being that such enterprises were more market-oriented and more efficient. After 1978, there was also an acceleration of TFP growth especially in the non-agricultural sector accounting for 1.2 % of the GDP growth.
The pre-1978 era of the Chinese economy was marked with state control of the economy that was closely modeled on the Soviet Industrialization. The reforms as set out in 1978 allowed privately-owned companies to hold their profits and set up a wage structure. The liberalization of the Chinese markets helped the country become a leading exporter in the world economy, boosting overall productivity by exposing the economy to outside competition. This ultimately drew workers from their rural homes to the cities which significantly impacted the labor market and economic productivity. The share of agricultural labor force fell by 36.8% between 1978 and 2012.
The sustained growth of the Chinese economy is also due to the high level of saving as a percentage of GDP that the country has. Levels of savings are a determinant of the long run economic growth. Compared to other advanced economies China has a high savings rate of 47%, more than twice as much as the global savings rate of 20%. Even before the reforms, China had a savings rate of 32% as a factor of GDP. This high-level of savings has helped China create a robust domestic investment portfolio. The surplus savings has made China a global net lender. China has sizable foreign cash reserves which the government can use to stabilize the currency and stimulate economic development.
The Future of the China Economy
The future of the Chinese economy lies with more market-oriented reforms. The Chinese economy is now heavily linked to the global economy making government restrictions unnecessary. Thanks to the market reforms of the last three decades, China is a thoroughly industrialized nation. Looking ahead, the Chinese economy will have to follow the path of green energy, intelligent manufacturing, modernization of agricultural output, high-quality service industry, and the coordination of rural-urban development.
Analyzing the future of China's economy reveal that the savings as a ratio of GDP will remain high compared to other economies. Due to the aging population, China will need to be more efficient in undertaking future investments. The high number of aged individuals will impact the savings as is the trend in other countries with aging populations. The effects of the aging population on the economy can be offset by balancing the market structure to encourage domestic consumption. Regarding GDP growth, the China economy will continue to grow at an average rate of 7% between 2015 and 2025. The GDP should slow to 4.5% by 2030 and around 3.6% between 2036 and 2050. As the TFP growth stalls, there is an increase in the contribution of policies to reduce wedges in the economy rises by about 20%.
U.S. and China Growth Rate and Forecast through 2050
Source: Morrison, Wayne. China's Economic Rise: History, Trends, Challenges, and Implications for the United States. PDF file. September 15, 2017. pp. 12.
Manufacturing Industry in China
China is the global leader of the manufacturing sector. China accounts for a 25% of the global value-added in this sector. Often described as the ''World's factory'', China has been very successful at manufacturing low-tech products which are often sold at low prices in the world markets. Most Chinese manufactures operate on low-profit margins supported by the low wages offered in the country compared to other manufacturing nations.
China has a dynamic manufacturing industry consisting of private and State-Owned Enterprises(SOEs). State-Owned Enterprises are subject to government interference making them susceptible to unprofitable investments. (Morrison 12).
China has a large workforce that makes the country ideal for low-cost manufacturing. Manufacturing is more important in China than in the United States accounting for 27.7% of the total GDP compared to the United States where it accounts for only 12.1%.
China is expected to continue being a leading manufacturing hub because the government spends a great number of resources in R&D. Also, the Chinese government has a clear plan on how to scale up the use of technology as outlined in the 13th Five-Year Plan and the Made in China 2025 Initiative.
Comparing manufacturing in China, U.S, and Japan
($ billions)
Source: Morrison, Wayne. China's Economic Rise: History, Trends, Challenges, and Implications for the United States. PDF file. September 15, 2017. pp. 13.
Liberalization of Chinese economic policies brought lots of benefits to the Chinese people, lifting millions out of poverty and cementing China as a global power. The challenges have also been in the form of making the Chinese products competitive abroad. Having been under communist rule for most of the 20th century, China has had only 30 years to equip itself with the appropriate technology and innovation capacity to match those in other advanced economies. A major goal has been to empower local talent and protect them from being overrun by international competitors (Zhang 7).
Challenges Facing the Chinese economy
The advancements China has had in its industries have had its costs. The rapid industrialization has polluted the environment, widened income inequality and exploited the Chinese worker whose hard-work and low pay has enriched state companies (Morrison 8). The Chinese government prioritized economic growth at the expense of all these challenges, and now they need to be addressed to sustain the economic growth. Economists have warned that China needs to put in place financial reforms to avoid a stagnation of GDP growth and average standard of living, a condition referred to as ''middle-income trap''.
The economy of China has not fully opened up to foreign competition. The economy is a ''socialist-market economy'' meaning the government has contended with market reforms in specific sectors to help the economy grow while retaining control over the economy (Yang 15).
If the country is to move towards high-tech manufacturing, there is need to address the grip the state has on the direction of the economy. The government ought to promote entrepreneurship and innovation without necessarily imposing guidelines to it.
Another real challenge facing the economy is the high number of SOEs. The SOEs are critical to the success of the Chinese economy despite being under the direct control of various state agencies. The SOEs are usually shielded from competition from the private sector. This coupled with the fact that they dominate the economy poses a risk moving forward if the country wants to implement the Made In China 2025 Initiative aimed at making Chinese goods competitive in the global economy (Morrison 23).
Made in China 2025 Initiative
China is fondly referred to as the ''world's factory''. Chinese products are known to bear the tag ''Made in China'' to distinguish them from similar products especially when the price is a factor. Chinese products are cheaper fostering the misconception that the products are of low quality. Even though China does not yet have a competitive high-technology manufacturing sector, some of its products are of high-quality. Usually, these products do not get the same market opportunities like similar products from other countries considered experts in advanced manufacturing (UK Trade and Investment 21).
China has lagged behind regarding innovation. Many of the successful brands in China are mere ''copycats'' of brands already established in other countries. For example, the online retailer, Alibaba is modeled after Amazon and the Chinese search engine, Baidu is modeled after Google. Chinese products lack originality, a significant factor when purchasing advanced technology equipment. China has the difficult task of enhancing the reputation of its products and implementing the policies geared towards making Chinese industries competitive (Aglietta and Bai 6).
To counter these challenges, the central government of China has unveiled and put into action a ten-year plan, the Made in China 2025 Initiative-aimed at making the Chinese manufacturing sector competitive and advanced. The initiative is unique, with five-year plans being the norm of economic planning in China. The Chinese Government is willing to take a more patient approach to upgrading its industries and is more comfortable with the economic prospects the country has at the moment. To deepen the implementation of the Made in China 2025 Initiative, the central government launched the 13th Five-Year Plan in 2016. The Initiative has drawn comparisons to the Industry 4.0 in Germany which aimed at improving the overall efficiency of the German manufacturing sector.
Application of Germany's Industrie 4.0 in the Made In China 2025
The Made in China 2025 is closely modeled on the Industry 4.0 of Germany.
Germany launched Industrie 4.0 industrial blueprint in 2012 ("When China's 'Made In China 2025' Meets Germany's 'Industry 4.0'"). The idea behind Industry 4.0 is smart manufacturing which entails using internet to connect SMEs efficiently and reliably to enhance innovation required in quality production. While both countries are leading manufactures in the world, Germany has the reputation of producing high-quality products and China has a lot to do to match the German standards.
This strategy is based on Germany's large machinery and plant manufacturing industry. Integrating this approach with Germany's IT knowledge and expertise in embedded systems will make Germany the pinnacle of advanced engineering ("When China's 'Made in China 2025' Meets Germany's 'Industry 4.0'").
The Government of China is keen on cooperating with Germany considering Industry 4.0 is the pillar of the initiative. The two countries have pledged to work together in implementing their respective economic plan with German technology offering the basis through which China will improve its industries. Made in China 2025 aims at moving Chinese manufacturing away from a value-added approach to high-end manufacturing (UK Chamber of Commerce 4). The goal is also to eliminate outdated and inefficient production capacity and help industry implement own-brand, own-design business.
The two countries might eventually become competitors in manufacturing high-technology merchandise, but for now, China is more concerned with removing manufacturing inefficiencies that pose a real challenge while Germany's main concern is introducing smart technology to its already advanced manufacturing infrastructure.
The Made in China 2025 aims at making Chinese manufacturing moderately high-tech by 2035. Though China needs to achieve high-end production to remain competitive, it will still rely on foreign markets such as Germany to provide it with advanced technology it needs to continue manufacturing products for world markets. That explains why China needs to borrow a leaf from the industry 4.0 while implementing the Made in China 2025 to understand what it needs to do to become a world leader in high-quality engineering.
Augmenting the 13th Five-Year Plan
Introduced in 2016, the plan focuses on maintaining social and economic growth while continuing with market reforms. The key reform areas include tackling countrywide industrial overcapacity, reforming SOE sector and improving private sector, promoting investors, advancing technology innovation and emphasizing green energy (Aglietta and Bai 17).
The13th Five-Year Plan will implement the Made in China Initiative at a greater depth. The success of the Made in China Initiative is intrinsic upon that of the 13th Five-Year Plan.
While the Made in China 2025 is clearly ambitious in trying to strengthen industries and upgrading the innovation and technological capacity of the manufacturing base, the 13th Five- Year Plan is constrained to optimizing the development of modern industrial systems by implementing changes on the supply side to address industrial overcapacity and transform production into a green economy.
China already has a high-technology manufacturing sector dealing in computers and smartphones with notable companies being those that have had international success such as Xiaomi, Lenovo, and Huawei. Still, high-tech production accounts for only 12% of the countries manufacturing output. Another point worthy of note is that the high-tech sector depends on imports of critical components from other high-technology industries abroad which hurt profits even as the industry tries to be more competitive.
The 13th Five-Year Plan has a critical demographic undertone. To deal with the nation's low birth rate, the plan is seeking to curtail the implementation of one-child policy and encourage couples to have a second child. Already China is bracing itself for a large number of old people. This will greatly reduce labor productivity at a time when China is looking for growth in international exports. The modest target of the Made in China policy is to make China a moderately wealthy country with high standards of living. To achieve that, the 13th Five-Year Plan will be vital in solving the immediate problems that need attention.
The 13th Five-Year Plan and the Made in China 2025 share the same scope and need to be monitored together.
Made In China 2025 Initiative and the Role of Information Technology
The primary idea behind Made in China 2025 is to promote information technology in the manufacturing industry, upgrade the sector by improving innovation, integrate technological advancement and industrial development, develop Chinese brands and support green manufacturing. To achieve this, the policy will have to adequately address the modern trends in manufacturing technology in the form of ''industrial internet'' which encompasses the fields of artificial intelligence, machine learning, robotics, and sensing and data collection.
Industrial Internet
Industrial Internet is a fast-growing field in the high-tech manufacturing industry that harnesses the combined power of intelligent systems, robotics, machine learning and the internet to facilitate industrial production. The newest trends in industrial internet include streamlining industrial operations using cloud computing and advanced analytics (Evans and Annunziata 7). The Made in China 2025 has set a goal to complete the construction of industrial internet infrastructure to cover all regions and sectors by 2025.
To help in accelerating the use of internet technology in industries, the Chinese government has launched Industrial Internet Plus Initiative as a component of the Made In China 2025. The Industrial Internet Plus will serve to integrate internet with the delivery of industrial and economic upgrading.
As part of improving the technological infrastructure in the economy, the government is targeting improving the cyber-security capabilities of companies and to creating robust network systems for key manufacturing sectors. The successful implementation of the Initiative while following strictly the principles of Industry 4.0 will be vital if China is to integrate Internet of Things as part and parcel of its manufacturing technologies (Evans and Annunziata 30).
To make Industrial internet and its applications central to the future economy of China, the government will be launching tax and fiscal policies to enable an environment for both foreign and domestic companies to thrive in within the Internet Economy.
The central government is looking to facilitate Chinese manufacturers create digital platforms will allow the companies connect and synchronize their departmental operations and connect the connect firms within the industry. The Government of China is also assessing the impact of the provision of internet infrastructure to small and medium-sized enterprises (SMEs). SMEs are critical to the economy of China and are the ideal incubators of local talent. The savings of using the industrial internet will streamline the operations of SMEs and make them more productive.
Evaluating Benefits of Applying Industrial Internet in the China Economy
The use of cloud computing and various data analytic environments make analyzing large data faster and more cost-effective than using traditional data analysis methods. Technologies to analyze large data sets are becoming more mature allowing companies to process and analyze massive amounts of information which can give them an edge in the industry ("China to Develop Industrial Internet").
The application of industrial internet in manufacturing activities will be a catalyst for economic growth in the economy. The integration of industrial internet in the economy will narrow the gap between China and advanced nations in a short period. Moreover, the use of industrial internet technology is less tedious considering we could use wireless technology instead of cables (Evans and Annunziata 25). China will have the advantage of not having to go through the entire process of implementing technology as the advanced manufacturers did.
China has an aging population and low birth-rate. The number of Chinese labor is declining annually. To counter this, China is looking at robotics as a source of energy in the future. Robotics and intelligent systems such as driver-less cars could be a major source of economic growth in the future.
When it comes to the value proposition of IoT, industrial companies stand to gain a lot regarding revenue growth. The focus should be not only on efficiency improvement and cost reduction but also on business growth (Evans and Annunziata 13). Through data analysis, including the previously undeveloped data, translating the data into relevant market insights helps companies to serve their customers better, providing new opportunities to improve customer loyalty and satisfaction.
Recommendation
The ''Made in China 2025 Initiative'' is a brilliant plan to upgrade the Chinese manufacturing industry to become a global leader in cutting-edge technology manufacturing. However, for the program to be implemented to fruition, the government needs to appreciate the importance of fostering competition both from outside and within. The plan has protectionist policies that are tailored towards minimizing foreign influence in the Chinese market. Such systems will only hinder the realization of goals as set out in the plan to make Chinese manufacturing competitive.
The integration of technology in day-to-day industrial activities is essential if China is to become a high-technology manufacturer. Applying the appropriate technology will ensure that industrial operations are unified and will foster cooperation among companies.
Conclusion
China has the resources to implement the Made in China 2025 Initiative and eliminate inefficiencies in the manufacturing industry. The Industry 4.0 of Germany is uniquely suited to China because of the rapid rate of production there. The success of the 13th Five-Year Plan will be instrumental in gauging the prospects of Made in China 2025. To achieve its industrial goals, the Chinese manufacturers need to embrace the use of smart technology and be welcoming to foreign competition to design products with high reputation in the global markets. If the plan is implemented the right way and with the required support then China is poised to become an advanced manufacturer in the next decade.
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