Made in China 2025

December 14, 2016 9:50 AM

China has launched a high-tech revolution: Beijing has devised an industrial masterplan named "Made in China 2025" and is investing billions to turn China into one of the leading industrial countries by 2049. As the latest MERICS Paper on China shows, China's ambitious strategy is starting to bear fruit. Industrial countries like Germany and the United States have to be prepared for strong competition.
posted by infini (25 comments total)

So which country will China outsource their labor costs to?
posted by Roentgen at 9:53 AM on December 14, 2016

It's already happening. Look at your clothing labels, mostly other Asian countries.
posted by advicepig at 10:01 AM on December 14, 2016 [7 favorites]

So which country will China outsource their labor costs to?

China isn't all over Africa just for the raw materials, although that's a good start.
posted by GuyZero at 10:11 AM on December 14, 2016 [9 favorites]

Is this the same China embarking on the ambitious plan to socially rank their entire population based on educational and financial qualities?

China is seeking to drill back to serfdom.
posted by parmanparman at 11:09 AM on December 14, 2016 [1 favorite]

So which country will China outsource their labor costs to?

Low-cost work that does leave China goes mainly to South-East Asia, only reinforcing Factory Asia’s dominance (The Economist, March 14th, 2015), but that's not the only part of their strategy:

First, it is clinging on to low-cost manufacturing, even as it goes upmarket to exploit higher-value activities. Its share of global clothing exports has actually risen, from 42.6% in 2011 to 43.1% in 2013. It is also making more of the things that go into its goods. The World Bank has found that the share of imported components in China’s total exports has fallen from a peak of 60% in the mid-1990s to around 35% today. This is partly because China boasts clusters of efficient suppliers that others will struggle to replicate. It has excellent, and improving, infrastructure: it plans to build ten airports a year until 2020. And its firms are using automation to raise productivity, offsetting some of the effect of higher wages—the idea behind the government’s new “Made in China 2025” strategy.

China’s second strength is Factory Asia itself. As wages rise, some low-cost activity is indeed leaving the country. Much of this is passing to large low-income populations in South-East Asia. This process has a dark side. Last year an NGO found that almost 30% of workers in Malaysia’s electronics industry were forced labour. But as Samsung, Microsoft, Toyota and other multinational firms trim production in China and turn instead to places such as Myanmar and the Philippines, they reinforce a regional supply chain with China at the centre.

China is still the center of that region.
posted by filthy light thief at 11:15 AM on December 14, 2016 [4 favorites]

The internal view ive heard from China is that this project is mostly a bust. That subsidy money is actually being diverted to construction and infra. While the patent quality is extremely low.

The skeptic in me also says "Institute for Area Studies" has an institutional imperative to over estimate area.
posted by JPD at 11:29 AM on December 14, 2016 [2 favorites]

The Great Leap Forward 2: This Time We'll Thrown In Some Capitalism
posted by Sangermaine at 11:45 AM on December 14, 2016 [1 favorite]

So which country will China outsource their labor costs to?

Countries in Africa, SE Asia, even the United States. It seems like a great opportunity to continue to dramatically reduce global poverty. Unless, of course, the Trump White House decides that "protectionism" is truly the way forward.

If you think it is strange that Chinese firms would hire Americans for manufacturing jobs, then you don't understand why some people voted for Trump: they want Chinese manufacturing jobs. Too bad they won't get them if free trade--the greatest reducer of global poverty in the history of the world--is thrown on the dustheap of history.
posted by My Dad at 1:22 PM on December 14, 2016 [2 favorites]

as Samsung, Microsoft, Toyota and other multinational firms trim production in China and turn instead to places such as Myanmar and the Philippines, they reinforce a regional supply chain with China at the centre.

Seems like the opposite conclusion to make from this shift.
posted by My Dad at 1:23 PM on December 14, 2016

Seems like the opposite conclusion to make from this shift.

It's all coordinated out of China and the individual parts being assembled probably all ship into or out of China as well. A plant making tiny screws in Myanmar is probably sending them all to a warehouse in China which in turn send them out to more complex factories doing subassemblies or whatever.
posted by GuyZero at 2:02 PM on December 14, 2016

How many value-added Chinese brands to you purchase, though? I can think of only one: Haier, although I guess my phone was made by Huawei.

Advanced manufacturing in the region is still dominated by Japan; Japan is the hub, and it is Japan that is shifting production from a hostile China to Myanmar, Thailand, Vietnam and Indonesia.
posted by My Dad at 2:16 PM on December 14, 2016 [1 favorite]

Lenovo, Motorola are both mainland China manufactured now as are Apple and pretty much every laptop that's not made in Taiwan. I don't think the brand has to be Chinese for the coordination to happen there.
posted by GuyZero at 2:49 PM on December 14, 2016 [2 favorites]

Some of the business majors I taught two years ago found first jobs in Bangladesh, where much of the labor involving clothing has moved. The investment in Africa is substantial, to understate it briefly.

When it's China and commentary I'm reminded of Dan Ackroyd's line in Tommy Boy: What the American public doesn't know is what it makes them the American public. Too much is immature, uninformed, and righteous sarcasm.

Which this FPP is not, but a German, privately-funded "think tank" engaged in policy and consultation with a high degree of transparency and "public" function defined by distance from "bureaucracy" and "ivory tower" and any romantic notions of art and culture.

This particular "paper" focuses on state capitalism and its challenges in western and european markets...so, I'm more prone to reference an international study academic such as such as this from 2012.

I like the paper, but date-driven policy is, by character, framed and promotional and its response is polite and tentative (not an inherent negative). Were I still instructing business majors, I'd mine it for those framings as contemporary expressions and topics to explore for job opportunities.

Otherwise it's pretty dry stuff.
Needs More China Bashing, oh, I mean CCP Realism /sarcasm
posted by lazycomputerkids at 3:35 PM on December 14, 2016 [1 favorite]

Apple and pretty much every laptop that's not made in Taiwan.

Apple is headquartered in the US, though. That's where the decisions are made. So you have to think about where capital flows from when considering where the hub is. Contract manufacturing is just another service industry.
posted by My Dad at 4:36 PM on December 14, 2016

Contract manufacturing is just another service industry.

Whose hub is China.

Where the marketing and sales people (and capital holders) are isn't a factor in terms of the structure of the supply chain. Maybe it's a matter of semantics here but although Apple is headquartered in the US their supply chain is firmly centered in China.
posted by GuyZero at 4:41 PM on December 14, 2016

This report comes down to one paragraph that will come to shape policy in both the EU and the US:

Discrimination against foreign enterprises

Industrial policy in China often entails measures to discriminate against foreign enterprises. The national and local governments restrict access to public procurement and limit the possibility of inbound foreign-direct investment... it is very likely that the Chinese government will intensify measures to protect Chinese suppliers from foreign competition in these technology areas as soon as Chinese enterprises have a real chance to challenge the market dominance of foreign tech suppliers. (page 39)

We already see the impact of this predominantly in the Internet sector, where the angry FAANG (FB, Amazon, Apple, NetFlix, Google) are largely locked out. Apple has a presence, but it feels tenuous – especially given the rise of new players like OnePlus.

While those companies dominate US and EU markets and rule the American stock market, both those markets combine represent <1B customer with moderately increasing / declining incomes. Ageing populations with generally low birthrates, who's growth stages have long since passed.

Consider that the per capita GDP of a Chinese citizen is 1/7 that of the US and EU. Which means those companies would be 15% larger than they are today if they had access to the Chinese market – and potentially much more. In the West, the FAANG fights tooth and nail with incumbents, and so therefore marketshare is hard-won. In China, ecommerce is exploding as are data services and everything else. For network effect plays like Uber and Amazon, the prizes are even larger.

If China's current growth rates continue, consumer incomes / spending will double in the next ten years, as it approaches that of the US and pre-Brexit EU. At that point, the largest American companies will be losing out on 25%+ of the global market for their products and services.

And that is why this paper is important. Because many many Western companies are depending on the current version of the world for their growth. From products to services, everyone sees the emerging populations of China and India (and Africa later) to be their futures. It is now dawning on the West that China has little intention of riding their product streams and cycles. Rather, China's goal is to compete head-to-head in every category. For the strategy heads, it's classic firm point-to-point competition on a state-run market level. Highly relevant for Chinese companies tend to be anointed players and winners.

Which has a very important implication for the Western world – namely no anti-trust or anti-competitive practices. As Chinese firms typically have fewer dominant firms in an area, and the government doesn't see data protection as being of primary importance, the data lakes of Chinese winners is going to be massive – potentially of the size where Western companies will have trouble competing. After all, China isn't interested in one Chinese company winning, it's interesting in China, Inc. winning – and therefore they can share the data to do that.

So all those Western companies counting on Chinese consumers to drive their margins and profits have probably now had a big pause. Without access to that market as it becomes more valuable, those companies face completely different futures. Serving older, poorer consumers, rather than young, rich consumers.

That will drive policy in the West because its already taking shape with Trump's protectionist leanings. He's a wildcard, and so one can expect that he won't rip up international trade whole-hog, but rather he will use trade policy selectively, to where it confers an advantage to the US. Talk about a gear-change. The US was the country that went around in the 1970s and 1980s hitting everyone over the head with the big stick to sign up to WTO standards and go to open markets. Now it is going the exact opposite direction...

The US may be hit hard – will probably be hit hard – and the bigger watch area is Europe. As the EU wavers and potentially may collapse, Europeans are at risk from moving from a single market to a confederation of markets. If that happens, it will be disastrous for the European Union and its people. Living standards will plummet, and that will be a vicious cycle. We already see it with the UK, where Sterling is $1.20 and falling. Goldman expects $1.10 by end of 2017, and then potentially parity by 2018/19. Which means the UK will be relegated to poor country status as it imports so much from abroad.

Already we see the effects there. It's quite telling because in the US, they raise prices. In the UK, they shrink volumes. The bag of pasta that was 500g last year is now 400g. Same price, less noodles. That is the future of a fragmented European Union. Same prices, less pasta.

The reason is quite simple. Borders represent friction, and friction represents waste. If one looks at the total cost stack of something being purchased, the smaller the market, the higher the compliance prices as a share of cost. The higher the overheads, the more expensive the product.

As anyone in a startup in the US and/or UK/EU will know, valuations in the US are much higher than in Europe. That is because exits and M&A are much more active. Because companies make more money, faster. Because the US is a single market, with one currency and one language – and relatively common regulatory frameworks. The EU may have a single market, but its GDP is split across currencies and languages – and that is with what the EU considers to be quite an advanced single market. That level of market fragmentation drives startup valuations lower. European companies are simply less valuable because their home markets are simply less valuable.

Now, bring in China. Single currency, single language, and single regulatory regime across the country. It's top down, and therefore the national regulations often Trump the local regulations, which means it's going to be a bigger, higher-value market than the US (which has more state / county / city layers). And it's a market with a lot of room to run and grow.

The Chinese government has proven very effective at locking out foreign competitors in tech already, and we can only presume they will also be effective at extending preferential treatment to other industries. I would say this policy framework is already having an effect on Western economies – and to a larger magnitude than anyone likely accounted for. While it may not hit current revenues *that* much, this policy is going to strangle the futures of Western companies, governments, and eventually citizens.

Finally, the US, UK, and EU, are doing exactly the wrong thing now – at the order of their people. Rather than unify and force a global market, people are scared and being pandered to by populist nightmares, and so countries are looking to close down... to their own detriments.
posted by nickrussell at 6:38 PM on December 14, 2016 [9 favorites]

The Chinese government has proven very effective at locking out foreign competitors in tech already, and we can only presume they will also be effective at extending preferential treatment to other industries.

It is a convenient myth that Google, FaceBook and Twitter were shut out to repress speech and agency-- the west has only slowly come to realize what "data mining" means...with what granularity relational databases define/identify users...to what degree intelligence services curate corporate accounts and records and by what tools and methods is still, and might always be, unknown...

It is ludicrous to assert western corporations might freely account citizens in every nation.
posted by lazycomputerkids at 2:46 AM on December 15, 2016 [1 favorite]

China isn't all over Africa just for the raw materials

When It Comes to Low-cost Labor, Is Ethiopia the New China?
posted by infini at 5:09 AM on December 15, 2016 [1 favorite]

Related to this, I've been wondering whether the British still call their porcelain "china". Back in the days, the word signalled expensive, exotic quality. Now, many see things that were "made in China" as disposable and probably a bit crap.

So, have people returned to calling their china porcelain because it doesn't have the same ring to it anymore?
posted by Captain Fetid at 5:44 AM on December 15, 2016

So, have people returned to calling their china porcelain because it doesn't have the same ring to it anymore?

Not in my experience as a native.

I don't think language necessarily tracks with economics – in Australia and New Zealand, 'Manchester' still means household linen, decades after the death of Manchester's cotton industry.
posted by mushhushshu at 6:14 AM on December 15, 2016 [3 favorites]

China is seeking to drill back to serfdom.

Serfdom may be the future. Or at least a totalitarian state that fits like a glove. China's already exporting its mass-surveillance/censorship expertise to countries like Russia, and now Britain is making moves in that direction (with its surveillance laws, and soon-to-be-passed law requiring adult verification on all social media and sites not suitable for children).

Chances are the Chinese “social credit” system will inspire others in places sooner or later. Russia and Turkey one can see jumping on this bandwagon if the Chinese model is successful; countries like Zimbabwe could buy the Chinese model as a turnkey solution. North Korea may get onboard, perhaps after the next leadership change, as a means of “opening up to the world”. Britain seems more remote on paper, though I can imagine Theresa May looking upon such a system approvingly; of course, it'd be sold as a means to encourage ethnic minorities to assimilate and/or “break the cycle of welfare dependency” among the morally-deficient scroungers who populate tabloid front pages and downmarket TV programmes).

Perhaps we, as a civilisation, reached peak liberalism at around the time we reached Peak Rock, i.e., sometime around the time of Woodstock.
posted by acb at 9:44 AM on December 15, 2016

> Advanced manufacturing in the region is still dominated by Japan.

That is true but the profits from that are much smaller than the profits from the wider markets in middle and entry-level manufacturing. Just compare the market capitalizations of the major Japanese manufacturers vs. the major Chinese ones. The Nikkei has been flat for 3 decades, so whatever Japan is making, it is not helping much. And Chinese firms are doing whatever they can to move up the chain towards more advanced manufacturing (see them buying Western manufacturing technology businesses, especially in semiconductors- an area critical to the future of any profitable product and one where China is very weak.)

And if you live in Asia (15 years combined between Japan and China) you will see a vast amount of products made in China vs. Japan.
posted by gen at 3:29 PM on December 15, 2016

nickrussell: "Rather than unify and force a global market, people are scared and being pandered to by populist nightmares, and so countries are looking to close down... to their own detriments."

As someone with extensive experience in Asia, I cannot favorite your comment enough. Bravo!

One thing I am hoping Trump will do WRT China is to fight fire with fire. That is, if China is blocking FAANG in their market, the US should do the same to BAT (and JD, and throw in a few others.) What happens when Jack Ma can't sell TMall and Alibaba products overseas? That business will collapse like a house of cards. It's only fair that the US & EU should do that if the Chinese block Western Internet services in China's domestic market.

The US does tax Chinese steel heavily (as it should, Chinese steel is of poor quality and the price is being kept artificially low) and it should frankly do a lot more of this.

There are very few markets large enough to stand up to China. In fact I believe the US is the only one. So if the US acts more aggressively with China, it will degrade business short-term but I think it will long-term force change in Beijing. And if the US and EU agree to collaborate on these decisions, even better!

The problem is, Washington DC changes administrations more quickly than Beijing does.
posted by gen at 3:44 PM on December 15, 2016

It's only fair that the US & EU should do that if the Chinese block Western Internet services in China's domestic market.

In this specific context, one really should separate the interests of the EU (who are in court witih FAANG themselves) with the US, wrt to China. See also most recent cargo trains from China to Europe.

Also, e-commerce inspired direct from factory warehouse sales businesses have been established in key West African (geographically, Lome, Togo) and soon, in East Africa (Dar es Salaam from what I can gather wrt logistics hubs construction). These are some of the earliest signals of formal market creation for domestic production.

and yes, decades of Asia experience shows the changes in China made and Japan made product lines but it totally depends on which market/country in "Asia" and their own relationship to China and Japan

Hence the recent push into SSA by B2C in both - Japan by partnering with India, so everyone's there
posted by infini at 1:55 AM on December 17, 2016

Also, a lesser noticed fact is that the EU's consumer market is technically larger than the US
posted by infini at 1:57 AM on December 17, 2016