- Industrial reforms needed to boost manufacturing efficiencies
- Country to embark on a 30-year program of improvement
- Status identifies areas of potential foreign investment interest
Miao Wei (苗圩), China’s Vice-Chairman of the CPPCC National Economic Committee and former Minister of Industry and Information Technology, stated at the recent Two Sessions meetings that China’s manufacturing strength is still that of a Tier-3 global power. Miao is not just a politician, but an astute businessman. Prior to his political career, Miao was President of Dongfeng Motors, then China’s second biggest carmaker. He was credited with rescuing Dongfeng from near bankruptcy and turning it into a profitable company.
Miao stated that while China has become a large manufacturer, the lack of control of core technologies making up the top end of the global value chain shows China still lacks Tier-1 manufacturing strength. His comments are part of the CPPCC process to plan China’s growth in a systematic manner and why they were discussed the Two Sessions meetings.
Miao said that China remains heavily dependent on imports of basic components and technologies (over 50 percent come from abroad), integrated circuits (80 percent imported), large-scale and high-quality imports of castings and forgings (90 percent imported), and imports of high-end hydraulic parts and seals (100 percent dependent on imports).
Accordingly, in the four-tier global manufacturing pyramid, China is currently in the third tier. It will take a further 30 years for China to become a Tier-1 global manufacturer, according to Miao, who also identified key areas of weakness in China’s overall position:
- Weak innovation in manufacturing: The level and the quality of R&D are insufficient. This deters and hinders innovation.
- Lack of fundamental capabilities: This includes common yet key technologies that would allow significant improvements in the manufacturing value chain.
- Product quality and reliability: The products and their quality need to be improved as the industry currently faces issues relative to its quality deficiency. Chinese equipment may not be as competitive as the international brands within the world’s equipment manufacturing industry. These are currently owned by more developed countries.
- Industrial supply chain: China’s industrial supply chain requires improvement as it produces overcapacity in the low value-added products and has a shortage of capacity in high value-added products.
The Tier 3 Theory
Miao introduced his “Tier 3 Theory” to guide China towards a path for development in manufacturing in 2015. According to this theory, the global manufacturing industry is characterized by a four-tier pyramid.
- Tier-1 is the global technological innovation center, currently dominated by the US.
- Tier-2 is high-end manufacturing, dominated by the EU and Japan.
- Tier-3 is low-end manufacturing, made up of major developing countries, including China.
- Tier-4 includes resource-exporting countries, including the OPEC states, Africa, Latin America, and others.
The China Manufacturing Power Development Index
In the 2020 China Manufacturing Power Development Index Report (released by the Chinese Academy of Engineering since 2015), the US ranked first, with an index value of 168.71. Germany and Japan emerged in the second tier with indices of 125.65 and 117.16, respectively.
China, in fourth place, remains close to Japan with an index of 110.84. South Korea, France, and the United Kingdom followed China.
Relevance to foreign investors
The weaknesses in China’s current industrial structure represent opportunities for foreign investors involved in these sectors and who may wish to take advantage of shortages and restructuring and be based in China – to provide R&D, technological innovations, and new solutions. Some of these are in areas where the West is already ahead and in possession of technologies also now nearing the end of a production cycle, but which may be beneficial to China as a steppingstone. Attention to China’s so-called ‘Negative List’, which outlines the industrial sectors open to foreign investors and applicable incentives for this, provides intelligence on where China sees foreign investment as key. An explanation of the latest negative list, issued six months ago, can be found here. Attention may also be paid to China’s Foreign Investment Law, which came into effect on January 1, 2020 and can be reviewed here, and the foreign investment encouraged catalogue here.
A further examination of what China intends to do can be seen in the ‘Made In China 2025’ plan. This is categorized into different sectors and can be seen as follows:
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.