The plan and its subsequent MIC25 Roadmap set Beijing’s industrial policy goals in three steps:
- Step 1 (2015-2025): basic industrialization, progress made in smart and green manufacturing
- Step 2 (2025-2035): complete industrialization, tier-2 manufacturing leader with solid indigenous R&D, breakthrough in key sectors
- Step 3 (2035-2050): Tier-1 manufacturing leader with advanced technology and industrial system
To boost domestic manufacturing companies’ competitiveness, productivity and profit margins, the plan and its technology roadmap set ambitious domestic market share targets for Chinese companies in the key sectors for this unfolding fourth industrial revolution, such as new-generation IT, high-end computerized machines & robots, aviation & space equipment, energy-saving & new energy vehicles, new materials, biomedicine & high-performance medical equipment.
Not new, but increasingly sophisticated industrial policy
The ambition of technological independence and “self-reliance” is not new and has been pursued in one way or another since at least the founding of the PRC in 1949. It has, however, in the years after the country’s entry into the WTO in 2001 gained again more traction, after a phase of largely institutional build-up and a focus on more horizontal S&T policies such as talent development.
In 2006, the “National Medium- and Long-Term Program for Science and Technology Development” (MLP) was launched that centered around 16 megaprojects to build innovative capabilities in key areas, and vowed openly to “reduce dependence on foreign technology to <30%”. “Indigenous innovation” was adopted as a top-level policy priority under then Premier Wen Jiabao, and certain policies, for instance government procurement, openly discriminated against foreign companies. The goal was clear: attract and absorb foreign technology, and gradually replace it with domestic IP.
Underlining the heightened urgency, the Chinese Communist Party (CCP) and subsequently the State Council in 2016 integrated various industrial policies and presented a new overarching vision, the “Innovation-driven Development Strategy” (IDDS). The leadership wanted to ensure that the country and its companies can make full use of this “window of opportunity” that the fourth industrial revolution presents to leapfrog to the technology frontier in key technologies.
The toolbox for success: MIC2025
Policymakers were given a rich industrial policy toolbox, including subsidies and access to production factors at below-cost, technology transfer requirements in turn for market access and public procurement policies for foreign business or industrial guidance funds targeted at the identified “bottleneck” technologies. In 2019, for instance, the value injected by industrial policy instruments into the Chinese economy amounted to more than the GDP of Finland, is higher than China’s fiscal spending on defense and amounts to ca. 50% of total social security spendings.
In recent years, however, Beijing has toned down the rhetoric on MIC2025 markedly in response to a rise in international backlash against what many in the West considered discriminatory and unfair policies. Beijing’s ambition in terms of industrial upgrading, however, has not changed.
But as Beijing sees the US continuing to pursue “technology containment” to hinder China’s development, the 14th Five-Year-Plan (2021-2025) puts particular emphasis on the need to safeguard technological self-sufficiency and to strengthen orientation towards the domestic economy. The sectoral Smart Manufacturing 14th FYP (2022) for instance talks about a “market sufficiency rate” of 70% for smart manufacturing equipment and 50% for industrial software by 2025. This means that domestic supply, or products “made in China”, shall meet 70% of the domestic demand.
This new sense for security considerations also in economic matters is increasingly formalized in policy. China’s overarching ‘Dual Circulation’ for instance seeks to both better leverage China’s “super-sized” domestic market by reforming it towards a “single market”, maximizing integration while minimizing administrative hurdles, as well as taking targeted measures to increase the economy’s resilience in view of “insecure industrial and supply chains” to ultimately enable China’s “self-circulation” in case of a “combat situation”.
What does this mean for foreign companies in China?
Absent a clear definition for terms like “indigenous innovation”, “self-sufficiency” or “market share” by the Chinese government, what now qualifies as “made in China” or “innovated in China”? Are sufficiently localized products by foreign companies being treated as “made in China”? This has direct implications on things like access to public tenders, such as with the non-official “document 551” – a list of products facing “buy local” requirements in public procurement.
MIC2025 talked about “technology self-assurance”, defined domestic and global “market share targets” for key industries and vowed to reduce “foreign dependence on core technologies”. So, while discrimination in practice still exists, the focus seems to have shifted to “innovation that occurs in China”, and not strictly “innovation realized and spearheaded by Chinese companies”.
Foreign businesses must localize their manufacturing
After 2016, all relevant Chinese economic plans have been emphasizing “supply capacity” and “market sufficiency” – the ability of China’s domestic market to provide the relevant critical resources, inputs and technology for its continued development, without relying on “insecure or unstable industrial and supply chains” as mused by Xi in a speech he gave in April 2020 to the CCP Central Financial and Economic Affairs Commission.
So, albeit on the basis of casuistic evidence only, there is little to no formal discrimination of foreign companies in the specific context of “self-sufficiency” criteria as long as foreign businesses localize their manufacturing so as to qualify as “manufactured in China” – in itself already a strong impact for companies. There may, however, also be “normal” commercial reasons for localization.
In fact, looking from Chinese policymakers’ perspective, this policy approach is in line with the “Dual Circulation” framework and Xi’s policy concept of China wanting to become a “large gravitational field” – both putting emphasis on China’s domestic market and its aspired significance in the global economy. Nonetheless, as a result either of other industrial policy measures favoring the state sector for instance or local protectionist action that in principle violate official policy, there may still exist market distortions for foreign business.
A survey conducted among Swiss and German machinery businesses in 2021 came to a similar, somewhat ambivalent conclusion. 36% of interviewed German machinery companies see a positive effect of MIC2025 on their business, mostly as a result of a stronger demand for automation and industry 4.0 solutions. 27% are negative. Swiss machinery businesses are less positive than their German counterparts. Only 17% of interviewed companies see a positive effect of the program on their business, with 33% being negative.