From Mao’s death and an industrial revolution to a technological goal strong enough to scare the United States and trigger a trade war starring Donald Trump
Introduction

4 factors underlying China’s technological rise

China became the second richest country in the world in 2011. The commodity price boom alongside with China’s export agenda of poor value-added products, high scale of production and cheap labor costs were the main factor of competitiveness that took the country to this position.

Chinese GDP Evolution

From 1976 until now, in billions of USDSource: World Bank and Macrotrends.

Chinese GDP Growth

From 1976 until now (%)Source: World Bank and Macrotrends.

The past few years, however, have been decisive in putting China on a new important path: technology and innovation. Today, 90% of computers and 75% of mobile phones in the world are produced in the Asian country. Issued by Chinese Premier Li Keqiang and his cabinet in May 2015, the Made in China 2025 initiative marked the governmental push for this last ongoing transformation. But like any government-led policy, it only began to take shape because it was also embraced by the Chinese productive sector and international investors and companies.

The 10 largest economies in the world over the years

in United States Dollars (x1000 / trillions of USD)Source: World Bank and OECD National Accounts data files/Oct. 2019

Made in China 2025’s main goal is to explore China’s increasingly wealthy home consumer base as well as the value-added global sourcing segment. In other words, China no longer wants to be the world’s factory, but also the cradle of innovation. According to China Briefing, a business publication by China Dezan Shira & Associates, a consultancy firm that helps decision-makers manage the legal, tax, and operational challenges of making business in China and India, this Chinese transition towards a hight-tech future it will not easy.

It requires transitioning the country’s existing manufacturing infrastructure and labor market towards a more specialized output–with emphasis on research and development (R&D) and technological innovation.

China Briefing.

The four factors that moves China

LABS has selected four factors that are making China a technological power, strong enough to scare the United States and trigger a trade war starring Donald Trump:

After Mao’s death, open economy and strong manufactured industry
High-tech capability gap and a new labor market
Made in China 2025 initiative
Focus on R&D and a huge network of suppliers
Factor 1

After Mao’s death, open economy and strong manufactured industry

The economic opening of China took place from 1976 when Mao Tse-Tung died and Deng Xiaoping returned to the Communist Party command. 2019, in fact, marks 70 years of Communist Party rule in the country. In China, it is the Communist Party general secretary who usually gains the status of the country’s leader because of his strong influence on the Chinese economy and culture.

Xiaoping was the supreme leader of China from 1978 to 1992. During this period, he introduced several economic measures, or as he would like to say “the second revolution” that really transformed China. In 1979, Xiaoping was the first Chinese leader to visit the United States. It was his idea to create special economic zones, where foreign companies could set up as long as they had Chinese organizations as partners.

After Xiaoping and Hu Jintao, Xi Jinping (photo), the current Chinese leader, became the general secretary of the Communist Party in 2012. One year after, when he assumed China’s Presidency, Jinping announced the Belt and Route Initiative, a plan focused on infrastructure investments in several countries in Asia, Africa, and Europe, with the aim of increasing China’s economic influence. It worked! China is now seen as one of the world’s leading sources of infrastructure investment by both developed and emerging countries.

According to The Economist, Asia first emerged as a manufacturing power in the 1960s, when Japan began exporting electronics and consumer goods, followed by Taiwan and South Korea. Two decades after, Japanese firms were building plants across South-East Asia. But it was China’s opening up that made the region the factory of the world.

In the 1990s the country produced less than 3% of global manufacturing output in terms of value; in the 2000s this share tripled and surpassed that of the United States; and today, it is almost one-third of the world’s global manufacturing output by value.

Global manufacturing output share

in terms of valueSource: World Bank and OECD National Accounts data files.

Factor 2

High-tech capability gap and a new labor market

Both private and public investment in education in China are high. On one side, the Chinese government spends 20% of its budget on the area. On the other side, household expenses with education reach levels equivalent to 50% of the government’s education budget. At the same time, China has the highest number of students studyning overseas, and they’re more likely to return to their country than students from other nationalities.

The growing specialization and automation of Chinese industrial production, however, is causing a profound change in the country’s labor market. Positions are becoming more specialized and salaries higher. As a result, lower value-added factories are moving to other parts of Southeast Asia looking for even lower costs.

According to the World Bank estimated data, China has less salaried workers than the United States and even Brazil, but this situation is changing, and changing rapidly. Since 1991 this proportion has risen from 30.9% of the total of employed people in the country to 53.6% of the total. These data are important because a high proportion of wage and salaried workers in a country can signify advanced economic development.

30.9%

TOTAL OF EMPLOYED PEOPLE IN THE COUNTRY IN 1991.

53.6%

TOTAL OF EMPLOYED PEOPLE IN THE COUNTRY IN 2019.

Wage and salaried workers in China, USA and Brazil

% of total employmentSource: World Development Indicators/World Bank/ILO modelation

Different from what one might think, productivity analysis indicates a low return for China’s public and private huge R&D investment. China’s labor productivity growth remains the highest around the world, but it has been slowing down in the recent decade. This is not an isolated fact. According to the 2019’s Global Competitiveness Report of the World Economic Forum, the world productivity growth started slowing down well before the financial crisis and plummeted afterward.

Still, China ranks 28th of the overall report. From all the criteria, the country’s best results are in ICT adoption (18th position), innovation capability (24th) and infrastructure (36th). On the other hand, the country’s performance when it comes to the functioning of the labour market is severely undermined by insufficient workers’ rights protection, conflictual industrial relations, low participation of women, among other factors. In these criteria, China is in the 72nd position.

2019’s Global Competitiveness Ranking

    Source: World Economic Forum.
    Factor 3

    Made in China 2025 initiative

    China has commoditized the low and medium-tech industry computers, smartphones, and even high-speed rails and now wants to do the same thing with high-tech (clean energy systems, autonomous cars, robotics, and so on). That means the advanced technologies used today in rich countries will be available to developing countries in a process driven by China. This was already an important goal of the Belt and Road Initiative, launched in 2013 by Xi Jinping, and only got stronger with the Made in China 2025 plan, launched in 2015.

    Although four years have passed after its launch, the program was no longer mentioned in official speeches, China has not stopped pursuing its main objectives. The plan targets a 70% self-sufficiency in critical components across a range of high-tech industries, among other goals, using government subsidies to help companies reduce their dependence on foreign technology and imports have become a political flashpoint for the US-China trade war.

    An example of this? China aims to produce 40% of the semiconductors it uses by 2020 and 70% by 2025. In September Alibaba and Huawei unveiled their first chips to power artificial intelligence (AI) processes. The one from Alibaba is called the Hanguang 800, and it can cut down computing tasks, that would take an hour, down to five minutes, according to the e-commerce giant claims. Huawei’s semiconductor, in its turn, is called the Ascend 910 and was created to be used in data centers.

    40%

    China aims to produce 40% of the semiconductors it uses by 2020.

    70%

    And 70% by 2025

    Although the domestic market is still an asset to the country, China has already begun to prepare for more unfavorable growth scenarios in which investment and foreign consumption will play important roles.

    In recent years, China has already received more foreign investment in proportion to its GDP than the United States.

    A new foreign investment law is under discussion and evaluation by international entities right now. The new law is set to take effect on January 1th and aims to address some (still) problematic aspects of the foreign investment in China, such as forced technology transfer and lack of intellectual property protection. Since the outbreak of the trade war with the US and as the economic growth of the country slows down, this kind of initiative is crucial for China to keep growing.

    Foreign direct investment, net inflows (% of GDP)*

    Source: World Development Indicators/World Bank

    Foreign direct investment, net outflows (% of GDP)*

    Source: World Development Indicators/World Bank

    Factor 4

    Focus on R&D and a huge network of suppliers

    From the second half of the 2000s, China has been ahead of the United States in Research and Development (R&D) by many measures: R&D spending; R&D spending as a share of GDP; number of academic research papers.

    R&D spending in % of GDP

    Sources: OEDC/Unesco/World Bank. *According to the National Bureau of Statistics (NBS).

    R&D spending in Purchasing Power Parities

    (1mi PPP/$Billions)Sources: OEDC/Unesco/World Bank. *According to the National Bureau of Statistics (NBS).

    The improved Chinese version of Quantitative Easing (QE)–a monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to inject liquidity directly into the economy–have been generating massive funds to be channeled toward R&D. According to The Economist, though, unlike other countries, such as Japan, that have turned to unconventional tools for general easing when all else has failed, China uses its lending for targeted purposes, hoping to avoid splashing cash all over an economy when debt levels are already too high. That’s what specialized analysts and journalists say even though it is impossible to know exactly how much money does this instrument leveraged throughout the years and its exact influence on China’s economic growth.

    Alongside with governmental efforts, Chinese companies have been also betting high on R&D. A great example of this is Huawei Technologies, one of the world’s greatest manufacturers of telecommunications equipment, mobile phones, tablets, and notebooks. In 2018 the company’s R&D investment reached 101.5 billion yuan (something like $15.1 billion at the time) and surpassed that from Microsoft, Apple, and Intel. The amount accounted for 14.1% of Huawei’s global sales revenue in 2018. According to the company’s 2018 annual report Huawei has invested more than 480 billion yuan ($71.4 billion at the time) in R&D in the last 10 years. Additionally, in 2018, 85% of Huawei’s working force (+80,000 employees) were involved with R&D .

    85%

    Huawei’s working force were involved with R&D in 2018.

    Besides this massive effort towards R&D, and thanks to China’s manufacturing revolution, the supply chains of several industries, consisting of thousands of tech components suppliers, are concentrated in the country. And if technological innovation is really about creating a new product or service through the combination of tech components, well, China is the place for it.

    Still, not all of the factors shown here guarantee that China will, in fact, become “the” global leader in technology and innovation. That’s the evaluation of Yanfei Li, an economist and researcher at the Economic Research Institute for ASEAN and East Asia, who wrote an article for The Diplomat about China’s tech rise.

    China’s achievements in the recent decade are mostly limited to ‘catching up’ in targeted fields. Most of the original innovations that Chinese industries are currently capable of are ‘incremental’ rather than ‘disruptive’ breakthroughs. Thus, there’s a long way to go for China to transform from a fast learner to a true innovator in major high-tech fields.

    Yanfei Li, economist and researcher.

    CREDITS
    Content by Fabiane Ziola Menezes
    Design by Leticia Mulinari
    Development by Daniel Koganas

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