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How Will the Coronavirus Impact Xi’s ‘Made in China 2025′ Plan?

In May 2020, Wuhan, the epicentre of the Coronavirus outbreak, has reopened its high schools. This is a positive signal and the masses are optimistic that COVID-19 may have been defeated in China with hopes of returning to ‘normalcy’. Despite what seems to be social recovery, the virus has hit China’s economy hard: industrial production fell sharply between January and March, car sales plummeted, the once promising outlook of China’s venture capital scene has also taken a substantial hit with the number of Series A deals dropping from 100 in December 2019 to 26 in February 2020. Evidently, beyond the social and health impacts that China has so greatly suffered, the economic impacts might be just the beginning. The current pandemic could derail Beijing’s grand plan.

‘Made in China 2025′

First things first, what is ‘Made in China 2025′? Introduced in 2015, the grand plan seeks to transform China’s manufacturing base from being a low-end manufacturer to becoming a high-end, high-tech producer. Among these are information technology, telecommunication (5G), advanced robotics, artificial intelligence, and new energy vehicles. Other sectors include aerospace engineering, emerging biomedicine, high-end rail infrastructure. Mirroring Germany’s Industry 4.0 development, these sectors are pivotal to the ‘4th industrial revolution’ which refers to the reconciliation of cloud computing, emerging technologies, big data into manufacturing supply chains.

Inspired by Germany’s industry “4.0″

Ultimately, Xi’s vision is to reduce China’s dependency on foreign technology and promote high-end Chinese technology to compete in an increasingly technology-driven world. Currently, China places high reliance on foreign made semiconductors (a central component to most electronic products), it accounts for 60% global demand but only manufacturers 13%. One of the specific targets set out in the ‘Made in China 2025’ plan aims to achieve 70% self-sufficiency in high-end industries.

Modernizing the manufacturing sector with “Made in China 2025”
How will China achieve its goals?

Beijing seeks to devote resources and intensifying centralized policy planning to coordinate across government, academia and private enterprises. The ambition is to tap into China’s growing middle-class consumer base who are demanding higher quality goods and services, as well as, the value-added global sourcing segment. The measures implemented including:

  • Foreign acquisitions and investments. Chinese companies, both state-owned and private have been encouraged to invest in foreign companies, notably semiconductor firms, to gain access to advanced technology. In 2016, the value of Chinese acquisitions in the United States alone amounted to over $45 billion.
  • Joint venture schemes. China’s strict commercial laws dictate that foreign companies wishing to do business or invest in China would need to enter into joint ventures with Chinese companies. There are both pros and cons associated with the scheme. Pros: foreign companies can invest in businesses that are otherwise restricted by the Party, and use the Chinese partner’s “guanxi” or connections and existing experiences in China. Cons: under these terms the foreign company is required to share sensitive intellectual property knowledge. For example, when China developed its high-speed rail network, it leveraged foreign concepts and designs, notably Japan’s Shinkansen.
  1. Cultivating state-owned and private companies. Despite the economic reforms by the Jiang administration during the 1990s which reduced the role of state firms in the economy, they still account for 1/3 of gross domestic product (GDP) and an estimated 2/3 of China’s outbound investment. Beijing has increased direct support for Chinese enterprises through state funding, low interest loans and tax breaks. The government has also championed home-grown companies by publishing a list of private companies which will help drive its 2025 goal, the list includes the likes of Huawei, ZTE, Alibaba, Tencent, DJI, Xiaomi and Baidu.
Economic activity slows but does not shutdown

Undoubtedly, China has been hit economically. Wuhan the epicentre of the outbreak is a key region for the country’s automotive industry and is an integral part of the Party’s vision for 2025. The Nikkei Asian Review reports that between January and March much of its industrial activity was halted. Despite, 2/3 of the country’s economy being forced to shut down in January, China’s strategic sectors were still operating. Xi’s grand dream has not been forgotten.

Some factories that were close to Wuhan remained open, even though the city itself was under lockdown at the time. Workers at NAND flash-memory producer Yangtze Memory Technologies.Co continued work as usual, though entering and exiting from the factory are strictly monitored. Changxin Memory Technologies Inc., a memory-chip maker near Wuhan was not impacted by the steep slowdown in domestic transportation of goods because it holds a national special license that allows the firm to continue making deliveries according to TrendForce (a market-research firm).

These chipmakers are essential to Beijing’s ‘Made in China 2025’ ambition. Yangtze Memory is managed by Tsinghua University Group (the business arm of Tsinghua University); Chairman Xi’s alma mater. It’s early-stage NAND (a type of non-volatile storage that does not require power to retain data) memory technology has shown glimpses of potential, and its half a generation behind global flash memory leaders. Though still playing catch up with its foreign competitors, it is however plausible the gap can be closed. Will Beijing really allow its ambitions to be jeopardized?

Whilst factories that manufactured toys, clothing or mundane appliances were closed in Wuhan for prolonged periods, but you can bet those with significance to Beijing will continue as usual.

What are the geopolitical consequences?

Of greater concern is not the economic impact of the pandemic but rather China’s relationship with its western colleagues post-pandemic era which could positively and negatively impact ‘Made in China 2025’. This wholly depends on Beijing’s action. Foreign Direct Investment (FDI) has already been strained during the Trade War between China and the US prior to the Coronavirus pandemic. With Trump’s remark of “man-made virus” and the deflection of the administration responsibilities by pointing the finger at China will further strain the two powers relationship. Between January-February 2020, Coronavirus dragged China’s FDI down further 8.6% totaling $19.2 billion according to China’s Ministry of Commerce. As aforementioned one of the key drivers to achieving the 2025 goal is encouraging foreign investments and establishing joint ventures. With global economic slowdown resulting from the pandemic this is downward trajectory of FDI in China is likely to continue.

Post the Coronavirus pandemic a number of countries are likely to re-evaluate its relationship and economic links with Beijing. Already in the UK, Dominic Raab has declared the UK “cannot go back to business as usual” with China. UK intelligence agencies (MI6 and MI5) have warned the government that it should seriously restrict Chinese takeovers of key companies, especially in high-tech areas such as artificial intelligence and digital communications (e.g. 5G). The British government has put on hold the takeover of Imagination Technologies, a UK based chip design firm engaged in artificial intelligence research, by China Reform Holdings, a venture capital fund controlled by the Chinese government.

Germany has already imposed a cap on FDI, likewise in Australia foreign investments are subject to scrutiny by the Foreign Investment Review Board, regardless of their deal value. As noted earlier, one of the key drivers for Xi to accomplish its dream is through acquisitions of foreign companies in specialized sectors like information technology. With increased scrutiny on China’s handling of the initial outbreak to the global supply chain already heavily dependent on China will prompt many foreign countries to reassess its economic links with China.

Positives for China?

As the outbreak highlights China’s reliance on the foreign technology and global supply chains, “spur the government to further intensify its efforts to promote domestic innovation” and double down on its ‘Made in China 2025’ plan, says Eswar Prasad (China expert at Cornell University).

The pandemic also pushed Beijing to exert even greater control of all parts of the country, including high-tech private sectors, which has led China in the development of cutting-edge technologies and been afforded relative freedom by the Chinese Communist Party, says Samm Sacks, a fellow at the New America foundation.

Beijing leveraged extensively facial recognition technology, advanced robotics, artificial intelligencebig data and drones to police the crisis. This result will accelerate Party plans to advance the surveillance state further. It will also prompt Beijing to double down on investments in Made in China 2025 technologies pivotal to achieving information & technology superiority and the ‘China Dream’.

Conclusion

Externally, western democracies are likely to reassess its relationship and economic ties with China, foreign investments to China are likely to decrease as a result of western countries reassessment of its relationship with China and the dire global economic situation. Internally, Beijing will need to rely more than ever on its growing middle-class population to buy into the 2025 plan. Perhaps, countries will re-evaluate their supply chain and economic ties with China but ultimately as summarized by Willy Shih (Professor at Harvard Business School) “The World is dependent on China for manufacturing”. This goes beyond medical equipment, it is about textiles, furnitures, toys, electronics, accumulating to trillion dollars of import each year.

“I’m in the school that talk is cheap. And if you really want to go down that path, then you have to be prepared for the consequences,” — Willy Shih

Edward Zhang