Can you briefly explain what makes Made in China 2025 (CM2025) so noteworthy?

CM2025 is a 5-year plan of domestic development in China. What makes it different is the fact that it is reaching out globally into an area where international companies have the edge. China is trying to stimulate innovation with a toolbox outlined in this report. The major importance is that China told us where it wants to be in 2025, and as it is an economic superpower, we need to take note of where it is headed for.

According to my conversation with a friend related to the former Chinese prime minister Zhu Rongji, the CM2025 mindset is causing damage to China because the government will put up a lot of money. As one of the former ministers said to me, if the Chinese government is pointing north, all the state-owned enterprises will go north because that is where the subsidies are going to be, but the business giants in the private sector, including TenCent and Alibaba, will go south because there is less competition. If the major companies run south, the enormous amount of subsidies will be wasted. That is why we advocate letting the market decide, letting the consumers decide, and letting the competition decide, instead of government picking the winners. The state-owned enterprise will always follow the lead of the party, and they will grow bigger with the subsidies but not better.

Under the CM2025 guidelines, what are Chinese companies expected to achieve in winning higher market share in the global as well as local markets?

It is very unusual, we have never heard of, that a government makes innovation plans and tells its companies what kind of market share it expects them to achieve. This kind of plan has never existed in the U.S or in Europe. For example, guidelines including “40% of basic components and basic materials to be domestically manufactured by 2020, rising to 70% by 2025,” is a typical socialist toolbox of planning. It is especially surprising in light of the Chinese government trying to distance itself from the market share thinking, because it knows that doing so will antagonize its trade partners.

Such unrealistically high market shares goals reflect the planning mindset of the decision makers. They completely disregard the fact that it is the customers that decide what kind of market share a company has. If a company produces a better product or provides satisfying service, certainly it will enjoy higher market share. However, what we come across here with CM2025 is a government telling a company to achieve this or that without or ignoring instructions on how to achieve such goals. But keep in mind, it is one thing that China has the planning mindset when guiding its domestic developments, but it will be totally different when it expresses its goals to its trading partners and also with regard to whether those market shares will be achieved or not. 

In seeking to gain technological progress, which industries in China are positioned to upgrade and how are they expected to achieve such progress?

(Due to time constraint of the interview, Mr. Wuttke provides the report titled “China Manufacturing 2025: Putting industrial policy ahead of market force” that contains relevant information to this question.) 

The European Union Chamber of Commerce in China explains that even though many Chinese companies are still operating according to the Industry 2.0 model and do not have the capacity to rapidly transition, in some ways China is well positioned to adopt Industry 4.0. This is due to the fact that in Baidu, Alibaba and Tencent, among other companies, China possesses strong and, in some areas, leading capabilities for digitization and big data. 

As highlighted by Rockwell’s CEO during the Barclays Industrials Select Conference in February this year, the company observes a greater willingness by Chinese companies to invest in higher level automation software than in the US where there remains a higher level of conservatism among many manufacturers. Siemens continues to see very strong demand from domestic Chinese customers, especially in automotive, where companies are willing to invest significantly in automation and higher level software (including product-lifecycle-management, or PLM) in order to boost productivity and speed up time-to-market. At an analyst meeting last year, the CEO stated that the only way to succeed over the longer term in China is to help domestic companies to become more efficient and productive. Siemens has already faced significant headwinds from government-supported Chinese competition, e.g. in telecoms (where the company was forced to exit at a significant cost to shareholders), rolling stock, steam turbines, gas turbines and it may be facing tougher times ahead in healthcare equipment.

At present, there are no Chinese automation companies of size (Hollysys and China Automation Group remain niche players). Interestingly, it is Midea, China's leading appliance manufacturer, which is now aiming to become the leading Chinese robotics manufacturer (after its acquisition of Kuka, a German firm) and is adding automation capabilities through smaller bolt-on acquisitions (e.g. Servotronix) in order to reduce the reliance on foreign suppliers. In Midea’s view, a key challenge for the Chinese robotics industry remains its reliance on foreign suppliers (e.g. Nabtesco or Harmonic Drive Systems).

One area that will be affected is foreign firms’ take-over of Chinese firms. What are the main concerns of the Chinese government in evaluating foreign M&A activities targeting Chinese domestic companies?

Chinese government is regulating and making merger and acquisition transactions in China very difficult. When a foreign company wants to increase its presence in China, the Chinese policy makers always put them into a box. At the same time, China is trying to get Chinese companies to go global with the one-belt one-road policies. They were surprised to see how much money left the country over the last twelve or fourteen months. They need to stop it because many companies have been misusing this, and the foreign exchange reserve was shrinking below 3 trillion. However, when it comes to high-tech transactions, Chinese government still encourage and welcome it because they expect it to be innovation powerhouse for the 2025 goals.

What are the difficulties that a foreign company will likely encounter when it tries to break into and thrive in the Chinese market?

First, in China, restrictions come before free investment. Unlike in the U.S. or Europe, there is an investment catalog in China which tells the investors, for economic reasons, where they can invest, where they might invest, and where they certainly cannot invest. In most of the OECD countries, the investment catalog is solely based on security concerns. U.S. has an investment catalog based on security, and Europe Union doesn’t even have one.

Secondly, China has a foreign investment law issued by the ministry of commerce which is again never seen in Europe nor in the U.S. This makes foreign companies’ investment plans in China even more difficult to accomplish. In some area, China is very open, for example there is almost no restrictions in the chemicals industry, and in other areas there are specific restrictions on the details of the investment plan.

How can Western firms protect their interests when the Chinese government has an explicit policy of favoring domestic firms through industrial policies?

First of all, with all these restrictions coming from the Chinese government, there are organizations such as the American Companies Representation Chamber and the European chamber to lobby for changes in these restrictions. But it is very difficult to push for a change. At the same time, we are frankly investing elsewhere. Take Europe as an example. Europe invest in the U.S. on average between $150 and 250 billion each year. Last year, European companies invest only $8 billion in China. The size of the economy is very similar between China and the United States in terms of purchasing power parity, and European companies are not stupid to not to invest in China. There are very little opportunities in China, while the U.S. is open to foreign investments. In the biggest emerging market in the world – China, the investment opportunity is very limited. For foreign companies to protect ourselves, we need to rely on higher technology and intellectual property rights. 

With CM2025, China is telling the world it wants to be the champion in certain areas through whatever methods necessary. For the rest of the world, we need to find our way to protect ourselves. In many cases, we argue that we should be self-confident in competing with China. But in some areas where the Chinese government is financing its companies, genuine business held by shareholders are put on the disadvantaged side. The government should step in and think about it. Organizations like the U.S. Chamber, our organization, and the Italian Chamber are advocating similar ideas recently, drawing governments’ attention on the different industrial policies that China has. 

China has been pursuing various industrial policies for a long time. What has been its record? Will CM 2025 be different from previous attempts?

China has been very good at making the deal of market entry versus technology transfer. It has also been very good at getting the money into fixed asset investment. However, as it is producing a major part of the world’s supplies, the engineering and branding is done by companies located in other countries in the world. The industrial policies have been effective to get the manufacturing in China, but the whole value chain is still elsewhere. Hence, CM2025 is an attempt to break out from low value-added industries and to get into industries evolving higher technologies. To do this with industrial policies is very difficult. We should be aware of the fact that past success may not be the ingredients of future success.