Charles Oliver is a co-founder and partner at GCiS China Strategic Research. Charles works with a wide range of multinationals in diverse business to business sectors in understanding their markets in China better and shaping their strategies for these.

Soh Siao Tin is an analyst at GCiS China Strategic Research, has been living in China since 2008 and follows China’s market and industry development closely. She studied at Singapore Management University and Peking University.

 

What is Made in China 2025?

Made in China 2025 (MIC 2025) is a program to transform and upgrade Chinese industry on a comprehensive basis, improving efficiency and delivering value-added in 10 notable industries. The program sets the goal of raising domestic content of core components and materials to 40% by 2020 and 70% by 2025. This is still being rolled out, and while the date given is 2025, as with the Belt and Road Initiative, the program is expected to last much longer. 

MIC 2025 should not be seen as a new departure for China. Rather, it is a natural extension or continuation of China’s industrial policy model, where particular industries are favored and certain companies receive significant support both from national and provincial governments, banks, etc. But with MIC 2025, the model now covers 10 high tech industries, which greatly expands the scope. Chinese companies were already developing with considerable success in the industries included, which account for about 35% of the country’s total industrial output. Many countries have an industrial policy, state ownership and/or support for companies, national champions, etc. But MIC 2025 is different in that: 
a) China’s support is more comprehensive and substantial
b) China’s economy is so large that the impact of this program will be substantial, and could impact or even alter markets both in China and in other countries

It is the combination of these elements that has drawn criticism from Western countries. 

Implementation of MIC 2025

While there have been official pronouncements on MIC 2025, details are limited, and precisely how the program will be rolled out is not yet clear. It will be defined ultimately by how much is done in practice.

Data on specific budgets is not widely available and only a few sets of figures have been released. For example, the municipal government of Huzhou in Jiangsu Province revealed in the published version of its budget for 2017 that it had allocated RMB175 million for MIC 2025, of which 80% went to project funding. That amount is not very large, but when one considers that Huzhou is a tier-3 city, and most tier 1-3 cities and provinces and regions have their own MIC 2025 plans and budgeting, the scope multiplies to be much more significant. Some sources report that the amount of subsidies connected with MIC 2025, both directly and indirectly, may exceed $200-300 bn.

Multi-faceted support for Chinese firms

Some in the Western business community believe that the levels of support that Chinese firms may receive through MIC 2025 will tilt the playing field in favor of Chinese companies, whether in China or in third-party markets such as Southeast Asia. As noted in the chart, support can be multi-faceted, in the form of:

• Subsidies: For example, with robotics and NEVs, central and local governments provide direct and/or indirect support to favored companies in priority industries. Government may also help to reduce the cost of companies’ products by covering a percentage of their price or even the cost of installation for customers.
• Direct Investment: Many government-backed funds have already been set up to invest in companies in these 10 industries. 
• Project Access: China is not a party to the Agreement on Government Procurement (GPA) under the WTO, and its public procurement market in many cases remains largely closed to foreign suppliers. 

Specific support, however, is difficult to track. And the fact is that many companies in these industries already receive subsidies in various forms not tied directly to MIC 2025. Furthermore, many or most Chinese companies in these target 10 industries will receive at least some support from MIC 2025. 

The solar panel model

Solar panels are a relevant example here. There was no master plan to create a large solar panel industry, but about 10-12 years ago, the central government put out heavy signals to this effect, and both local governments and industry reacted. As noted in the chart, the result was a huge increase in capacity expansion, far outpacing domestic demand. Significant support was provided in the form of fiscal subsidies and tax incentives. While many of the solar panel companies failed, China ended up dominating the world market, with Chinese firms making up most of the major solar panel producers. By most measures, from a Chinese perspective, this (informal) program was a success.

Meanwhile during this period, due in large part to the availability of cheaper imports, many American solar panel companies went bankrupt. In 2012, and again in 2014 and 2018, the U.S. put tariffs on solar panels from six key Chinese firms, up to 100%. Now, Western business groups are concerned that with MIC 2025, this model for market share control may be replicated in a range of new product categories, such as robotics, again disrupting global markets to the advantage of Chinese firms. With some of these industries, such as shipping, aviation and advanced materials, there are much higher technical or capital barriers to entry and it would be much harder to follow the solar panel model to domination. However, concerns over the use of some similar tactics are valid. 

Local content requirements

Whether it is officially acknowledged or not, import substitution is by most assessments an aim of MIC 2025. The message for U.S. companies is that as the program evolves, some opportunities for exports to China will be curtailed (though others may grow).

Even if a U.S. firm has production in China, in some cases U.S. firms may still be at a disadvantage relative to Chinese firms due to preference for “indigenous products.” For example, the MIIT published on its website market share targets, aiming for indigenous electric vehicles and plug-in hybrid electric vehicles (PHEVs) to have domestic market share of more than 70% by 2020, and for NEVs to enjoy domestic market share of more than 80% by 2025. These are not binding targets, and there is also a question of whether “indigenous” includes foreign companies production in China. There is room for debate here, but many foreign sources believe it does not.

And whether officially acknowledged or not, the government in China has great influence on procurement in the chosen 10 industries, whether acting as a supplier, customer, regulator or financing source. Take the power industry as an example. Most equipment companies are state-owned, and essentially all power plants and transmission bureaus are government owned. Given that nearly the entire procurement process in this industry is controlled by the government, it is the government that will have the final say on what is procured. In other industries such as aerospace, maritime and shipping, and agriculture equipment, the influence of the government on procurement is likewise large.

Opportunities for U.S. companies?

According to AmCham Shanghai’s China Business Report, 48% of members see MIC 2025 more as an opportunity than as a threat. Many will not agree with this, but the program offers opportunities for U.S. firms. As Chinese companies in these 10 industries develop, they will have more demand for higher quality products and components, which U.S. companies can provide. Chinese companies will often act as OEMs or EPCs, and can be customers. Two examples: 

Wind Power, Solar Power: Products here include actuators (motion control), T&D and electronics equipment, inverters and converters, high-end processed metal. Goldwind Science uses a range of foreign components, for example. China is making big investments in new energy.

Commercial Aviation: Many of the systems and products used the COMAC models are supplied by Western firms. For example, Honeywell is supplying many products and systems for C919.

In addition to products, U.S. companies can also be involved in engineering, software, and services. Higher value cost competitive Chinese products may also be of interest to U.S. business.

Main risks for U.S. companies, and how to mitigate them

The main risks for U.S. companies are IP protection and market access. 

Market Access in China: Will U.S. companies, formally or informally, lose access to markets in China due to this program? The consensus is that in some cases, they will. 

Technology: While there is an enhanced effort to acquire technology from the U.S., the U.S. government has recently taken several steps to make this more difficult, such as strengthening CFIUS. 

Better Local Competitors, Global Competitors: Certainly China will turn out better competitors, but to a great extent this was happening anyway. How much will MIC 2025 push this forward?

Different Standards: China is actively competing to influence and author global standards, and MIC is one tool in this (e.g., 5G.) 
Worse Long-Term U.S.-China Relations: This is not just about the Trump administration. A worsening of economic relations are a good probability regardless. What will this mean for U.S. firms competing in China? Will European or Japanese companies gain from this? 
There is no simple answer for U.S. firms faced with these issues, and the current U.S. tariff program also complicates matters. Much of MIC 2025 lies in the realm of politics, but here are several suggestions: 

• IP, Tech: Be informed, prepared, nimble, clear-eyed. SMEs may need particular support from AmCham or other organizations to understand and work through China’s legal system.
• Access: U.S. companies should be clear about where they fit in the value chain, and focus on this. Be aware of forces in China that will make your company less competitive.
• Compliance: Dot all the I’s in compliance, make sure relations with local and provincial governments are strong.
• Being Informed. Don’t just follow key government actions in this area, but also make sure that HQ is aware of what is happening here. 

Many experts we spoke with believe that China will roll out MIC 2025 on a flexible basis. It will be important for American business to watch this closely, stay on top of these changes, and take steps to minimize risk where needed. 

New Chinese National Champions?

China already has a very large set of “National Champions.” The SASAC companies have revenues of nearly RMB4 trillion (Xinhua). Many have duopolistic powers and consist of 102 of the top companies in China, including giants like CNPC and the State Grid. There is another set of private or listed companies that can also fit this label, such as B-A-T (Baidu, Alibaba Group, Tencent), or Haier, Huawei, Lenovo, SANY, BYD, etc. 

The Belt and Road Program is dominated by leading SOEs, which lead over 80% of large projects. With MIC 2025 though, will the focus still be on SOEs, will a new breed of National Champions arise from this? Could this be companies like Yingli Solar or Jinko Solar? Both are top five solar panel suppliers. These companies compete not just in China but globally. For example, in April, Jinko announced plans to set up a U.S. factory in Florida. This is based on a 2.75 GW contract with NextEra Energy. Alibaba and Tencent are moving aggressively into Southeast Asia and other markets. However, questions remain: 

• Can SOEs drive innovation? Will SMEs receive their share of funding and participation? 
• What if the goals of these companies and the goals of the government diverge? 
• Will China use MIC 2025 as a tool to reform SASAC?
• What does it mean to be a Chinese (or U.S.) company? HQ? Listing? Location of factories?

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