Emily Jin
Industrial capacity is not synonymous with technological prowess. A country’s industrial base includes not just its cutting-edge technologies and actors, but also its foundational capabilities that make up the base of its economic prosperity and competitive capacity. The People’s Republic of China’s (PRC) “smart manufacturing” policies aim to upgrade its foundational industrial capabilities and create conditions for technological breakthroughs. If the Chinese Communist Party (CCP) is successful at developing a self-reliant and high-value smart manufacturing sector, the productivity gains would better equip China to challenge the United States’ economic and national security interests.
What is smart manufacturing? Chinese policymakers conceptualize it as manufacturing integrated with information technology using advanced techniques—which drives data-driven production, generative digital operations, and the fortification of intelligent supply chains that are responsive to internal and external supply and demand. In China, smart manufacturing is as much of a buzzword—or an aspirational goal—as it is a declared path to national wealth and power. With concentrated state capacity and investment and knowledge transfer from international firms, China is positioning itself to upgrade foundational parts of its economic model and prepare for significant productivity advances in manufacturing. The near-term goal is to obtain the technology capabilities. The broader, and perhaps more strategically important, goal is to reduce reliance on foreign inputs.
Smart manufacturing became an official focus of the CCP as part of the Made in China 2025 plan, which was announced in 2015. During General Secretary Xi Jinping’s 2017 report at the 19th Party Congress, he emphasized that smart manufacturing is a strategically important facet of transforming the Chinese economic model. Moving from “Made in China” to “Trademarked in China,” Chinese policymakers want the country’s economic engine that can manufacture rapidly to become one that can manufacture with consistent high quality. Hou Jianguo, the president of the Chinese Academy of Sciences, reflected in the official publication of the CPC Central Committee that “scientific and technological self-sufficiency and s
elf-strengthening are strategic pillars of national development.” Typical of PRC official documents and speeches, the language from this development plan is reminiscent of battle calls as it frames smart manufacturing as a “primary battlezone” for strong economic development.
How is the PRC’s smart manufacturing campaign faring? Eight government departments are involved in China’s smart manufacturing industrial development, led by the Ministry of Industry and Information Technology (MIIT). In 2021, this group jointly announced a smart manufacturing development plan pegged to the country’s 14th Five-Year Plan. As of June 2022, the MIIT announced notable achievements, including establishing 42 smart manufacturing international standards in recent years. Many sectors fall under “smart manufacturing.” But the plan has a pointed focus on creating national and international standards for advanced manufacturing—which demonstrates the PRC’s determination to lead in technical know-how and, more importantly, to drive discussions related to global smart manufacturing. It is clear that Chinese policymakers are taking strategic lessons from other industrial nations to boost the competitiveness of its smart manufacturing sector: China’s smart manufacturing development plan explicitly acknowledges other countries’ development blueprints, including Germany’s Industrial Strategy 2030, the United States’ back in 2018, and Japan’s Society 5.0 vision. Chinese academics have also compared China’s smart manufacturing initiatives to similar initiatives in the United States, Germany, and Japan.
Robotics is a crucial part of China’s smart manufacturing ambitions and larger industrial policy. A slightly different configuration of government agencies (with MIIT again at the helm) announced a related five-year development plan for the robotics industry in 2022 at the same time as the release of the smart manufacturing development plan. The robotics development plan touted a growth rate of 15 percent in China’s robotics industry between 2016 and 2020, which is faster than the projected global robotics growth rate of 11.8 percent from 2022 to 2028. The global value of the industry was around $33.9 billion in 2021, with China seemingly occupying a dominant share. According to Zhang Hongyong, an expert on Chinese and global value chains, Chinese government subsidies provided to the robotics industry have grown more than threefold from 4.6 billion RMB ($670.4 million) in 2015 to 15.4 billion RMB ($2.24 billion) in 2019. In 2020, China reached the robotics density (a metric used to measure a country’s level of industrial automation) of 246 units per 10,000 employees, which is almost twice the global average of approximately 120.
However, China is highly reliant on foreign suppliers in this industry, as over 70 percent of its 2020 industrial robots came from foreign suppliers. As the biggest industrial robot market in the world (in terms of sales and operational stock), China has a high demand for robots that—as of now—must be mostly fulfilled by foreign imports, especially given the country’s ambition in the sector, as illustrated by MIIT’s statement that China aims to double its manufacturing robot density by 2025. China in the short term will likely continue to rely on foreign, high-value robotic inputs. But it is clear from China’s development plans that it wants to eventually supplant imports with indigenous capacity: The plan calls for the industry to derive its strength from self-reliance by solving the issues of insufficient knowledge, a lack of an industrial foundation, and a dearth of high-end supply.
That China first issued this plan in 2021 may seem to indicate that the PRC is still in the early stages of learning from the strategies of other industrial nations. However, provincial and municipal governments have been integrating foreign firms’ know-how and capital into their smart manufacturing development for some time. In 2017, 29 American companies sent representatives to the city of Shenzhen, and some formed strategic partnerships with Chinese companies and the Shenzhen government. More recently, 40 Japanese Fortune 500 companies attended the 2021 China-Japan Smart Manufacturing and Digital Technology Development Forum in the city of Yantai, which set the stage for many joint ventures. Chinese and German professionals from trade associations and think tanks initiated joint projects in July 2021 at the Sino-German International Cooperation Industrial Park in Beijing. In May 2021, Chinese and Japanese companies established joint ventures with a total investment of 4 billion RMB ($591 million) in the Changshu Economic and Technological Development Zone. (See the Appendix below for several examples of foreign firm participation in the Chinese smart manufacturing sector since 2015.)
Certain domestic and international trends are driving China to use smart manufacturing to facilitate its industrial growth in the coming years. Domestically, the country’s working-age population is shrinking and could decline by two-thirds by the end of the century. It is therefore necessary for China to transform its industrial model to mitigate the growth-dampening effects of its looming labor shortage.
Internationally, China is no longer the lowest-cost labor market, as other low-cost producers in Southeast Asia are competing meaningfully. Lots of Chinese companies are shipping their operations to East Africa, as low-cost labor there is increasingly more affordable than that presented by China’s aging working population. Moreover, targeted technology controls and trade restrictions from the United States and other nations are expediting China’s timeline to prop up its technological self-reliance. China’s acceleration toward self-reliance and home-grown strength is not a short-term policy change. Rather, it is part of a deeper transformation in the Chinese economic composition. Smart manufacturing has the potential to broadly and exponentially upgrade China’s industrial capacity, and it is an essential component in China’s industrial policy and domestic technological self-strengthening.
The economic and national security risks of the CCP reaping successes in its smart manufacturing development are apparent. If the U.S. government does not restrict its innovative firms from assisting China’s self-strengthening mission, Chinese firms could erode the competitiveness of American firms—which is already happening in certain industries. This would also open up the possibility of the CCP seizing control over the most profitable segments of smart manufacturing supply chains and production networks, which could threaten the global community's economic and national security interests. The United States should work to forestall these concerning developments with a two-pronged strategy.
The first prong is defensive. In the immediate term, the U.S. government needs to regulate technology and capital transfer. To limit U.S. firms’ contribution to China’s industrial development, policymakers will need to allocate analytical resources toward investigating the extent of American involvement in China’s smart manufacturing efforts. These efforts should focus on areas of smart manufacturing that would present the most concentrated national security risks—such as advanced robotics with military applications.
The most straightforward tool in this area might be investment reviews in cases of Chinese acquisitions of American firms with smart manufacturing technologies. One recent example of this review occurred in May 2020, when the Committee on Foreign Investment in the United States (CFIUS) unwound Ekso Bionics’s involvement in joint ventures with Chinese partners. CFIUS had a strong case for unwinding this company’s role in these partnerships, as Ekso Bionics could have transferred technology with military applications (specifically combat exoskeletons) to China.
To broaden the impact of this type of review, these types of investigations into U.S.-Chinese joint ventures and partnerships would need to become more common—which U.S. industry would likely resist. A 2013 assessment of China’s strategic and emerging industries program by the U.S.-China Business Council sought to provide “[r]ecommendations to ensure full participation for foreign-invested companies in China’s industrial modernization.” This kind of collaboration may have been appropriate in 2013, but the political winds have changed since then. Industry mindset would need to shift accordingly to prioritize U.S. economic and national security over market access.
The second prong is proactive and complementary to the defensive prong: In the longer term, the U.S. government must invigorate its industrial base with sustained investment and cultivation of its labor force. The science portion of the CHIPS and Science Act is a great start. The $280 billion investment in American science and technology development—including National Science Foundation initiatives aimed at elevating educational attainment and broadening workforce participation in crucial sectors—is the kind of initiative that could increase U.S. smart manufacturing competitiveness in the long run term. But, among other additional steps, the United States also needs to upgrade its energy productivity to account for the energy-intensive production processes involved in advanced and smart manufacturing.
As the U.S. government asks cutting-edge industry leaders to partially withhold capital and knowledge from Chinese counterparts, policymakers need to provide enticing domestic opportunities to compensate for these near-term losses. The White House’s detailing of smart manufacturing as a critical and emerging technology in February 2022 (under advanced manufacturing) was a solid move. But the White House should also designate the key government agencies to lead on U.S. smart manufacturing development. Initiatives and organizations such as the Smart Manufacturing Institute—a public-private partnership—should spearhead the public discourse in this area.
The National Institute of Standards and Technology and the Office of Industry and Analysis—both of which are within the Department of Commerce—should be the analytical and coordinating arms for America’s smart manufacturing strategy. If these agencies were to conduct an investigative review of U.S. industry participation in Chinese smart manufacturing development, they would have enough information to determine the necessary extent of technology control and give industry participants alternatives to the Chinese market (through regional network initiatives such as Manufacturing USA).
While both defensive and proactive responses are necessary, the United States should not rely too heavily on defensive tools and indiscriminately cut off American firms’ participation in the Chinese market. After all, the strength of the American economic system lies in its openness. If American firms are not in the Chinese market, other multinational corporations with competitive offerings would likely fill the void—as the sector is fragmented and highly competitive (see the Appendix for examples). There’s a case to be made for ensuring American multinationals with trailing-edge technologies can still operate in the Chinese market, which would not necessarily threaten U.S. economic and national security. To find that balance, the U.S. government must immediately analyze industry dynamics and U.S. firms’ participation in the Chinese market. In the meantime, policymakers must also craft proactive policies to sustain long-term growth of American smart manufacturing.
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