Oct 20, 2021
In December 2020, China’s Chang’e 5 mission touched down on the moon to collect rock samples. Three weeks later, the lunar module returned to earth carrying a cargo of more than four pounds of samples, the first such mission to be completed in more than forty years, making China the third country after the US and the former Soviet Union to return from the moon. This is remarkable progress, but when assessing China’s core mission to achieve independence in key technology-based industries, it helps us ask questions such as: despite some clear success stories, why is China still importing around half of the key components needed to build commercial jetliners?
Further understanding the true extent of China’s technological progress was behind our decision to engage Chris Miller, assistant professor of economic history and international history at the Fletcher School of Tufts University, to assess China’s progress developing technological independence. This is not just a discussion about China’s e-commerce or digital economy, but an independent assessment of China’s industrial policy and the government’s efforts to develop new technology companies to spur future growth and avoid the middle-income trap that has beset many other nations in their economic development. Beijing is placing billions of dollars of (venture capital) bets that state guidance and government subsidies can produce profitable companies with world-class technology that can continue to lift economic standards.
Chris’s research concludes that China’s record with flagship government industrial policy programmes, focused on specific sectors through plans like ‘Made in China 2025’ and its predecessors, is mixed – even when measured on the state’s own terms. There’s no denying that Beijing has an extraordinary record of generating economic growth over the past four decades. But policies that have produced China’s economic growth – its move away from central planning after the 1970s, its embrace of foreign investment and exports, and its massive infrastructure investment – are very different from its attempts to support specific industrial sectors or firms. Therefore, to assess progress over the last 15 years since Beijing launched major subsidy programmes targeting specific sectors and supporting development of cutting-edge technology, we need to define what we mean by industrial policy. Chris draws on the expertise of Barry Naughton, an eminent scholar of China’s economy, who defines industrial policy as “any type of selective, targeted government intervention that attempts to alter the sectoral structure of production”.
One of the more intuitive ways to assess China’s progress is to look at China’s 2006 industrial policy – centred around engineering megaprojects – with comparable categories from ‘Made in China 2025’, launched in 2015. Chris concludes that only a few of the 2006 megaprojects were phased out, with most added as objectives for 2025, suggesting that targeted sectors have not yet reached the technological frontier. There are certainly exceptions, including the effort to land a spacecraft on the moon and to produce next generation broadband wireless, but in many categories, such as robotic manufacturing, aircraft, advanced pharmaceuticals, and high-end computer chips, China’s dependence on foreign components has increased rather than decreased.
There is also more than meets the eye when delving into China’s success stories, which include its role in consumer electronics production (e.g., iPhones), leadership in digital payments (AliPay and WeChat Pay), high speed rail and TikTok, which has been a major feature of our lockdown lives over the last 18 months. So, what can we deduce from these successes? Firstly, digital payment systems and the likes of TikTok were unplanned and unexpected by the government, and therefore not related to industrial policy. Secondly, China’s high-speed rail is less about product innovation and more about the government’s ability to build the required infrastructure using technology already in use across Europe and Japan. This suggests that Huawei winning a major share of the market for 5G network equipment is the only major example in which a Chinese firm has won international contracts thanks to technological innovation in a field designated by Beijing as an industrial policy priority. Even then, Huawei, which operates more like a private firm, outperformed ZTE, its state-owned competitor in China.
Looking ahead, Chris’s research shines a stark light on China’s technological progress and asks the question whether Beijing – through huge subsidies – can achieve independence in its own microchip industry without relying on increasingly less cooperative US technology. It also asks whether China, the largest market for electric vehicles, can assume global leadership in this burgeoning industry where only three Chinese firms make the top 10 in domestic electric vehicle sales and no Chinese brands are in the top 10 for global sales.
Our job at Ninety One is to digest this research, conduct our analysis and consider the implications for investors as China progresses along its path (or not) to technological independence.
against the odds, China’s huge investment plan pays off. Western analysts who underestimated China’s technological progress on internet-based firms in the early 2000s and 2010s do so again.
successes (like solar equipment) and failures (like semiconductors) forms our base case. Broad-based research and development investments provide some upside to growth through productivity gains in the medium term.
China succeeds in very few areas. Debt piles up and China reverts to a less expansive innovation policy in 2-5 years, weighing on capital and labour productivity.
In determining which scenario might be realised, our analysis of Chris’s research has focused on China’s shift from horizontal industrial policy innovation to vertical policy innovation. The former seeks to foster economic development without a focus on which particular sectors will grow (infrastructure spending). However, vertical industrial policies target specific sectors and we have seen a decisive shift in this direction since 2006. Chris’s research shows unambiguously that the results of these policies have been mixed. However, it is also clear that China is pouring unprecedented sums of money into its effort. If we go back to the aircraft example, while half of the state-owned Comac widebody planes still rely on imported parts – analysts believe that the resources available to Comac are effectively unlimited.
China’s motivation is twofold. Relations with the US have remained hostile even with the change of administration in the White House, with the US willing to deny China access to vital technologies. In addition, Beijing believes that in the middle of a technological revolution, there is an opportunity for China to get ahead of other countries in general-purpose technologies.
For a nation established so recently, it is not accidental that the People’s Republic of China aims to become a technological superpower by 2050, a year after celebrating its first century. China has demonstrated that it can succeed in technological development despite a lack of historical precedent. The success of the internet names such as Alibaba and Tencent, which are now among the largest in the world, is one of the clearest examples. It is our thesis that despite the mixed record of recent industrial policy, China’s general policy apparatus, run by a bureaucratic elite of considerable ability, should not be underestimated.
To access the full research paper, please click here.
|Engineering megaprojects, launched 2006||Comparable category in ‘Made in China 2025’, launched 2015|
|Advanced numeric-controlled machinery and basic manufacturing technology||Automated machine tools and robotics|
|Core electronic components, high-end generic chips, and basic software||New generation information technology|
|Extra large scale integrated circuit manufacturing and technique||New generation information technology|
|Control and treatment of AIDS, hepatitis, and other major diseases||Biopharma and advanced medical products|
|Drug innovation and development Biopharma and advanced medical products||High-definition earth observation systems Space and aviation equipment|
|Large aircraft Space and aviation equipment||Manned aerospace and moon exploration Space and aviation equipment|
|Genetically modified organisms Biopharma and advanced medical products||Large advanced nuclear reactors No comparable category, targets probably achieved|
|Large-scale oil and gas exploration||Not in ‘Made in China 2025’, status of industrial policy goals unclear|
|New-generation broadband wireless mobile telecommunications||Not in ‘Made in China 2025’, achieved via 5G technology|
|Water pollution control and treatment||Not in ‘Made in China 2025’, status of industrial policy goals unclear|
|No comparable category||Maritime equipment and high tech shipping|
|No comparable category||Modern rail transportation equipment|
|No comparable category||New energy vehicles and equipment|
|No comparable category||Agricultural equipment|
|No comparable category||New materials, such as polymers|