Among the various beliefs about China’s economy is the view that the country cannot long sustain the title of “the world’s factory.”
The argument is that as GDP grows and wages rise, China will invariably lose industrial production to other economies. Now that labor in the country is twice as expensive as in India or Vietnam, his stage of factory leader would have its days numbered.
Belief has some elements of truth. The government, however, wants to prove the conclusion wrong. The authorities want the country to remain a manufacturing power. They understand that losing industrial competitiveness is not inevitable — but something the result of wrong policies. The point is that competitiveness can no longer come from the low cost of labor (or the basis of environmental degradation).
It will be services and technology that will drive Chinese industrial modernization. The future of the economy is not an industry versus services dilemma, as some often characterize. It’s just the opposite. The industry will become more competitive because, starting from an already robust base, it will incorporate industrial internet technologies, especially artificial intelligence, for gains in productivity and competitiveness.
Increasingly, the added value of Chinese industry will come from technological services, enabled by 5G.
In 20 years, China will lead the world in advanced manufacturing, with artificial intelligence (AI) driving improvements in automation, predicts Kai-Fu Lee, one of the great references in AI. Chinese factories already have the largest number of industrial robots, but they have a relatively low level of intelligence. In the future, robots will gradually reach other levels from AI and will be used in more scenarios, estimates the expert.
For the avoidance of doubt, the movement of industrial investment out of China for reasons of labor cost is real and has been going on for more than a decade. Sectors such as clothing and footwear, for example, are finding more attractive options in Vietnam, Cambodia and Bangladesh.
Other industries are looking for alternatives to production in China to mitigate risks and costs associated with tariffs and sanctions adopted especially by the US.
If changes in value chains are to some degree inevitable, de-industrialization need not be. The perception here is that de-industrialization was an American mistake that Beijing does not intend to repeat. Manufacturing’s share of Chinese GDP has fallen since 2015, totaling just over a quarter of the 2020 total.
The authorities want to contain this movement, which would be happening “too soon, very quickly”. The new five-year plan 2021-2025 aims to stabilize the industry’s share of GDP.
Maintaining a strong industrial base matters to China not just for economic or technological reasons. There is strategic value in certain industrial chains in the face of an external environment that Beijing increasingly characterizes as hostile to Chinese interests.
The goals of reducing external dependence and promoting self-sufficiency have gained increasing importance. In the field of advanced semiconductors, for example, Beijing feels Washington’s hand squeezing its neck.
In 2049, the centenary of the founding of the People’s Republic of China, the authorities intend the country to be a superpower in the areas of science, technology and innovation, a cybernetic superpower and, yes, also a “global manufacturing superpower”.
China is convinced that, as it modernizes, it doesn’t need to let industry get in the way. To do this, it needs the industry to evolve together — pulled by robots.
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