China’s plan to dominate seven high-tech industries

The track-record on industrial policy is distinctly mixed, but this coming from China, we’re not laughing, somehow..

China’s Bold New Plan for Economic Domination
By David Abraham & Meredith Ludlow
May 18 2011, 7:00 AM ET Comment

The Chinese leadership has unveiled a strategy to lead the globe in seven of the most important industries. Is the rest of the world ready?

Over the past few months, Beijing has released several plans laying out its vision for the country’s economic future. China’s twelfth Five-Year Plan, approved in March, and a follow-up plan released late last month by the National Development and Reform Commission, reveal a national strategy with several worrying developments for multinational corporations.

The economic blueprints focus on seven “Strategic Emerging Industries” that Beijing aims to dominate on a global level: alternative energy, biotechnology, new-generation information technology, high-end equipment manufacturing, advanced materials, alternative-fuel cars, and new energy technologies. Global firms that compete in everything from hydropower to flat panel display technology will have to account for stronger Chinese competition. And for countries, such as Japan and Korea, with hopes of having their domestic firms lead these industries, these new Chinese plans may necessitate revamping their policies of state assistance for corporations.

To support its strategic industries, Beijing is set to provide accommodating fiscal, tax, and financial policies as well as to “reasonably guide mergers and acquisitions to increase manufacturing industry concentration,” according to the published plans. This includes roughly $1.5 trillion in government spending (almost 5 percent of GDP) annually, the goal of which is to grow the strategic industries’ contribution to China’s growth from less than 5 percent today to 15 percent by 2020. In other words, China plans to triple the role that these high tech industries play in its economy. By 2020, Standard Chartered estimates that China’s economy will reach $25 trillion. At these levels, China intends that $3.75 trillion, or roughly the equivalent of Germany’s annual GDP, will come from its seven strategic industries.

Much of the growth will be designed to meet increasing domestic demand, but China will be unable to consume all it produces. High-tech exports, then, will necessarily become a vital component of its plans. China’s auto production, for example, is expected to triple to 40 million vehicles annually by 2020. Meanwhile, the government is actually limiting the number of new car permits as part of its plan to ameliorate the nation’s travel problems. China will need overseas markets to absorb its excess capacity.

Multinationals and foreign governments should not lull themselves into considering this plan unattainable, as China has a strong track record of meeting its economic goals. According to its own measures, Beijing met or exceeded more than 80 percent of the objectives for its eleventh Five-Year Plan, even surpassing its targeted GDP growth rate of 7.5 percent and reducing its sulfur dioxide and chemical oxygen demand emissions.

Five years ago, Beijing also announced the National Medium- and Long-Term Plan for the Development of Science and Technology (MLP), which set out a national strategy of growing the economy on science and technology industries. Since then, China’s heavily subsidized solar sector has emerged as the world leader in photovoltaic cell production, with more than 40 percent global market share.

China has what it takes to rapidly implement its plan: a firm political will with centrally coordinated policies, a legal and financial system biased toward governmental economic initiatives, and abundant financial resources. In addition, weak intellectual property rights enforcement has helped Chinese industries to avoid costly research and development expenditures. According to the U.S. Chamber of Commerce, many multinationals characterize China’s MLP as a “blueprint for technology theft on a scale the world has never seen.”

China’s economy and plan face great challenges: inefficient resource allocation, rising salaries, energy shortages, inflation, and an overwhelming bureaucracy — at least ten different regulators oversee energy initiatives, for example. In addition, the upcoming 2012 political transition could lead to erratic policy implementation as candidates vie for power. However, any economic slowdown will lead Beijing to push exports more aggressively.

These economic plans do not necessarily spell the end of high-tech manufacturing for competing nations. Product quality is a major concern in China. For example, the country recently lowered maximum allowable speeds on its high-speed rail to address safety concerns. An accident on China’s vaunted rail system could complicate efforts to export infrastructure to foreign markets.

However, China has overcome safety issues before. Even though, three years ago, numerous countries found contaminations in Chinese blood thinner, Chinese pharmaceutical exports have rebounded. China now manufactures more than 70 percent of the world’s penicillin and 50 percent of its aspirin.

If global companies are to compete in China’s strategic sectors, they will have to work hard to produce reliable products, continue to innovate, and remain protective of proprietary technologies. Because despite calls for “indigenous innovation,” China produces few new products — such as high-tech films or circuits — and remains reliant on imports and foreign technology. China’s lack of intellectual property rights protection and its focus on replication dissuades creative thinking, leaving domestic companies often a few steps behind.

Foreign governments, meanwhile, will need to provide new assistance policies to domestic firms, as Washington did in January, when it offered General Electric a $437 million loan to ensure locomotive sales to Pakistan. They should also support research and development funding and continue encouraging collaboration between academia, government, and business. China’s plans are not only a call to rally China’s domestic industries overseas. They are a warning for foreign multinationals. China is beyond commoditizing t-shirts and solar panels. The world should get ready.