Made in China 2025, Explained

As trade talks continue with no end in sight, this “new era” of U.S.-China relations features frictions over technology and manufacturing ever more prominently. In particular, “Made in China 2025” continues to command headlines. Since its launch in 2015, this initiative has been the subject of intense concern and recurrent controversy, resulting in a level of prominence that is quite singular for a rather abstruse matter of industrial policy. Made in China 2025 is but one key piece of a complex architecture of plans and policies aimed at generating “innovation-driven development,” an agenda that has emerged as a clear priority under Xi Jinping’s leadership.

In many respects, the launch of this initiative reflected a response to the weakness of Chinese manufacturing capabilities relative to global leaders, while also seeking to take advantage of a perceived opportunity to achieve a new source of growth. Increasingly, Made in China 2025 has come to be emblematic of these ambitions, rightly provoking intense U.S. anxieties over China’s emergence as a technological powerhouse that rivals American leadership. The core objective of advancing “indigenous innovation” to enable China’s “national rejuvenation” has been highly consistent across recent generations of Chinese Communist Party (CCP) leaders. In this regard, the technological dimension of China’s rise is integral to its future trajectory as a rising power with global ambitions.

At its core, Made in China 2025 has aimed to transform China into a “manufacturing superpower.” In particular, the plan highlighted 10 priority sectors, which include new-generation information technology; advanced numerical control machine tools and robotics; aerospace technology, including aircraft engines and airborne equipment; and biopharmaceuticals and high-performance medical equipment. At a time when China’s economy is slowing, the embrace of such emerging industries and technologies is seen as a critical means to sustain and upgrade growth. For instance, the pursuit of advances in intelligent manufacturing is seen as vital to ensure future competitiveness against the backdrop of a new industrial revolution.

These objectives are not unique to China. Made in China 2025 was inspired by a close study of Germany’s “Industry 4.0” initiative. In this regard, it is not the focus of this initiative, but the intentions reflected in its objectives and execution that are concerning. In a world in which technology and innovation have become highly globalized, China has sought “self-sufficiency” in core technologies across a range of prioritized industries. Implicitly and often quite explicitly, China’s objective to become a manufacturing superpower implies the ambition not merely to catch up with other advanced economies but to surpass and displace them to achieve a dominant position in these industries worldwide.

As the Chinese economy slows and Beijing seeks to ensure more sustainable development for the long term, this embrace of emerging technologies and innovation is seen as a national imperative at the highest levels. Made in China 2025 must be contextualized by the tradition of an extensive assortment of industrial policies, of which most remain less infamous but are nonetheless significant, including the National Medium- and Long-Term Program for Science and Technology Development (2006-2020), which emphasized the importance of improving China’s indigenous innovation capabilities to enhance national competitiveness. This dedication to indigenous innovation is influenced by intense concerns about the dangers of lagging behind or remaining reliant upon foreign technologies, informed by the historical memory of China’s past weaknesses and technological backwardness.

From a historical perspective, this state-driven approach to advancing innovation is hardly surprising, continuing the legacy of the 1960s-era “Two Bombs, One Satellite” program. However, Xi has clearly elevated this agenda to a new level. The current moment is seen as a unique historic opportunity for China, at which there is a convergence between a new scientific and technological revolution and industrial transformation with China’s own evolving model of economic development. Of course, the intended endpoint and ultimate destination for these plans is 2049, the year by which China intends to be truly “world-class” as a science and technology superpower and otherwise. At the same time, Chinese policymakers also often candidly recognize some of the continued shortcomings, such as in integrated circuits, that persist at present, resulting in dependence upon access to “international innovation resources” that remain lacking domestically. 

The strategy that connects all of these initiatives comes from a guideline for “innovation-driven” development that links a number of interrelated initiatives collectively highlighting a panoply of disruptive technologies. This singular strategy, released jointly by the CCP’s Central Committee and the State Council, declares, “innovation drives and shapes the fate of the nation.” This agenda has taken shape under the 13th Five-Year Plan (2016-2020), a timeframe in which China is clearly elevating its emphasis on seizing the “commanding heights” of innovation, seeking to achieve a first-mover advantage in certain strategic technologies. Through the National Science and Technology Innovation Plan, China has launched 15 “megaprojects,” prioritizing certain strategic technologies for major advances by 2030, which range from robotics and brain science to a deep space station  and quantum computing and communications. The elevated priority placed on these technologies has resulted in the introduction of billions in investment in long-term research and development, including through the establishment of new national laboratories, such as for quantum information science.

At the same time, there is a renewed emphasis on a number of new “strategic emerging industries,” which include new energy, biotechnology, and next-generation information technology. Beyond the national initiatives, a number of cities have implemented their own measures at the local level, competing to establish their own local specialty and advantage, including as Jinan’s plans to create a “Quantum Valley.” Often, this funding combines the expertise and resources of investors with the government’s direction, including a new venture capital guidance fund established in 2016 that is targeting strategic emerging industries, having raised money to the level of 17.85 billion Chinese renminbi (over $2.6 billion).

Xi’s work report to the 19th Party Congress in October 2017 provided perhaps the most authoritative assessment of the directionality of China’s plans and intentions. In his remarks, Xi highlighted:

We will work faster to build China into a manufacturer of quality and develop advanced manufacturing, promote further integration of the internet, big data, and artificial intelligence with the real economy, and foster new growth areas and drivers of growth in medium-high end consumption, innovation-driven development, the green and low-carbon economy, the sharing economy, modern supply chains, and human capital services. We will support traditional industries in upgrading themselves and accelerate development of modern service industries to elevate them to international standards. We will move Chinese industries up to the medium-high end of the global value chain, and foster a number of world-class advanced manufacturing clusters.

Of course, these ideas and themes are not unique to Xi Jinping personally; rather there has been a fair amount of consistency in how Chinese leaders have addressed and pursued these objectives. For instance, Hu Jintao in his own work report to the 18th Party Congress in November 2012 highlighted similar objectives, calling for China to “promote the sound growth of strategic emerging industries and advanced manufacturing industries, [and] speed up the transformation and upgrading of traditional industries.” However, Xi has placed his own imprimatur upon innovation in a way and to an extent that implies that this concept is not merely a buzzword but should be considered a core element of his ideology.

These plans and goals must be taken seriously as an authoritative indication of China’s ambitions and aspirations. However, their importance can be overstated, relative to the key role that China’s tech sector has played in actualizing this agenda. China’s success in today’s disruptive technologies can be attributed to the dynamism of China’s tech companies, which have emerged as global leaders in their own right. These new national champions include leading companies like Baidu, Alibaba, Tencent, and iFlytek, which are major players in artificial intelligence (AI) and critical contributors to national platforms and laboratories for AI development. Unlike the state-owned enterprises that have been and remain such a major factor in China’s development, this new tech sector started out primarily private and relatively independent of state direction, while often benefiting from strong state support and investment.

However, that balance is starting to shift in ways that may undermine the future success of these tech companies. Presently, the CCP appears to be in the process of asserting ever tighter control over Chinese tech companies. As Xi has declared, “[t]he Party leads everything.” Even the most successful companies have not been exempt from this trend, which may prove damaging, including to their ambitions for global expansion.

The critical question remains: Can China reconcile the inherent tension between innovation and authoritarianism? Evidently, these are core contradictions in China’s model of development. The space within which tech companies could operate with some autonomy and independence is becoming more constrained. For instance, the expectation that tech companies include a Party secretary among their leadership and establish a Party committee is not a new phenomenon but does appear to have deepened. The tendency toward Party-ification and imposition of stronger ideological control is unlikely to prove conducive to the creation of a “culture of innovation.” At present, there are deep concerns regarding the ways in which the Party-state could guide or control the activities of tech companies through such extralegal mechanisms as this Party presence in corporate leadership. These concerns are at the heart of current debates regarding Chinese telecom firm Huawei, exacerbated by the lack of clarity and accountability on these issues. When Huawei claims to be a purely private company but its senior executives are issued type “P” (public affairs) passports – and the Chinese government responds to a routine matter of law enforcement by taking Canadian citizens hostage as leverage and in retaliation – it is hard to take seriously those protestations.

These critical contradictions extend to the gap between the lofty rhetoric on innovation and the techniques through which the Chinese government has sought to achieve it, namely extensive and ongoing industrial espionage. In recent history, the means by which China has pursued technological advancement have provoked intense concern among U.S. leaders and increasingly worldwide about “predatory” practices. These tactics have included intellectual property (IP) theft, forced tech transfer, and targeted subsidies that can be highly distortionary and have proven deeply damaging, as documented extensively in the Section 301 report released by the Office of the U.S. Trade Representative based on an investigation of China’s practices regarding IP and tech transfer. Evidently, as recent incidents have demonstrated, these activities continue, and the techniques employed have evolved, including seemingly exploiting scientific cooperation and academic collaborations to access latent knowledge and the latest advancements. In the fall of 2018, the U.S. Department of Justice unveiled a series of indictments against Ministry of State Security (MSS) officers and operatives who have often targeted many of the same strategic emerging industries that China’s science and technology plans prioritize. Meanwhile, a number of Chinese laws and policies have thinly disguised a tendency toward protectionism in justifying the exclusion of foreign technology companies with a preference for “secure and controllable” technologies. Despite commitments, including in Made in China 2025 itself, to improved protection of IP, China’s apparent successes in its transformation into a global leader in certain strategic emerging industries will always come with the asterisk of the legacy of these practices.

However, the near-term threat presented by these unfair and damaging techniques is starting to be eclipsed by an awareness of the long-term challenge of China’s emergence as a powerhouse in emerging technologies. This model of Chinese innovation is extending to concentrate on a new lineup of technologies that move beyond manufacturing to recognize the potential of the digital economy as a new driver of development. For instance, as of 2018, strategic emerging industries are estimated to have contributed about 20 percent of China’s GDP growth annually over the past decade. In particular, AI, which was not, as it happens, initially included in Made in China 2025, has only more recently emerged as a clear priority for the Chinese government. Here too, China has learned from other nations in the formulation of its own industrial policies. In particular, the U.S. Office of Science and Technology Policy (OSTP) had released a number of plans and roadmaps in mid- and late-2016 that appear to have served as inspiration for Chinese policymakers at a time when Beijing had become increasingly concerned about AI, responding in part to the “Sputnik moment” of AlphaGo’s defeat of Lee Sedol in the game of Go in the spring of 2016.

In retrospect, it is ironic that China may have benefited more from these early efforts than the United States has so far in building upon that policy foundation to advance innovation, with a speed and scale of execution that tends to provoke envy from Americans. China’s embrace of AI has been uniquely enthusiastic. In particular, the New Generation AI Development Plan, released in July 2017, has corresponded with a massive mobilization of national funding and resources in support of this AI megaproject in ways that may prove very inefficient, but perhaps highly effective in the long term.

In his remarks ata Politburo study session on promoting the healthy development of AI, Xi emphasized, “Accelerating the development of a new generation of AI is an important strategic handhold for China to gain the initiative in global science and technology competition.” He urged that China must “occupy the commanding heights” of “crux and core technologies.” While these ambitions have only recently started to command headlines around the world, Xi’s emphasis on “core technologies” is a theme that has been consistent throughout his tenure, including in a major address at a conference for cyber security and informatization in April 2016, at which he mused:

What are core technologies? As I see it, there are three areas that we can grasp. The first is basic technology, commonly used technology. The second is asymmetric technology, or “trump card” technology. The third is advanced technology, or disruptive technology. In these areas, we are at the same starting line with the outside world, if we are able to take the lead in deployments and concentrate on our attack, we might well be able to realize a transformation from running at their heels to running abreast with or even ahead of them.

Traditionally, Chinese leaders have tended to employ distinctly militaristic language in their discussions of technological competition. For instance, Xi declared in that same speech, “We must… attack strategic passes in a coordinated manner. We must assault well the fortifications of core technology research and development…We must concentrate the most powerful forces to act together, compose shock brigades and special forces to storm the passes.”

If China sees itself “at war” to seize the “high ground” in innovation, then U.S. policies may be only intensifying its will and determination to fight. In particular, concerns over “crux and core” technologies have been even more acute in the aftermath of the ban on the export of U.S. semiconductors to ZTE, which had brought the company to its knees before being reversed. Even as the impact of the trade war on the Chinese economy, including a number of the industries prioritized in Made in China 2025 itself, has become more acute, Chinese leaders have only made symbolic gestures so far in response to U.S. pushback against the predatory and problematic elements of Chinese policies and behaviors. The strong backlash against Made in China 2025 has resulted in at least cosmetic changes to China’s approaches to industrial policies, such as a de-emphasis on the phrasing and branding of Made in China 2025 in some of the latest documents. Still, there are strong indications that the underlying initiatives are continuing without substantive alteration nonetheless. Even if the phrase “Made in China 2025” itself becomes less prominent, its disappearance would represent at best a superficial indicator, since this model of development remains very deeply ingrained.

U.S. policy responses to this China challenge must be informed by a nuanced awareness of the benefits and shortcomings of this paradigm of innovation. Indeed, serious thinking on this new phase of technological competition must take into account a realistic assessment of Chinese and American strengths and weaknesses.

Take, for example, the much-vaunted notion that China has a crucial advantage in AI as a result of data. Chinese venture capitalist and AI expert Kai-Fu Lee has often declared, “Data is the new oil, and China is the new Saudi Arabia.” Chinese policymakers have similarly highlighted that China is well-positioned for leadership in AI because it is on track to possess an estimated 30 percent of the world’s data by 2030. However, it is unlikely at best that China could possess an enduring advantage as a result of data alone. There are some unique benefits to the depth and quantity of data available, including that generated as a result of China’s leapfrogging technology ecosystem, in which mobile services and payments have rapidly become mainstream. Yet much of this data is only directly relevant to specific machine-learning techniques and applications. For instance, China has achieved specific strengths in facial recognition, among other types of computer vision, and natural language processing, to which the massive corpus of data available has contributed. The recognition of data as a critical strategic resource, including through the creation of open platforms and promotion of data sharing, may stand China in good stead to achieve unique synergies between private sector and national developments in AI. However, this advantage may prove ephemeral, given today’s advances in machine learning have involved rapid progress in techniques that do not require such massive amounts of data. In this regard, the United States, which remains home to some of the world’s leading AI companies and researchers, retains a major advantage, at least for the time being.

Often, American assessments of China’s tech prowess have oscillated between dismissal and overestimation. Even recently, there was a mistaken but recurrent perception in the United States that China was practically incapable of innovation and only achieving advancement on the basis of commercial cyber espionage and intellectual property theft. The level of attention to and concern with Made in China 2025 is warranted insofar as this initiative and the zeitgeist that it represents ought to be taken quite seriously as an indication of the scope and scale of China’s techno-strategic aspirations. To dismiss these measures as industrial policies that are doomed to fail in the long term reflects a level of overconfidence and an ahistorical perspective. At worst, a state-driven approach can prove counterproductive, even deeply damaging to a country’s economic potential. At best, thoughtful government intervention can be a critical enabler of innovation.

Presently, there are intense concerns that China is “winning” the “race,” whether in AI, quantum computing, or fifth-generation telecommunications (5G). The question of assessing the actual balance in these technologies is always complicated, since assessments can vary depending upon the metrics used and a more granular breakdown of the technologies in question. For example, China is a leader in the development of quantum communications infrastructure, as demonstrated by the launch of the world’s first quantum satellite, but does not possess an undisputed advantage in the field. Moreover, being a first mover is not necessarily the most important determinant of long term competitiveness, particularly when considerations of safety and security are at stake, as in 5G.

As a competitor, China is perhaps uniquely challenging, but not unassailable. The paradigm of innovation that is at the heart of China’s approach to strategic competition has certain strengths but may also prove self-limiting or self-defeating as a result of the underlying contradictions. Although industrial policy can be disparaged as an inefficient approach to resource allocation, there are certain elements of China’s policies that are smart and, in fact, seemingly inspired by what the United States has executed successfully in the past. In this regard, China may have learned the right lessons from U.S. policies during the Cold War, including recognizing education as a national imperative for competition, and American policymakers today must also revisit that legacy.

The level of concern and attention that is directed toward Made in China 2025 should also be directed at China’s new initiatives in STEM education, including for AI talent development. In many respects, the United States and China today are in more of a “talent race” than an arms race. For instance, Xi has personally declared, “competition in comprehensive national strength is talent competition. Whichever country has the advantage of talent will eventually possess the advantage of strength.” This attitude is quite clearly reflected in the highly targeted recruitment of top talent in key fields through a range of talent plans, which stands in stark contrast to U.S. restrictions on immigration that are starting to discourage top students and scientists from coming and staying. The United States must take this competition equally seriously, recognizing that revitalizing American education and reevaluating our policies on immigration are among the most vital – and obvious – policy responses, for which the impact could be enduring.

Ultimately, the United States cannot control China’s policies or constrain its ambitions. Moreover, America alone possesses limited options for leverage, which will make coordination with allies and partners to exert greater pressure a critical course of action going forward. Although U.S. policymakers must realize the dangers of complacency in the face of China’s advances and aspirations, there are also reasons to recognize the potential that the tensions and contradictions that lurk below the surface of its successes may undermine its paradigm for innovation in the long term. Meanwhile, American leaders can choose to respond in ways that concentrate first and foremost on bolstering American innovation and competitiveness.