Made in China 2025: is your business ready?

Rumours of the demise of China’s ambitious Made in China 2025 (MiC 2025) strategy have been greatly exaggerated. This industrial policy will continue to transform China into a manufacturing superpower over the next decade through “localisation”, innovation and acquisition of advanced technologies. Foreign companies operating in China, and those doing business with China or Chinese firms from abroad, who have largely taken a “wait and see” approach to MiC 2025, now need to catch up to new industrial and geopolitical realities.

Understand: MiC 2025 is not just about tech companies

MiC 2025 has drawn much attention and triggered concern for its support of high-tech, strategic sectors since its announcement in 2015. The ten key sectors identified by the government constitute nearly 40% of China’s value-added manufacturing output. 

• Key MiC 2025 sectors

However, in reality, MiC 2025 extends beyond these sectors to affect almost all manufacturing and makes MiC 2025 relevant to almost every business with Chinese interests. This stems from the fact MiC 2025 is a broad manufacturing policy framework driven by the central leadership, but implemented at the local level. This allows companies in less strategic industries to argue for their inclusion in provincial or local funding, or other support programmes.

At the same time, as a consequence of MiC 2025’s broad goal of “upgrading manufacturing”, companies in various sectors are claiming upgrading activities to portray themselves as MiC 2025 firms. In some overcapacity-stricken sectors, this is a survival strategy to avoid closure, but many companies are taking this further to expand their investments, at least ostensibly, into industries more closely linked to the ten priority sectors.

Prepare: MiC 2025 means new competition in China and abroad

The breadth of the sectors involved in MiC 2025 and the scale of transformation Beijing strives for mean the policy plan will transform the competitive landscape in China and abroad. While support for innovation is theoretically not limited to Chinese-owned companies, the policy in practice strongly benefits these firms rather than foreign companies operating in China or even Chinese-foreign joint ventures. Multiple high-level announcements by central government officials promise equal treatment of foreign and local companies under MiC 2025. However, local officials have admitted to rejecting applications by wholly foreign-owned enterprises. The most significant support appears to have gone to politically connected local champions.

Moreover, Chinese companies are using that support to acquire advanced technology companies abroad. The policy therefore unsurprisingly also carries a significant risk of politicisation, as seen in the ongoing US–China trade tensions. The US and the EU are tightening foreign investment reviews in direct response to China’s global tech and manufacturing acquisition drive.

The government is supporting this manufacturing overhaul through various means, including investment funds, preferential tax treatment and research and development support. However, Beijing is moving away from direct financial subsidies to companies and instead making funding available through mixed public–private investment funds or through MiC 2025 manufacturing innovation centres. These bodies aim to concentrate resources for specific industries to accelerate development. The government has set up around 100 national and local manufacturing innovation centres as well as nominating specific cities or city clusters as MiC 2025 innovation demonstration zones.

• Concentration of Made in China 2025 government

Respond: Adapting to another ‘new normal’ through localisation

There are numerous opportunities and risks stemming from China’s MiC 2025 plan for foreign companies. A thorough understanding of MiC 2025 dynamics and goals can help better position companies to benefit – directly or indirectly –from the record-breaking funding available. Preparing for the industrial and political changes that will accompany MiC 2025 will also be essential to prevent being caught off guard by potentially business-ending increased competition, restricted market access or political vetoes of mergers and acquisitions:

• Understand the competition: With most Chinese companies trying to gain direct financial support from MiC 2025, companies need to gain a better understanding of changes to their competitive environment and specifically the benefits and competitive advantages their competitors (and partners) receive from MiC 2025.
  
  
• Get more local: The extent to which foreign companies can benefit from China’s market liberalisation and innovation support will depend, to a large extent, on how China defines the “localisation” of technology and innovation that President Xi Jinping and MiC 2025 demand. Control Risks’ research in several industrial manufacturing sectors has shown most companies in China are aware of a drive to localise their procurement, but generally interpret this recommendation by buying products manufactured in China, not necessarily from Chinese-owned companies.
  
  
• Know if your industry is “core” technology: For some critical “core” technologies, such as semiconductors or operating systems, Beijing wants to remove its dependency on foreign-owned companies for national security reasons. For these sectors, localisation will mean preferred procurement not just of products made in China, but made by Chinese companies. National security concerns will continue to drive this trend, regardless of trade agreements or improved trade relations with the US or EU.
  
  
• Anticipate the politicisation of more business deals: Acquisitions by Chinese companies, particularly state-owned enterprises, will draw more scrutiny from foreign regulators, potentially causing significant delays or even preventing the deal. At the same time, understanding the industrial policy drivers – and funding – influencing foreign firms’ Chinese business partners will become more important in negotiating various relationships in China and globally.
  
  
• Renew your stakeholder strategy: As business deals are more at risk of politicisation, the same will be true for policy and regulatory enforcement tools. From investment screening to antitrust probes and environmental inspections, Chinese and foreign companies are under pressure to create a compelling narrative that shows government stakeholders their operations align with policy priorities. Companies need to understand the evolving enforcement infrastructure and stakeholders through a proactive, risk-management focused government relations strategy.