Why the Made in China 2025 road map to hi-tech supremacy will miss its deadline

The day after China’s State Council unveiled Made in China 2025, Donald Trump tweeted that rival Republican candidate John Kasich stole his “make America great slogan”.

“Designed to transform China from a manufacturing giant into a world manufacturing power”, according to the Xinhua News Agency announcement on May 19, 2015, the roll out of the state-backed industrial policy came at a time when Washington was distracted – to say the least.

China is often a punching bag during US presidential elections, and the last one was no exception, amplified by Trump's “America first” message and his frequent references to how China had “raped” the US economy and stolen its jobs.

In October 2015, China’s Ministry for Industry and Information Technology published a separate technology road map which laid out self-sufficiency targets in key sectors, including 80 per cent for new-energy vehicles, 70 per cent for industrial robots, 50 per cent for aviation systems and 40 per cent for mobile phone chips – all to be achieved by 2025.

China is heavily reliant on core foreign technology to manufacture these products, including semiconductors, computer numerical control (CNC) machines and robotics parts, so the Made In China 2025 localisation targets were definitely stretch goals. Until Trump was elected president, Beijing’s call to action to acquire foreign technology seemed to be going to plan. Chinese companies acquired 10 European and US makers of advanced automation equipment in 2015-2016, according to Mercator Institute.

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Fast forward to March 2018 and Trump made good on an election promise to impose tariffs on Chinese imports – and suddenly Made in China 2025 has been the talk of Washington. But in China, as the trade war escalated, references to the industrial policy disappeared from Xinhua reports and there was a general toning down of the rhetoric about a resurgent nation set to challenge the US as a cyber superpower.

When the 2025 blueprint was devised, it was done with the apparent belief that it would be “business as usual” – which meant China could continue to acquire overseas companies without much pushback, and trade foreign technology for access to its market. (Though not condoned by Beijing, there have been individual cases of alleged intellectual property theft which have seen criminal charges filed in US courts against Chinese citizens.)

When German robotics company Kuka was bought by Chinese electrical appliance maker Midea in August 2016, alarm bells began ringing, although the US$5 billion deal was ultimately approved by German and US authorities as it included safeguards to control IP transfer out of Germany.

Since then, the alarm bells have become louder – both in the US and Europe – and it will now be near impossible for China to (legally) acquire the foreign technology needed to reach its 2025 targets. On a visit to Beijing in May, German leader Angela Merkel called for “reciprocal” market access and IP protections, while the new  US Foreign Investment Risk Review Modernisation Act will increase scrutiny of foreign investments in American firms.

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The value of global merger and acquisition deals in the third quarter fell 35 per cent over the previous quarter, according to Thomson Reuters data released on Friday. One casualty was Qualcomm’s US$44 billion purchase of NXP Semiconductors, which was called off in July after China delayed antitrust clearance, a move seen as retaliation against US trade tariffs.

With M&A under a cloud, Beijing has only two options to achieve its 2025 targets: technology transfers and original research and development. The first, whether “forced” or done willingly for access to the Chinese market, is also unlikely to work out in time for the 2025 localisation targets as Western tech companies have their guard up. In fact, in the short term, China’s reliance on core foreign technology is likely to increase as it upgrades it manufacturing lines with overseas parts.

That only leaves original R&D, but the country’s record in fundamental research is weak – one Chinese expert cited a “lack of scientific spirit” as the main reason – although there are some R&D champions such as state-backed chip giant Tsinghua Unigroup which claims to spend a hefty 30 per cent of revenue on R&D and telecoms maker Huawei Technologies with a ratio of 15 per cent.

Chinese chip makers, flush with money from the state-backed Integrated Circuit Fund, have also accelerated recruitment of engineers from Taiwan, especially targeting Taiwan Semiconductor Manufacturing Company, which accounts for more than half of global semiconductor wafer foundry revenues. But the line between recruitment and spying is blurry with a number of ex-TSMC engineers being accused of IP theft after receiving generous salary packages to join mainland Chinese rivals.

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Interestingly, the “domestic” production targets in Made in China 2025 exclude Taiwan, which Beijing says is part of China. If Taiwan production was included, the localisation targets in wireless telecoms, including semiconductors, would probably already be “achieved”, given the island’s technology leadership in these industries.

A study by the Mercator Institute concluded that while the most ambitious Made in China 2025 goal of a broad and economy-wide upgrading of industry by the stated deadline will “very likely not be reached due to weaknesses in the design and implementation of the policy”, it did note that the plan “will elevate a small but powerful group of Chinese manufacturers, dramatically increasing their competitiveness”.

It is just as well Chinese state media is downplaying Made in China 2025. While this didn’t work as a strategy to ease US-China trade tensions, it may turn out to be a handy face-saving move when the localisation targets miss their deadlines.

Craig Addison, a tech news editor at the Post, has been covering Asia technology since 1992. Follow @craigaddison