‘Made in China 2025’ Disappears in Name Only
Short-circuiting the People’s Republic of China’s ambitions to control technology
The Chinese government has moved quickly to erase all mention of its flagship industrial policy “Made in China 2025” (MIC 2025) from official speeches, papers and official press amid heightened international concern. However, the MIC 2025 strategic policy continues to play a central role in the People’s Republic of China’s (PRC’s) efforts to achieve its technological, economic and military ambitions, namely to be the dominant supplier and leading research and development (R&D) center for 10 strategic 21st-century economic sectors. Despite recent attempts to divert international attention away from MIC 2025’s stated objectives, the Chinese Communist Party’s (CCP’s) implementation of the 5-year-old plan will continue, if not accelerate, following the U.S. administration’s tariff actions and trade restrictions against Chinese telecommunications companies Huawei and ZTE. MIC 2025 is a manifestation of the CCP deploying a comprehensive, whole-of-government approach to turn the PRC into a global technology powerhouse at the expense of other countries.
The CCP’s continued pursuit of MIC 2025 policies and goals underscores the priority the party places on achieving economic and technological self-reliance and domination of key next-generation industries. The United States and its allies — confronted with the PRC’s playbook — need to accordingly respond to the challenging economic asymmetries presented by China’s growing global influence.
National security practitioners in the Indo-Pacific should continue to pay attention to the policies and programs under MIC 2025, regardless of the plan’s progress, inefficient use of capital or adjusted prominence to date. The PRC’s model of authoritarian state-capitalism — actualized through MIC 2025 — has serious implications for the region, given the interconnectedness of economic prosperity to national security, the dual-use nature of frontier technologies and the PRC’s acceleration of military-civilian fusion.
A Step in China’s Long March
The CCP through MIC 2025 aspires to transform the PRC from a low-value, heavy industry producer into a “smart” manufacturing, high-tech powerhouse, whose economic growth is powered by domestically dominated next-generation technologies such as quantum computing, artificial intelligence (AI) and microprocessors. China’s State Council outlines 10 sectors China seeks to dominate through MIC 2025: next-generation information technology (for example, semiconductors and cyber), robotics, aerospace, maritime engineering, advanced rail, new energy vehicles; power equipment (smart grid and smart cities), advanced agriculture, new materials and biopharma.
Becoming the global leader of these emerging sectors is central to China’s ability to reap the power of the “fourth industrial revolution,” according to consultancy PwC. The fourth industrial revolution refers to the technological evolution underway “that is blurring lines between the physical, digital, and biological spheres,” according to the World Economic Forum’s Klaus Schwab. Dominance in these sectors enables the companies, or in the PRC’s case, the government, to set global standards, exert monopolistic pricing, impose trade embargos, and lead in military hardware and software development, enabling distinct advantages in hard and sharp power situations.
Avoiding Middle-Income Trap
Chinese leaders also believe that MIC 2025 will prevent China’s economy from falling into the middle-income trap. Coined by economists Indermit Gill and Homi Kharas, the middle-income trap contends that middle-income countries — defined by per capita gross domestic product (GDP) of about U.S. $12,000 — will slide into wage stagnation and slower economic growth unless they can boost productivity beyond traditional inputs of land, labor and capital. After more than three decades of unprecedented rapid growth as the world’s largest factory of low-valued products, China’s previous economic growth model is no longer working. Through MIC 2025, the CCP hopes to avoid economic stagnation and set the country on a path toward future economic stability. If successful in its economic objectives, MIC 2025 will accomplish two core goals: preserve the CCP’s legitimacy at home and abroad and enhance the People’s Liberation Army’s (PLA) military capabilities.
Reducing Reliance on Foreign Tech
Released in 2015, MIC 2025 has increasingly raised considerable alarm around the world, in no small part because of the sheer size of the program and the rising importance of geoeconomics. Many countries use industrial policy to achieve their economic and national security goals. However, MIC 2025 seeks explicitly to displace the leadership of advanced economies in high-tech industries by building and backing Chinese “national champions” that can then become leading global titans.
In particular, MIC 2025’s localization targets signaled that China is determined to take over — not just compete in — next-generation technologies that are the future drivers of global economic growth. Localization targets refer to the percentage of market share to be held by Chinese firms within China’s and the world’s markets. The plan’s unofficial road map projects that by 2025, China’s economy should achieve 70% self-sufficiency in key tech industries. By 2049, China desires to lead global markets as a tech powerhouse in time for the 100th anniversary of the PRC. It is also no coincidence that MIC 2025’s targeted completion date aligns with the PRC’s goal to become a world-class military power, as outlined by Xi Jingping at the CCP’s 19th Party Congress.
Beyond trying to build up China’s innovation ecosystem, MIC 2025 follows a familiar playbook of Chinese economic statecraft to protect Chinese companies to grow domestically, subsidize their efforts to capture global market share and displace foreign competitors in the process. Tools the government employs in this endeavor include: intellectual property theft, state-backed commercial espionage, forced technology transfers in exchange for market access, subsidies for national champions, protectionism and import substitution policies, acquisitions, and foreign talent recruitment programs. China also uses advanced economies’ open education systems to cultivate human talent in the science and tech industries. Central to the implementation of MIC 2025 is the role of the CCP in coordinating and aligning the activities of its private sector, research institutions and academia, including through the use of CCP committees and access to finance.
Mention of Policy Disappears
In the wake of international backlash over the past year and a half, Chinese leaders have publicly downplayed MIC 2025, avoiding any references of the plan in official speeches, publications and propaganda. Official Chinese media outlets received explicit instructions from the central government to avoid the term “MIC 2025” in print and online platforms. Mention of MIC 2025 was notably absent from the 2019 Chinese government work report delivered by Premier Li Keqiang to the National People’s Congress in Beijing, despite having been highlighted in the previous three work reports. (The CCP’s annual work report communicates specific economic policies to local governments, businesses and citizens to set the future direction of the country and catalyze action.) Li, however, still vowed that the PRC would upgrade traditional industries, strengthen R&D and support sectors such as next-generation information technology, new-energy autos and new materials — aspects found within MIC 2025.
China’s government claims to international audiences that it will release a revised — and presumably less threatening — version of the MIC 2025 plan. However, regardless of what is included in MIC 2025 version 2.0 or how the program is rebranded for international audiences, the CCP remains committed to pursuing MIC 2025’s stated objectives. In fact, China’s government appears to be preparing for the long game and doubling down on its long-term industrial strategy to upgrade manufacturing — a move incentivized partially by U.S. tariffs and national security bans against PRC companies by Australia, Japan, New Zealand and the United States.
Using its monopolistic control over domestic media, the CCP is stirring up national sentiment to guide all elements of society to band together to achieve China’s technological, economic and military-civilian fusion goals. The domestic speeches of CCP leader Xi Jinping, who is also PRC president, domestic speeches increasingly urge China to accelerate self-reliance, master core technology, become a cyber superpower, and create an innovation-driven economy – all themes that were fundamental to the creation of MIC 2025.
Deeply Rooted Tech Ambitions
Conceptually, the core objectives of the MIC 2025 strategy are not new to China. Indeed, their roots extend deep in Chinese history and society. MIC 2025 is fundamentally an evolution of the PRC’s long-standing industrial policies aimed at developing core technologies to boost domestic growth and preserve political legitimacy. China’s leaders from Mao Zedong through President Xi have all coalesced around the strategic importance of technology as a source of national power and the need to develop indigenous Chinese science and tech capabilities, according to China scholar Evan Feiganbaum.
Deng Xiaoping’s 1978 launch of economic “reform and opening” designated science and technology as paramount to China’s modernization, while Hu Jintao’s 2006 “indigenous innovation” strategy serves as the direct precursor to MIC 2025. Similar to MIC 2025, Hu’s strategy established targets to wean China off foreign technology, establishing an objective to reduce the country’s reliance from 60% in 2006 to 30% and become a global tech leader by 2050. Other government-backed initiatives, such as the 1986 “863” high-tech development program, sprung up to fund research to reduce China’s reliance on foreign technology and led to the creation of Shenzhou, China’s indigenously developed manned spacecraft, and Tianhe-2, one of the world’s fastest supercomputers.
Hu’s strategy launched a new era of techno nationalism, according to China expert James McGregor. Indigenous innovation became the blueprint for a whole-of-government approach with deeply embedded elements of unfair competition: forced foreign tech transfer, discriminatory treatment of foreign investment in China’s market, intellectual property theft, cyber espionage, excessive subsidies to domestic firms and import substitution policies, all drawbacks that Western firms were willing to accept as the “cost of doing business in China” to gain market access. These policies in aggregate have helped increase Chinese companies’ control of key foreign technologies and expanded their domestic and global market share at the expense of foreign competitors.
The CCP accelerated and expanded the idea of indigenous innovation after President Xi came into office in 2012 and declared China would become a “moderately prosperous society” by doubling its 2010 per capita GDP by 2021, and by 2049 would become a “fully developed, rich and powerful” nation.
Analysts note, however, that these industrial policies in aggregate violate the PRC’s commitments to the World Trade Organization and could unfairly place Chinese companies’ in pole position to set standards, develop protocols and establish strategic ecosystems of next-generation technologies, including AI, deep learning and smart manufacturing, among others. China’s increasing advantages in these sectors are accelerating the closing of an already narrow window for multinational firms to fairly compete in these areas in China. Simply put, China is expanding its domestic and global market share at the expense of foreign competitors, but not through free and fair competition in open markets.
CCP Guidance Funds Distort Global Markets
The Chinese government is allocating vast financial resources to implement MIC 2025 and build up domestic “national champions.” A slowing domestic economy and the downplaying of MIC 2025 by CCP’s official mouthpieces has not delayed the allocation of money and personnel to the MIC 2025 cause. The strategy is moving forward, full steam ahead, even though limitations to this approach exist, including the potential for inefficient allocation of capital to state-owned enterprises and duplication of efforts.
Various analysts estimate that MIC 2025 is supported by 800 to 1,600 central and local government guidance funds, with a combined estimated value of U.S. $584.8 billion in capital at the end of 2018, according to consulting firm Zero2IPO Research. The firm calculates that an average of 7.57 new government guidance funds are created every month, with each fund averaging U.S. $361 million in capital. This massive amount of state-guided money consists of a mix of Chinese direct and indirect funding, subsidies, tax breaks, low-interest loans and government procurement contracts.
Gavekal Dragonomics Senior Analyst Lance Noble, however offers a caveat: The success of the CCP’s industrial policy is unlikely to be determined by the extent of funding but rather by “the interaction between the structure of the industry, government policy and the actions of individual companies.” Using metrics that follow the above, he estimates that within the PRC’s MIC 2025 policy, China has better odds of success in the sectors of electric vehicles and pharmaceuticals than in civil aircraft development.
Concerns exist that, given the size of MIC 2025 government guidance funds, excess capacity and global market distortions will follow, having a similar effect as that of Chinese government-backed funding of industries ranging from solar to steel. Additional opacity of MIC 2025 government funding indicates there will be inefficient allocation of capital and misallocation of resources. Unfortunately, as the CCP continues to downplay MIC 2025 policy, being able to follow the money and track how these government guidance funds might distort global markets and future industries will prove difficult.
If You Can’t Build It, Buy It
Beyond subsidizing domestic firms, MIC 2025’s related government guidance funds are focused on obtaining foreign technology that China needs through overseas acquisitions and foreign investments in early stage tech startups and incubators. Over the past 18 years, Chinese foreign direct investment in the information and communications technology sector amounted to approximately U.S. $16.8 billion annually, according to consultancy Rhodium Group’s investment monitor. The majority of this deal flow occurred from 2014 to 2016, in line with the Chinese government’s launch of MIC 2025 and associated tech industrial policies, per their calculations.
Some of these deals were led by China’s private sector and categorized as venture capital investment to avoid foreign government scrutiny. However, these investments are unlikely to have been pursued for pure profit motives but rather to directly or indirectly help China bolster its domestic science and technology capabilities. As President Xi reexerts Communist Party control over all domestic economic forces to achieve national objectives, the line between China’s private sector and government-supported firms continues to blur — an observation that finds little resistance among many China academics and practitioners. Examples of the CCP tightening its grip over the private sector include the passage of the 2017 National Intelligence Law, the increase in Communist Party committees at private companies and the use of government venture capital funds to invest in private firms specializing in next-generation technologies, according to researcher Ashley Feng with the Center for a New America Security.
Melanie Hart, a China policy expert with the Center for American Progress, cites China’s foreign tech acquisition strategy as an example of gray zone tactics in the economic sphere. For example, China uses incremental steps to acquire “piece by piece” foreign know-how to ultimately transfer the entire value chains to China. (Historian Hal Brands defines gray zone challenges as activity that is coercive and aggressive in nature but deliberately designed to remain below the threshold of conventional military conflict.) China has adopted these tactics in a number of strategic priorities, most visibly in exerting sovereignty claims in the South China Sea.
For example, the development of the car-ride sharing industry is a quintessential example of China’s command and control approach to dominate, by any means possible. China’s largest ride-sharing company, Didi Chuxing, battled head-to-head with U.S. competitor Uber, employing all the state-sponsored advantages in its favor — including state-provided subsidies and favorable media coverage — while Uber was the victim of blunted market access, last-minute changing regulations and carefully orchestrated smear campaigns. Uber eventually sold its China business in exchange for a small equity share in Didi Chuxing. Regionally, Didi Chuxing has continued to expand by acquisition, investing over U.S. $2 billion in Singapore-based company Grab, doubling down on what turned out to be the accurate belief that Grab had what it took to defeat Uber in Southeast Asia. After ousting Uber from Southeast Asia via Grab, Didi has been eyeing Australia as its next place for regional conquest. It is no coincidence that the CCP-supported Didi is investing massive amounts of financial capital to develop automated driving technologies and artificial intelligence capabilities.
The scale at which China is leveraging open market economies and innovation centers to acquire foreign tech has led advanced economies to reevaluate how to protect economic security and innovation. Within the Indo-Pacific, Australia, Japan and the U.S. have recently revised foreign investment regulations, including in the emerging technology sector.
Competitiveness, Innovation at Stake
MIC 2025 or whatever name is given to the PRC’s model of “innovation mercantilism” fundamentally challenges the economic welfare of countries that have core competitive advantages in higher-wage, innovation-based industries, said the Information Technology and Innovation Foundation’s Robert Atkinson. Unlike with low-value manufacturing industries, a permanent loss of competitiveness in a country’s tech sector and innovation base is hard to recreate because of the complexity of long-standing ecosystems and high barriers of entry, he said. Moreover, a loss of leadership in advanced tech industries would create a “death spiral.”
First, market-based firms lose market share and profits to mercantilist-supported competitors. At stake are the loss of advanced, high-wage jobs in advanced manufacturing and tech industries, especially in places such as Japan, Korea, Taiwan and the United States. Market-based companies are also unable to reinvest their revenues to develop the next generation of innovative products, further harming their country’s respective innovation ecosystem, according to Atkinson. Supply chains are often reorganized as a result, leading to negative consequences for a country’s economic security and ability to preserve its defense industrial base.
For example, China’s forced tech transfer of Japan’s high-speed rail intellectual property resulted in Japanese firms’ Chinese joint venture partner becoming its high-speed rail low-cost competitor, according to Brad Setser of the Council on Foreign Relations (CFR). In exchange for access to China’s market, Japan transferred its highly prized high-speed rail intellectual property to China. Once China obtained and mastered the technology, it cultivated its own high-speed rail capabilities under the careful protection of CCP policies and regulations, only to turn around and compete globally with Japanese high-speed rail companies and undercut their competitiveness and innovation base.
Inroads to Regional Semiconductor Industry
Shifting to a different sector, China’s ongoing MIC 2025 economic statecraft risks chipping away at the competitiveness and innovation of the semiconductor industry in the region. The Indo-Pacific is home to nine out of the world’s top 10 semiconductor companies. If developing a domestic high-speed rail industry was China’s imperative in the 2000s, China continues its charge to create national champions in the semiconductor industry to replace foreign suppliers.
Despite limited success until now, China views the development of a domestic semiconductor industry as critical to economic growth because semiconductor chips are the backbone of future technological breakthroughs, including in AI, autonomous systems and quantum computing, according to the Semiconductor Industry Association. The Chinese government’s planned semiconductor investment over the next five years of U.S. $118 billion dwarfs the planned research and development of foreign competitors, according to the Center for Strategic and International Studies’ James Andrew Lewis.
In addition to large-scale government funds to build a domestic semiconductor industry, China is accused of state-sponsored intellectual property theft at foreign firms in places from Silicon Valley to Taiwan. Indo-Pacific countries are taking up measures to address these threats. For example, the South Korean legislature is seeking ways to address trade secret theft in the semiconductor industry through harsher penalties. The Japanese government meanwhile is considering revising its Foreign Exchange and Foreign Trade Act to expand the foreign investment restricted list to include such sectors as semiconductors, while also assessing the creation of an export control framework for advanced technologies, similar to the U.S. revised export controls system.
Dual Use Technologies, Military Civilian Fusion
MIC 2025 also remains a vital component of CCP Chairman Xi’s defense modernization and military civilian fusion strategy designed to reform the PLA into a world-class military by 2049. First, the dual-use nature of MIC 2025 technologies will help the PLA to accomplish battlefield superiority. For example, China is already incorporating AI into military robotics programs, autonomous capabilities and military command decision-making, according the Center for New American Security’s (CNAS’) Gregory Allen. The PLA anticipates AI will drive the next revolution in military affairs as military systems and fighting doctrine transition from “informatized” to “intelligentized,” CNAS’ Elsa Kania said. China’s technological advances in other MIC 2025 sectors will have long-term military implications for the region and the nature of next-generation warfare, including quantum communications, radar and cryptography; autonomous vehicles and automated systems; and robotics, according to researchers Meia Nouwens and Helena Legarda with the International Institue for Strategic Studies.
Second, through MIC 2025 and other associated industrial policies, Chinese private sector firms are increasingly playing a larger role in advancing China’s military and national security goals. For example, Chinese private sector AI and facial recognition technologies are at the heart of the CCP’s persecution of millions of the Uighur ethnic minority group in Xinjiang, according to Kania. These same Chinese national champion AI companies also export their surveillance tools around the world to support authoritarian governments’ efforts to monitor their citizenry.
Opportunities for the Region
Amid the CCP’s efforts to remove MIC 2025 from international consciousness, the international community should continue to raise awareness on the PRC’s unfair and predatory economic practices through calls for transparency and information sharing. Enhanced information sharing in the Indo-Pacific region between the public and private sectors and academia is essential to address threats posed by the CCP’s model of state capitalism and economic aggression. U.S. allies and partners are already pursuing diplomatic efforts in the region. However, more outreach needs to be conducted with the private sector and universities because that is where the majority of tech transfer occurs — whether legally, forced, surreptitiously or illegally.
Sharing information with the tech private sector and with R&D labs at academic institutions will reinforce the need for strong defensive measures, including transparency of ownership, while also raising awareness about long-term unintended consequences that their investments or joint ventures can have. Simultaneously, the private sector and research labs still hold power to influence the behavior of the CCP, although their influence will wane as Chinese companies gain more international market share and as more Chinese universities become world class. Unified, public pressure with the threat of real consequences has worked with China in the past. For example, foreign companies’ unified, pressure — in combination with U.S. government support — prevailed in rolling back China’s 2003 introduction of a local domestic standard for wireless networks, according to the CFR’s Adam Segal.
Equally critical will be information sharing between the public and private sectors and academia on how to further strengthen innovation ecosystems and enhance collaboration among the U.S. and its allies across the Indo-Pacific, in order to set up the region for sustained economic success and shared prosperity for decades to come. A call for global R&D funding and partnerships among countries with similar, shared values would be a welcome start. This can lay the framework to create global infrastructure for next-generation technologies, (similar to how 5G consortiums are being developed), to effectively compete against China’s discriminatory MIC 2025 strategy. Ultimately, R&D collaboration based on the rule of law and reciprocity enables all partners to reap the benefits from technological innovation.
Arati Shroff, a foreign service officer with the U.S. Department of State, is an Una Chapman Cox fellow and East-West Center adjunct fellow in Honolulu, Hawaii. Her views are her own and do not represent those of the Department of State.