The World China Made

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THE WORLD CHINA MADE

“Made in China 2025” Nine Years Later

Project for Strong Labor Markets and National Development


The Office of Senator Marco Rubio
CONTENTS
Foreword by Senator Marco Rubio 3
Introduction 4
China’s Industrial Strategy 5
Assessing “Made in China 2025” 7
Strategic Industries 8
Aerospace and Aviation 10
Agricultural Machinery 14
Biotechnology 17
Electric Vehicles 19
Energy and Power Generation 24
High-Speed Rail 27
New Materials 29
Robots and Machine Tools 31
Semiconductors 33
Shipbuilding 35
Innovation 38
Smart Manufacturing 41
Basic Industry 43
Branding 45
Sustainability 47
Structural Reform 49
Manufacturing Services 51
“Going Global” 53
Conclusion 56

2
FOREWORD
Senator Marco Rubio: Meeting the China Challenge
Communist China is the most powerful adversary the United States has faced in living
memory. This is no exaggeration. We sometimes forget that past enemies, including
Nazi Germany and Soviet Russia, had smaller economies than we did. Each tried to take
over its neighbors and hurt our country in the process. Each failed because America out-
built and outgunned it.

However, the Chinese Communist Party is playing a better hand, as it controls the
largest industrial base in the world, fuels its factories with market-distorting subsidies
and rampant theft, and, as this report highlights, now leads in many of the industries
that will determine geopolitical supremacy in the 21st century, from shipbuilding to
electric vehicles. This means Beijing will have greater sway over which set of values
defines the 21st century: liberty and representative government, or authoritarianism
and oppression.

To make matters worse, the United States is in a weaker position than it was in the past.
Decades of overregulation and “free trade” with adversarial economies like China’s have
eroded our industrial base. Shuttered factories, drugs, and illegal immigration have
destroyed small-town communities. Four years of the Biden-Harris Administration
appeasing our adversaries abroad, raising the cost of living at home, and undermining
our economy with red tape, endless reviews, and woke diversity mandates haven’t
helped.

For years, I’ve raised the alarm about this. I’ve introduced countless bills to stop
Beijing’s predatory behavior and start the process of rebuilding America’s factories and
communities. These include efforts to protect American technology from espionage,
empower the American auto industry to beat heavily subsidized Chinese competitors,
and hold companies accountable for using Uyghur slave labor, among many others.

This report is my latest effort. It’s a wakeup call about how serious the threat we face has
become. No longer can we fall back on old dogmas and stale talking points. If we want to
win, we must take bold action to rebuild our country, overcome the China challenge, and
keep the torch of freedom lit for generations to come.

Sincerely,

Marco Rubio
U.S. Senator

3
INTRODUCTION
In 2019, the Office of Senator Marco Rubio released a report, “Made in China 2025 and
the Future of American Industry,”1 which raised the alarm about China’s ambitious plan,
“Made in China 2025” (MIC2025), to overtake the United States in high-value, high-
technology sectors. Now, with 2025 looming, it is time to assess how China has done.

Since it was unveiled in 2015, MIC2025 has undergone changes in marketing and
emphasis. The changes in marketing have occurred in response to external criticism by
China’s trading partners. The policy has gone underground, communicated in new
slogans away from the glare of international media attention. The changes in emphasis
reflect China’s experience with industrial policy, as it shifts additional resources and
focus to sectors that are succeeding. Despite these changes, the main goals of the
strategy remain the same: turn China into a “manufacturing powerhouse,” make the
country self-reliant, and achieve technological leadership, supply chain dominance, and
global economic supremacy.

This report finds that China has reached, or is near to reaching, the technological cutting
edge in most of the sectors it has targeted. Of the 10 sectors targeted by MIC2025, China
can credibly claim to be the world leader in four (Electric Vehicles, Energy and Power
Generation, Shipbuilding, and High-Speed Rail); China is therefore shaping up to be a
superpower of green energy and advanced logistics, often in areas of technology with
obvious military application. In five sectors, China has made substantial progress
toward the technology frontier, but is not yet a leader: Aerospace and Aviation,
Biotechnology, New Materials, Robotics and Machine Tools, and Semiconductors. In
just one sector, Agricultural Machinery, has China fallen short of its aims. If Xi Jinping
were a fund manager, he would have every reason to be pleased with the performance of
this portfolio. China’s investments have generated outsized returns in not one, but
several sectors.

In addition to targeting high-tech sectors, MIC2025 included a variety of other macro


goals. It is difficult to assess China’s performance using these goals, though
generalizations can be made. In sum, China is by far the world’s leading exporter, and
the composition and destination markets of its exports are shifting in response to its rise
and the world’s reaction to that fact. China has built a formidable system for research
and development, though the quality of its research is uneven. China has produced
household-name brands, but far fewer than the scope of its industrial base would
suggest. China has a highly connected and automated industrial base and is the world
leader in the manufacture of “green” products, though its integration of those systems
into its electrical grid is incomplete.

1Office of Senator Marco Rubio, “Made in China 2025 and the Future of American Industry,” February 12, 2019,
https://www.rubio.senate.gov/rubio-releases-report-outlining-china-s-plan-for-global-dominance-and-why-america-
must-respond/.

4
The developed world is accustomed to looking down on China as a second-rate power.
The default attitude is that we have specialized knowledge and abilities that China lacks;
that we are the teacher, China the pupil. This position naturally lends itself to a merely
defensive strategy, to keep China from stealing or otherwise obtaining what we already
have. It is also outdated, limited to a shrinking number of sectors where we retain
genuine and significant advantages. A defensive strategy is still warranted to prevent
China from preying on us further. But it cannot be our only response.

The United States must act now to avoid living in a world where China is the teacher,
and we are the pupil. Unfortunately, this is the world China is making, in part through
MIC2025.

CHINA’S INDUSTRIAL STRATEGY


MIC2025 is sometimes presented as a modern-day policy innovation on the part of the
Chinese state, but it is the continuation of decades of industrial policy engrained in the
DNA of communist countries, and nearly two decades of industrial policy explicitly
focused on transforming China into a technologically advanced and innovative power.

An important predecessor to MIC2025 was the “National Medium and Long-Term Plan
for the Development of Science and Technology” (MLP), released in 2006 and
concluded in 2020. That plan was one of China’s first forays into industrial policy with
an explicit focus on innovation and high technology, as opposed to “traditional”
industrial sectors like metals, mining, and basic manufactures. The MLP was notable for
announcing 16 “Megaprojects” that China would complete by 2020. Some of these
projects, like the effort to build China’s first wide-body passenger aircraft, would later be
included in MIC2025.

The Chinese government unveiled MIC2025 in May 2015. The document announcing
the policy was characteristically sweeping and grandiose. Its preamble identified
manufacturing as a matter of world-historic importance, stating that “without a strong
manufacturing industry, there will be no country and no nation.”2 The document stated
that China has a “great historical opportunity” to become a world power, owing to the
fact that globalization has placed China at the center of the world’s supply chains. By the
time the document was released, the “China Shock” that followed the country’s
accession to the World Trade Organization had already rippled across the globe,
decimating textile, apparel, furniture, and other important industries in the United
States and other developed nations.3 China was already the world’s factory.

MIC2025 nevertheless took a critical view of the Chinese industrial base. The document
described China as being “still in the process of industrialization, [still having] a major

2 State Council of the People’s Republic of China, “Notice of the State Council on the Publication of ‘Made in China
2025,’” May 8, 2015, https://cset.georgetown.edu/wp-content/uploads/t0432_made_in_china_2025_EN.pdf.
3 David Autor, David Dorn, and Gordon Hanson, “The China Shock: Learning From Labor Market Adjustments to

Large Changes in Trade,” National Bureau of Economic Research, Working Paper 21906, January 2016,
https://www.nber.org/system/files/working_papers/w21906/w21906.pdf.

5
gap with advanced countries.” It is worth quoting the document’s criticism at length, to
give a sense of where the Chinese Communist Party (CCP) thought the country needed
to improve:

The manufacturing industry is large but not strong. The capacity for independent
innovation is weak, and key and core technologies and high-end equipment are
highly dependent on foreign countries. The manufacturing innovation system
with enterprises as the mainstay is not perfect. Product quality is not high, and
there is a lack of world-renowned brands. The efficiency of resource and energy
utilization is low, and the problem of environmental pollution is more
pronounced. The industrial structure is unreasonable, and the development of
high-end equipment manufacturing and producer services lags behind other
countries. The level of informatization is not high, and the depth of integration
with industrialization is insufficient. The degree of industrial internationalization
is not high, and the globalization of enterprises is inadequate.

The goal of MIC2025 was therefore to upgrade China’s industrial base and capacity for
innovation so that, within the policy’s 10-year span, China would “enter…the ranks of
the manufacturing powerhouses.”

MIC2025 outlined nine “strategic tasks and priorities” to accomplish this goal
(emphases added):

1. Improve National Manufacturing Innovation Capabilities


2. Promote the Deep Integration of Informatization and Industrialization
3. Strengthen Basic Industrial Capabilities
4. Strengthen Quality Brand Building
5. Fully Implement Green Manufacturing
6. Promote Breakthrough Development in Key Fields
7. Deep[en] Promotion of Structural Adjustments to the Manufacturing
Industry
8. Actively Develop Service-Oriented Manufacturing and Producer Services
9. Improve the Level of Internationalized Development of the Manufacturing
Industry

The sixth goal, concerning breakthrough developments, connects to 10 “strategic


sectors” in high-value fields that the CCP wished to heavily subsidize and dominate by
2025. A companion document to MIC2025 listed ambitious goals for each sector,
including export targets and the percentage of the domestic market that the CCP
expected to be met by domestic firms.

If not for these aggressive targets, MIC2025 may not have occasioned much attention.
But the plan’s emphasis on exports and import substitution posed an obvious threat to
non-Chinese firms and countries that produced and sold in the China market. MIC2025
therefore generated a firestorm of criticism that only grew with China’s industrial base
over the next decade.

6
Beijing altered its messaging on MIC2025 in 2019, as U.S.-China trade tensions
intensified and the Trump Administration imposed its first round of tariffs on Chinese
goods. Chinese officials and propaganda organs stopped mentioning the policy. Beijing
adopted a conciliatory tone on trade and promised an end to discrimination against
foreign firms. Behind the scenes, however, Beijing continued to implement MIC2025
without disruption.

If there was any doubt, recent pronouncements by CCP leaders show Beijing’s continued
focus on manufacturing. Late last year, General Secretary Xi Jinping introduced a new
slogan, “new quality productive forces.”4 This slogan was emphasized at the National
People’s Congress earlier this year. Premier Li Qiang’s annual work report states that
“moderniz[ing] the industrial system and developing new quality productive forces at a
faster pace” are the top priorities of the government.5 Supporting documents released by
the Ministry of Industry and Information Technology elaborated on what this slogan
means.6 The documents identify sectors and technologies that the state will promote.
The list of technologies includes humanoid robots, quantum computers, brain-computer
interface, 6G network equipment, deep-sea drilling and mining technology, and
advanced aviation equipment.7 There is considerable overlap between the technologies
and sectors on this list and MIC2025. Indeed, analysts have referred to “new quality
productive forces” as “the next evolution of the ‘Made in China 2025’ strategy.”8

Far from abandoning aggressive industrial strategy, Beijing appears to be preparing for
another decade of manufacturing- and export-oriented development. That decision will
have dramatic consequences for the world, just as MIC2025 reshaped China and global
trade during the past decade.

ASSESSING “MADE IN CHINA 2025”


Has MIC2025 been a success? This is not a straightforward question to answer, since
China’s “goals” for the project were often vague or undefined, while at other times,
China set very precise goals that are nonetheless impossible to measure without access
to proprietary (and often CCP-controlled) data.

This report seeks to shed light on the problem in the following ways. It examines in
detail the 10 industries China targeted for “breakthrough development.” It then

4 Yanzi Xu, “China’s Focus on New Quality Productive Forces,” Information Technology & Innovation Foundation,
May 28, 2024, https://itif.org/publications/2024/05/28/chinas-focus-on-new-quality-productive-forces/.
5 Li Qiang, “Report on the Work of the Government,” Second Session of the 14th National People’s Congress of

the People’s Republic of China, March 5, 2024, https://npcobserver.com/wp-content/uploads/2024/03/2024-


Government-Work-Report_EN.pdf.
6 Ministry of Industry and Information Technology of the People’s Republic of China, “Implementation opinions of

the Ministry of Industry and Information Technology and other seven departments on promoting the innovation and
development of future industries,” January 29, 2024,
https://www.miit.gov.cn/zwgk/zcwj/wjfb/yj/art/2024/art_ad15b0f08a714fd8888c0e31468b8c54.html.
7 Ministry of Industry and Information Technology of the People’s Republic of China, “Implementation opinions of

the Ministry of Industry and Information Technology and other seven departments on promoting the innovation and
development of future industries.”
8 Xu, “China’s Focus on New Quality Productive Forces.”

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examines the other eight “strategic tasks and priorities” laid out by China in MIC2025
and China’s progress toward those goals.

This report does not attempt to determine whether China’s specific mix of policy tools
was the right one relative to alternate approaches. Instead, it answers the related, but
different question of whether China has met the goals it set for itself in its industrial
strategy, regardless of whether the tools it used helped or harmed its mission. In other
words, this report attempts to answer whether China has, in fact, developed into the
“strong” industrial power it hoped to become when embarking on this strategy almost a
decade ago.

The answer to that question is yes.

Strategic Industries
The goal of MIC2025 that has drawn the most attention is to “promote the rapid
development” of 10 strategic industries. This goal came with ambitious export targets
for each sector, raising alarm that the world would be engulfed by another wave of
heavily subsidized, inexpensive Chinese exports, this time of high-value-added, high-
technology manufactures.

In 2019, the Rubio office charted the global export share of the United States and China
in 32 groups of high-value goods, roughly corresponding to the products China targeted
in MIC2025. That exercise showed that by 2017, China had “increased its global market
share to nearly match the U.S. in some high-price, high-value products.”9 Updating the
chart, as this report does below, shows that China’s progress in exporting these goods
has continued unabated, surpassing the United States and rising from there. Focusing
on this basket of high-value goods shows that China has had considerable success
climbing the value chain of global trade. While the country is still a massive producer of
cheap toys, apparel, and electronics, it is now among the world’s most competitive
producers of just about everything, from machine tools to dock cranes.

9
Office of Senator Marco Rubio, “Made in China 2025 and the Future of American Industry.”

8
Source: UN International Trade Centre, Trade Map, accessed August 28, 2024, https://www.trademap.org/.

Note: Selected four-digit lines include: 8406 Steam turbines and other vapor turbines; 8408 Compression-ignition
internal combustion piston engine; 8411 Turbojets, turbopropellers and other gas turbines; 8414 Air or
vacuum pumps; 8426 Ships' derricks, cranes; 8429 Self-propelled bulldozers, angledozers, graders, levelers,
scrapers, mechanical shovels, excavators, shovel loaders, tamping machines and roadrollers; 8430 Moving,
grading, levelling, scraping, excavating, tamping, compacting, extracting or boring machinery; 8456 Machine
tools for working any material by removal of material, by laser or other light or photon beam, ultrasonic,
electro-discharge, electro-chemical, electron beam, ionic-beam or plasma arc processes; 8457 Machining
centers, unit construction machines and transfer machines for working metal; 8458 Lathes for removing metal;
8459 Machine tools, including way-type unit head machines, for drilling, boring, milling, threading or tapping;
8460 Machine tools for deburring, sharpening, grinding, honing, lapping, polishing or otherwise finishing
metal; 8461 Machine tools for planing, shaping, slotting, broaching, gear cutting, gear grinding or gear
finishing, sawing, cutting-off; 8462 Machine tools, including presses, for working metal; 8479 Machines and
mechanical appliances not specified or included elsewhere in this chapter; 8486 Machines and apparatus of a
kind used solely or principally for the manufacture of semiconductor boules or wafers, semiconductor devices,
electronic integrated circuits or flat panel displays; 8501 Electric motors and generators; 8502 Electric
generating sets and rotary converters; 8504 Electrical transformers, static converters, and inductors; 8543
Electrical machines and apparatus, having individual functions; 8601 Rail locomotives powered from an
external source of electricity or by electric accumulators; 8602 Rail locomotives (excluding those powered from
an external source of electricity or by accumulators), locomotive tenders; 8603 Self-propelled railway or
tramway coaches, vans and trucks; 8605 Railway or tramway passenger coaches, luggage vans, post office
coaches; 8701 Tractors; 8703 Motor cars and other motor vehicles principally designed for the transport of
persons; 8704 Motor vehicles for the transport of goods; 8705 Special purpose motor vehicles (e.g. breakdown
lorries, crane lorries, fire fighting vehicles, lorries, mobile workshops and mobile radiological units); 8901
Cruise ships, excursion boats, ferry-boats, cargo ships, barges and similar vessels for the transport of persons or
goods; 8902 Fishing vessels; 8904 Tugs and pusher craft; 8905 Light-vessels, fire-floats, dredgers, floating
cranes, floating docks, floating or submersible drilling or production platforms; 8906 Vessels, incl. warships
and lifeboats. Headings are shortened for length.

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This section provides an overview of China’s progress in all 10 strategic sectors
identified in MIC2025. As we will see, China has succeeded beyond expectations in a few
areas, made progress while remaining behind the pack in others, and fallen well short of
its goals in at least one.

Even this mixed assessment represents an undeniable victory for the CCP. China led in
zero of these cutting-edge industries a decade ago. Now it is the undisputed leader in
several, and it can use this leadership to coerce and control the rest of the world.

AEROSPACE AND AVIATION

• China’s passenger-jet champion, COMAC, has notched success in the domestic


market, but is not yet a viable competitor of the Boeing-Airbus duopoly.
• China has developed impressive space-launch capabilities and satellite systems,
but is still weaker than the United States in space.
• China’s aviation success story is in commercial drones, where it possesses
dominant market share and has built world-leading companies like DJI.
MIC2025 targeted aviation and space technology for promotion. The emphasis of
MIC2025’s aviation agenda was commercial jet aircraft, while the emphases of its space
agenda were heavy-lift rockets and satellites. This section discusses both. It also
discusses a third group of technologies—aerial drones and their manned cousins,
electric vertical take-off and landing aircraft—which were not envisioned by MIC2025,
but which have emerged in recent years as a driver of China’s economy.
Recent, high-profile stumbles by Boeing have led to speculation that China could seize
the opportunity to break into the major leagues in commercial aviation. That is certainly
what Beijing hopes for, and it has spent decades and billions to build its state-owned
champion, the Commercial Aircraft Corporation of China (COMAC), into a competitor
of Boeing and Airbus. This possibility is still far off, as China has struggled to bring its
commercial aerospace offerings to the industry cutting edge. At present, it is behind not
only Airbus and Boeing, but also Embraer, the widely respected Brazilian firm that, far
more than COMAC, deserves the title of understudy to the Big Two.
COMAC’s most important offering is the C919, a narrow-body passenger jet similar in
profile to the Airbus A320 and Boeing 737. More than a decade and a half after it was
announced, the C919 is still in the infant stages of commercial operation. The plane’s
maiden testing flight was in 2017, and it entered commercial service last year.10 The
plane first flew internationally this year—to Singapore, the easiest of overseas jaunts.
The plane appeared at the Singapore Airshow, where COMAC hoped to drum up interest
with foreign airlines.
COMAC has racked up an impressive domestic order list for the jet and is expanding its
manufacturing facilities, but it has yet to attract international clients. The plane has only

10Sophie Yu and Brenda Goh, “China’s C919 15-year journey to maiden commercial flight,” Reuters, May 26, 2023,
https://www.reuters.com/article/idUSL1N37N0EF/.

10
been approved by Chinese regulators and ordered by Chinese airlines, all of which have
a vested interest in the success of their champion.
COMAC will struggle to break the Airbus-Boeing duopoly in large part because the C919
is still technologically inferior to those companies’ offerings. The plane is heavier than
the most popular version of the Boeing 737 by roughly a ton and has a shorter range by
about 1,000 nautical miles.11 Those specifications likely rule COMAC out for airlines
seeking to increase fuel economy and utilization rates.
An even more awkward fact for Beijing is that the C919 is not close to being a fully
“Chinese” plane. Chinese state media admits that 40 percent of the plane’s components
are imports, and the true figure is likely higher.12 The plane’s electrical system, landing
gear, flight recorder, flight control and fuel system, weather radar, and tires are all
foreign-made—in fact, American-made. Most significantly, the C919’s jet engine is the
product of a joint venture between GE Aviation and France’s Safran Aircraft Engines.
Beijing has made replacing this engine a priority, clearing roadblocks for the regulatory
approval of a home-grown turbofan engine by Aero Engine Corporation of China. That
engine is still in testing and is likely years from commercial operation.
China has had more success in space. The country is one of three capable of
independently launching humans into outer space, alongside the United States and
Russia. Since 2021, China is also the only country with an independent, permanently
crewed space station. The launch of the Tiangong (“Sky Palace”) represented the
culmination of a two-decade-long effort to develop China’s manned space program.
MIC2025 focused on developing China’s rockets and satellites. China’s Long March
rockets are the backbone of its space-launch capabilities. China has several proven
medium-lift launch vehicles and one proven heavy-lift launch vehicle of this type,
though the payload and cost of delivering payload into orbit of these rockets are
significantly worse than those of American workhorses like SpaceX’s Falcon 9. China is
also developing two super heavy-lift launch vehicles, the Long March-9 and Long
March-10, which bear striking resemblance to their American competitors, SpaceX’s
Starship and NASA’s Space Launch System. China fantasizes that the Long March-9 will
one day, like Starship, be a reusable rocket, though that capability will likely remain out
of its reach for many years. The Long March-10, a more realistic blueprint, is slated for
its first launch in 2027.
China has increased the tempo of its rocket launches in recent years to bolster its
impressive constellation of satellites. Georgetown’s Center for Security and Emerging
Technology (CSET) reports that Beijing has performed 322 orbital launches between
2013 and 2022, with 64 launches occurring in 2022.13 The United States launched more

11 Tatenda Karuwa, “The COMAC C919 vs Boeing 737 – An Aircraft Comparison,” Simple Flying, June 13, 2023,
https://simpleflying.com/comac-c191-boeing-737/.
12 Michelle Toh, “China’s answer to Boeing and Airbus isn’t as ‘homegrown’ as it seems. Here’s why,” CNN, June 2,

2023, https://www.cnn.com/2023/06/02/tech/comac-c919-china-aircraft-intl-hnk/index.html.
13 Corey Crowell and Sam Bresnick, “Defending the Ultimate High Ground: China’s Progress Toward Space Resilience

and Responsive Launch,” Georgetown University Center for Security and Emerging Technology, July 2023,
https://cset.georgetown.edu/wp-content/uploads/CSET-Defending-the-Ultimate-High-Ground.pdf.

11
rockets in both periods, due mainly to a sharp increase in launches beginning in 2019.
America’s continuing advantage in space is best illustrated by the number of payloads it
has launched into orbit over the past decade. In 2019, U.S. payloads went vertical, while
China’s increased only marginally.

12
Source: Gunter’s, “Orbital Launches of 2023,” https://space.skyrocket.de/doc_chr/lau2023.htm

Source: Center for Strategic and International Studies, “Space Environment: Payloads Launched by Country,”
https://aerospace.csis.org/data/space-environment-total-payloads-launched-by-country/

13
In the past five years, CSET reports that China has launched 419 satellites. Some of
these satellites are constituents of the BeiDou Navigation Satellite System, which China
developed in the wake of the 1995-96 Taiwan Strait Crisis to end the “humiliation” of its
dependence on the U.S. Global Positioning System (GPS).14 That effort has paid
dividends. BeiDou is now twice the size of GPS, is more accurate—particularly in the
developing world, and has more features. As Chinese electronics and influence
proliferate across the world, BeiDou will take on greater significance as a tool of Chinese
diplomacy and, potentially, espionage.
The final aviation and aerospace technology worth noting is one that China’s industrial
planners largely did not foresee a decade ago: aerial drones. The United States
pioneered the use of drones for military purposes, and the U.S.-led smartphone
revolution perfected the lightweight sensors and semiconductors that power small
commercial drones. However, the U.S. commercial drone industry has since been all but
wiped out by Chinese drone makers like DJI and Autel, which have received heavy state
subsidies.15 Today, China has captured 90 percent of the U.S. market for commercial
drones.16 Countless Chinese drones are flying over American skies, collecting—and
potentially transmitting—treasure troves of data.
China’s dominance of the commercial drone sector has led to the emergence of what
Beijing calls the “low-altitude economy.” China envisions a future where armies of
coordinated drones perform everyday tasks from package delivery to crop dusting to,
one day, taxi services. A Chinese eVTOL aircraft recently completed its maiden flight in
Nanjing, which means even the more fantastic applications of this technology may be
closer to reality than many believe.17

AGRICULTURAL MACHINERY

• MIC2025’s prioritization of agricultural machinery reflects the CCP’s—and


General Secretary Xi’s—preoccupation with food security.
• China has failed to build internationally competitive manufacturers of
agricultural machinery. By some metrics, China’s mechanization of agriculture
has gone into reverse.
• China remains deeply reliant on foreign sources, including the United States, for
food, despite a crash program to increase the supply of arable land.

14 Sarah Sewall, Tyler Vandenberg, and Kaj Malden, “China’s BeiDou: New Dimensions of Great Power Competition,”
Harvard Kennedy School Belfer Center, February 2023,
https://www.belfercenter.org/sites/default/files/files/publication/Chinas-BeiDou_V10.pdf.
15 Cate Cadell, “Drone company DJI obscured ties to Chinese state funding, documents show,” Washington Post,

February 1, 2022, https://www.washingtonpost.com/national-security/2022/02/01/china-funding-drones-dji-us-


regulators/
16 David Lynch, “Chinese subsidies for drones, chips put U.S. at risk, House panel says,” Washington Post, June 26,

2024, https://www.washingtonpost.com/business/2024/06/25/china-subsidies-house-panel/.
17 Jennifer Meszaros, “ET9 eVTOL Prototype’s Maiden Flight Signals Nanjing’s Low-Altitude Progress,” APAC

Aviation Insights, April 27, 2024, https://medium.com/apac-aviation-insights/evitechs-successful-maiden-flight-


marks-advancement-in-nanjing-low-altitude-development-5fa28ed3f50f.

14
China’s prioritization of agricultural machinery may seem odd in a list dominated by
cutting-edge technology like semiconductors and airplanes. To make sense of it, one
must realize the unique vulnerability of China in agriculture. Simply put, China does not
make enough food. Beijing knows that self-reliance in agriculture is critical to breaking
free from the West, particularly if it hopes to absorb Taiwan by force.18 The evidence
shows that China’s insecurity in this area is growing worse, not better, despite feverish
efforts to reclaim farmland, mechanize agriculture, and grow food.
China has run a trade deficit in agriculture every year for at least two decades. That
deficit has ballooned since 2015, growing from $45 billion to $135 billion in 2023.19
China maintains vast stockpiles of staples like rice and grain to feed its population, but
relies heavily on imports to feed livestock that meet the Chinese peoples’ demand for
meat.
China runs especially large deficits in soybeans, which it imports mainly from Brazil and
the United States to use as feedstock.20 But its list of dependencies is long,
encompassing beef (imported mainly from Brazil, Argentina, Australia, and the United
States), corn (imported from Brazil and the United States), and dairy (imported from
New Zealand). As this list demonstrates, many of China’s most acute needs come from
the United States and allied countries, which poses a strategic challenge for Beijing.
Xi, a leader old enough to remember the terrible famine that accompanied the CCP’s
Great Leap Forward, has spoken on multiple occasions about the importance of food
security. He has warned that failure to address this problem will leave China at the
mercy of foreign powers. “We will fall under others’ control if we can’t hold our rice bowl
steady,” he has said.21
China has thus started a crash program of land conversion to increase the amount of
arable land for agriculture, reversing an earlier policy of reforestation. In some parts of
the country, planting of trees is forbidden, and recently planted trees—including trees
that grow valuable commodities like fruit—are being uprooted.22 Authorities have
reclaimed more than 400,000 acres of land since 2021 for corn and soybean production.
But Chinese official statistics show this campaign has yet to right the ship. The amount
of cultivated land in China fell from 333 million acres in 2015 to 315 million in 2022,
close to the level that Beijing believes is a bare minimum for food security.23

18 Edward Luttwak, “The clue China is preparing for war: Xi is laying the groundwork while the West looks away,”
UnHerd, July 19, 2023, https://unherd.com/2023/07/the-clue-china-is-preparing-for-war/.
19 Xin Ou, “Trade balance of agricultural product imports and exports in China from 2005 to 2023,” Statista, accessed

March 1, 2024, https://www.statista.com/statistics/1301293/china-balance-of-trade-in-agricultural-products/.


20 UN International Trade Centre, “List of supplying markets for a product imported by China, Product: 1201 Soya

beans, whether or not broken,” accessed March 1, 2024, https://www.trademap.org/.


21 Sun Yu, “China expands farmland in bid to cut foreign food reliance,” Financial Times, August 13, 2023,

https://www.ft.com/content/6702e861-24c1-4383-be1c-bb0ba3b09c8a.
22 Frederic Lemaitre, “China imposes deforestation in the pursuit of food independence,” Le Monde, June 27, 2023,

https://www.lemonde.fr/en/environment/article/2023/06/27/china-imposes-deforestation-in-the-pursuit-of-food-
independence_6038140_114.html.
23 National Bureau of Statistics of China, “China Statistical Yearbook 2023: 8-20 Area of Cultivated Land by Region,”

accessed March 1, 2024, https://www.stats.gov.cn/sj/ndsj/2023/indexeh.htm.

15
China’s mechanization of agriculture has also fared poorly. Despite great advances in
manufacturing, China has failed to raise a manufacturer of agricultural equipment that
can compete with the likes of John Deere. In fact, last year, China’s agriculture ministry
opened investigations into machinery subsidy fraud, alleging that the $3 billion in funds
Beijing had allocated to help China’s farmers mechanize was stolen or wasted on shoddy
equipment.24 Earlier this year, Beijing announced a further corruption probe—into
China’s agriculture minister, Tang Renjian.25 While China has a trade surplus in tractors
and related parts, it is nowhere near the size of its surplus in other automotive goods.
China’s major export market for tractors is Russia, a market that has quadrupled since
Russia’s war in Ukraine; this speaks to the unique circumstances of Russia’s isolation, as
well as the dual-use nature of heavy equipment, more than any commercial success on
China’s part.26

Source: National Bureau of Statistics of China, “China Statistical Yearbook 2023: 12–4 Major Agricultural Machinery
at Year-end,” accessed June 21, 2024, https://www.stats.gov.cn/sj/ndsj/2023/indexeh.htm.

24 Cyril Ip, “‘Cash cow’ subsidies: China targets fraud in farm machinery sales scheme,” South China Morning Post,
December 4, 2023, https://www.scmp.com/news/chia/politics/article/3243671/cash-cow-subsidies-china-targets-
fraud-farm-machinery-sales-scheme.
25 Colleen Howe, “China probes agriculture minister for suspected disciplinary violations,” Reuters, May 18, 2024,

https://www.reuters.com/world/china/china-probes-agriculture-minister-suspected-disciplinary-violations-2024-
05-18/.
26 UN International Trade Centre, “List of partner markets for a product commercialized by China, Product: 870194

Tractors, of an engine power >75 kW but <=130 kW,” accessed March 1, 2024, https://www.trademap.org/.

16
Most strikingly, official Chinese statistics of machinery power and number of tractors of
all sizes employed in agriculture have declined since MIC2025 began.27 China’s
consumption of chemical fertilizer has also declined.28
These facts indicate that China’s food security problem is growing and represents a
persistent dependency on the West, especially the United States. China cannot yet claim
to hold its rice bowl steady, as Xi so clearly desires it to.

BIOTECHNOLOGY

• Chinese biotech companies are now producing novel drugs and therapies in small
numbers, though they remain rare.
• China still relies on talent, technology, and capital from foreign biotechnology
and pharmaceutical companies.
• China has built internationally successful genomics companies with strong ties to
U.S. and other Western pharmaceutical companies and research institutions.

China’s vast chemical industry has made it a world leader in the production of low-end
active pharmaceutical ingredients (APIs), which are used in generic drugs. By some
estimates, India and China together produce between 60 and 70 percent of generic
drugs for the U.S. market—and India is deeply reliant on China for APIs, meaning
China’s role is even larger than topline statistics indicate.29

But Beijing’s ambitions in biotech are far bigger than generic drugs. The CCP wants
China to become a “biotech superpower” with companies capable of competing with
Western pharmaceutical multinationals on the frontier of medicine.30

Not long ago, China’s biotech sector was disparaged as far behind, mostly producing
copy-cat drugs and therapies that built on research performed by other countries. There
are signs that reputation is outdated, that China is positioned to transition from a “fast
follower” to a biotech leader in the years ahead. However, despite considerable
investment, China still struggles to produce novel drugs and therapies and remains
deeply reliant on Western resources in this sector.

The Australian Strategic Policy Institute’s (ASPI) Critical Technology Tracker finds that
China leads in research of four out of seven biotech categories: synthetic biology,
biological manufacturing, genome and genetic sequencing and analysis, and novel

27 National Bureau of Statistics of China, “China Statistical Yearbook 2023, 12-4 Major Agricultural Machinery at
Year-end,” accessed March 1, 2024, https://www.stats.gov.cn/sj/ndsj/2023/indexeh.htm.
28 National Bureau of Statistics of China, “China Statistical Yearbook 2023, 12-5 Irrigated Area of Cultivated Land and

Consumption of Chemical Fertilizers,” accessed March 1, 2024, https://www.stats.gov.cn/sj/ndsj/2023/indexeh.htm.


29 Mary Van Beusekom, “Cost of China-made drug ingredients more than doubled during the pandemic,” University

of Minnesota Center for Infectious Disease Research and Policy, June 21, 2024,
https://www.cidrap.umn.edu/resilient-drug-supply/cost-china-made-drug-ingredients-more-doubled-during-
pandemic.
30 Anna Puglisi and Chryssa Rask, “China, Biotechnology, and BGI: How China’s Hybrid Economy Skews

Competition,” Georgetown University Center for Security and Emerging Technology, May 2024,
https://cset.georgetown.edu/publication/china-biotechnology-and-bgi/.

17
antibiotics and analysis.31 In one of those categories (synthetic biology), ASPI judges
there is a “high” risk of China monopolizing that technology. By contrast, the United
States leads in research in just three areas: vaccines and medical countermeasures,
genetic engineering, and nuclear medicine and radiotherapy.

China’s biotech industry has benefited from an influx of foreign capital, technology, and
talent. In 2021, $2 billion in venture capital and private equity flooded into the sector.32
Most of the Western multinationals have major footprints in the country, often entering
joint ventures with Chinese firms in the hunt for new drugs. Earlier this year, Fierce
Pharma reported that “the CEOs of AstraZeneca, Bayer, Bristol Myers Squibb, GSK,
Novartis, Pfizer, and Takeda came together in Beijing to show the companies’ continued
interest in China” at a development forum.33 Perhaps most important of all, China’s
indigenous firms rely on so-called “sea turtles,” or Chinese nationals who study in the
West and work at top pharmaceutical firms before returning to the mainland to run
those firms’ competitors.34

These efforts are starting to bear fruit, although China remains behind the pack in drug
discovery. Chinese pharmaceutical companies have started to produce “first in class”
drugs in small numbers. These drugs employ novel mechanisms of action to treat
medical conditions, and are thus viewed as a reliable sign of true innovation. However,
they are still rare. One Chinese drug regulator lamented in 2021 that “original new
drugs” were “as rare as morning stars.”35

China has had more success in the field of genomics. Its national champion is the now
partially blacklisted BGI Group, which began as a research institute of the (also now
blacklisted) Chinese Academy of Sciences and runs the country’s gene bank.36 BGI and
its subsidiaries, in particular MGI Tech and Complete Genomics, are significant
producers of gene-sequencing instruments, equipment, and reagents, as well as gene-
sequencing services. MGI Tech has undergone a significant commercial expansion. The
company increased its domestic market share from 13 percent to 39 percent in the three
years after the Covid-19 pandemic, in part due to government purchasing policies that
privileged domestic firms. It also captured more than a five percent market share
globally, allowing it to now earn more than half of its revenue overseas. Before federal
restrictions fell in place, MGI Tech had even received research grants from the U.S.
military, a disturbing fact given BGI Group’s close ties to the People’s Liberation Army

31 Jamie Gaida, Jennifer Wong Leung, Stephen Robin, & Danielle Cave, “ASPI’s Critical Technology Tracker: The
global race for future power,” Australian Strategic Policy Initiative, 2023, https://ad-aspi.s3.ap-southeast-
2.amazonaws.com/2023-03/ASPIs%20Critical%20Technology%20Tracker_0.pdf.
32Anna Nishino, “Pharmacy of the world: China’s quest to be the No. 1 drugmaker,” Nikkei Asia Review, December

23, 2021, https://asia.nikkei.com/static/vdata/infographics/chinavaccine-2/.


33 Angus Liu, “Big Pharma CEOs gather in Beijing to show continued interest in China, offer policy advice,” Fierce

Pharma, March 26, 2024, https://www.fiercepharma.com/pharma/big-pharma-ceos-gather-beijing-continued-


interest-china-policy-advice-local-drug-industry.
34 Nishino, “Pharmacy of the world.”
35 Bloomberg News, “China’s $220 Billion Biotech Initiative Is Struggling to Take Off,” May 15, 2023,

https://www.bloomberg.com/news/articles/2023-05-15/china-biotech-stumbles-despite-220-billion-investment.
36 Philip Wang and Kathleen Magramo, “US adds Chinese genetics firms to trade blacklist over surveillance

allegations,” CNN, March 2, 2023, https://www.cnn.com/2023/03/02/business/us-blacklist-bgi-chinese-genetics-


surveillance-companies-intl-hnk/index.html.

18
(PLA). The company has reportedly performed genetic collection and analysis of foreign
persons and ethnic minorities within China on behalf of the Chinese government.37

Another Chinese biotech player is WuXi AppTec, a contract research and manufacturing
company that provides a host of services to its clients. WuXi has a client base and
manufacturing facilities in the United States, boasting that its customers include all of
the top 20 pharmaceutical companies.38 An industry association of American biotech
companies found that 79 percent had at least one contract or product agreement with a
Chinese manufacturer; the “vast majority” were with WuXi or a subsidiary. 39 WuXi’s
presence in the American market risks exposing U.S. intellectual property to theft.
Earlier this year, a U.S. intelligence report claimed that the company transferred the
data of an American client to China without its consent.40

Suspicion of China’s biotech companies likely will worsen the outlook for these
companies in the years ahead, which will test the strength of its research base and native
talent. Given its dependence on Western talent, technology, and capital, China’s biotech
industry may not be able to rise to the challenge.

ELECTRIC VEHICLES

• China is the world leader in EV technology and production.


• China’s growing export of automobiles of all types threatens a second “China
Shock” that could degrade auto industries elsewhere in the world.
• China’s EV companies are locked in a brutal price war that will winnow the field
and battle-harden the most competitive Chinese firms in the years ahead.
Perhaps no technology better exemplifies China’s rise in manufacturing than electric
vehicles (EVs). The daily news is filled with articles about the threat that Chinese EVs
pose to Western automakers. These EVs are cheap. Some entry-level models, such as the
BYD Seagull hatchback, sell for as little as $10,000. But it would be a mistake to view
Chinese EVs merely as cheap. Thanks to sustained investment and focus on battery
technology, drivetrains, and other fundamentals, Chinese automakers are producing
EVs of impressive quality, with strong range, innovative features, and luxury stylings.
China is a force to reckon with in EVs. The question now is how much damage it will do
to the U.S. auto industry.
China did not start from zero on autos or even EVs. When MIC2025 was announced, the
country already had a large auto industry, dominated by China’s Big Four state-owned

37 Kirsty Needham and Clare Baldwin, “China’s gene giant harvests data from millions of women,” Reuters, July 7,
2021, https://www.reuters.com/investigates/special-report/health-china-bgi-dna/.
38 WuXi Biologics (Cayman) Inc., “Interim Report 2023,” https://www.wuxibiologics.com/wp-

content/uploads/2023-Interim-Report.pdf.
39 Karen Freifeld, “US bill to restrict WuXi AppTec, Chinese biotechs revised to give more time to cut ties,” Reuters,

May 10, 2024, https://www.reuters.com/technology/us-bill-restrict-wuxi-apptec-other-chinese-biotech-cos-revised-


give-more-time-2024-05-10/.
40 Angus Liu, “In new letter to Defense Department, WuXi AppTec refutes claim of secret data transfer,” Fierce

Pharma, May 13, 2024, https://www.fiercepharma.com/pharma/would-never-approve-does-not-condone-wuxi-


apptec-refutes-claim-secret-ip-transfer-letter-dod.

19
car companies: Shanghai Automotive Industry Corporation (SAIC), Dongfeng Motor,
FAW Group, and Changan Automobile. These companies mostly served the domestic
market, though they had a modest export business to rogue nations such as Iran and
Venezuela.
Zeyi Yang of the MIT Technology Review credits one man, Wan Gang, for jumpstarting
China’s EV industry.41 Wan was an Audi engineer who returned home and, in 2007, was
named minister of science and technology. Wan knew that China would struggle to
catch up with Western automakers in internal-combustion engines and hybrids, so he
set China on the path to “leap ahead” by developing EV technology. Subsequent Chinese
policy, including MIC2025, reflected this decision. Chinese authorities began
subsidizing EV purchases and production, waiving expensive license-plate registration
fees for EV buyers, and slashing red tape for factory construction. The Center for
Strategic and International Studies (CSIS) has calculated that China’s subsidies to its EV
industry exceeded $60 billion in the 2009-2017 timeframe, more than the United States
devoted to semiconductors in the CHIPS Act.42

41 Zeyi Yang, “How did China come to dominate the world of electric cars?,” MIT Technology Review, February 21,
2023, https://www.technologyreview.com/2023/02/21/1068880/how-did-china-dominate-electric-cars-policy/.
42 Luke Patey, “The Great EV Glut,” The Wire China, May 19, 2024, https://www.thewirechina.com/2024/05/19/the-

great-ev-glut-european-union-electric-vehicle-china-chinese-electric-vehicles-evs-eu/.

20
Source: UN International Trade Centre, Trade Map, accessed August 28, 2024, https://www.trademap.org/.

Note: Selected six-digit line: 870380 Motor cars and other motor vehicles principally designed for the transport of
<10 persons, incl. station wagons and racing cars, with only electric motor for propulsion; Heading is shortened for
length.

21
Source: UN International Trade Centre, Trade Map, accessed August 28, 2024, https://www.trademap.org/.

Note: Selected six-digit lines include: 870322 Motor cars and other motor vehicles principally designed for the
transport of <10 persons, incl. station wagons and racing cars, with only spark-ignition internal combustion
reciprocating piston engine of a cylinder capacity > 1.000 cm³ but <= 1.500 cm³; 870323 Motor cars and other
motor vehicles principally designed for the transport of <10 persons, incl. station wagons and racing cars, with only
spark-ignition internal combustion reciprocating piston engine of a cylinder capacity > 1.500 cm³ but <= 3.000 cm³;
and 870324 Motor cars and other motor vehicles principally designed for the transport of <10 persons, incl. station
wagons and racing cars, with only spark-ignition internal combustion reciprocating piston engine of a cylinder
capacity > 3.000 cm³; Headings are shortened for length.

China’s intense focus on EVs led to the emergence of a new crop of EV and battery
manufacturers. The proliferation of Chinese EV companies is due in part to policy
support and in part to the relative simplicity of EV technology—EVs have far fewer parts
and far more prepackaged parts than do internal-combustion engine vehicles. Whatever
the exact cause, these startup companies proved far more innovative and successful than
the state-owned enterprises that came before.
The outstanding case is BYD, a Shenzhen-based company founded as a manufacturer of
lithium-ion batteries for cell phones. Before BYD received consistent support from the
state, it benefited from an infusion of American capital: Warren Buffet’s Berkshire
Hathaway invested $230 million in the company in 2008, the same year that Tesla
delivered its first vehicle, the Roadster.43 BYD rocketed to the head of the pack in

43Arjun Kharpal and Evelyn Chang, “Musk once laughed off BYD as a threat. Now the Chinese giant has taken Tesla’s
EV crown — here’s how,” CNBC, January 4, 2024, https://www.cnbc.com/2024/01/05/how-byd-grew-from-a-
phone-battery-maker-to-ev-giant-taking-on-tesla.html.

22
Chinese EVs due to its innovative battery technology (batteries make up approximately
40 percent of the cost of an EV). BYD’s history as a battery maker allowed it to create a
lithium-ion phosphate battery, dubbed the Blade, that was thinner, cheaper, and safer
than competitors on the market. This innovation in turn allowed BYD to slash prices on
its vehicles, contributing to booming sales at home and abroad. In the final quarter of
2023, BYD dethroned Tesla in new EV sales, though it has since fallen back to second
place.44 Its market capitalization is currently higher than that of Ford or GM.45
MIC2025 set an ambitious goal of 3 million domestically made EV sales per year by
2025. China shattered that goal. In 2014, roughly 75,000 EVs were sold in China.46 In
2023, 6 million EVs were sold at home, plus an additional 2.8 million plug-in hybrids.47
Incredibly, China’s supply has far outstripped substantial domestic demand. It exported
nearly five million cars of all kinds last year, dethroning Japan as the world’s largest
auto exporter. Of those, more than one million were EVs, which have begun piling up in
European ports like Rotterdam and Amsterdam-Bruges.48
China’s auto industry threatens a second China Shock that could decimate industry in
the developed world. Already, countries are adopting a variety of strategies to mitigate
this risk and remain competitive. The Biden Administration has pegged its hopes on the
Inflation Reduction Act, with the unintended consequences of directing subsidies to
Chinese battery and EV companies and miring U.S. automakers deeper in a segment of
the market undergoing a brutal price war. The Biden Administration has also imposed
stiff tariffs on EVs that are made in China while ignoring the threat posed by Chinese
gas-powered vehicles and EVs that are made in China’s expanding network of transplant
factories. Europe is also contemplating tariffs, which, in a Faustian bargain, it may use
to encourage greater investment by Chinese automakers on European soil.
As the developed world struggles to respond to China’s EV dominance, China itself is
undergoing a ferocious winnowing. There are hundreds of Chinese EV companies at
present, all trapped in a war of price and production as government subsidies begin to
phase out. Many, if not most of these companies will not survive the threshing that is
underway. The few companies that do, however, will be battle-hardened and ready to
take on the rest of the world. As Lan Xiaohuan of Fudan University explains, “it is
exactly in this stage of brutal competition that the industry is developing quickly,
numerous small firms rise and fall fast, and resources and technologies are quickly
concentrated in the hands of leading companies.”49 Automakers in the developed world

44 Laura He, “A brutal elimination round is reshaping the world’s biggest market for electric cars,” CNN, April 25,
2024, https://www.cnn.com/2024/04/24/business/china-ev-industry-competition-analysis-intl-hnk/index.html.
45 Selina Cheng, River Davis, andRaffaele Huang, “Having Overtaken Tesla, BYD Is Running Into Problems

Overseas,” The Wall Street Journal, March 12, 2024, https://www.wsj.com/business/autos/having-overtaken-tesla-


byd-is-running-into-problems-overseas-7d883f02
46 Report Buyer, “China Electric Vehicle Industry Report, 2014-2015,” PR Newswire, September 14, 2015,

https://www.prnewswire.com/news-releases/china-electric-vehicle-industry-report-2014-2015-300142619.html.
47 CK Tan, “China’s 2023 auto sales grow 12% on overseas demand for EVs,” Nikkei Asia Review, January 11, 2024,

https://asia.nikkei.com/Business/Automobiles/China-s-2023-auto-sales-grow-12-on-overseas-demand-for-EVs.
48 Matko Rak, “European ports filling up with Chinese autos,” World Cargo News, May 2, 2024,

https://www.worldcargonews.com/ports-terminals/2024/05/european-ports-filling-up-with-chinese-autos/.
49 Zichen Wang, “Lan Xiaohuan on China’s Local Government Competition and Overcapacity,” Pekingnology, March

30, 2024, https://www.pekingnology.com/p/lan-xiaohuan-on-chinas-local-government.

23
will need to think carefully about how best to compete in an EV world increasingly
dominated by China.

ENERGY AND POWER GENERATION

• China has built a commanding position in solar-energy technology, with a share


of the global supply chain exceeding 80 percent.
• China is the technology leader in nuclear power, although construction at home
and abroad is proceeding at a slower pace than desired.
• China is developing international standards and bidding aggressively on
ambitious overseas projects for the electricity grid.
China is now the world’s dominant power in energy and power generation equipment.
This may seem over-bold, but a brief review of the facts leaves little room for doubt.
The gulf between China and the rest of the world is most obvious in solar energy, one of
the “new three” technologies that China is prioritizing, along with batteries and EVs.50
The U.S. Department of Energy’s deeply researched report on the world’s solar
photovoltaic supply chain makes for sobering reading on this score. According to that
report, China’s share of the global supply chain exceeds 80 percent. In 2021, China had
70 percent of the world’s production capacity for metallurgical grade silicon, 98 percent
of ingot capacity, 97 percent of wafer capacity, 81 percent of solar cell capacity, and 77
percent of solar module capacity.51
This dominance, according to the U.S. Department of Labor, means that nearly half of
the globe’s polysilicon supply is sourced in China’s Xinjiang Uyghur Autonomous
Region, where it is mined and purified with Uyghur slave labor. The rapid scaling of
solar production worldwide is not expected to change that fact. Per the Department of
Energy report, “By the end of 2024, global manufacturing capacity for PV modules will
increase another 40% to 1,100 GW, with China maintaining an 80-95% share
(depending on the manufacturing segment) of the supply chain.”52
By contrast, the United States produced zero ingots, wafers, or cells last year. That may
change this year, when a Georgia factory capable of making ingots, wafers, and cells
opens—but even then, American production will be a rounding error compared to
production in China.

50 Guangming Daily, “Looking at the resilience and momentum of foreign trade from the perspective of the “internet
of things,” August 10, 2023, https://www.gov.cn/yaowen/liebiao/202308/content_6897581.htm.
51 Paul Basore and David Feldman, “Solar Photovoltaics: Supply Chain Deep Dive Assessment,” U.S. Department of

Energy, February 24, 2022, https://www.energy.gov/sites/default/files/2022-


02/Solar%20Energy%20Supply%20Chain%20Report%20-%20Final.pdf.
52 Basore and Feldman, “Solar Photovoltaics: Supply Chain Deep Dive Assessment.”

24
Source: International Energy Agency, “Solar PV Global Supply Chains,” accessed June 20, 2024,
https://www.iea.org/reports/solar-pv-global-supply-chains/executive-summary./

As China ramps up production, it has flooded the world with cheap solar panels. Five
percent of China’s gargantuan trade surplus in 2023 came from solar cells alone. 53
Meanwhile, prices of solar cells are in freefall, declining by half in 2023, with further
price cuts expected. Chinese solar panels are so cheap they are being used as fencing and
paving materials in some parts of Europe. This wave of cheap production has also
crushed the solar industry throughout the rest of the world.
China has also snatched the lead from the United States in nuclear technology, although
its dominance is not nearly as complete as in solar. As with other fields, China
established its footing in nuclear through joint ventures with Western companies,
notably Westinghouse (U.S.) and Areva (France). The condition for market access in
China was technology transfer to China’s two nuclear state-owned enterprises, China
National Nuclear Corporation and China General Nuclear Corporation. These firms then
collaborated on a design for their own third-generation nuclear reactor, heavily copied
from foreign sources, and climbed the value chain in components, construction, and
operation. As a result, China is now in an exclusive club of countries that have designed

53Author calculation from UN International Trade Centre, “Bilateral trade between China and World, Product:
854143 Photovoltaic cells assembled in modules or made up into panels,” “Bilateral trade between China and World,
Product: 854142 Photovoltaic cells not assembled in modules or made up into panels,” and “Bilateral trade between
China and World, Product: TOTAL All products,” accessed March 1, 2024, https://www.trademap.org/.

25
their own nuclear reactors and have the capacity to construct them using entirely
domestic firms.
China has also pushed to the frontier of nuclear technology—with vital assistance from
the U.S. government. Late last year, a consortium that includes the China National
Nuclear Corporation began commercial operations at the world’s first fourth-generation
nuclear reactor, located in Shandong Province south of Beijing.54 Fourth-generation
reactors are designed with passive safety systems to render catastrophic accidents
impossible, while increasing energy yield and flexibility of fuel types. Chinese regulators
also greenlit the country’s first molten salt experimental reactor last year, which uses
thorium for fuel instead of uranium.55 The United States built a test reactor of this type
in the 1960s, but subsequently abandoned the effort. During the Obama Administration,
Oak Ridge National Laboratory signed a cooperation agreement with the Chinese
Academy of Sciences that transferred the plans for a thorium reactor to China. 56 “The
U.S. government seems to welcome Chinese scientists into Department of Energy labs
with open arms,” one physicist noted.57
Despite these advances, China’s nuclear expansion has fallen short of the CCP’s
ambitious goals. The country did not meet its target of 85 GW of installed capacity by
2020 and is still just shy of that target.58 It has also struggled to export reactors
overseas, despite its grand vision of building a “Nuclear Belt and Road” of 30 overseas
reactors by 2030. So far, Pakistan is the only country with Chinese nuclear reactors.
Finally, China’s investments in power generation equipment are also bearing fruit. State
Grid is China’s largest state-owned utility. It is the third-largest company in the world by
revenue, after Walmart and Saudi Aramco, and has more than a million employees.
State Grid has overseen construction of more than 30 ultra-high voltage (UHV)
transmission lines to connect inland power plants with coastal population centers, all
part of an effort to create a “super grid” that connects the entire country.59 The largest of
these projects, a collaboration between State Grid and a subsidiary of Japan’s Hitachi,
stretches almost the length of the country, from northern Xinjiang to the central
seaboard. It transmits enough power for 12 million people.60

54 Colleen Howe, “China starts up world’s first fourth-generational nuclear reactor,” Reuters, December 8, 2023,
https://www.reuters.com/world/china/china-starts-up-worlds-first-fourth-generation-nuclear-reactor-2023-12-06/
55 Nuclear Engineering International, “China’s experimental molten salt reactor receives license,” June 20, 2023,

https://www.neimagazine.com/news/newschinas-experimental-molten-salt-reactor-receives-licence-10952226.
56 David Lague and Charlie Zhu, “Special Report: The U.S. government lab behind China’s nuclear power push,”

Reuters, December 20, 2013, https://www.reuters.com/article/idUSBRE9BJ0RN/.


57 Lague and Zhu, “Special Report.”
58 Howe, “China starts up world’s first fourth-generation nuclear reactor.”
59 Ye Ruolin and Yuan Ye, “Untangling the Crossed Wires of China’s ‘Super Grid,’” Sixth Tone, March 9, 2021,

https://www.sixthtone.com/news/1006932.
60 Hitachi Energy, “The world’s most powerful transmission system facilitated by Hitachi ABB Power Grids

Technologies,” December 7, 2020, https://www.hitachienergy.com/us/en/news/features/2020/07/the-world-s-


most-powerful-transmis-sion-system-facilitated-by-hi.

26
State Grid is investing heavily in transmission infrastructure, at home and overseas. It
plans to invest $70 billion in the Chinese grid in 2024.61 It is also “going out” to build
overseas, with business in 51 countries in 2021, including the construction and
operation of thousands of miles of transmission lines in Brazil.62
An important goal of MIC2025’s overseas project was to “establish a China-led
international standard system” for UHV equipment. China has made progress toward
creating such a system. From 2019 to 2022, the International Electrotechnical
Commission (IEC) was led by Yinbiao Shu, a former president of State Grid and
chairman of China Huaneng Group, another state-owned utility.63 The number of IEC
executive positions held by China increased by 100 percent between 2011 and 2021—
although China still lags other powers, such as the United States, Germany, and Japan. 64
Despite the immense scale of State Grid’s operations and efforts, China’s power grid is
still seen as insufficient to meet the country’s voracious demand for energy. Many of the
UHV transmission lines are operating well under capacity, or else are delayed. 65 State
Grid is a long way off from achieving its goal of a national “super grid.”
What’s not in doubt is that China is a world leader in energy of virtually all kinds, and is
the dominant producer of solar in particular.

HIGH-SPEED RAIL

• China has by far the largest high-speed rail network in the world, but its
infrastructure building spree has come at a staggering cost.
• China uses high-speed rail as a diplomatic tool to integrate foreign countries into
the Belt and Road network and develop export markets.
• The export performance of China’s state-owned rail companies is
underwhelming, and China has failed to meet the export targets it set in
MIC2025.

China has laid more high-speed rail than the rest of the world combined, despite the
country’s late start at developing such a network. Today, China’s high-speed rail
stretches 28,000 miles, twice its length a decade ago, when MIC2025 was announced.66

China developed its rail industry using the time-tested strategy of forced joint ventures
and technology transfer. China invited foreign rolling-stock companies to participate in
61 Bloomberg News, “China’s State Grid to Keep Spending High to Match Renewables,” January 14, 2024,
https://www.bloomberg.com/news/articles/2024-01-15/china-s-state-grid-to-keep-spending-high-to-match-
renewables.
62 People’s Republic of China Belt and Road Portal, “Light up the World, Link with the Globe: State Grid Corporation

of China on the Belt and Road,” accessed August 29, 2024, https://eng.yidaiyilu.gov.cn/z/230718-1/index.shtml.
63 Yinbiao Shu, Biography, International Electrochemical Commission, accessed August 29, 2024,

https://www.iec.ch/basecamp/yinbiao-shu.
64 The U.S.-China Business Council, “USCBC Comments on China’s Influence in International Standards Setting for

Emerging Technologies,” December 6, 2021, https://www.uschina.org/advocacy/regulatory-comments-on-


china/uscbc-comments-china%E2%80%99s-influence-international-standards-setting-emerging-technologies.
65 Ye Ruolin and Yuan Ye, “Untangling the Crossed Wires of China’s ‘Super Grid.’”
66 Xinhua, “China’s operating high-speed railway hits 45,000 km,” January 9, 2024,

https://english.news.cn/20240109/28b8075c73384fa894e90afd1b8d0dbc/c.html.

27
the construction of its high-speed rail network, promising massive potential profits for
an equally massive infrastructure buildup. As a condition of market entry, China forced
these companies to enter joint ventures with Chinese firms, leading to the diffusion of
knowledge and technology. China’s supposedly indigenous high-speed trains bear
striking resemblance to the trains that foreign companies like Canada’s Bombardier and
France’s Alstom brought to China years ago, as researcher Kyle Chan has pointed out.67
As in so many areas, China copied and stole from the best, then kicked out its foreign
competition.

During the Global Financial Crisis, China used high-speed rail as a form of debt-fueled
stimulus—what one observer labeled “Railway Keynesianism.”68 Construction of high-
speed rail lines employed hundreds of thousands of workers laid off from factories
during the economic slump. It also supported demand for cement and steel, preventing
a collapse of those vital commodities’ sectors. In return, Beijing aimed to connect the
country, spurring economic development in and projecting greater control over small
towns, many of which got high-speed rail stations. China’s two-decade-long rail blitz
recalls the United States’ nation-building during the 19th century, which included
construction of the Transcontinental Railroad and many smaller lines. The difference, of
course, is that China’s high-speed rail network is constructed and operated almost
entirely by state-owned enterprises, whereas the U.S. infrastructure buildout was
conducted mainly by private companies, albeit with considerable public support.

Creating the world’s largest and fastest high-speed rail network has come at a staggering
cost to the Chinese government. In late 2022, China State Railway Group reported
holding more than $890 billion in debt—an amount equal to five percent of China’s GDP
at the time, per Nikkei Asia Review.69 Municipal governments have taken on even more
debt to finance high-speed rail projects. This massive debt compounded with falling
ridership during the pandemic to force a change. Beijing has sharply raised fares and
ordered some local governments to cease spending on infrastructure, although it still
envisions increasing the size of the network by thousands of miles this decade. 70 Clearly,
Beijing views high-speed rail as a prestige project and public good essential for
economic development and consolidation of control over the nation. It is willing to
leverage massively to achieve those goals.

Another prominent player in Chinese high-speed rail is CRRC, a state-owned rolling


stock manufacturer that is now the world’s largest. CRRC’s products may be imitative
rather than innovative, but it is able to offer rolling stock at a significant discount due to
subsidies it receives from the Chinese government. Today, CRRC supplies virtually all
trains to the Chinese market, the world’s largest.
67 Kyle Chan, “How China uses foreign firms to turbocharge its industry,” High Capacity, March 29, 2024,
https://www.high-capacity.com/p/how-china-uses-foreign-firms-to-turbocharge.
68 Dhaval Desai, “China’s high-speed railways plunge from high profits into a debt trap,” Observer Research

Foundation, June 23, 2021, https://www.orfonline.org/expert-speak/chinas-high-speed-railways-plunge-from-high-


profits-into-a-debt-trap.
69 Shin Watanabe, “China Railway expands high-speed network as profits take back seat,” Nikkei Asia Review,

January 29, 2023, https://asia.nikkei.com/Business/Transportation/China-Railway-expands-high-speed-network-


as-profits-take-back-seat.
70 Keith Bradsher, “China Is Raising Bullet Train Fares as Debts and Costs Balloon,” The New York Times, May 13,

2024, https://www.nytimes.com/2024/05/13/business/china-bullet-trains-ticket-prices.html

28
However, CRRC’s dominance at home has not translated to success abroad, at least not
yet. The company earns less revenue today than it did a decade ago, brings in little
revenue from exports, and has seen its revenue from sales of railway equipment decline
by one third.71 Interestingly, China’s export of rail locomotives by value has plummeted
the past decade, while many other categories of rail parts and coaches have stagnated.72
These statistics are due, in part, to proactive measures by foreign countries to shield
their markets from Chinese rolling stock and components. They are due, as well, to the
fact that CRRC has established overseas manufacturing bases in more than 10 countries.

But they could also indicate that the Chinese government views its rail industry as more
of a diplomatic tool than a moneymaker. Rail projects with foreign countries are an
important component of China’s Belt and Road Initiative, in particular the “New Silk
Road” that connects China to countries across Asia and the Middle East. The most
recent example is Indonesia’s 88-mile-long Jakarta to Bandung high-speed rail line,
which began commercial operation last fall.73 The rail line was built as a joint venture
between state-owned Indonesian firms and China Railway International Co., with trains
provided by CRRC. It is likely that the Chinese government subsidizes such projects
because it believes they will facilitate exports for other Chinese industries or draw
foreign countries closer to its sphere of influence.

NEW MATERIALS

• China has established a vast R&D base for new materials, though it has so far
failed to produce epochal breakthroughs.
• China has made important incremental progress in key materials, such as
advanced carbon fiber, that long served as bottlenecks to development in other
areas of technology.
In 2023, the scientific community was abuzz about a non-peer-reviewed article,
published by Korean scientists, claiming to have discovered a room-temperature
superconductor—a discovery that, had it been validated, would have been a
monumental breakthrough in physics and materials science, dramatically decreasing the
amount of energy required to run machines as diverse as supercomputers and MRI
machines.
Instantly, an international race began to recreate the crystalline material used by the
Korean scientists and replicate their findings. These replication attempts ultimately
failed, and the original paper was retracted. But a striking fact of this saga was the

71 CRRC Corporation Ltd, “2022 Annual Report,” https://www.crrcgc.cc/Portals/73/Uploads/Files/2023/5-


4/638188141827907831.pdf
72 UN International Trade Centre, “Bilateral trade between China and World, Product: 86 Railway or tramway

locomotives, rolling stock and parts thereof; railway or tramway track fixtures and fittings and parts thereof;
mechanical (including electromechanical) traffic signalling equipment of all kinds,” accessed March 1, 2024,
https://www.trademap.org/.
73 Achimad Ibrahim and Niniek Karmini, “Indonesian president launches Southeast Asia’s first high-speed railway,

funded by China,” Associated Press, October 2, 2023, https://apnews.com/article/indonesia-china-high-speed-


railway-jakarta-bandung-3f1e4b5be6a83a0b0f54981c2e93be60

29
outsized role played by China. Chinese scientists—many of whom were affiliated with
the country’s most prestigious national laboratories and universities—were among the
first to recreate the material in question, and their preprint manuscripts flooded the
internet.74 This episode demonstrated beyond doubt Beijing’s ambitions in materials
science. China still lags in many areas of materials science, but it has created a massive
research and development (R&D) complex to catch up with its competitors—and
ultimately, it hopes, leap ahead.
ASPI’s Critical Technology Tracker again provides valuable evidence about the
seriousness of this effort. Of the 10 technology areas ASPI tracks related to advanced
materials, China has a research lead in all, meaning Chinese institutions are publishing
the most highly-cited, high-quality research in those fields.75 An example is nanoscale
materials, which are engineered materials up to 100 nm in size that hold great potential
for medical, energy, and construction applications. ASPI finds that nine out of the top 10
institutions in this field measured by the Hirsch index—a metric of scholarly impact—
are in China, led by the Chinese Academy of Sciences. Measured another way, by
proportion of most-cited papers, the entire top 10 list is dominated by Chinese
institutions.
A more circumspect view of China’s materials science industry was provided late last
year by Yong Gan, a former vice president of the Chinese Academy of Engineering. Yong
saw “grand opportunities” and rapid development in China’s output of new materials. 76
He reported that China’s new materials industry has had a compound annual growth
rate of 20 percent since 2015, versus 10 percent globally. The scale of China’s new
materials industry is also large, accounting for 30 percent of global output.
Nevertheless, Yong criticized China’s research base for its failure to achieve
breakthroughs and the “insufficient novelty” of its patents. Chinese scientists “have yet
to make any epoch-making contributions in terms of breakthroughs in important
materials,” he lamented. China’s investment intensity in new materials R&D also lags
behind that of other developed countries, such as the United States, Japan, and United
Kingdom. Ultimately, Yong placed China in the “second tier” of countries in new
materials, alongside Korea and Russia, but behind the United States, Japan, and the
European Union.
In a similar vein, technology analyst AJ Cortese notes that China has a talent problem in
materials science.77 Simply put, young Chinese do not seem to view the industry as a
promising field, and are entering it in far fewer numbers than they are other high-tech
fields, like computer science. Most materials science jobs are in “traditional” industries,
located in China’s industrial heartland. They tend not to attract the country’s best talent.

74 Margaret Harris, “’Room-temperature superconductor’ LK-99 fails replication tests,” physicsworld, August 15,
2023, https://physicsworld.com/a/room-temperature-superconductor-lk-99-fails-replication-tests/.
75 Jamie Gaida, Jennifer Wong Leung, Stephen Robin, and Danielle Cave, “ASPI’s Critical Technology Tracker.”
76 Yong Gan, “Research on the Innovative Development of New Materials Science and Technology in China,”

Engineering, January 2024, https://doi.org/10.1016/j.eng.2023.03.022.


77 AJ Cortese, “Materials Science Matters: The Talent Central to China’s Tech Pivot,” Macro Polo, August 8, 2023,

https://macropolo.org/materials-science-talent-chinas-tech-pivot/.

30
Carbon fiber technology in China provides a case study, showing that China is catching
up quickly, but has not yet cracked the top tier of materials science powers.
Lightweight, stiff, and strong, carbon fiber is an advanced material key to strategic
industries. As Cortese documents, China is now the world’s dominant producer of mid-
range carbon fiber, responsible for 43 percent of global output, followed by the United
States (18.5 percent) and Japan (9.6 percent).78 The indigeneity of China’s carbon fiber
has also skyrocketed, climbing from 12.5 percent in 2015 to more than 60 percent
today.79 Cortese attributes China’s success to its wind-power industry—wind-turbine
blades are made of carbon fiber—which provided the demand signal for Chinese firms to
invest.80 However, China has long been locked out of the market for advanced carbon
fiber (so-called T1000 carbon fiber), which is essential to aerospace and defense
applications and has long been subject to multilateral export controls.
China is only now overcoming this hurdle. Late last year, Shenzhen University and
Changsheng Technology announced a breakthrough in the mass manufacture of T1000
carbon fiber.81 If China is able to scale production of this material, it could enter the first
rank of powers in sectors like aerospace, where it lags to this day. In such a world,
China’s focus on advanced materials would be vindicated. But it has not been vindicated
yet.

ROBOTS AND MACHINE TOOLS

• China does not yet have a world-leading, home-grown robotics manufacturer. Its
most valuable firm is an acquisition from overseas.
• Chinese robotics firms have nonetheless started to take over domestic market
share from leading international firms, progressively moving into higher-value
types of robots and reducing China’s reliance on imports.

China has introduced robots into its factories on a scale and at a speed never before seen
in history, as this report discusses at greater length in the section on Smart
Manufacturing. It is in a race against time, as it attempts to automate its industry to
make up for a shrinking pool of prime-age workers. The urgency of this task has made
China dependent on foreign manufacturers of robots and advanced machine tools, like
high-end computer numerical control machines. Beijing’s goal in MIC2025 was to end
this dependency.

China has not yet built a national champion in robotics capable of challenging the
world’s leading companies. Japanese firms, along with the Swedish-Swiss giant ABB,

78 AJ Cortese, “The Curse of Success: Can China Level Up on Carbon Fiber?,” Macro Polo, October 26, 2023,
https://macropolo.org/can-china-take-carbon-fibers-to-the-next-level/.
79 Cortese, “The Curse of Success.”
80 Ibid.
81 Zhang Tong, “Chinese tech could break barrier to making crucial defence and aerospace material,” South China

Morning Post, August 23, 2023, https://www.scmp.com/news/china/science/article/3231954/chinese-tech-could-


break-barrier-making-crucial-defence-and-aerospace-material.

31
dominate the list of top industrial robotics companies by revenue, taking six out of the
top 10 spots in one informal ranking.82 No home-grown Chinese company made the cut.

Instead, China bought a champion. The country’s most important robotics asset is
KUKA, a more than century-old Bavarian manufacturer. The Chinese electrical
appliance manufacturer Midea absorbed KUKA in 2016, one year after MIC2025 was
launched. Midea initially took a small stake in the company before expanding that stake
to 95 percent of outstanding shares and pushing aside its CEO.83 Midea claimed not to
want full control of the company, but nonetheless purchased all outstanding shares in
2022, completing the takeover. KUKA’s specialized knowledge in robotics for the
automotive industry is of particular importance as China ramps up its EV industry.
KUKA currently supplies major European, American, and Chinese automakers. Tesla,
for example, reportedly relies on KUKA robotic arms in its Gigafactories, including the
Austin Gigafactory that produces the Cybertruck.84 Midea undoubtedly hopes to digest
the technology and knowledge that KUKA has built over the past century to improve
China’s standing in robotics.

China’s homegrown firms are smaller, but growing quickly in the domestic market. The
main players are Suzhou Inovance Technology, Estun Technology, and Efort
Intelligence Equipment. Inovance is the most significant firm of the three, with more
than $2 billion in revenue and a market cap of $25 billion. The company was founded by
a group of former Huawei engineers and is referred to as the “little Huawei.”85 The
firm’s billionaire founder, Zhu Xingming, has signaled that his goal is to break into the
top three companies in the sector within five years, which would require a significant
international expansion. The product page on the company’s website for the European
market says Inovance’s industrial robot offerings are “coming soon.”
Already, “the little Huawei” and other homegrown Chinese firms are helping China
break its dependence on imported robots and machine tools. Despite record
installations, China’s imports of industrial robots have declined the past two years. 86
This is due to the steadily increasing business of Chinese firms, which had an estimated
35.5 percent domestic market share in 2022, up from 17.5 percent a decade ago.87
China’s position in the highly fragmented machine-tool market is even stronger, with
Chinese producers accounting for nearly a third of global production in 2022; Germany

82 Marcus Law, “Top 10 industrial robotics companies in the world in 2023,” Technology Magazine, February 10,
2023, https://technologymagazine.com/top10/top-10-industrial-robotics-companies-in-the-world-in-2023
83 Cynthia Wrage and Jakob Kullik, “After Kuka—Germany’s Lessons Learned from Chinese Takeovers,” China

Observers in Central and Eastern Europe, July 21, 2022, https://chinaobservers.eu/after-kuka-germanys-lessons-


learned-from-chinese-takeovers/.
84 Rebecca Ren, “How does appliance giant Midea bulk up robotic arms for Tesla and the entire EV industry,”

Pingwest, January 9, 2023, https://en.pingwest.com/a/11293.


85 William Langley and Gloria Li, “Chinese robot maker says protectionism will not stop its march,” Financial Times,

April 4, 2024, https://www.ft.com/content/0cdf78f9-e2cc-48ff-ba65-027f1cf83334.


86 International Trade Centre, “Bilateral trade between China and World, Product: 847950 Industrial robots, n.e.s,”

accessed March 1, 2024, https://www.trademap.org/.


87 Caixin Global, “Homegrown robots are marching into Chinese factories,” June 16, 2023,

https://www.thinkchina.sg/technology/homegrown-robots-are-marching-chinese-factories.

32
and Japan, the world’s second and third largest producers of machine tools, each made
about 13 percent of the world’s machine tools that year.
Foreign CEOs are waking up to the fact that the tables are turning against them in
China. Earlier this year, the Japanese robotics giant, Omron, performed a mass layoff—
its first since the dot-com bubble.88 The firm’s president acknowledged that “we’ve
become increasingly dependent on China” and are “struggling against the rise of local
Chinese makers.”
China has not yet become a major exporter of industrial robots and has a limited
footprint in the high end of the robotics and machine tool market, but its firms are
becoming more sophisticated as they learn to service industrial clients at home. As the
former general manager of Estun remarked last year: “In the past, domestic industrial
robots were mainly used for tasks such as handling, palletising, loading and unloading,
and low-end welding. Now, they are gradually expanding into high-end tasks such as
assembly, polishing, gluing, and spraying, and are entering industries previously
monopolised by foreign robot manufacturers.”89

SEMICONDUCTORS

• China remains deeply reliant on foreign countries for key inputs, including
lithography equipment, Electronic Design Assistance software, and advanced
materials.
• Chinese semiconductor manufacturing companies like SMIC are pushing the
boundaries of what is possible in the face of export controls, but are several
generations behind the leading edge.
• China is developing a dominant position in legacy chips, which have immense
commercial and military significance, as well as assembly, testing, and packaging.

General Secretary Xi has described information technology, in particular


semiconductors, as the “heart” of Chinese industry.90 “When your heart isn’t strong, no
matter how big you are, you’re not really strong,” he has said.91 Accordingly, MIC2025
targeted semiconductors for special attention and support.

Today, China still trails much of the developed world in cutting-edge semiconductor
fabrication, semiconductor manufacturing equipment, Electronic Design Assistance
(EDA) software, and advanced materials like substrates and gases. It also runs a
substantial trade deficit in semiconductors, relying on imports, mostly from Taiwan and
Korea, to meet the voracious demands of its internal market and manufacturers.
However, it is developing home-grown alternatives in each area. China is also well-
positioned to dominate the production of less advanced chips (so-called legacy chips)

88 Hirotaka Tamaoka, “China automation slump lays bare Omron’s dependence on market,” Nikkei Asia Review,
March 15, 2024, https://asia.nikkei.com/Business/Electronics/China-automation-slump-lays-bare-Omron-s-
dependence-on-market.
89 Caixin Global, “Homegrown robots are marching into Chinese factories.”
90 Geoffrey Cain, “The Purges that Upended China’s Semiconductor Industry,” American Affairs, Winter 2022,

https://americanaffairsjournal.org/2022/11/the-purges-that-upended-chinas-semiconductor-industry/.
91 Cain, “The Purges that Upended China’s Semiconductor Industry.”

33
and other parts of the semiconductor supply chain, like assembly, testing, and packaging
(ATP).

China has invested heavily to develop an indigenous semiconductor industry, spending


potentially more than $150 billion in the past decade through state-led investment
funds like the National Integrated Circuit Industry Investment Fund (the “Big Fund”)
and a host of smaller, local funds.92 Recently, Beijing has concentrated control of its
semiconductor investments in a secretive government-run working group, which
indicates the importance the CCP places on semiconductor technology and its desire to
avoid further sanctions from the U.S. government.93

This state-directed investment has produced expensive failures, notably Tsinghua


Unigroup, whose overextension and decline led to a round of corruption probes,
prosecutions, and purges of company executives and managers at the Big Fund.94

However, it has also produced successes. China’s memory champion, Yangtze Memory
Technologies Corp. (YMTC), was formerly owned by Tsinghua Unigroup, and has
similarly benefited from massive state investment. YMTC appears to be succeeding
despite a U.S. government blacklisting, reportedly producing the world’s most advanced
commercially available NAND memory product.95 The company is successful enough
that in 2022, Apple considered using its memory products in devices for the Chinese
market, although it scrapped that plan due to political backlash. 96

China’s premier manufacturer of logic chips is Semiconductor Manufacturing


International Corp. (SMIC), a state-owned firm with close ties to the Chinese military.
SMIC has also battled U.S. sanctions with considerable success. Multilateral export
controls on semiconductor manufacturing tools have cut off SMIC’s access to the most
advanced chipmaking equipment produced by firms like ASML. In response, SMIC has
pushed the boundaries of what is possible with older equipment. Last year, Huawei
stunned industry observers by releasing a new smartphone powered by a SMIC logic
chip at the 7 nm node of production, just a few generations away from the cutting edge.
SMIC produced this chip using older tools, although it is unclear whether this
workaround can produce chips in sufficient quantities and with a high enough yield to
be profitable. Nevertheless, the appearance of this chip was widely touted in Chinese
state media as a victory for indigenous Chinese chipmakers over U.S. technology
controls.

92 Economist Intelligence Unit, “China boosts state-led chip development,” March 13, 2024,
https://www.eiu.com/n/china-boosts-state-led-chip-investment/.
93 Paul Triolo, “A New Era for the Chinese Semiconductor Industry: Beijing Responds to Export Controls,” American

Affairs, Spring 2024, https://americanaffairsjournal.org/2024/02/a-new-era-for-the-chinese-semiconductor-


industry-beijing-responds-to-export-controls/.
94 Triolo, “A New Era for the Chinese Semiconductor Industry.”
95 Anton Shilov, “China’s YMTC Starts Producing Mysterious New Memory, Ups 3D NAND Prices,” Tom’s Hardware,

July 18, 2023, https://www.tomshardware.com/news/ymtc-ups-3d-nand-price-starts-production-of-mysterious-


memory
96 Office of Senator Marco Rubio, “Rubio to Apple: Deal with CCP Chipmaker Would Threaten U.S. National Security,

Strengthen China,” April 1, 2022, https://www.rubio.senate.gov/rubio-to-apple-deal-with-ccp-chip-maker-would-


threaten-u-s-national-security-strengthen-china/

34
Despite these advances, China remains substantially behind the cutting edge in virtually
all areas of semiconductor manufacturing. In particular, China lags in lithography
equipment and EDA software and remains reliant on a handful of Western firms for
such products. Its problems will grow if a future U.S. administration is more diligent
about denying export licenses to China’s blacklisted chip champions, particularly SMIC
and YMTC, and sanctioning Chinese suppliers to those firms and Huawei.

The picture changes when one looks at legacy or “mature” chips, as well as other parts of
the supply chain, like ATP. These areas have not been the subject of as much attention
or concern in Washington. But China’s semiconductor industry is robust in them, posing
a distinct threat to manufacturers elsewhere in the world. SMIC and other Chinese
chipmakers have been on a construction spree of fabs producing less advanced chips,
which go into automobiles, airplanes, and countless weapons systems. Last year, the
U.S. Director of National Intelligence noted that China plans to build “dozens” of
semiconductor factories by the end of 2024, “most of which will be dedicated to
producing older, more mature technologies.”97 China is therefore poised to capture a
significant share of the global market for these vital chips in the years ahead; China
already controls 27 percent of global foundry capacity in the 20-45 nm range, and as
much as 80 percent of global foundry capacity in this range could be located in
mainland China and Taiwan within the decade, according to the Rhodium Group.98 This
consolidation would further raise the stakes of a Taiwan contingency.99

Another strength of China’s, and point of dependency for the United States, is ATP. Two
of the four largest ATP companies, Amkor Technology and JCET Group, are Chinese.
Virtually all of the operations in this back-end segment of the semiconductor supply
chain are concentrated in a few countries in Asia. And China is aggressively buying
factories from and buying stakes in non-Chinese ATP firms, like Taiwan’s ASE Group
and Powertech Technologies. While ATP is typically low-value and labor intensive, it is a
bottleneck that could be used against Western chipmakers. Increasingly, that bottleneck
runs through China.

SHIPBUILDING

• China is by far the world’s largest shipbuilding power by tonnage, outbuilding the
United States by a margin that is difficult to fathom.
• China has demonstrated the ability to produce quality as well as quantity,
building highly capable aircraft carriers, large LNG tankers, and cruise ships.
• China’s growing fleet of “research” vessels and RORO ships enables it to project
power in the Asia-Pacific and propel its exports to distant markets.

97 Office of the Director of National Intelligence, “Annual Threat Assessment of the U.S. Intelligence Community,”
February 6, 2023, https://www.dni.gov/files/ODNI/documents/assessments/ATA-2023-Unclassified-Report.pdf.
98 Jan-Peter Kleinhans, Reva Goujon, Julia Hess, and Lauren Dudley, “Running on Ice: China’s Chipmakers in a Post-

October 7 World,” Rhodium Group, April 4, 2023, https://rhg.com/research/running-on-ice/.


99 Kleinhans, et. al, “Running on Ice.”

35
Last year, the Office of Naval Intelligence reported that China’s shipbuilding capacity
exceeded our own more than 200 times over.100 This remarkable statistic speaks to the
equally remarkable rise of China as a shipbuilding power. Chinese shipyards now float
as much tonnage each year as the rest of the world’s shipyards combined, while U.S.
commercial shipbuilding has shrunk to a fraction of a percent of global output, behind
small maritime powerhouses like Turkey.101

In addition to sheer output, China has climbed the value chain by demonstrating the
ability to build some of the world’s largest and most sophisticated types of ships. The
three “crown jewels” of the shipbuilding industry are aircraft carriers, liquified natural
gas (LNG) tankers, and luxury cruise ships. China has proven its mettle in all three
areas. In May, the PLA Navy (PLAN) began sea trials of the Fujian, China’s third aircraft
carrier and its first to be designed and built domestically, as well as its first to employ
catapults; the PLAN is also allegedly building a smaller carrier for fixed-wing drones,
which would be the first in the world.102 China is competing fiercely with Korea for LNG
tanker orders, with three shipyards taking contracts for the huge vessels in recent
years.103 China’s Hudong-Zhonghua shipyard recently released a design for the world’s
largest such tanker, in collaboration with Qatar.104 And last year, China’s first
domestically built luxury cruise liner, the Adora Magic City, embarked on its maiden
voyage.

100 Alexander Palmer, Henry Carroll, and Nicholas Velasquez, “Unpacking China’s Naval Buildup,” Center for
Strategic and International Studies, June 5, 2024, https://www.csis.org/analysis/unpacking-chinas-naval-buildup
101 UN Trade and Development, “Ships built by country of building, annual,” accessed May 22, 2024,

https://unctadstat.unctad.org/datacentre/dataviewer/US.ShipBuilding.
102 H.I. Sutton, “China Builds World’s First Dedicated Drone Carrier,” Naval News, May 15, 2024,

https://www.navalnews.com/naval-news/2024/05/china-builds-worlds-first-dedicated-drone-carrier/.
103 The Maritime Executive, “China Trounces Korea Taking Three-Quarters of Shipbuilding Orders in April,” May 8,

2024, https://maritime-executive.com/article/china-trounces-korea-taking-three-quarters-of-shipbuilding-orders-
in-april.
104 The Maritime Executive, “China Designs World’s Largest LNG Carrier,” September 5, 2023, https://maritime-

executive.com/article/china-designs-world-s-largest-lng-carrier.

36
Source: UN Trade and Development, “Ships built by country of building, annual,” accessed May 22, 2024,
https://unctadstat.unctad.org/datacentre/dataviewer/US.ShipBuilding.

Just because China has demonstrated the ability to build these cutting-edge vessels does
not mean its shipbuilding industry as a whole is cutting-edge. The Fujian is not nuclear-
powered (although the PLAN has a host of nuclear-powered attack submarines), and has
fewer elevators and catapults than the U.S. Navy’s Ford class carriers. Korean shipyards
remain the most sought-after destinations for LNG tankers. And the Adora Magic City
is far from the world’s largest or most advanced cruise liner—and in fact, only 30
percent of the ship’s suppliers were Chinese.105

Still, China’s growing strength in shipbuilding is already having strategic consequences.


Chinese-built roll-on/roll-off (RORO) ships are ferrying Chinese-made automobiles to
foreign markets. BYD alone plans to own eight such vessels within two years, each
capable of carrying thousands of cars.106 RORO ships are also critical to war plans for
Taiwan, as any such invasion would require an immense amount of amphibious sealift.

105 Lin Yang, “China’s First Cruise Ship: Made in China, Sourced from Europe,” POLYGRAPH.info, February 14, 2024,
https://www.polygraph.info/a/fact-check-china-s-first-cruise-ship-made-in-china-sourced-from-
europe/7487605.html.
106 Shizuka Tanabe, “BYD to deploy fleet of 8 car carriers to underpin global EV expansion,” Nikkei Asia Review,

March 5, 2024, https://asia.nikkei.com/Spotlight/Electric-cars-in-China/BYD-to-deploy-fleet-of-8-car-carriers-to-


underpin-global-EV-expansion.

37
Chinese merchant ferries take part in PLA exercises, demonstrating their ability to
offload vehicles at sea, without the benefit of a developed harbor. 107

China is also using its shipbuilding strength to expand its footprint in the Indo-Pacific.
MIC2025 called for the development of offshore engineering and deep-sea exploration
capabilities, including “deep-sea space stations.” The deep-sea space stations have yet to
materialize, but China has made strides in less fantastic offshore engineering
technology. In December 2023, a Chinese ultra-deepwater drilling vessel, the
Mengxiang, conducted sea trials.108 Around that time, a separate Chinese research
vessel, the Zhu Hai Yun, circumnavigated Taiwan and entered its territorial waters at
several points;109 that vessel embarked from a research institute that collaborates with
the PLAN on signals intelligence.110 China hopes to use experimental vessels like these
to project power, spy on its neighbors, and, as Baron Public Affairs notes, create a “blue
economy” based on deep-sea mining and drilling primarily outside of its exclusive
economic zone.111 China has already secured exclusive rights to mine 92,000 square
miles of international seabed in the Pacific, 17 percent of total licensed area.112

As one Chinese marine geologist has said: “[N]ow we have this equipment, we can make
up for lost time. China can be its own master and can host and work with people in
developing countries.”113

Innovation
• China’s capacity for innovation has improved along a variety of metrics, including
R&D spending, science and technology cluster development, and patents.
• By one account, China leads the world in producing high-quality research in 37
out of 44 critical technologies, including technologies with important military
applications.

MIC2025 placed innovation “at the core” of China’s manufacturing industry.114 In


particular, the strategy called for strengthening R&D, improving innovative design
capabilities, promoting applied research into science and technology, and strengthening
China’s ability to set standards for manufacturing. By many metrics, China’s
manufacturing sector is far more innovative today than it was a decade ago.

107 Conor Kennedy, “Ramping the Strait: Quick and Dirty Solutions to boost amphibious lift,” Jamestown Foundation,
July 16, 2021, https://jamestown.org/program/ramping-the-strait-quick-and-dirty-solutions-to-boost-amphibious-
lift/.
108 Baron Public Affairs, “Deep-Sea Minerals: The Next Arena of U.S.-China Competition,” Winter 2024,

https://www.baronpa.com/library/deep-sea-minerals-the-next-arena-of-u-s-china-competition/.
109 Matthew Funaiole, Aidan Powers-Riggs, and Brian Hart, “Skirting the Shores: China’s New High-Tech Research

Ship Probes the Waters Around Taiwan,” Center for Strategic and International Studies, February 26, 2024,
https://features.csis.org/snapshots/china-research-vessel-taiwan/.
110 Funaole, et. al, “Skirting the Shores.”
111 Baron Public Affairs, “Deep-Sea Minerals.”
112 Lily Kuo, “China is set to dominate the deep sea and its wealth of rare metals,” Washington Post, October 19, 2023,

https://www.washingtonpost.com/world/interactive/2023/china-deep-sea-mining-military-renewable-energy/.
113 Kuo, “China is set to dominate the deep sea and its wealth of rare metals.”
114
State Council of the People’s Republic of China, “Notice of the State Council on the Publication of ‘Made in China
2025.’”

38
The World Intellectual Property Organization (WIPO) produces the “Global Innovation
Index,” which ranks countries by a basket of metrics associated with innovation. In
2015, the year MIC2025 was released, China ranked 29th in the world, above Portugal
and Italy and below Spain and Slovenia (Hong Kong ranked 11th).115 In 2023, China
ranked 12th in the world, above Japan and Israel and below Korea and France (Hong
Kong ranked 17th).116 This represents a marked improvement in China’s position relative
to other countries.

China scored highly on metrics related to innovation in manufacturing, including


corporate R&D investment (2nd), gross capital formation (2nd), industry diversification
(2nd), domestic market scale (1st), cluster development (2nd), patents (2nd), labor
productivity growth (1st), high-tech manufacturing (13th), high-tech exports (5th), and
industrial designs (2nd). It fared poorly in environmental metrics, “institutional” metrics
related to its political and regulatory environment, and “online creativity” metrics
related to software development and app creation. This distribution of strengths and
weaknesses indicates that China is highly innovative in manufacturing, while struggling
in areas of less obvious relevance to production.

WIPO also tracks science and technology clusters around the world, which are areas
with a particularly high concentration of companies and institutions dedicated to
scientific and technological pursuits. There, too, China has made significant progress. In
2023, for the first time, China had the most clusters in the top 100 (24), surpassing the

115 World Intellectual Property Organization, “Global Innovation Index 2015 Rankings,” accessed June 20, 2024,
https://www.wipo.int/edocs/pubdocs/en/wipo_pub_gii_2015-intro5.pdf.
116 World Intellectual Property Organization, “Global Innovation Index 2023,” accessed June 20, 2024,

https://www.wipo.int/edocs/pubdocs/en/wipo-pub-2000-2023-en-main-report-global-innovation-index-2023-
16th-edition.pdf.

39
United States’ 21.117 China has three clusters in the top 10 (Shenzhen/Hong Kong,
Beijing, and Shanghai), compared to the United States’ four (San Francisco,
Boston/Cambridge, San Diego, and New York City). China, of course, is a much larger
country than the United States, so on a per capita basis it has fewer innovation clusters.
But the gap is shrinking.

Another measure of innovation is a country’s research into critical technologies. ASPI


tracks countries’ progress in these technologies by looking at countries’ shares of highly
cited research papers, their score on the Hirsch index, and the number of top-
performing research institutions they possess.118 ASPI finds that China has established
“a sometimes stunning lead” in the technology race, leading the world in research of 37
out of 44 critical technologies. China also has the lead in every technology related to
manufacturing. ASPI judges that the risk of China establishing a technology monopoly is
high in eight of those 37 technologies, including nanoscale materials and
manufacturing, advanced radiofrequency communications (i.e. 5G), and electric
batteries. The United States leads in research of the seven remaining areas of critical
technology, mostly related to computing (including quantum computing), vaccine
development, and space. In none of the fields where the United States leads in research
is the risk of technology monopoly deemed high.

China’s evident lead in high-quality research on critical technologies should serve as a


wakeup call for U.S. policymakers, who have long consoled themselves that, while the
United States has lost manufacturing to Asia (increasingly, China), we retain the world’s
best system for basic research. These findings cast doubt even on that consolation.
China is capable of high-value research in a variety of fields, related to both production,
where it excels, and theoretical fields, where the United States once enjoyed a
comfortable lead. If this research produces breakthroughs and innovations, the Chinese
state is well-positioned to apply those findings in its corporate sector. It is unlikely to
make the same blunder the United States has. Since the disappearance of U.S. corporate
laboratories, our nation has struggled with applied research and translating new
scientific knowledge into commercial applications for U.S. producers.119

Finally, MIC2025 placed great emphasis on patents as a metric of innovation. As a


consequence of this focus and China’s broader industrialization, China’s patent activity
has risen dramatically.

An especially useful metric of innovation is the number of international patents filed


under the Patent Cooperation Treaty (PCT), which allows filers to apply for a patent in
multiple jurisdictions at once. Receiving a PCT patent is considered more challenging
and valuable than simply receiving a patent from the filer’s national patent office. Since
2020, China has filed the most international (i.e. PCT) patent applications of any
country (70,015 in 2022), surpassing the United States (59,056), Japan (50,345), and

117 World Intellectual Property Organization, “Global Innovation Index 2023 Cluster Rankings.”
118 Gaida, et. al, “ASPI’s Critical Technology Tracker.”
119 David Adler, “The American Way of Innovation and Its Deficiencies,” American Affairs, Summer 2018,

https://americanaffairsjournal.org/2018/05/the-american-way-of-innovation-and-its-deficiencies/.

40
Germany (17,530).120 Huawei files by far the most international patent applications of
any company (6,494 in 2022), followed by Korea’s Samsung (3,924). Besides Huawei,
three Chinese companies—BOE Technology Group, Contemporary Amperex
Technologies Ltd. (CATL), and Oppo Mobile Telecommunications—are in the top 10.

Many analysts note that the quality of Chinese research and patents is often low, and
there is prodigious evidence this is the case. However, the statistics above indicate that
China now has many companies, research institutions, and cities dedicated to high-
quality research and innovation. It is not merely cribbing the work of others anymore.

Smart Manufacturing
• China leads the world in installations of industrial robots and installed more
robots in 2022 than the rest of the world did combined.
• China’s robot density surpassed the United States’ in 2021, a striking feat given
the size of China’s manufacturing workforce and wage levels relative to our own.
• Chinese smart manufacturing is enabled by its vast 5G telecommunications
network, composed of more than 3.5 million 5G base stations.

Beijing promotes “smart manufacturing” as a means of upgrading Chinese industry so


that it is advanced, not merely large. Smart manufacturing integrates digital technology
and automation into factory settings to monitor production, increase productivity, and
reduce downtime and reliance on line workers. Widespread adoption of smart
manufacturing technology is a priority for the Chinese government to ensure that
production remains high in the future, even as the pool of Chinese workers shrinks due
to demographic changes. As the economist Nicholas Eberstadt notes, if current trends
hold, “China’s working-age population will be more than 20 percent smaller in 2050
than in 2020.”121

A review of the global manufacturing landscape shows that China has made great strides
to upgrade its industry, dramatically increasing factory automation and building
cutting-edge factories in large numbers. However, China still depends on foreign
multinationals and imports to satisfy its voracious demand for advanced machine tools
and robots. It also lags behind the most developed countries in its degree of automation,
reflecting the fact that much of China’s mammoth industrial base is not yet cutting
edge—though it is still formidable.

China’s installation of industrial robots is a useful proxy for the state of its
manufacturing base. According to the International Federation of Robotics, China
installed more industrial robots in 2022 (290,258) than the rest of the world did
combined, and has been the world’s largest market for industrial robots for more than a

120 World Intellectual Property Organization, “PCT Yearly Review 2023,” 2023,
https://www.wipo.int/edocs/pubdocs/en/wipo-pub-901-2023-exec-summary-en-patent-cooperation-treaty-yearly-
review-2023-executive-summary-the-international-patent-system.pdf.
121 Nicholas Eberstadt, “East Asia’s Coming Population Collapse,” Foreign Affairs, May 8, 2024,

https://www.foreignaffairs.com/china/east-asias-coming-population-collapse.

41
decade.122 Perhaps a more useful statistic than sheer volume of robots is robot density,
which measures how many industrial robots a country has against the number of
workers it employs in manufacturing. China has made strides here as well. In 2021,
China surpassed the United States in robot density.123 It now ranks fifth in the world,
well below the world leaders of Korea and Singapore, but evenly matched with Germany
and Japan.124 This is an impressive feat, given the sheer size of China’s manufacturing
sector; it employs roughly 38 million people in manufacturing. It is especially
impressive because Chinese manufacturing workers are paid less than similar workers
in richer countries like Germany and Japan, meaning Chinese firms are installing robots
far in excess of what would be expected if their goal was to achieve cost savings through
automation. Controlling for wage levels, China has by far the highest robot density of
any country, as Robert Atkinson of the Information Technology and Innovation
Foundation has noted.125

Source: International Federation of Robotics

122 International Federation of Robotics, “World Robotics 2023 Report: Asia ahead of Europe and the Americas,”
September 26, 2023, https://ifr.org/ifr-press-releases/news/world-robotics-2023-report-asia-ahead-of-europe-and-
the-americas.
123 International Federation of Robotics, “China overtakes USA in robot density,” December 5, 2022,

https://ifr.org/ifr-press-releases/news/china-overtakes-usa-in-robot-density.
124 International Federation of Robotics, “Global Robotics Race: Korea, Singapore and Germany in the Lead,” January

10, 2024, https://ifr.org/ifr-press-releases/news/global-robotics-race-korea-singapore-and-germany-in-the-


lead#:~:text=The%20top%20most%20automated%20countries,2023%20report%2C%20presented%20by%20IFR.
125 Robert Atkinson, “How Innovative Is China in the Robotics Industry?” Information Technology and Innovation

Foundation, March 11, 2024, https://itif.org/publications/2024/03/11/how-innovative-is-china-in-the-robotics-


industry/.

42
Another rough metric is to consider where the world’s most advanced factories and
supply chains are located. The World Economic Forum’s Centre for Advanced
Manufacturing and Supply Chains attempts to do this, compiling a list of factories that
are putting “smart manufacturing” into practice. The center’s most recent report
identifies 132 such factories and end-to-end supply chains.126 One third (45) are located
in China, including nearly half of the factories under the heading “advanced industry.”
Most of the Chinese factories and supply chains are owned and operated by non-Chinese
multinational corporations, such as Bosch (Germany), Foxconn (Taiwan), Western
Digital (United States), and Siemens (Germany). However, many Chinese champions
also appear on the list, including CATL, BOE, Foxconn Industrial Internet, Haier, and
Sany Heavy Industry.

Chinese smart manufacturing is enabled by its world-leading telecommunications


network. The CCP boasts that China has deployed 3.5 million 5G base stations.127 The
United States, by contrast, has deployed approximately 100,000 such base stations. 128
5G is especially important in industrial applications, enabling automation, robotics, and
advanced logistics. China claims more than 10,000 5G-powered industrial internet
projects, and that number will surely grow as its 5G buildout continues at a rapid clip. 129

There are also signs that China is breaking its dependence on foreigners in areas such as
machine tools and robotics. It is common for multinationals to manufacture their
products in China to sell into the China market. In many cases, the Chinese government
requires foreign firms to manufacture in-country, enter into joint ventures with Chinese
firms, and use Chinese firms as suppliers as conditions of market access.130 This
inevitably results in diffusion of technology and manufacturing know-how to the
indigenous Chinese industrial base. Homegrown Chinese firms are beginning to
compete with foreign competitors even for high-end, high-value goods, as we will see
later in this report.

This sample of advanced manufacturing indicates that China still relies on the expertise
and technology of foreign multinationals for some categories of high-end, high-value
industrial goods. However, China’s aggressive procurement of such technology, paired
with its leadership in telecommunications, shows that its manufacturing sector is far
more advanced than it was a decade ago.

Basic Industry
• China is the undisputed king of basic industrial inputs, such as steel and cement.

126 Francisco Betti, Vincent Desnos, Yves Giraud, Federico Torti, Martin Becker, Youssef Benkhaira, and Enno de
Boer, “Global Lighthouse Network: Shaping the Next Chapter of the Fourth Industrial Revolution,” World Economic
Forum, January 2023, https://www3.weforum.org/docs/WEF_Global_Lighthouse_Network_2023.pdf.
127 Xinhua, “China home to over 3.5 mln 5G base stations,” April 6, 2024,

https://english.www.gov.cn/archive/statistics/202404/06/content_WS6610e145c6d0868f4e8e5c84.html.
128 Ameya Paleja, “China’s 5G dominance: 3.19 million base stations built, outpacing US,” Interesting Engineering,

October 23, 2023, https://interestingengineering.com/culture/5g-base-stations-china-exceed-3-million.


129 Paleja, “China’s 5G dominance.”
130 Chan, “How China uses foreign firms to turbocharge its industry.”

43
• China’s position in these areas has been driven by its breakneck development of
infrastructure and real estate.
• Debt crises in these sectors are leading to a painful rightsizing of China’s industry
that is only partially offset by increased exports of commodities like steel.

MIC2025 and much of the discourse surrounding it focused on cutting-edge technology.


However, one of the main goals of China’s industrial strategy was to promote strong
basic capabilities in industry. MIC2025 singled out basic components, techniques,
materials, and technology as the “four basics” in need of support. At least part of
Beijing’s interest in basic industrial capabilities appears to be military. MIC2025
discussed dual-use capabilities and military-civil fusion at length in its section on basic
industrial capabilities, indicating that the Chinese government understands that wars
are won primarily on the strength of “legacy” and “mature” technologies, not theoretical
capabilities that may never leave the lab or reach the battlefield. MIC2025 called for
upgrading basic industry to use more advanced techniques, investing more in
innovation, and coordinating development to prevent gluts.

Judged by gross production, China is the undisputed king of basic industry. We can see
this most strikingly in steel and cement, complementary goods that are the building
blocks of modern civilization. Nations produce these materials mostly for their internal
markets, and only secondarily for export. A surge in steel and cement production
therefore indicates a surge in construction and other downstream industries that rely on
these inputs, such as the automotive and electricity sectors. Heavy producers of steel
and cement can be said to be in a nation-building phase. They are the material
precondition of development. Shortages of these materials can thus inhibit the process
of development; for example, the high price of concrete has been identified as a factor
limiting the production of new nuclear power plants in the United States.131 By that
standard, China has been on a tremendous nation-building tear that is only beginning to
cool due to the country’s real-estate crisis.

China uses as much cement in two years as the United States did in the entire 20th
century.132 Virtually all of that cement is made at home by firms like Anhui Conch and
the state-owned China National Building Materials Group. China produced 2.3 billion
metric tons of cement in 2022, down from a high of 2.5 billion tons in 2014 and the
lowest production volume since 2012.133 Despite this downturn, China still produces and
consumes more cement than the rest of the world does combined. The second-largest
producer, India, made 356 million metric tons of cement in 2022—a mere 16 percent of
China’s production.134

131 Thomas Hochman, “What’s holding back nuclear in America?,” Oxford Institute for Energy Studies Forum,
February 2024, https://www.oxfordenergy.org/wpcms/wp-content/uploads/2024/02/OEF-139-.pdf.
132 Hannah Ritchie, “China uses as much cement in two years as the US did over the entire 20th century,”

Sustainability by Numbers, March 6, 2023, https://www.sustainabilitybynumbers.com/p/china-us-cement.


133 Shin Watanabe, “China’s cement makers race to consolidate amid property woes,” Nikkei Asia, July 25, 2023,

https://asia.nikkei.com/Business/Materials/China-s-cement-makers-race-to-consolidate-amid-property-woes.
134 Globe Newswire, “India Cement Market Report 2022: A $26+ Billion Market in 2022 - Analysis, Competition,

Forecast & Opportunities 2018-2022 && 2023-2028,” November 28, 2022, https://finance.yahoo.com/news/india-
cement-industry-report-2022-101500273.html.

44
A nearly identical story can be told about steel. In 2022, China produced more than one
billion tons of crude steel, forged by China Baowu Group and a bevy of other, regional
steelmaking conglomerates.135 India again came in second, producing 125.3 metric tons
of crude steel, followed by Japan (89.2 million tons) and the United States (80.5 million
tons). China’s output of crude steel is still near record highs, although, like that of
cement, this figure has declined the past two years. Unlike in the cement industry,
China’s steelmakers have responded to falling prices and demand at home with an
export blitz. China’s steel exports rose by a third in 2023, to 90.26 million tons.136 Most
of those exports went to Southeast Asian countries like Thailand and Malaysia. 137

Despite these impressive statistics, there is reason to doubt whether China’s push to
upgrade its basic industrial capabilities has been successful, and whether its gargantuan
lead over the rest of the world is sustainable. China’s building spree is coming to an end,
with its major property and infrastructure developers overleveraged and on the brink of
insolvency. Beijing is thus looking to other sectors, such as its energy grid and
manufacturing sector, to drive demand for industrial inputs. China’s steel and building
materials industries are bracing for a long winter of consolidation and plant closures,
which explains the recent scramble for exports by its steelmakers.

Some Chinese officials have also cast doubt on the resilience of China’s basic industrial
capabilities. In 2021, Miao Wei, a member of the CCP Central Committee and former
minister of industry and information technology, said that China’s “basic capabilities
remain weak,” and that too many Chinese business leaders and officials had ignored
“the transformation and upgrading of traditional industries.”138 Some of these
traditional industries are in for a painful period of adjustment in the coming years,
though China is unlikely to be dethroned as the world’s top producer any time soon.

Branding
• Chinese companies dominate global rankings of the largest companies by
revenue, although many of its largest companies are state-owned enterprises.
• China has built world-leading companies with strong brands, such as Huawei,
TikTok, and BYD, although it has produced fewer such companies than the
strength of its industrial base would suggest.
• Beijing’s espionage and cutthroat trade practices threaten the brands of even its
most important companies, triggering a wave of backlash in foreign markets.

MIC2025 called for “the transformation of Chinese products to Chinese brands,” in


recognition of the fact that China punches below its weight in establishing trusted and
135 World Steel Association, “World Steel in Figures 2023,” May 18, 2023, https://worldsteel.org/data/world-steel-in-
figures-2023/.
136 Amy Lv and Tony Munroe, “China’s steel sector has bigger worries than Biden tariff hike,” Reuters, April 21, 2024,

https://www.reuters.com/markets/commodities/chinas-steel-sector-has-bigger-worries-than-biden-tariff-hike-
2024-04-19/.
137 Tomio Shida, “China’s surging steel exports risk new round of trade frictions,” Nikkei Asia Review, December 20,

2023, https://asia.nikkei.com/Spotlight/Comment/China-s-surging-steel-exports-risk-new-round-of-trade-frictions.
138 Miao Wei, “Advancing the High-Quality Development of the Manufacturing Industry,” April 14, 2021,

https://cset.georgetown.edu/wp-content/uploads/t0328_Miao_Wei_manufacturing_power_EN.pdf.

45
esteemed companies. The Chinese government identified product quality as the crux of
the problem: Chinese and international consumers alike viewed “Made in China”
products as low quality, and therefore had little trust in the companies that produced
them.

Today, China has developed a number of world-class brands, and its companies
dominate global rankings of companies by revenue. However, China has not managed to
shed its brand-image problem, due in large part to the aggressive policies of the regime
in Beijing. China underperforms in brand quality, even as it overperforms in countless
areas of gross production.

The simplest way to rank the strength of a country’s companies is by revenue. The
Fortune Global 500 provides this metric each year. It has charted an astonishing rise by
China over the past decade. In 2015, 98 Chinese companies appeared on the Fortune
Global 500, compared to 128 American companies.139 The best-performing Chinese
companies by revenue were Sinopec Group, China National Petroleum Corp., and State
Grid Corporation—all state-owned enterprises. By 2023, the number of Chinese
companies on the Fortune Global 500 was higher than the number of American
companies, 142 to 136. The top performers were the same: State Grid, China National
Petroleum, and Sinopec.

Despite strong earnings, Chinese firms lag behind their international competitors in
other metrics. As CSIS has documented, Chinese firms on the 2022 Fortune Global 500
ranked 10th by average profit margin and average return on assets.140 In part, this is due
to the industry composition of Chinese firms, which are heavily concentrated in capital-
intensive sectors of “traditional” industries. More importantly, it reflects the fact that
fully 71 percent of Chinese firms on the Fortune Global 500 are state-owned.141

Other metrics of brand competitiveness show that China has made mixed progress.
WIPO’s Global Innovation Index measures the “global brand value” of a country’s
companies based on the estimated cost those companies would pay to license their own
brand if they did not own it. Mainland China ranked 17th in this metric when WIPO first
incorporated it in 2020.142 Four years later, it has slid to 20th place, although it remains
the leader among countries in its income group.143 China’s most valuable brands are a
mix of state-owned and nominally private enterprises. The top 10 by value include state-
owned stalwarts like the Industrial and Commercial Bank of China and State, as well as
nominally private companies like TikTok/Douyin, WeChat, and Huawei.

WIPO creates this metric in collaboration with Brand Finance, a company dedicated to
the study of brand valuation. Brand Finance data indicates that the number of Chinese
companies among the world’s most valuable 500 brands grew from 44 in 2015 to 68 in

139 Fortune, “Fortune Global 500,” accessed June 7, 2024, https://fortune.com/ranking/global500/.


140 Qin (Maya) Mei, “Fortune Favors the State-Owned: Three Years of Chinese Dominance on the Global 500 List,”
Center for Strategic and International Studies, October 7, 2022, https://www.csis.org/blogs/trustee-china-
hand/fortune-favors-state-owned-three-years-chinese-dominance-global-500-list.
141 Mei, “Fortune Favors the State-Owned.”
142 World Intellectual Property Organization, “Global Innovation Index 2020.”
143 World Intellectual Property Index, “China ranking in the Global Innovation Index 2023.”

46
2024.144 In both years, state-owned enterprises made up about half of China’s entries on
the list. However, in 2024, nominally private companies rank much higher on the list
than they did a decade before. TikTok/Douyin has topped the list as China’s most
valuable brand, at seventh place overall, though it remains to be seen how the
impending ban on ByteDance in TikTok’s most important overseas market, the United
States, will affect the app’s brand value in the years ahead. Another eight nominally
private Chinese companies have cracked the top 100. This is a stark change from 2015,
when the most valuable “private” Chinese company to appear on the list, Baidu, ranked
85th; it was the only such company to crack the top 100. This phenomenon indicates that
China’s supposedly private brands are gaining traction relative to state-owned
enterprises, although China still relies on the latter far more than comparable nations
do, which undoubtedly hurts its brand competitiveness.

China’s brands face additional headwinds from negative public opinion about the
Chinese government. Ironically, MIC2025’s aggressive subsidies and export promotion
have led to a backlash that weakens China’s brands overseas, even as they have helped
many of Chinese companies climb the value chain and improve the quality of their
products.

Sustainability
• China leads the world in installation of renewable energy, but remains the world’s
worst polluter and has hedged its installation of renewables with significant
increases in traditional carbon-intensive power.
• When industrial strength and sustainability have come into conflict, Beijing has
chosen to prioritize the former.

Another pillar of China’s MIC2025 strategy was green manufacturing. This goal had two
prongs. First, to dominate the production of renewable energy and green technology,
such as solar panels, wind turbines, and EVs. Second, to “green” China’s manufacturing
sector by lowering its emissions and resource intensity. Beijing claimed that these goals
would feed off of each other, creating a virtuous cycle where China’s traditional
strengths in carbon-intensive inputs like steel and aluminum would give producers of
renewables a cost advantage; China could then install home-grown renewables into its
electricity grid and industrial base, lowering the emissions of those sectors in turn.

In practice, China has placed much greater stock behind reaching the first goal
(manufacturing renewables) than the second (reducing emissions in its manufacturing
sector). China’s dominant production of green technology was discussed in the Critical
Technologies section of this report, so this section focuses on its attempt to “green” its
manufacturing sector.

Brand Finance, “Global 500 2024: The annual report on the world’s most valuable and strongest brands,” January
144

2024, https://brandirectory.com/rankings/global/.

47
China is the world’s worst polluter and emits the most greenhouse gas of any nation. It
rates poorly on a slew of environmental metrics, including air pollutants, heavy metal
exposure, and ocean plastics.145

The Chinese government has made bold commitments to reduce carbon emissions and
increase its use of renewable energy. Xi has announced that China’s carbon emissions
will peak by 2030, and that China will become carbon neutral by 2060. Xi has further
pledged not to build new coal plants overseas (a much-heralded announcement that
conveniently serves to strengthen China’s domestic manufacturing at the expense of
foreign competitors). China has also signed multiple non-bindings declarations with the
United States pledging to dramatically increase capacity of renewable energy, such as
wind and solar.

China’s commitment to decarbonization is driven more by worries about energy security


than any vaguer environmental commitment. China is the world’s largest oil importer,
importing 11 million barrels of oil per day. Most of these imports arrive by sea and
transit the Strait of Malacca, leaving them vulnerable to blockade. China’s overland
pipeline capacity is insufficient to make up for a loss of seaborne imports, despite its
deepening trade in oil with Russia. China has therefore adopted a number of strategies
to mitigate this dependency, including stockpiling and constructing underground oil
reservoirs.146 Transport electrification is another facet of this strategy, allowing Beijing
to manage oil demand for strategic reasons while trumpeting the change as a victory for
the environment.

China leads the world in renewable energy installations, a boom enabled by its
dominant production of solar panels, wind turbines, and nuclear power plants. China
installed more solar panels last year than the entire installed capacity of the United
States, and has more solar-farm capacity than the rest of the world does combined.147
China is also ramping up nuclear, with 55 reactors in operation and 26 under
construction—although the United States still has a sizeable lead in terms of operating
nuclear capacity, due mainly to reactors built decades ago. 148

Despite this renewable blitz, a host of factors have led China to hedge its installation of
renewables with vast increases in carbon-intensive energy and production. Beijing has
responded to flagging economic growth and challenges with renewable energy
(including intermittency and a record drought that hurt its production of hydropower)
with a shift back to reliance on coal-fired power. As a consequence, China’s emissions
have started to diverge in recent years from its ambitious targets. China’s carbon-
dioxide emissions increased by 12 percent between 2020 and 2023, in large part due to

145 Sebastian Block, John Emerson, Daniel Esty, Alex de Sherbinin, and Zachary Wendling, “2024 Environmental
Performance Index,” Yale Center for Environmental Law & Policy, 2024, https://epi.yale.edu/about-epi.
146 Gabriel Collins, “China’s Energy Import Dependency: Potential Impacts on Sourcing Practices, Infrastructure

Decisions, and Military Posture,” Rice University Baker Center for Public Policy, March 2022,
https://www.uscc.gov/sites/default/files/2022-03/Gabriel_Collins_Testimony.pdf.
147 Isabel Hilton, “How China Became the World’s Leader on Renewable Energy,” YaleEnvironment360, March 13,

2024, https://e360.yale.edu/features/china-renewable-energy.
148 World Nuclear Association, “Nuclear Reactors in China,” accessed June 7, 2024, https://www.world-

nuclear.org/nuclear-reactor-database/summary/China.

48
increased emissions from the energy and manufacturing sector.149 Further increases are
expected, as China continues to approve and build new coal-fired power plants—
permitting the equivalent of two coal plants per week in 2023.150 Virtually all of the new
coal capacity to come online last year was in China. The country has approved enough
new coal capacity—218 GW in two years—to supply power to all of Brazil.151

Ironically, China’s dominance in clean energy technologies is coming at a high cost to


the environment. In parts of China where rare-earth elements are mined and processed,
the earth is marred by massive tailings ponds of toxic waste, some miles wide. 152

Even China’s evident successes, such as dramatic improvements in air quality in major
cities in the past decade, are not the tidy stories told by Beijing’s propaganda organs.
Much of the improvement in air quality was caused by the relocation of coal-fired power
plants and heavy industry from major urban centers to the interior of the country.153
And last year, levels of particulate matter in most major Chinese cities increased by 7.7
percent, the first worsening of air quality in a decade.154

When push comes to shove, Beijing has prioritized industrial strength over
sustainability—gambling that it can produce its way out of its problems, including a
shrinking population and high levels of debt. This choice reflects the stark reality that
manufacturing is, and will be for the foreseeable future, a resource- and emissions-
intensive activity. Despite Beijing’s bold climate commitments, it wishes above all to be
the world’s dominant manufacturing power. Its actions and energy mix reflect that wish.

Structural Reform
• Beijing has expressed a commitment to the structural reform of its economy, but
has proven unable or unwilling to follow through in practice.
• Some sectors of China’s economy suffer from severe overcapacity, leading to
supply gluts and harmful surges in exports.
• Other sectors accused of overcapacity, such as automobiles, do not obviously
suffer from the affliction, and may genuinely represent the growing
competitiveness of Chinese firms.

149 Lauri Myllyvirta, “Analysis: Record drop in China’s CO2 emissions needed to meet 2025 target,” Carbon Brief,
February 22, 2024, https://www.carbonbrief.org/analysis-record-drop-in-chinas-co2-emissions-needed-to-meet-
2025-target/.
150 Julia Simon, “China is building six times more new coal plants than other countries, report finds,” National Public

Radio, March 2, 2023, https://www.npr.org/2023/03/02/1160441919/china-is-building-six-times-more-new-coal-


plants-than-other-countries-report.
151 Colleen Howe and Ella Cao, “In China’s coal country, full steam ahead with new power plants despite climate

pledges,” Reuters, November 30, 2023, https://www.reuters.com/sustainability/chinas-coal-country-full-steam-


ahead-with-new-power-plants-despite-climate-2023-11-30/.
152 Michael Standaert, “China Wrestles with the Toxic Aftermath of Rare Earth Mining,” YaleEnvironment360, July 2,

2019, https://e360.yale.edu/features/china-wrestles-with-the-toxic-aftermath-of-rare-earth-mining.
153 Jason Douglas, “China’s Factory Floor Is Moving—But Not to India or Mexico,” The Wall Street Journal, October

7, 2023, https://www.wsj.com/world/china/chinas-factory-floor-is-movingbut-not-to-india-or-mexico-dbd9fd69.
154 Christian Shepherd, “China’s air quality worsened this year for the first time in a decade,” Washington Post,

December 22, 2023, https://www.washingtonpost.com/world/2023/12/22/china-pollution-worse-coal/.

49
One of the more intriguing goals of MIC2025 was structural reform of manufacturing to
promote high-value industry, phase out obsolete industry, and resolve what the CCP
refers to as “the contradictions of excess capacity.”155 This goal was closely tied to
Beijing’s campaign of “Supply Side Structural Reform,” announced in 2015, which
aimed to deleverage China’s heavily indebted corporate sector and reduce capacity in
areas such as steel and coal, where industry had grown too large even for China’s vast
domestic market. As part of that campaign, China shuttered 290 million tons of coal
capacity and 60 million tons of steel capacity, a monumental feat that, as the Economist
recently noted, meant China had “removed more capacity in these industries than most
countries have ever possessed.”156

Despite this push for restructuring, China still has excess capacity in many sectors, a
problem that has worsened due to the property crisis and cooling of its economy. Excess
capacity occurs when a country’s ability to produce certain goods outstrips demand for
those goods in its market, leading to cratering prices and spillovers into international
markets. The Rhodium Group notes that China’s overall industrial capacity utilization
rate has declined the past three years, though it is not at the crisis levels it reached in
2016.157 Still, in some sectors especially vulnerable to a property downturn, such as
cement and glass, China’s capacity utilization is as low as 30 percent, indicating severe
excess capacity.158

Until very recently, China’s leaders continued to pay lip service to structural reform in
official speeches. During the National People’s Congress, Premier Li listed “overcapacity
in some industries” as the second problem preventing a sustained economic recovery,
after lack of demand.159

However, Beijing has proven unwilling—or perhaps unable—to deal with this problem in
practice. Its policy choices since the Covid-19 pandemic, in particular, have been the
opposite of what it should do if it aims to reduce excess capacity. The Rhodium Group
notes that lavish government support to the industrial sector during the pandemic has
sharply increased the number and ratio of industrial companies operating at a loss. 160
Xi’s decision to redouble support for manufacturing is a further sign that Beijing is
deprioritizing the rightsizing of industry. In effect, China is trying to outrun its troubles
through even greater commitment to manufacturing and exports.

In some cases, Beijing’s excess capacity appears to be the product of careful planning
more than worsening economic challenges. Excess capacity is evident in many high-tech
fields, such as lithium-ion batteries, where China appears to be on track to produce

155 State Council of the People’s Republic of China, “Made in China 2025.”
156 The Economist, “What Xi Jinping gets wrong about China’s economy,” May 9, 2024,
https://www.economist.com/finance-and-economics/2024/05/09/what-xi-jinping-gets-wrong-about-chinas-
economy.
157 Camille Boullenois, Agatha Kratz and Daniel H. Rosen, Overcapacity at the Gate, Rhodium Group, March 26, 2024,

https://rhg.com/research/overcapacity-at-the-gate/.
158 Tom Hancock, US-Europe Gripes on China Overcapacity Aren’t All Backed by Data, Bloomberg, April 2, 2024,

https://www.bloomberg.com/news/articles/2024-04-02/us-europe-gripes-on-china-overcapacity-aren-t-all-backed-
.by-data
159 Qiang, “Report on the Work of the Government.”
160 Boullenois, et. al, “Overcapacity at the Gate.”

50
three times more batteries than the entirety of the world’s demand.161 China retains a
similar excess capacity for rare earth magnets—critical inputs in drones, lasers, EVs, and
numerous military technologies. Despite signs that global demand for these magnets has
begun to flatten, CCP officials have recently ordered state-owned mines to increase
processing of rare-earth minerals, while simultaneously issuing regulations aimed at
tightening CCP control over rare-earth supply chains.162

China’s excess capacity is already leading to painful rounds of consolidation in several


sectors. And yet, despite that harm to profitability, the CCP may view said capacity as an
avenue to gain effective control over strategic supply chains, including those listed
above, through export dumping. The ability to flood the global market at any moment
with excess magnets, for example, provides Chinese authorities broad discretion to set
global prices and strategically undermine competitors abroad.

As international criticism of its trade practices has intensified, China’s leaders have
angrily denied there is a problem at all. One month after his address at the NPC, Li
performed an about-face, stating that the problem of overcapacity should not be
attributed solely to China. Xi has taken an even stronger line, stating that “[t]he so-
called ‘problem of China’s overcapacity’ does not exist, either from the perspective of
comparative advantage or in light of global demand.”163 China’s state media has adopted
a typically triumphalist tone, claiming that what Western countries call overcapacity is
in fact evidence of China’s superior manufacturing, which has triumphed in
international competition and can produce more products at lower prices than its
competitors.

In some of the sectors that have provoked the loudest protests from Western
policymakers, there is some truth to China’s protests. The Chinese EV industry, for
example, does not have unusually low capacity utilization rates outside of uncompetitive
firms that are likely to go bust as part of the ferocious culling underway in that sector.
Falling prices and rising production in this sector seem to stem from a combination of
heavy state subsidies and genuine competitive advantage. Some analysts have gone so
far as to say that China’s EV industry is “21st Century Fordism” in practice.164 This is all
the more reason to take China’s industrial policy seriously as a threat to American, and
indeed global, industry.

Manufacturing Services
• China emphasizes producer services, as opposed to consumer services, as a key
support for its manufacturing industry.

161 The Economist, “What Xi Jinping gets wrong about China’s economy.”
162 Enes Marina, “Rare-Earth Prices Are in the Doldrums. China Wants to Keep Them That Way.,” The Wall Street
Journal, July 15, 2024, https://www.wsj.com/finance/commodities-futures/rare-earth-prices-are-in-the-doldrums-
china-wants-to-keep-them-that-way-bf0477da.
163 The Economist, “What Xi Jinping gets wrong about China’s economy.”
164 Glenn Luk, X, June 3, 2024, https://x.com/GlennLuk/status/1797626337919701086.

51
• China’s national-security crackdown is leading to an exodus of world-leading
foreign firms, accelerating the timeline on which China must rely on its own firms
to provide many of the same services.

MIC2025 supplemented its focus on the manufacturing sector with a drive to improve
the country’s producer services, which are business-to-business services such as finance,
logistics, consulting, and advertising. Beijing emphasizes producer services over
consumer services because it is the former that enable Chinese manufacturers to build.
In a 2020 speech to the China International Fair for Trade in Services, General
Secretary Xi described the services sector as “unique” because it is “asset-light but heavy
in soft factors of production.”165 The lodestar of Beijing’s economic thought is
production; its industrial policy is oriented around that goal, including in how it thinks
about services.

As China’s manufacturing sector has grown dominant, Beijing has dangled services as
an area where foreign firms can participate. However, MIC2025 clearly indicated
Beijing’s hope that indigenous Chinese firms should one day take over from foreign
firms, just as they have in manufacturing. Beijing’s recent and abrupt crackdown on
foreign consulting and finance firms has accelerated this drive for indigeneity.

China’s services sector has experienced growth in the past decade, though services
account for a far lower share of its economy than they do for those of its rivals. Services
of all types accounted for 53 percent of China’s GDP in 2022, up from 51 percent in
2015.166 By contrast, services accounted for 78 percent of GDP in the United States, 70
percent in Japan, and 63 percent in Germany. Since 2015, employment growth in
producer services in China has been particularly brisk, while the employment share of
consumer services (while much higher) has stagnated.167

China pays lip service to the importance of liberalizing its services sector to entice new
investment from foreign firms. In 2020, Xi declared that the services sector “requires,
more than other sectors, an open, transparent, inclusive and non-discriminatory
environment.”168 This declaration was accompanied by a slew of plans to open up
targeted services sectors, notably financial services.

However, growing tensions with the United States and other countries have led to an
abrupt end to China’s drive for openness. In 2023, the business environment for foreign
firms operating in China—particularly firms from the United States and its allies—
darkened dramatically. A new “national-security” crackdown began, with 2023 as the
watershed year. China broadened its Counter-Espionage Law to cover any “documents,

165 Xi Jinping, “Remarks by H.E. Xi Jinping, President of the People's Republic of China, At the Global Trade in
Services Summit of The 2020 China International Fair for Trade in Services,” China Daily, September 4, 2020,
https://www.chinadaily.com.cn/a/202009/04/WS5f52502ea310675eafc57a8c.html.
166 World Bank Group, “World Development Indicators: Structure of value added,” accessed June 7, 2024,

https://wdi.worldbank.org/table/4.2.
167 Xilu Chen, Guangyu Pei, Zheng Song, and Fabrizio Zilibotti, “Is China Becoming a Service Economy?,” VoxChina,

October 12, 2022, https://www.voxchina.org/show-3-292.html.


168 Xi Jinping, “Remarks by H.E. Xi Jinping, President of the People's Republic of China, At the Global Trade in

Services Summit of The 2020 China International Fair for Trade in Services.”

52
data, materials, or items related to national security and interests,” not just official state
secrets.169 It also began to investigate and harass foreign firms carrying out due-
diligence, audit, and other consulting work in China. Early that year, Beijing instructed
state-owned enterprises to phase out their work with the Big Four accounting firms,
thus denying Western investors insight into their books and operations. China’s
cybersecurity regulator barred Micron products from being included in critical
infrastructure.170 Wind Information, China’s equivalent of Bloomberg Terminal,
restricted access to financial data and satellite imagery to users outside mainland China,
citing “relevant laws and regulations.”171 Chinese authorities raided the offices and
detained employees of the Mintz Group, an American due-diligence firm allegedly
looking into forced labor in the Xinjiang Uyghur Autonomous Region.172 Other
employees of Western firms, including senior executives, were detained or barred from
leaving the country for months at a time.

China’s crackdown accelerated a corporate exodus from China. Foreign direct


investment in China plummeted 80 percent in 2023 from the year before.173 FDI was
negative in the third quarter for the first time ever recorded. Venture capital and private
equity in Chinese companies plummeted, as firms deeply compromised by China
scrambled to unwind their investments.174

China increasingly must rely on its own firms to provide financial and professional
services to other parts of its economy, on a shorter timeline than Beijing perhaps
anticipated. It has a slew of companies capable of providing these services. Many of
China’s top companies by revenue and market capitalization are banks, insurance
companies, and enterprise-technology companies (e.g., Tencent). But the loss of blue-
chip Western firms will be hard to replace if the exodus continues. China is paying a
heavy price for Xi’s obsession with national security.

“Going Global”
• China seeks to “go global” by turning its domestic firms into truly globe-spanning
enterprises.

169 Dennis Kwok, “Xi’s National Security Agenda: How can governments and businesses de-risk?,” China Strategic
Risks Institute, June 21, 2023, https://www.csri.global/research/xis-national-security-agenda-how-can-
governments-and-businesses-de-risk.
170 Kevin Yao, “China fails Micron’s products in security review, bars some purchases,” Reuters, May 22, 2023,

https://www.reuters.com/technology/chinas-regulator-says-finds-serious-security-issues-us-micron-technologys-
2023-05-21/.
171 Rebecca Feng, “A Chinese Alternative to Bloomberg Terminals Quietly Limits Information Overseas,” The Wall

Street Journal, May 27, 2023, https://www.wsj.com/articles/a-chinese-alternative-to-bloomberg-terminals-quietly-


limits-information-overseas-bd98cf5e.
172 Vishakha Saxena, “US Consultancy Firm in China Worked on Xinjiang Before Raids,” Asia Financial, May 19,

2023, https://www.asiafinancial.com/us-consultancy-firm-in-china-worked-on-xinjiang-before-raids.
173 Iori Kawate and Shunsuke Tabeta, “Foreign direct investment in China falls to 30-year lows,” Nikkei Asia Review,

February 19, 2024, https://asia.nikkei.com/Economy/Foreign-direct-investment-in-China-falls-to-30-year-low.


174 Erin Griffith, “Silicon Valley Venture Capitalists Are Breaking Up With China,” The New York Times, February 21,

2024, https://www.nytimes.com/2024/02/21/technology/silicon-valley-vc-china.html.

53
• As trade barriers against China’s products rise in the industrialized world,
Chinese firms have targeted the Global South as an export market and overseas
manufacturing base.
• The “Sino-forming” of the developing world poses a diplomatic as well as
commercial threat to U.S. interests.

Encouraging Chinese companies to “go out” or “go global” has been official policy since
at least the mid-1990s. This policy was originally motivated by concern that China’s
largely state-owned enterprises would never become internationally competitive if they
did not expose their products and people to the rigor of foreign competition. Chinese
firms like Lenovo and Sinopec were early participants in this policy, establishing
overseas operations and reaping the benefits in terms of technology and talent.

MIC2025 was in many respects an insular strategy, focused on strengthening China’s


domestic industry. However, it also inaugurated a new effort to “go global” by
encouraging Chinese manufacturing companies to become truly globe-spanning
enterprises. The Belt and Road Initiative has provided key support for this goal,
facilitating infrastructure projects in the Global South that shift excess construction
materials and workers overseas, while paving the way for further exports.

China’s outbound investment is difficult to quantify with any reliability, but it is


formidable. Official statistics from China’s Ministry of Commerce claim that outbound
investment grew from $12.3 billion in 2005 to $183.8 billion in 2023, and has not
dipped below $100 billion in the past decade. Some analysts, notably Derek Scissors of
the American Enterprise Institute (AEI), cast doubt on these statistics, noting the
absurdity of China’s claim that outbound investment accelerated in 2020-21, when the
world was in the depths of the pandemic.175 AEI’s investment tracker reflects much
smaller sums of outbound investment, but records a significant increase in 2023 to $56
billion.176

Whatever the exact figure, it is clear that China’s businesses are eager to expand their
international operations. As trade barriers against Chinese products go up, Chinese
businesses are “going out” in an attempt to circumvent them, with considerable success.
David Goldman notes that while Chinese exports to the United States have plummeted
in recent years, they have come in through the back door; China’s exports to the Global
South have risen in step with the United States’ imports from the Global South,
indicating massive circumvention of U.S. trade barriers.177 Goods are being shipped
from China to third-party countries, re-flagged, then shipped to their final destination in
the United States, a practice referred to as transshipment.

175 Derek Scissors, “Better but Not Well: China’s Global Investment Needs More Fuel,” American Enterprise Institute,
January 18, 2024, https://www.aei.org/research-products/report/better-but-not-well-chinas-global-investment-
needs-more-fuel/.
176 Scissors, “Better but Not Well.”
177 David Goldman, “2 words explain China export ‘surge’: Global South,” Asia Times, May 21, 2024,

https://asiatimes.com/2024/05/2-words-explain-china-export-surge-global-south/.

54
Source: UN International Trade Centre, Trade Map, accessed August 28, 2024, https://www.trademap.org/.

Note: Trade data representing “Global South” includes the following regions: Association of Southeast Asian Nations
(ASEAN), South Asia, Middle East North Africa (MENA), Africa, South America, and Central Asia.

Perhaps a greater long-term concern than transshipment is China’s greenfield


investment abroad. Chinese companies are establishing global value chains, which
include sophisticated factories that will allow them to enter foreign markets and tamp
down criticism about export practices. In 2022, CATL announced a multi-billion-dollar
investment in a battery factory in Hungary, Europe’s largest. Chinese automakers,
including BYD, have acquired or announced factories in Brazil, hoping to expand their
position in the Latin American market. A number of news articles also report China’s
interest in building EV factories in Mexico to access the American market through the
back door—although Mexican officials appear to have hit the brakes on these plans by
denying Chinese automakers access to incentives like low-cost land or tax breaks.178

The United States may succeed in preventing China from gaining a toehold in its
backyard, but it will face greater challenges farther from home. Countries desperate to

178Diego Ore, “Exclusive: Mexico, facing US pressure, will halt incentives to Chinese EV makers,” Reuters, April 18,
2024, https://www.reuters.com/business/autos-transportation/mexico-facing-us-pressure-will-halt-incentives-
chinese-ev-makers-2024-04-18/.

55
industrialize will be sorely tempted to welcome Chinese manufacturers, who are now
best in class in a variety of industries. The way will be paved by China’s diplomats and
BRI projects to sweeten the deal. These commercial ties will grow into political ties that
may be hard to untangle. The Global South risks being “Sino-formed,” to use Goldman’s
phrase, by the newest wave of “going out.” The United States will need to offer a
substantive alternative, not just strong condemnations and humanitarian aid, to avoid
this setback.

CONCLUSION
Commentary on China’s economy swings wildly between extremes. On the one hand, the
Chinese economy is often portrayed as deeply troubled, perhaps even on the verge of
collapse. Stories in this vein emphasize China’s very high debt burden, slowing growth,
distressed real-estate sector, and aging population—all real problems. President Joe
Biden repeated a version of this argument in an interview with TIME magazine in June,
where he stated that China’s economy is “on the brink”:

Name me—Would you trade places with Xi Jinping and any other country? Not a
joke, I'm being deadly earnest, a rhetorical question. But would you? You’ve got a
population that’s considerably older than the vast majority of the youth in
Europe, that is too old to work. And they are xenophobic. Where is it coming
from? Where is it going to grow? You’ve got an economy that’s on the brink there.
The idea that their economy is booming? Give me a break.179

On the other hand, there is growing awareness—and alarm—about China’s dominant


position in high-tech sectors deemed critical to the future of the world economy.
President Biden’s attempts to wall off the American auto industry from Chinese
competition, while insufficient, show he is aware of this fact.

Can these stories be reconciled? Perhaps. It may be the case that China’s export- and
manufacturing-oriented development model has been successful enough to propel
China to the technology frontier in the short term, but not successful enough to help the
country outrun its structural problems in the long term. This is certainly the narrative
that many in Washington prefer, as it recalls our victory in the Cold War. Then, an
innovative, dynamic, and capitalist United States triumphed over an adversary with a
gerontocratic and dysfunctional political class and a communist economic model
incapable of managing the transition to the information age. It is tempting to believe
that a similar triumph is now assured because our nation has been so successful in the
past. We win, they lose.

But an invincible belief in one’s own success is a recipe for complacency. And
increasingly, this belief is at odds with the evidence in front of our faces. If this report
conveys any message, let it be that the United States cannot be complacent about

179TIME, “Read the Full Transcript of President Joe Biden’s interview With TIME,” June 5, 2024,
https://time.com/6984968/joe-biden-transcript-2024-interview/.

56
Communist China. Think-tank scholars and economists may bank on China’s coming
collapse. Beijing is taking the other side of that wager. It believes that manufacturing,
exports, and “new quality productive forces” are the keys to regime survival and indeed
to the “great rejuvenation of the Chinese nation.” It believes that technology and
production will enable it to preserve its communist system while becoming a rich
country. So far, it has succeeded in blazing this alternative development path. But
suppose today is the high-water mark of China’s power. Even in such an optimistic
scenario, the CCP will still present a real, existential threat to American industry and
workers for years to come. And Communist China will still be a more formidable
adversary than any the United States has faced in living memory. At this point, the
burden of proof should be on the critics who insist the CCP’s project is doomed to fail.

Instead of being complacent, the United States must act urgently to shield itself from
China’s predations and reboot its ailing industry. This will require a bold industrial
policy to support sectors critical to our national and economic security, paired with an
equally bold deregulatory agenda to clear the path for industry to build again. 180 It will
require strong trade barriers capable of adapting to China’s transshipment and “going
out” strategy. It will require greater vigilance against Chinese espionage, propaganda,
and technology theft, particularly in sectors like aerospace, agriculture, and biotech,
where we retain leads. Adapting to the new reality will require dusting off old history
books and playbooks for development.

We should be circumspect enough to realize that, in many areas, the days when China
needed to steal from us are past. Now, in sectors as diverse as shipbuilding, EVs, and
energy, China leads the rest of the world. Already, Beijing is deploying new resources to
lock in its advantages in these sectors, and to use its technology and trade to remake the
world according to its interests.

180U.S. Senator Marco Rubio, “Industrial Policy, Right and Wrong,” National Affairs, Spring 2024,
https://www.nationalaffairs.com/publications/detail/industrial-policy-right-and-wrong

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