What lessons can China’s industrial strategy offer the UK?

Luke Hamm is CEO of GovGrant, a specialist adviser helping companies take advantage of generous government tax incentives for innovation.

You can’t keep China out of the news. Not only is it poised to overtake the USA as the world’s biggest economy (and this may be a political factor behind the current trade war with the US), but in the UK, the government is weighing up whether to allow Huawei, the Chinese telecoms giant, to build parts of the UK’s 5G network. 

Policymakers are nervous about the prospect of Huawei building the network and so enabling the Chinese State to exert some control over the UK’s communications. The Five Eyes Security Alliance – an intelligence-sharing alliance between the UK US, Canada Australia and New Zealand - could be compromised. The Americans are said to be especially worried, but that may be related to the politics of trade, as opposed to intelligence per se. 

China’s Belt and Road infrastructure strategy has also received plenty of coverage and plenty of comment, but another area where the Chinese are determined to live up to their ambition to be the global powerhouse of the 21st Century is in innovation and R&D. 

China’s commitment to fuel growth in new sectors such as Technology, AI, Robotics and Clean Energy, is wrapped up in its ambitious ‘Made in China 2025’ (MIC 2025) Industrial Strategy. Launched in 2015, the aim is to generate innovation-driven development and turn China into a manufacturing superpower in ten years. 

Among its various goals, the MIC 2025 aims to raise the domestic content of core components and materials in ten key sectors to 40 percent by 2020 and 70 percent by 2025. 

MIC 2025 targets include: 

• Supply 70% of the domestic robotics market
• High tech ship design and manufacturing to supply 50% of international markets
• 40% of railways business to be overseas
• Three domestic companies to rank in the top five global energy-saving vehicles companies
• Supply 80% of space information applications
• Innovative development and production to reach international standards for biopharma and medtech
• 95% self-sufficient in new materials
• Mobile communications equipment to supply most of domestic and nearly half of international markets
• Renewable energy equipment to account for 80 per cent of the market
• Become the world’s biggest agricultural equipment maker.

The end goal of the MIC 2025 being near self-sufficiency for domestic companies would then enable Chinese companies to compete for a greater foothold in global markets. MIC2025 is backed by hundreds of billions of dollars of state banks and other pools of government capital. 

Currently, China spends 2.18% of GDP on innovation, but it looks set to miss its target 2.5% by the end of this year. Actual funding rose just over 12% last year, making China the second biggest spender on innovation after the US, but the Chinese figure of 2.1% is just half that of South Korea’s, and significantly below Japan’s 3.5%, Germany’s 2.9% and the United States’ 2.8%. Neither China nor the UK is currently in the world’s top 15 for R&D spend. 

China’s MIC 2025 is undoubtedly ambitious, but looks increasingly unattainable, not least because it is starting from such a low base. In 2017, high-tech manufacturing accounted for just under 13% of total industry value. Over 50% of China’s technology standards for smart manufacturing don’t match internationally accepted ones. Machining and manufacturing are nowhere near high enough in terms of standards, and there remain big question marks over China’s ethics and the rule of law, which undermines investor confidence. 

Bloomberg, for example, notes that China’s new energy vehicle, or NEV, industry is patchy at best. The MIC 2025 target is for home-built vehicles to have an 80 percent domestic market share. “Yet it has yet to produce a global or even a domestic champion. Instead, subsidies have led to swaths of low-quality electric cars. Several would-be ‘Tesla killers’ have come and gone. Ultimately, China brought in Tesla itself to manufacture locally.” 

The UK’s own industrial strategy, launched in 2017, aims to achieve 2.4% of GDP invested in innovation by 2027. The government will be increasing the rate of R&D tax credit to 12%, and invest £4.7bn between 2017-21 in R&D across new industries. 

While the UK’s targets and spend are clearly more modest than the Chinese, the UK’s great advantage is that it already has a long tradition of innovation, meaning the government can build on what already exists, as opposed to starting from scratch, like the Chinese. China needs to accelerate spending to catch up with the rest of the world. 

The UK instead needs to turbocharge what it already has. The lesson of MIC 2025 for our own Government is that the UK is already a global economic powerhouse in new industry sectors, but it needs much more support and help if we are to retain and improve our position in the R&D rankings. 

Whereas China’s government has perhaps been too ambitious with its MIC 2025 objectives, our own government is far too timid. Ministers need to grasp the opportunity and significantly increase R&D spend, especially post-Brexit if we are to join the innovation ‘top table’ in the 2020s. 

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