“New Industrialization”: The Industrial Upgrading Theory Driving China’s Advanced Manufacturing Policy
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“New Industrialization”: The Industrial Upgrading Theory Driving China’s Advanced Manufacturing Policy

As China faces geopolitical pressure at the high end of the value chain and price competition at the low end, Beijing has made leading-edge, highly-efficient manufacturing capabilities a top policy priority. In this analysis, experts Kendra Schaefer and Cory Combs from Trivium China provide an in-depth overview of this emerging effort, dubbed “new industrialization.”

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Accompanying documents for this analysis include:

  1. Fully Implement the Spirit of the 20th Party Congress to Vigorously Advance New Industrialization
  2. Constructing a Modern Industrial System Centered on Advanced Manufacturing—An Interview with Jin Zhuanglong, Party Group Secretary and Minister of the Ministry of Industry and Information Technology

Kendra Schaefer

Partner, Trivium China

Cory Combs

Associate Director, Trivium China

For the past three decades, China has entertained ambitions of moving its industrial and manufacturing sectors up the value chain and taking its rightful place among manufacturing superpowers. In the early 2000s, the motivators for pushing for industrial upgrading included strengthening national defense and military capabilities, achieving a higher degree of international competitiveness and economic independence, and raising citizens’ quality of life. But in the mid-2010s, as the double-digit growth in China’s gross domestic product (GDP) slowed, a new economic impetus for industrial upgrading emerged: Chinese economists and policymakers grew concerned China might fall victim to the middle-income trap. 1

The World Bank introduced the term middle-income trap in 2006 to describe economic stagnation when a low-income economy initially achieves growth through manufacturing exports driven by cheap, low-skilled labor but cannot successfully transition to a new economic model as wages rise and companies migrate to less expensive shores. 2 Chinese economists and policymakers have long sought to avoid such an outcome by gradually moving the nation from a period of “high-speed growth to high-quality development.” In other words, policymakers have shifted away from a development model based on the production of low-end consumer goods toward a model driven by consumption, industrial innovation, and production of high-end goods through advanced manufacturing, broadly tracing a development pathway similar to that taken by Germany, Japan, Singapore, South Korea, and Israel.

This task has become increasingly urgent as new economic headwinds—such as slowing GDP growth, an aging population, and competitive challenges to China’s low-end manufacturing sector posed by countries such as Vietnam, Mexico, and India—have increased pressure on China to quickly transform. Additionally, geopolitical challenges, such as efforts by the United States and its allies to block China’s access to advanced manufacturing technologies, and environmental issues such as climate change threaten to disrupt global supply chains and resource supply. The geopolitical pressure at the top end of the value chain and the increasing competition at the lower end have placed China in what some Chinese industrial policy scholars have referred to as a “two-way squeeze.” In this situation, China cannot bank on long-term dominance in low-end manufacturing and will meet with resistance when competing at the high end of the value chain, potentially stranding China in the lower-middle portion of the chain and tanking its international competitiveness.3

Thus, achieving high-quality development through industrial policy—specifically through advanced manufacturing—is, arguably, one of the state’s highest priorities, if not its top priority. In March 2023, speaking to delegates from the manufacturing province of Jiangsu at the annual Two Sessions, Chinese president Xi Jinping stressed, “There are two critical areas for China: one is to safeguard our rice bowl, and the other is to develop manufacturing.”4

The question, then, is how the state proposes to achieve that goal—and part of the answer lies in a development theory dubbed New Industrialization (新型工业化). New Industrialization was first tabled at the 2002 Sixteenth Party Congress, where then president Jiang Zemin called on the state to take “the road toward new industrialization” by cultivating advanced manufacturing, integrating industrial processes with emerging information technologies, developing a skilled talent pool, investing in scientific education, and reducing industrial pollution.5

More recently, New Industrialization has been adopted and revitalized by President Xi, his cabinet, and key industrial officials.6 Xi’s report at the Twentieth Party Congress in October 2022 listed achieving New Industrialization among China’s top development goals for 2035.7 In March 2023, Chinese minister of industry and information technology Jin Zhuanglong held a press conference on promoting New Industrialization, which he described as “an inevitable requirement for the realization of Chinese-style modernization, the fundamental support for building a socialist modern power, an urgent necessity for building up China’s competitive advantages, and a strategic choice to achieve high-quality economic development.”8 On September 20, 2023, Premier Li Qiang presided over a meeting of the State Council in which he called on the government to go all out in its pursuit of New Industrialization.9

President Xi’s framing of New Industrialization is closely based on President Jiang’s original framing but has been upgraded and modernized to reflect the evolving technological, economic, environmental, and political landscape. Jiang called for building an advanced manufacturing industry based on information technologies, science, environmental protection, and efficient resource management. Likewise, Xi’s New Industrialization encompasses support for the following activities:

  1. Building leading-edge manufacturing capabilities driven by innovation while simultaneously upgrading traditional manufacturing enterprises, primarily through the use of data, the Internet of Things, artificial intelligence (AI), and industrial process digitization
  2. Availability of fundamental telecommunications infrastructure, such as 5G and optical fiber networks
  3. Employing industrial greening to improve efficiency and reduce waste in the industrial and telecommunications sectors while also leveraging China’s leadership in green tech for economic and competitive ends
  4. Limiting local protectionism and unifying the Chinese market so that disparate industrial clusters lend their strengths to the power of the nation rather than generate low-quality overcapacity by competing for resources and leadership in the same industries

To observers, it might seem odd to group all of these seemingly disparate issues under one banner. But, as outlined below, each element of Xi’s approach to New Industrialization focuses on increasing industrial efficiency to improve competitiveness, maintain growth, and accomplish more with fewer resources.

First, New Industrialization seeks high-quality development and industrial efficiency by placing high-tech companies at the top of the value chain and traditional manufacturers at the bottom in a mutually reinforcing cycle of iterative upgrading. The cycle works thusly: High-tech companies innovate and compete to produce more advanced materials and tools, digitized processes, and new services, increasing their technological capabilities and improving efficiency. These advancements then filter down the value chain, where traditional industries adopt and integrate them into traditional manufacturing processes, causing production efficiency to rise, product development cycles to get shorter, and defective product rates to decrease across the economy. This larger market for products offered by high-end industries on the top of the value chain provides more revenue for innovation, which in turn kickstarts a new iteration of the upgrading cycle.

Broadly speaking, this idea does not materially differ much from conceptualizations of the innovation cycle in countries such as the United States. However, this innovation-driven approach, in which “rising digitization lifts all boats,” is particularly interesting in the Chinese context, where there is a significant technological divide between traditional low-end and high-end manufacturers. Thus, small-scale and low-end manufacturers are not well positioned to take advantage of and adopt high-end technologies, even if such technologies exist. Indeed, according to the China Electronics Technology Standardization Institute (CESI, 中国电子技术标准化研究院), as of 2022, only 50 percent of small-scale suppliers in key industries had achieved more than a basic level of digitization, and only 9 percent had an advanced level of digitization.10 Under New Industrialization, the state has sought to force that gap to close by throwing significant support behind improving the digital capabilities of small-scale and low-end manufacturers. Jin discussed the issue in a November 2023 interview:

Traditional industries are the basis of the modern industrial system, and they cannot simply be abandoned because they are “low-end industries.” We must aim instead to push them in high-end, intelligent, and green directions; implement manufacturing technology transformation projects; implement tax incentives and special re-loan policies; and support enterprise equipment updates, process upgrades, digital empowerment, and management innovation to allow traditional industries to sprout anew from old trees.11

The second element of Xi’s approach to New Industrialization is ensuring widespread availability of digital telecommunications infrastructure, such as 5G networks, optical fiber, and data centers. Lack of underlying infrastructure can limit companies’ ability to digitally transform. At a December 2023 conference convened by the Ministry of Industry and Information Technology (MIIT) with the heads of its regional telecommunications bureaus to outline information and communications technology (ICT) infrastructure policy priorities for the upcoming year, telecom bureau chiefs were explicitly directed to support New Industrialization by doing the following:12

  • ensuring widespread availability of optical fiber and 5G
  • providing policy support for 5G-enabled factories
  • getting out ahead of the development of 6G technology
  • supporting the rollout of industrial internet networks
  • optimizing the layout of internet architecture and geographic distribution of data centers

Encouraging development of green technologies is the third element of Xi’s modernized conception of New Industrialization. While environmental and climate-related considerations are certainly a key motivator, inclusion of green tech under the New Industrialization banner is less about environmental protection and more about increasing China’s international competitiveness in green and low-carbon technologies. Global demand for such technologies is poised to explode over the next several decades—providing China’s world-leading cleantech sector myriad avenues for high-quality, innovation-led growth in existing and emerging industries. China currently dominates global production in many areas of cleantech manufacturing, including solar panels, electrolyzers, and electric vehicle (EV) batteries. It is also increasingly leading in cutting-edge segments like offshore wind turbines. Meanwhile, the International Energy Agency forecasts the global market for mass-manufactured cleantech products will grow to $650 billion annually by 2030.13 In this context, China’s central economic planners naturally view cleantech manufacturing growth as a chance to thrust the industrial economy further up the value chain.

Cleantech is one key industry that proves that iterative, trickle-down industrial upgrading can pay big dividends over time. China’s contemporary cleantech energy dominance arose largely from iterative economic upgrading efforts, more than long-term strategy. The modern battery industry chain provides an instructive example. In the 1950s, state planners invested in the mining and processing of myriad mineral resources, searching for all means to make nonagricultural lands productive. It took another 30 years for those investments to pay off as reform and opening in the 1980s aligned with Western countries’ desire to offshore environmentally harmful mining operations. In 1995, a company called BYD began to make lithium-ion batteries, capitalizing on abundant domestic mineral resources. Profits were limited until the EV revolution, when BYD and others, such as CATL, became some of the biggest cleantech companies in the world, using advantages rooted in decades of prior investment in largely low-grade production. Only in the 2010s did targeted government strategy seize on opportunities for EVs to drive industrial upgrading. Similar stories hold for many cleantech industries in which China leads today, including solar.

This success is a clear lesson to Beijing that iterative upgrading, particularly combining new technologies with traditional industries, can catalyze a rapid leap forward in industrial competitiveness. Thus, drawing on the lessons learned through these efforts, Beijing is now pursuing a more proactive and farsighted industrial development strategy. In the cleantech space, officials are pushing both state-owned and private enterprises to double down on industrial advantages developed over years of low- and medium-quality prospects—all in pursuit of industrial upgrading and transitioning toward production of higher-end goods like advanced cleantech products.

Finally, Xi’s vision of New Industrialization is predicated on rationalizing the structural layout of the Chinese market. China consists of dozens of separate regional markets that local governments protect and regulate. The result of this fragmentation is that redundant competition and local protectionism—particularly in the manufacturing sector—constrain China’s economic productivity. In other words, instead of playing to their regional strengths, local governments use protectionist barriers to compete in manufacturing industries, leading to overcapacity and inefficiency and thinly spread resources like talent and capital. The phenomenon can be seen in the automotive industry. In 2020, there were 122 auto manufacturers in China—compared to four in the United States. Of those 122 manufacturers, 101 were running at less than 60 percent capacity.14

Local protectionism also keeps manufacturing quality stuck at the low end of the value chain. Low-end manufacturers compete primarily on price, and when they cannot compete on price without state support, instead of improving quality and thus competitiveness through innovation, they turn to heavy subsidies and protectionist policies from their local governments to keep prices low and drive competitors from other provinces out. This is not conducive to a manufacturing sector focused on upgrading; as policymakers see it, forcing manufacturers to compete fairly in the national marketplace would go a long way toward solving the problem.

In April 2022, the Central Committee of the Chinese Communist Party (CCP) and the State Council issued a policy document titled Opinions on Accelerating the Construction of a Unified National Market, which called for promoting industrial upgrading and innovation by “guiding the effective allocation of innovative resources.”15 In practice, this policy entails the following actions:

  • only allowing the national government, not the local governments, to implement negative lists for market access
  • using antimonopoly and anti–unfair competition laws and regulations to crack down on local protectionism
  • using the national corporate social credit system to equalize penalties for bad market actors and incentives for good market actors, thus reducing local protectionism
  • streamlining the flow of capital, data, energy, talent, and carbon trading across provinces

The accompanying documents, translated by CSIS, include Jin’s thoughts on New Industrialization. As head of the MIIT, Jin is the key official responsible for stewarding the development of New Industrialization. In these essays, he expands on some of the ideas mentioned here, providing further insight into China’s industrial upgrading strategy.

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