The world’s manufacturing powerhouse needs to reorient its strategy
China, so far the global manufacturing powerhouse, is on the cusp of change. The two sources of its phenomenal growth—rising labour force and capital investment—are stabilising now. The workforce is ageing and it now takes 60% more capital to produce one unit of GDP than during 1990-2010. Increased productivity will need to accelerate and contribute up to half of the GDP growth to sustain 5.5-6.5% growth. That is why China needs to be an innovation leader. According to a McKinsey report, The China Effect on Global Innovation, opportunities for innovation in China would create value of $1 trillion to $2.2 trillion in 2025. The country has the wherewithal to be a global innovation leader since it spends $200 billion on research—the most after the US—and churns out 30,000 PhDs in science and technology every year. It also has the world’s largest consumer base and the most extensive manufacturing ecosystem too.
Of the four archetypes of innovation—customer-focussed, efficiency-driven, engineering- and science-based—Chinese companies have performed well in customer-focused and efficiency-driven businesses, while in the other two, the response is mixed. Slow regulatory processes, inefficient allocation of intellectual property protection and under-investment by the private sector have hit science-based innovation. To maintain the lead in manufacturing, Chinese companies need to innovate. In the Industry 4.0 era, major manufacturing processes and logistics will be digitally linked. If China can prevail, manufacturing could create value of $450 billion to $780 billion per year in 2025, accounting for 12-22% of the GDP. Companies need to make a larger commitment to innovation and policymakers need to broaden access to funding for entrepreneurs. The Chinese government can raise the bar on innovation by being a demanding purchaser.