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China’s New Digital Industrial Transformation

China’s post-COVID rebuild will position the country to weather future pandemics.

By Bob Savic for
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China’s New Digital Industrial Transformation
Credit: Pixabay

China’s economy has taken a serious beating from the COVID-19 pandemic in recent months. After 6 percent annual growth in the last quarter of 2019, the economy contracted by 6.8 percent in the first three months of this year. It was a humbling lesson for China’s policymakers, used to guiding high levels of growth steadily downwards over many years. In response to the pandemic’s impact, Beijing has positioned the coronavirus crisis as a platform for launching an ambitious and wide-scale digital transformation of its industrial power.

China’s Demand for Tech Flourishes as the Economy Contracts

The severe decline in China’s gross domestic product (GDP) in 2020 has been largely due to weak domestic consumption. Following the COVID-induced lockdown, China’s households have opted to save rather than spend. Retail sales hit their lowest point, a 20.5 percent year-on-year drop, in January, during the lockdowns. The sector has only gradually improved over recent months, with May registering a year-on-year decline of 2.8 percent. The trade sector has been even more depressed. Imports plunged by 16.7 percent in May, the worst monthly performance this year, on the back of contracting investment in both private and state sectors.

Notably, not all trade sectors reflected this dismal picture. Crude oil imports rose by an annual 19.2 percent in May, which was a monthly all time high, although that followed an even greater drop of 50.2 percent in prior months.

The standout sector displaying consistently robust import growth since the beginning of the year has been technology. Purchases of overseas-made electronic components, from January to April, were up by 10.1 percent. With a value of $115 billion, electronics imports reached a record high over the period. Some of the more advanced tech subsectors have performed even better. Integrated circuits gained 11.2 percent with a value of $99 billion. Imported audio and visual equipment surged by 30 percent, also reaching a periodic record high value of $4.5 billion. Other subsectors to report robust import demand have been lithium batteries, insulated cables, and electrical equipment.

Launching a New Digital Era for the Economy

The sharp rises in technology imports at a time of overall depressed import demand begs the question as to what accounts for such starkly contradictory sets of economic data. In part, it’s because China’s demand for foreign technology has been relatively strong for years. The government has initiated a string of policies on technological advancement to boost a process of catch-up with more advanced economies.

However, shortly following the lifting of coronavirus-induced shutdowns across the country, and the consequent steep declines in economic output, China’s policymakers decided to change course and significantly deepen their technological upgrading. In early March, President Xi Jinping delivered a keynote speech on the deployment of prevention and control measures for COVID-19 pandemic. This included major initiatives in the development of the “industrial internet,” including policies for the construction of a new digital industrial infrastructure.

Accordingly, China’s large telecoms operators were called on to build high-quality communications networks covering all the country’s regions and cities. As a starting point, Xi announced the creation of 20 showcase examples of digital networks available for connecting industrial enterprises.

The policy speech also invoked a digital upgrade of China’s top 100 industrial companies and required up to 1,000 leading services enterprises to enable industrial internet and intranet transformation. 5G networking would become the cutting-edge technology applied in transforming China’s industrial internet across large vertically-integrated industrial enterprises.

In line with Xi’s policy direction, one of China’s leading internet operators, Alibaba Cloud, has been constructing 10 industrial internet platforms for various industry sectors, including textiles, clothing, food and beverage, processing, home appliances, electronics, and textile printing and dyeing.

According to Wei Wei, head of Alibaba’s Cloud Industrial Internet Platform, the newly-applied technology provides for integrated product development, manufacturing, sales, logistics, warehousing, and energy management – essentially creating a singular digital service ecosystem. For instance, Wei says, the dyed-spinning industry “can now realize lean sales, procurement, and warehousing management, so that goods and services across the supply chain are standardized and online, while transaction data is transparent and open.”

By mid-May, China’s National Development and Reform Commission (NDRC) went a few steps further in progressing Xi’s proposed digital transformation by launching the “Digital Transformation Partnership Action Plan 2020” (hereafter, the Partnership program). Alongside accelerating digital transformation across various industries and sectors, it’s been designed to help small and medium sized enterprises (SMEs) overcome difficulties in adapting to digital transformation. As a result, the Partnership program has promoted inclusive “cloud-based intelligence” involving large numbers of SMEs, including support in the provision of information integration, open resource networking, software and hardware support, supply chain management, and professional training.

The NDRC’s efforts have been coordinated with multiple stakeholders including government ministries, regulatory agencies, and provincial and city governments. In combination with the latter, Alibaba Cloud’s Industrial Internet Platform has been rolled out in the Waxing district of Huizhou City. The prefecture, commonly referred to as “Chinese kid’s town,” became the country’s main center for children’s wear production in the early 1980s. It currently hosts about 20,000 small-scale apparel makers, accounting for half of China’s sales revenue in the sector.

“A new digital model for cluster manufacturing will be introduced to support children’s wear companies by reformulating the sector’s traditional production and sales models, through intelligent production, collaborative networking, product automation and services extension,” explained Wei Yun, who heads up Alibaba’s Internet Platform in the local venture. With the industrial platform now in place, the goal is for the the city’s annual average sales of 63 billion Chinese renminbi ($8.8 billion) to rise to 100 billion RMB ($14.1 billion) by the end of 2020.

Aside from cooperating with government bodies, the Partnership program goes further than any previous Chinese government industrial upgrading programs, to include a broad array of private commercial enterprises, ranging from high-tech to financial institutions to utilities and energy companies. Among some of the better-known tech-related participants are Alibaba, Xiaomi, Hikvision, Huawei, Foxconn, Didi Chuxing, Meituan Dianping, Tencent, ZTE, Dot Life, China Telecom, China Power, and Lenovo.

From Ground-Based Industrial Platforms to Space Orbiting Networks

China’s Ministry of Industry and Information has been the main government body charged with the national coordination and lay out of 5G networks and Industrial Internet integration. According to its spokesman, Xie Shafeng, the new generation of information technologies such as internet of things, big data, artificial intelligence (AI) and blockchain have all played a crucial role in both epidemic control and prevention, alongside the resumption of industrial production.

On account of these changes, Xie claims that society’s understanding of information technology has expanded. “The next step will be to quicken the pace of digital transformation,” he says. “This would involve nurturing new formats of development involving a ‘shared global platform economy’ through the creation of a ‘cloud’ multi-industry chain.”

Hede Aerospace, China’s largest commercial satellite communications provider, has taken up the international cloud services platform aspect of digital transformation. In May, the company launched the Hede 4 satellite. Once operationally linked with three other satellites earlier launched into orbit, Hede 4 will provide global marine and aviation big data application services. Zhou Dachuang, Hede’s Chief Executive, said that “satellite application services will be integrated into the era of the Internet of Everything, AI and big data.” Hede Aerospace therefore plans to ramp up investment in research and development of satellite networking and upgrading intelligent information networking power, on a global level.

China’s International Tech Collaborations Face Growing Challenges

Xi’s keynote address on developing the Industrial Internet also touched on encouraging enterprises “from all over the world” to engage in in-depth cooperation with China’s industrial enterprises and big data providers. Dongfang Guoxin, a big data production and solutions provider for industry users, recently introduced a big data platform for ultra-large-scale data storage and online analysis. To improve the performance of its platform, the company uses second-generation Intel scaleable processors to speed up cache performance and enable cost-savings. Wang Hu, general manager at Dongfang’s Technology Center, emphasises that the company “will further strengthen cooperation with Intel and other partners to improve big data cloud computing technology.”

The extent of Chinese technology companies’ international partnerships and capacities to access foreign-made advanced technologies has come under elevated uncertainty in recent months. In early June, a further round of U.S. sanctions was imposed on 33 Chinese entities, several of which included Chinese tech firms in the AI and cloud services sectors, for their part in alleged surveillance and human rights abuses in the Xinjiang Uyghur Autonomous Region of western China. These sanctions came on top of 28 Chinese entities that were blacklisted in late-2019.

The U.S. Commerce Department has also recently blocked access of American semiconductor chipmakers’ products for Huawei Technology, which is one of the Chinese tech companies participating in Beijing’s Partnership program. The restrictions also prohibit Huawei’s access to non-U.S. manufactured semiconductors where the product is based on American-designate technology or software. Consequently, Taiwan’s largest chipmaker, Taiwan Semiconductor, has been reportedly restricting sales of such products to the Chinese tech giant.

In turn, several Chinese media outlets have warned of the possibility of placing U.S. companies on an “unreliable entities list.” Details of the list and applicable countermeasures have yet to be made known. Even so, the immediate impact of the current set of U.S. actions is likely to be limited. China’s purchases of foreign technology are generally diversified with the bulk of high tech purchases, outside the United States, being relatively evenly sourced from South Korea, Japan, and Taiwan or their affiliates in Vietnam, Malaysia, and Thailand.

The Future Implications of China’s Digital Transformation

The longer-term ramifications of mounting U.S. sanctions on the development of China’s technology sector may raise more significant barriers in its striving for world-leading industrial connectivity. On the other hand, the new digital transformation of China’s vast industrial sector could prove an unstoppable force.

Xi’s digital policy drive has certainly been given further impetus by the sudden appearance of new coronavirus cases in Beijing, requiring parts of the capital to be put under lockdown with numerous flights into and out of the city being cancelled. Somewhat ironically, this newly-reported outbreak only reinforces the government’s stated justification for the digital transformation, as industrial remote connectivity may be the key to avoiding serious disruptions in the sector’s output from ongoing coronavirus risks.

Indeed, the policy raises questions over whether Beijing anticipates COVID-19 to be only the latest – and not the last — in a long line of virus-driven pandemics. These stretch back to the SARS contagion — which, like the coronavirus, also originated in China — during the early 2000s, followed by an almost regular occurrence of globally-mobile new viruses since that time. The upshot of it all may be that China’s policymakers now consider global virus risks to have become the norm, perhaps due in part to accelerated climate change. If so, China’s latest government-directed and large-scale industrial digital transformation, harnessing the resources of multiple sectors of society, may be a lesson for all policymakers around the world to take on board.

Bob Savic is a visiting professor at Nottingham University’s Asia Research Institute and a senior research fellow at the Global Policy Institute in London, U.K.