Innovation in China: The Effect of Chinese Patents
on Sales of Chinese High Tech Industrial Robotics
Master Thesis
Rico Griek (10539050) University of Amsterdam
Faculty Business Administration: Entrepreneurship and Innovation Supervisor: Tsvi Vinig
Abstract
This study examines the effect of Chinese patents on sales of Chinese industrial robotics, through a quantitative study. The main focus is to find a causal relationship between innovation output and economical reward. Over the last 30 years, China has gone through a major transformation opening up to capitalism and facing rapid economical growth. Rising wages and lower growth rates led to the development of multiple government programs to stimulate further transition to an innovation leading country. These programs are mainly centred around quantitative outcomes. Industrial robotics represent the highest technological achievement of all mechanical robotics and are used in all high-technology sectors. The implementation of AI, CPS and IoT requires quality developments in the production of industrial robotics. Differences arise in economic value of patents, as one patent can generate a higher economical reward than multiple together. This quantitative study, based on data from the last eleven years, suggests that China’s increase in patents, strongly affects the qualitative development of industrial robotics resulting in an increase of sales of Chinese industrial robotics. Furthermore, this study examines causal relationships of r&d spending and patents. This is done based on data from the last twenty years, and suggests that r&d subsidy negatively impact r&d spending, while export strongly affects r&d spending. R&d spending is likely to increase patent applications and is expected to be mediated by scientific journals. Analysis shows that patents does not affect sales of industrial robotics. Furthermore, only high tech exports affect r&d spending, while scientific journals mediate the relationship between r&d spending and patents.
Keywords: Patents, R&D Spending, Industrial Robotics, GDP, Subsidy Programs, High Tech, 13th Five Year Plan, 15 Year Science and Technology Plan, Made in China 2015, AI, Innovation
This document is written by Student Rico Griek who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Acknowledgements
First of all, I would like to thank my supervisor, Dr. Tsvi Vinig. His input and expertise about China was highly valuable. His guidance and motivational supervision helped to improve this thesis in qualitative matters. Furthermore, he left room for my own vision and understanding to make the work of this thesis possible.
Secondly, I would like to thank all my friends and family, who supported me throughout this process and took the time to listen to me and to give advice when needed.
Lastly, and especially, I want to thank my parents, who not only supported me during this project, but who are supporting me in everything I do.
Table of Content
Introduction 7
Government Policies Stimulating Chinese Innovation 15
2.1 History China’s Medium to Long Term Science and Technology Plan 17 2.1.2 Current Results Medium- Long Term Plan 18 2.2 Key Concepts of China’s 5 Year Plan (2016 - 2020) 20
2.3 Made in China 2025 25
2.3.1 4th Industrial Revolution - Implementation of AI, CPS and IoT 26
2.3.2 AI Leadership 2020 28
2.4 Mass Entrepreneurship and Innovation in the AI Sector 30
2.5 Structure of China’s High Tech Sector 32
2.6 China’s Industrial Robotic Market 33
Factors Impacting Sales Chinese Industrial Robotics 35
3.1 The quantitative effect of High Tech Exports on R&D Spending 35 3.2 Effect of China’s Subsidy Policies on R&D spending 36 3.3 Impact of R&D Spending on Patent Applications 39 3.4 Effect of Patents on Sales Industrial Robotics 42 3.4.1 Effect of Protection Systems and FDI on Patent Applications 43 3.4.2 Transition from State Owned Enterprises to Private-Held Enterprises 44
3.4.3 China’s Patenting System 45
Methodology 46
Setting 46
Database and Time Frame 47
Sample 48 Independent Variables 48 Control Variables 49 Statistical Approach 51 Results: 54 Hypotheses 1 & 2: 54 Hypothesis 3 56 Hypothesis 4 58 Discussion 60
Index of Tables Table 1. 20 Table 2. 46 Table 3. 52 Table 4. 55 Table 5. 56 Table 6. 57 Table 7. 58 Table 8. 59 Table 9. 60 Appendices 66 References 71
Introduction
China’s intense economical transformations have transformed China into the world largest exporter of high tech goods, comprising $500 billion dollars. In extension to that, the Chinese market is the biggest industrial robotic market in the world since 2013, with a total market share of 30% in 2016 (IFR). The industrial robotic industry grew on average 15% a year over the last 5 years with total annual sales of 294,312 units in 2016. Industrial robotics are characterized by rapid technological change and high inputs of scientific research and development expenditure (Keeble, 1990). Over the last eleven years, Chinese industrial robotic manufacturers experienced an increase in market share within China from 10% to 31% in 2016. Previous literature did not examine why Chinese
manufacturers find such a rapid rise in market share. However, aligning with China’s goals to become a high tech leading manufacturer by 2025 and to produce 70% of the sold industrial robotics in China by 2020, this research examines the relationship between innovation output and economic reward. As Western literature found mixed relationships between patents and sales, no research examined the effects of China’s increase in patents on sales of Chinese industrial robotics. This research will contribute to the existing theory, whether Chinese patents provide enough quality to improve the development high tech industrial robotics, causing an increase in sales. This is done by examining the concepts of China’s MLP (Medium to Long Term Science and Technology Plan), China’s 13th 5 Year Plan and China’s Made in China 2025 Plan. Furthermore quantitative research should examine the relationship between patent applications and sales of Chinese industrial
robotics.
In 2016, China filed 1,338,503 patents outnumbering the USA 3 times. In previous
literature, patenting is used as a proxy for the output of innovation, whereas patenting is defined by having exclusive rights for a certain new technology, which is a product or a process that provides a new way of doing something or offers a new technical solution to a problem. Patents are given by the government and can apply for a specific country or the whole world and is set for 20 years (Shu, Wang, Gao, & Liu, 2015). The creation of patents is a general used indicator of the amount of economic knowledge in a country. However, the main purpose for an individual or company to patent a technology is to secure this technology and to reward the innovators by making it a
commercial success (Gilbert, & Shapiro, 1990). The commercial success of a patent depends on the quality and exploitation of the patent. Previous research found that the amount of citations and easiness of exploitability are major predictors of the success of a patent. According to Fisch, Block, and Sandner (2016), Chinese patents are less cited compared to Western countries and are of less economical value due to the incremental improvements. To improve the quality of patents, less focus should be placed towards decreasing r&d costs, but rather to increase r&d spending. Theory
hold that r&d spending is affected by GDP. Between 2000 and 2018, China’s GDP grew 10 fold, making China the second largest economy of the world. However, China faced a decline in economic growth to below the government standard of 7% a year over the last two years. As China’s economic growth was mainly driven by low-costs manufacturing, rising wages have disruptive effects on a country’s export value, as low-cost advantages disappear (Kharas, & Kohli, 2011). To increase export value, countries need to focus on innovation, as innovations create competitive advantages and stimulate sales (Geroski, & 2000). This result build upon the study of Scherer (1965), who found innovation, measured by patents, have a positive effect on growth of sales. Patents are the foundation for improved products and the creation of ground breaking
innovations. This not only creates competitive advantages, but also disrupt industries. However, an empirical study from Cefis and Orsenigo (2001) failed to find a relation between patents and sales. The major difficulty is the long period of time it takes to convert economic valuable knowledge into economic performance. Even when an idea has been patented, uncertainty about the market
environment and development costs may lead to threat the patent as a future possibility and extent implementation time (Bloom, & van Reenen, 2002). Nonetheless, patenting eventually pays off as there would be no other reason to continue pursuing patenting ideas, if it wasn’t for monetary incentives (Coad and Rao, & 2007). Monetary incentives is found to be the primary reason to innovate. However, government policies can stimulate innovation by tax incentives and r&d subsidies. Previous research found that government subsidy programs enhance patenting by more than 20% (Fisch, Block, & Sandner, 2016). The Chinese government increased its subsidy budget over the last 18 years from 0.04% of its GDP to 0.13%. Furthermore, the Chinese government keeps a strong influence on China’s economical and political landscape. They have introduced several strategies with prosperous goals to become a global leader in the high-tech industry. The
government stimulates industrial modernisation by implementing advanced information analytics systems, that intend to use this global transformation to obtain more control over the most profitable segments of global supply. While most actions by governments are incremental and marginally modify policies or programs, the Chinese government uses progressive approaches to support innovation. China’s Made in China 2025, 5 Year Plan and 15 Year Science and Technology Plan all aim to further enhance GDP growth and to increase its technological grasp on the world (Wübbeke, Meissner, Zenglein, Ives, & Conrad, 2016). As all these policies relate to the systematic movement of acquiring control over global supply chains, China tend to create economic advantages through internal innovation. Internal innovation is achieved by the creation and implementation of new ideas, concepts, services or products and requires economic valuable knowledge (Cassiman, & Veugelers, 2006). The Knowledge Spillover Theory of Entrepreneurship (KSTE) states that start-ups are one way of diffusing and converting knowledge into a societal utility (Carlsson et.al, 2009).
This builds upon the idea that innovation is realised by exploiting opportunities originating in knowledge, which are overlooked or neglected by large companies (Braunerhjelm, Ding Ding, & Thulin, 2017). Knowledge can further be acquired. As Chinese outbound investments reached $160 billion in 2017, they actively acquire core technologies and knowledge (Ali, & Wang, 2018). Consequently, this gives companies quick access to core technologies and knowledge, creating opportunities in foreign and domestic markets. Nonetheless, acquiring companies is expensive and doesn’t provide a sustainable way of knowledge creation. Furthermore, Arora and Gambardella (2004) found that internal know-how is needed to use external know how. Acquiring external knowledge doesn’t include how to exploit this. Therefore, the Chinese government is upscaling the quality of its education system to increase its economic and social knowledge level and is further opening up its borders to enhance knowledge trade. After Mao’s death in 1976 and due to poverty and lack of economic growth, China started to transform its economic system (Hanlon, 2015). The transition led to change from a plan to a transition economy, deregulating their laws and stimulating the creation of private companies (Choi, Lee, Williams, 2011). Further elaborations happened, when China joined the World Trade Organization in 2001. The WTO is an intergovernmental organisation that regulates international trade. Their main concern is to regulate and decrease trade embargoes to stimulate economic growth. Countries that are part of the WTO have significant higher levels of trade (Goldstein, River, & Tomz, 2007). The advantages of being a WTO member and being a low cost manufacturer contributed to exceeding growth numbers of 10% over the last 30 years. In those thirty years, China’s economy overtook many Western technological leading countries like
Germany and France in GDP and is now the second biggest economy in the world after the United States (He, Chen, Mao, & Zhou, 2016). China's economy has grown from $214 Billion dollars in 1978 to $11.21 Trillion dollars in 2016.
However, China’s growth merely relied on low cost labor (Fan, 2014). China’s low cost labour advantage, abundance of natural minerals and governmental policy programs, resulted in China producing 20% of the world manufacturing output equalling $2 trillion and causing a decline in total Western manufacturing companies (Bernard, Jensen, & Schott, 2005). The US faced a manufacturing decline as part of its GDP from 27 percent in 1960 to 12 percent in 2018. The main reason is found in Western companies outsourcing labor intensive products to low-wage countries like China and India in order to keep up their profits. On average, purchasing costs accounts for 60-70% of the total expenditures in manufacturing (Herberling, 1993). Therefore, international sourcing is an effective way to reduce purchasing costs by taking advantage of low-cost countries. These costs advantage can go up to 70%. However, many researches argued that outsourcing manufacturing processes reduce technical skills and knowledge within the national country. This
of the new outsourcing policies and became the worlds biggest producer of goods (Yang, Chen, & Monarch, 2010). The cheap labor was used to produce and export low-end products like socks, shoes, plastic materials, toys, etc, decreased China’s unemployment rate to 4% in 2017. In 2009, one-third of its GDP consisted of manufacturing activities and contributed to almost 95% of the total export sales of China (Sun, 2009). This included everything from low-tech products to high-tech products. Comparing China’s economic activities with India, a difference can be noticed. India heavily focuses on the service industry, which takes up to 61% of their GDP as of today (Sengupta, & Puri, 2018). The primary advantage of a service driven industry, is that a country is less volatile, when wages rises (Kowalkowski, 2017). China's labor costs increased drastically over the last eleven years, making it less attractive as a low costs manufacturer of goods (Balsvik, Jensen, & Salvanes, 2015) As many foreign companies have production facilities in China, wages lies up to 3 times higher than that of India, which puts pressure on China’s manufacturing processes. Since 2011, labor costs went up from $2,19 to $3,60 an hour in 2017, averaging South Africa's and Portugal's minimum wages and outnumbering the average hourly wage of India 5 times. Recently, large Western companies shifted their production facilities to nearby low-wage countries like Bangladesh and Thailand. When this trend proceeds and without further change of China’s
ecomodel, it is expected to have tremendous impact on the growth of the Chinese economy and its labour force (Kharas, & Kohli, 2011). Two studies by Chinese academic institutions showed their concern regarding the Chinese labour market. The Institute of Population and Labor Economics at the Chinese Academy of Social Sciences implied that China at some point will reach a Lewisian turning point, where the surplus of low wage rural labor will degrade, so that industrialisation can not rely on low wage labor jobs anymore, driving up the costs of production (Cai, 2008).
Furthermore, the Development Research Center of the State Council, claimed that research showed that 75% of the villages have no qualified young labor left to transfer from agriculture into other sectors (Yang, Chen, & Monarch, 2010). The staggering supply of human labour further drives up wages, impacting Chinese growth rate This situation is being anticipated by the introduction of various innovation focused plans. Based upon Germany’s 4.0 Industry Plan and USA’s Industrial Internet, China expended its industry modernisation plan to all high-tech industries that contribute to economic growth in advanced economies (Wübbeke, Meissner, Zenglein, Ives, & Conrad, 2016). Germany’s 4.0 Industry Plan is a worked out plan to enhance innovation in big data, cloud
computing, modern communication and intelligent machines. The main factors in this plan are the digitisation and integration of any simple technical or economical relation to complex technical, economical complex networks (Zezulka, Marcon, Vesely, & Sajdl, 2016) and the creation of new market models and the digitisation of products and services offerings. Literature found that due to its good education system, Germany is more likely to succeed in their plans. This further implies
that if China wants to transform too a sustainable innovation driven country, knowledge among citizens have to be improved (Acs, Anselin, & Varga, 2002). Over the years, China intensified its education program. As of 2018, 7 Chinese Universities ranks in the top 100 of best universities in the world, compared to 4 in 2016 (QS ranking). This is double the amount in just two years time. The increased knowledge rate is useful in the creation of economic knowledge that leads to innovative- product processes and disruptive innovations, which on their hand are an important factor to stimulate long-term economic growth, international trade and regional development. The Ministry of Education mandated to prerequisite every student with nine years of tuition, which will increase knowledge levels among citizens. Furthermore, the number of doctoral degrees fivefold from 1995 to 2005. This potentially impact China’s innovation rate, as a better education system and more graduating students, results in a better overall understanding of what is needed in the marketplace. Furthermore, bringing in updated knowledge create new insights, ideas and motivation for the existing r&d team. One could argue that this process is already going on, as China filed 30 times more patents in 2016 compared to 2002 (1.3 million compared to 41.418) (WIPO), showing strong indications that China’s innovation rate is accelerating.
What caused this increase? Previous studies found several arguments; 1. The enormous increase in patents can partly be contributed to the tremendous growth of the Chinese economy. This makes it possible for companies to spend more money on r&d, which is recognised as an input that positively affects patents (Dang, & Motohashi, 2015). Second, the government provides
subsidy to financially support companies to file patents. Previous research actually showed that government subsidies increases the amount of patents filed by more than 30%. China’s first patent subsidy policy started in 1999 in Shanghai (Lei, Sun, & Wright, 2012). Within 4 years almost all provinces had subsidies in place. However these subsidies differentiate in each province. Some provinces provide a fixed amount of reimbursement for patent applications, no matter the costs of filling a patent or whether the patents gets granted or not. Other provinces, rather reimburse based on an applicants’ actual out of pocket spending and others compensate based on a portion of the application fee and award a price if applications get granted. Subsidies has been extended by the introduction of tax incentives in 2009 to lower the costs and stimulate r&d. 3. Lastly, China is the largest receiver of Foreign Direct Investments (FDI). Since 1979, foreign direct investments has increased dramatically from $1 billion in 1980, to $83 billion US dollar in 2007 (Fetscherin, Voss, & Gugler, 2009). These investments impacts economic growth, while also drastically changing the global trade patterns and competitive landscape (Yang, Chen, & Monarch, 2010). FDIs were not only used to buy Chinese companies or to build production facilities, they also tend to bring in knowledge to execute a specific task. FDIs not only accelerate employment growth in the host
forward linkage in the host countries. This stimulates the transition from low-skilled labor to high skilled labor, therefore increasing the knowledge rate, which positively influences the amount of patents filed (Mallampally, Sauvant, & Karl, 1999). However, foreign companies protected their trademarks and intellectual properties, which reduced the actual knowledge gained by Chinese companies. To become less dependent on FDIs, the guideline for the National Medium- and Long-term Science and Technology Development Programs (2006-2020), aims to emphasise the strategic role of innovation and to lay out long-term goals and specific measures in order to boost China's aspiration to become an innovation centre by 2020 (Ma, Lee, & Chen, 2009). In this plan, four critical problems were addressed and open for salvation; First, growth relied too much on manufacturing processes for Western countries. Belke, Oeking & Setzer (2015) argue that when 25% of its GDP is generated by export, a country become highly vulnerable to foreign policies. Second, China’s technological capabilities failed short to the required environmental needs, which caused China relying too much on foreign technology. Third, China was unable to produce their own defence systems and fourth, China’s scientific reputation was too low. Furthermore, China announced its Made in 2025 program (2016 - 2025). The program intends to replace foreign technologies by Chinese technology. China’s urge to push for industrial modernisation during the fourth industrial revolution has led to an enormous demand in technological products. However, Chinese suppliers are incapable of meeting the domestic demand for smart manufacturing products like industrial robots, smart sensors, wireless sensor networks and radio frequency identification chips on the short term (Wübbeke, Meissner, Zenglein, Ives & Conrad, 2016). This brings
opportunities for foreign suppliers to fulfil current and future demand. He and Li (2010) stated that satisfied customers of high tech goods are less likely to switch to another product from another brand. As China is the biggest market of high tech goods, Chinese suppliers are likely to miss future market share. However, the Chinese government is actively intervening its domestic market,
benefiting domestic companies and restricting foreign companies. Targets has been set by the Chinese government that by 2025, forty per cent of mobile phone chips on the Chinese market should be produced by Chinese suppliers, seventy per cent of industrial robots and eighty per cent of renewable equipment. China’s third plan consists it latest 5 Year Plan (2016 - 2020) that aims to stimulate product development in ten key industries in order to achieve its Made in 2025 plan. These ten key industries are all subjected to the high tech industry and are based on the fourth industrial revolution. This fourth industrial revolution leads to the change of economic and social systems by the use of Internet of Things, ICT and cyber physical systems. As these subjects provide real time data, and efficient use of resources, collaboration between human and robotics is vital.
Concluding, China’s drive to become an innovation centre is driven by the government with the introduction of several plans. However, the economical success of product innovation relies on
the ability of Chinese companies to sell their products in- and outside China. It is proven that product innovation positively impacts competitiveness of companies to compete with competitors (Lukas, & Ferrel, 2000) and is therefore seen as a powerful tool of competition in the global market (Bowen, Rostami, & Steel, 2010). Effective design and development of new products have a
significant impact on cost, quality and customer satisfaction (Clark, & Fujimoto, 2010). Companies achieving sustainable competitive advantages puts themselves in dominant positions (Porter, 1985). Since product innovation is only useful when it creates economic value by increasing sales, it is important to understand how patenting contribute to the sales of high tech industrial robotics. With a lot of research already done on this topic in the Western World, there is relatively little research done that examines the context of China (Chen, & Yeh, 2012). Western literature showed that patents positively impacts sales and market value. This, since patents are often only exploited, when there is real economic value to it. Henkel & Hoenig (2015) found that Western researchers are influenced by economic market capitalism and less of set targets, while Chinese research
institutions aim to achieve the set targets by the government. China always had a strong government in control with a unique culture and a completely different social and economic system where a large number of cultural barriers impede the process to simply apply success factors identified in the West to the Chinese context (Wang, & Chung, 2013; Zhang et al., 2011). In 2012, a rapport
delivered by President Hu Jintao in the 18th National Congress Party, the Chinese government stated that China would speed up the pace to transform its economy from a made in economy to an innovation-driven economy (Fan, 2014). Despite there is still doubt if China is actually capable of catching up with innovation-driven Western countries. The believers claim that China is indeed out-innovating the West, while doubters claim that China lacks quality innovations (Steinfeld, 2010). Although it is a fact that China produces the most patents every year, there is also concern regarding the quality of those patents (Dang, & Motohashi, 2015). With wages catching up quickly with Western countries, ground-breaking innovations are needed to sustain growth and overcome the Middle Income Trap (Liang, & Marshall, 2011). The Middle Income Trap refers to the unsuccessful transformation of a country’s economy in where they are unable to compete with low-wage and low income economies, but are also unable to compete with high-skilled, advanced economies in where innovation is the main driver. This will result in growth stagnation and often in negative growth. Other research found that to overcome the Middle Income Trap, fast growing countries have to transform their economies from a low-wage country to a high-tech country, in where innovations has to be the main source of growth (Kharas, & Kohli, 2011). Previous research examined the growth of innovation of Chinese firms, by using patents to calculate the rate of innovation by comparing them with both upcoming and already established countries (Wei, Xie, & Zhang, 2017).
They found that China is capable of becoming an innovation-driven country and found no support that China will be trapped in the middle-income hypothesis.
In this research, sales of industrial robotics will be used as a proxy for innovation to find out if patents impact sales of China’s high tech industry. Previous research used sales of high tech firms as a proxy for the outcome of innovation (Coad, & Rao, 2008). They found that innovation is crucial for fast growing firms. As advanced robotics become more important to improve the quality of products and making product processes and costs-structures more efficient, more emphasise is put on developing and manufacturing industrial robotics, while using CPS, Internet of Things and AI systems (Grau, Indri, Bello, & Sauter, 2017). Since 2013, the Chinese market has been the biggest robotic market in the world and an increase in Chinese supplied robotics is noticed (IFR). However, no research has yet be done that examines the effect of Chinese patents on the sales of China’s industrial robotic industry. It is expected that robot density will increase in the next two decades and will have sufficient impact on the labor market as its substitute many current jobs (Brynjolfsson. & McAfee, 2014). Robot density is expressed by the amount of robotics for every 10.000 workers (IFR). In the Western World, including the United States and Western Europe, the total amounts of working robotics have been increased fourfold between 1993 and 2007. As of 2015, for every 10000 workers there are 164 robotics in the US, compared to 314 robotics for every 10000 in Germany (World Robotics 2015). Thirty nine percent of industrial robotics are used in the automobile industry, followed by nineteen percent in the electronics industry, since percent in the metal industry and further nine percent in the plastic and chemicals industry. The IFR (Internal Federation of Robotics) estimates that there are currently between 1.5 and 1.75 million industrial robots operating, which according to the Boston Consulting Group (2015) can reasonably be expected that these numbers will grow to 4 to 6 million by 2025.
However, compared to Europe, US, Japan and South Korea, China’s robot density is still low. Chinese robot density reached 36 in 2015 (World Robotics 2015), compared to 336 in South Korea and 221 in the USA. Despite, China is currently the biggest market for industrial robots worldwide with annual sales being more than 87.000 and increasing every year. Still only 26.970 of these robots were installed by Chinese robot suppliers, leaving more than 60.030 robots being installed by foreign robot suppliers. With China’s Made in China 2025 plan it further aims to produce and sell 70% of the total domestic robotic market by 2020. As high tech robotics are characterised by advanced technology, it is important to find out if patents affect sales of Chinese industrial robotics. As China currently holds the most patents of the world, you could argue that major product improvements should be noticed, making their high tech products superior and attractive for potential customers to buy Chinese high tech products.
Government Policies Stimulating Chinese Innovation
The Chinese government aims to sustain economic growth of 7% a year (13th 5 Year plan). However, recent years indicate a slow down of the economy, resulting in growth numbers below 7%. To enforce growth, China needs to adapt, harness and develop the ability to enhance its innovative potential (Krammer, 2009). China’s economic transformation strategy is based upon the endogenous growth theory, which emphasise that growth has to be produced by contributing factors inside the economy itself. These factors are primarily based on stimulating the development of a knowledge-based economy where investments in human capital, innovation and education are vital. The theory further holds that long term growth depends on its ability to innovate and should be stimulated by policy measures. As of 2015, China spent 2.07% of its GDP on r&d, which is lower than the world average of 2.2%. However, the Chinese government actively stimulates and transforms its economy to rely less on low-wage manufacturing in the future. In China’s latest 5 year plan (2016-2020), the Communistic Party of China (CPC), announced five guiding principles to fulfil the goal of doubling its GDP by 2020 compared to 2010 and to achieve a more balanced, sustainable development by coordinating a range of economic indicators (Hong, 2017). These principles are based on innovation, coordination, green development, further opening up of the economy and enhancing sharing principles. In each principle, technology plays a central part in becoming an innovation driven country. However, only three Chinese companies are listed in Thomson Reuters top 100 Innovation index of 2017. They conduct their research on 28 factors across eight performance pillars (financial, legal compliance, management & investor confidence, innovation, risk & resilience, people & social responsibility, reputation and environmental impact). The absence of Chinese companies in the innovation index rankings represents a lack ofinternational recognition. Furthermore, according to the automation readiness index of 2018, China ranks 12 out of 25 countries. The automation readiness index ranking is based on who is best prepared for the challenges and opportunities of intelligent automation. Intelligent automatisation enhances product improvement and mass customisation as it stimulates the availability of
customised services and products (Schulz, Egodage, Tabbone, & Garetto, 2017). However, intelligent automatisation is likely to disrupt industries, as the increased productivity and functionality will substitute current jobs. Therefore countries will face loss of current jobs and current workers are challenged with a continually lifelong learning approach and more workplace flexibility requirements (Arntz, Gregory, & Zierahn, 2016). Already 3% of the companies have implemented and 75% of the companies expect to use intelligent automatisation systems within three years (Brynjolfsson, Rock, & Syverson, 2017). The substitution of jobs hold trend with previous industrial revolutions introducing new efficient ways of producing and communicating
(Cowan, 2018). The new developed jobs centred around developing, operating and maintaining these new ways of producing and communicating. Therefore, China is currently restructuring its education system, increasing obligated tuition years and providing subsidies to prepare their
economy for the fourth industrial revolution. These subsidies allow for stimulating entrepreneurship by providing tax benefits and subsidies to lower start up costs. However, safety issues concerning Chinese citizens slow downs innovation, as safety allows people to fulfil their economic and social potential (Zacharatos, Barling, & Iverson, 2005). China’s international score for rule of law is low (ranked 70th), which indicates the extent to which citizens have confidence in and abide by the rules of society, the quality of contract enforcement, property rights, the police, the courts as well as the likelihood of crime and violence. This also negatively affects the score for government
effectiveness. Government effectiveness captures the perceptions of quality of public and civil services and the degree of their independence from political pressures, the quality of policy formulation and implementation and the credibility of the government’s commitment to such policies. Jiao, Koo and Cui (2015) state that a firm’s engagement in innovation activities is influenced by local legal environment and significantly promote the innovation development rate. Higher government effectiveness is noticed in countries with higher democratic values (Magalhaes, 2014). As China is theoretically a democratic country, it is ruled by one Party. The eight smaller parties are all under control of China’s communistic party and therefore are no threat to China’s political system. Since the Chinese government strongly controls its political and economical system, benefits apply to those who are a member of the Party (Piotroski, Wong, & Zhang, 2015). This includes tax and license advantages. However, this control over its political and economical system continues in the creation of multiple initiatives to achieve global leadership in the high tech sector by 2025. These initiatives encourages Chinese research institutions to conduct cutting-edge research, better protection of IP systems and setting up tax incentives to stimulate r&d. This should proceed China being a leader in high-tech industries rather than an imitator (Pham, Nguyen, Sgro, & Tang, 2017). In this research, industrial robotics will be used as a proxy for the high tech industry. Industrial robotics are highly advanced machines and are widely used in all high tech production processes using Internet of Things, CPS and artificial intelligence to enhance both economies of scale and scope. Economic reward is measured by sales of Chinese produced industrial robotics. Sales is the ultimate economic reward for a product that delivers value. In the industrial robotics industry, product quality is perceived to be the most important factor in
purchasing decisions (Gemünden, Ritter, & Heydebreck, 1996). Therefore, patens should enhance product offering and therefore increase economic reward.
2.1 History China’s Medium to Long Term Science and Technology Plan
2000 scientists, engineers and business executives were mobilised to discuss problems, challenges and research opportunities in 20 different categories in China in 2003 (Cao, Suttmeier, & Simon, 2006). The 20 categories were considered to be China’s main subjects for the coming 15 years. In these 15 years, China would aim to decrease its dependency on foreign technologies, to develop their own high quality products and to enhance the creation of a sustainable economy. The first steps to the development of the Medium- to Long Term Science and Technology Plan (MLP) were taken in 1995, when the first policy initiatives were introduced to enhance the nation’s strength in science, technology and education. This should be done by solving four critical problems addressed (Zhou, & Leydesdorff, 2005). The first critical problem was that China’s growth was mainly driven by manufacturing processes for Western countries, lacking its own research and development processes for innovative commercial technologies and depending on foreign technologies. China’s ‘market for technology strategy’, aimed on attracting multinationals to share their knowledge and technology for market access. This strategy attracted multinationals, but the intellectual property and technical standards remained possession of multinationals, which increased their profits and exploited their power over the production facilities. Second, China’s economic growth harmed the environment. Since the fall of Mao’s regime in 1979, China heavily invested in infrastructure and construction to modernise the country. Over-investments, lack of sustainability, polluting China biosystem and inefficient use of resources forced China to start transforming their economy (Serger, & Breidne, 2007). However, China’s need for energy, environmental protection, clean water and public health, failed short with the lacking technological capabilities of Chinese companies. Since 2007, China emits the most CO2 of the world, doubling USA’s CO2 pollution (Wang, Xue, Brimblecombe, Lam, & Zhang, 2017). To reduce CO2 emissions, China signed the Paris Climate Agreement in 2015, along with 195 other countries. They agreed to reduce CO2 emissions by reducing the use of fossil fuels, keeping global warming in between 1.5 and 2 degrees celsius (Rose, Wei, Miller, Vandyck, & Flachsland, 2018). However, no general plan was set out and therefore the goal of reducing CO2 pollution was left to INDCs (Intended Nationally Determined Contributions), in where countries could make their own plans to reduce pollution. China’s INDC is to lower carbon dioxide emissions by 65% compared to 2005. This should be achieved by generating green energy; wind energy, nuclear energy, water energy and solar energy as well as reducing the use of fossil fuelled cars and other transportation vehicles by substituting them for electric transportation. Investments in
generating green energy will reach 200 billion in 2020 (Dai, et al. 2016) As China’s need for energy is growing, growth in generating green energy is outpacing thermal based energy (Mathews, 2016). Energy from water, wind, sun and nuclear energy saw in increase of 72% in the first half of 2017,
compared to 28% of extra thermal capacity. Overall, 25% of the total energy is now produced by green energy generation compared to just 13.8% in the Netherlands. Third, China’s military defence depended mostly on importing defence systems from foreign countries. This made China vulnerable in case of a war. Last, China’s scientific reputation was low. Many of China’s best researchers went to find career opportunities abroad. Subsidies that had a specific purpose were misused for personal benefits, causing a lack of quality patents and a slowly increasing researchers force (Dang, & Motohashi, 2015). The failure of conducting ground breaking research led to an increase in control mechanisms and resulted in extra attention for considerable scientific and technological progress in the 15 year MLP (Cao, 2008)
2.1.2 Current Results Medium- Long Term Plan
China launched its 15 year MLP with 20 topics for the development of science and technology In the beginning of 2006. The 20 topics can be centred in three key areas; frontier technology,
engineering mega projects and science mega projects (Cao, Suttmeier, & Simon, 2006). By dividing the subjects in three key areas, the Chinese government could specialise policy programs. However, multiple issues raised with the execution of the MLP. Chinese economists argued that the best way to achieve technological advancements and reduce dependency on foreign technology was by continuing transferring knowledge. They were afraid that Western countries would stop transferring knowledge and reduce their presence (Cao, Suttmeier, & Simon, 2006). However, disappointment about the actual gain of knowledge by transferring and applying knowledge from foreign
enterprises led to a different approach. A second issue involved the selection of mega projects. Since most of the national programs are controlled by the MOST (Ministry of Science and Technology), skepticism about the effectiveness of the national programs raised. The centrally selected r&d programs, raised the question, whether or not these strategic plans make for good science and innovation in China. US based Chinese life scientists rejected 863 out of 973 programs based on a lack of inefficient funding, lack of transparency and programs being subjected to MOST members, rather than scientists. However, the MLP proceeded in its goal to reduce foreign
technology to 30% of the total value and increase patenting to become one of the top 5 patent producers of the world by 2020. To enhance patenting, expenditure for r&d increased to 2.1% of its GDP in 2017, aiming for its set goal of 2.5% by 2020. The increase r&d expenditure enforced the amount of researchers and researches conducted. The MLP is further based on the indigenous innovation model (zizhu chuangxin), where Chinese companies should be capable to innovate by themselves rather than buy or acquire knowledge from the outside (Grimes, & Sun, 2014). Grimes and Sun conducted a longitudinal study, in which they compared two time periods to find a
changing profile of China’s top 200 exporting companies between 2001 and 2012. They concluded that although China aims to decrease the presence of foreign companies, the share of FIE (foreign investment enterprises) increased from 50% in 2001 to 66% in 2012. The SOE (state owned enterprises) reduced its share from 45.5% in 2001 to 19.5% in 2012, while POE (private owned enterprises) increased their share from 4.5% to 14.5%. These numbers indicate that 2 out of 3 top 200 Chinese exporting countries are foreign owned enterprises. This contradict with reducing the presence of foreign enterprises. However, share of the total value of export shows different results. The total share in export of private owned enterprises was 3% in 2001 compared to 10.1% in 2012. FIE decreased its export share from 46% to 40.9%, where SOE slightly decreased from 51% to 49%. The results of Grimes and Sun shows mixed results. China sees an increase in foreign owned enterprises, but also find a decline of export value owned by foreign enterprises. This could indicate that foreign companies are more focused on expanding into China’s domestic market or Chinese private owned enterprises developed better products and therefore sees an increase in export value.
However, the outcome after twelve years after the implementation of the MLP, shows that China succeeded in entering the top 5 of most patent producing countries. In 2016, 302,136 Chinese patents were granted for compared to 143,723 of the US. Furthermore, the MLP enhanced research funds and increased research facilities, resulting in more conducted researches and increasing the amount of patents filed for (Fisch, Block, & Sandner, 2016). China’s started the creation of mega projects as the National High Speed Rail Network, the Shanghai Yangshan deepwater port and the Beijing Capital International Airport Terminal 3 to enhance China’s economic growth. These mega projects are complicated of nature and exceed costs of $700 million (He, Luo, Hu, Chan, 2015). China’s National High Speed Rail Network consists of three components; a national HSR grid and a upgraded or new built railway that is used for high-speed trains and intercity lines (Cao, Liu, Wang, & Li, 2013). The national HSR grid contains of 8 corridors of which 4 goes north-south and 4 goes west-east. These lines are designed to reach a speed of 300 - 350 km/h and should reduce travelling time with conventional trains by 50%. The HSR network is expanded to cover 90% of the Chinese population by 2020. This new and fast way of transportation enhances economic growth,
transportation times decrease. Furthermore student enrolment in Chinese universities increased from 5.5 million in 2006 to 7.8 million in 2016, while China’s research force increased by 30%. The amount of researchers for each million people increased from 932 in 2006 to 1203 in 2016,
allowing more researchers to conduct ground breaking research. Furthermore, China decreased its defensive import from 3.6 billion to 1.1 billion in 2017 (World Bank), while military expenditure increased from 441 billion in 2006 to 1.4 trillion in 2017 according to the World Bank. This
currently working on its 5th generation jet fighter, Chengdu J-20, which will use advanced high tech systems to compete with the Joint Strike Fighter.
Table 1: China’s Engineering & Science Megaprojects
2.2 Key Concepts of China’s 5 Year Plan (2016 - 2020)
China’s 13th 5 Year Plan is the continuation of its 12th year plan, stimulating the transformation to sustainable energy generation and enhancing domestic high tech manufacturing to complement traditional manufacturing (Ng, Mabey, & Gaventa, 2016). The 12th Year Plan (2011 - 2015) centred around 7 priority industries; new energy, energy conversation and environmental protection,
biotechnology, new materials, new IT, high-end equipment manufacturing and clean energy
vehicles and emphasis high quality growth to develop a sustainable economy overcoming pollution, intensive energy use and resource depletion (KPMG, 2011). The plan further focused on increasing domestic consumption as domestic consumption as a percentage of GDP fell to 36% in 2011, making the Chinese economy vulnerable to foreign import policies. The key economic and non-economic targets of the 12th 5 Year Plan are summed in figure 1.
Engineering Megaprojects Science Megaprojects
Advanced numeric-controlled machinery Development and reproductive biology
Control and treatment of AIDS Nanotechnology
Core electronic components, high end chips Protein science Drug innovation and development Quantum research Extra large scale circuit manufacturing
High-definition Earth observation systems Genetically modified new-organism breeding
Large aircraft
Figure 1: Key Targets China’s 12th Year Plan (2011 - 2015)
Source: Center for Strategic and International Studies
In 2016, the Chinese government stated an average annual growth of 7.8% over the last 5 years, experiencing a higher growth than predicted. Energy consumption decreased by 18.2%, where 16% was predicted. Use of major pollutants decreased by 12% compared to an expected 8%.
Urbanisation reached 55.8%, which is more than the forecasted 51.5%. However, the target of r&d spending to spend 2.2% as part of its GDP was not met. By 2015, China spent 2.066% on r&d. The outcomes are found in figure 2.
Figure 2: Outcome Key Targets China’s 12th Year Plan (2011 - 2015)
Source: Center for Strategic and International Studies
China’s 13th 5 Year Plan builds upon the same aspects as the 12th Year Plan focusing on expending services, high technology, a healthier environment, and a stronger social safety net. China’s targets can be found in figure 3.
Key Economic Targets Key Non-Economic Targets
Annual GDP Growth: 7% Increase non-fossil fuel use to 11.4%
Increase Urbanisation from 47.5% to 51.5% Reduction of energy use per unit of GDP: 16% Increase service sector contribution to GDP by four
percentage points, from 43% to 47%
Reduction of CO2 emissions per unit of GDP: 17%
Increase spending on r&d to 2.2% of GDP Increase forest coverage by 21.66%
Hold Inflation (CPI) at or below 4% a year Decrease pollutants COD and sulphur dioxide by 8% each
Key Economic Targets Key Non-Economic Targets
Annual GDP Growth: 7.8% Non Fossil use 12%
Urbanisation 56.1% Reduction of energy use per unit of GDP 18.2% Service sector contributing to GDP 50.5% Reduction of CO2 emissions per unit of GDP: 20%
R&D spending 2.066% Forest coverage 21.66%
Hold Inflation (CPI) at or below 4% a year Pollutants COD and sulphur dioxide decrease 15.5%
Figure 3: Key Targets China’s 13th 5 Year Plan (2016 - 2020)
Source: Center for Strategic and International Studies
China heavily focused on generating sustainable energy and in 5 years time, China has overtaken Europe in low carbon and clean energy investments. On a per capita level, China invested $74 per person compared to $78 in the EU. China’s wind and solar capacity surpass the EU in 2018 and produce 35% more GW than in the EU by 2020. Since 2011, the EU has seen a decline in green energy investments, whereby China increased its investments in these sectors to 1% of its GDP in 2015 compared to 0,2% in the EU. By the end of the 13th Five Year period total investments of $2.6 trillion will have been made, increasing its non-fossil power generation to 1000 GW. To meet the targets set in the 13th Five Year Plan, investments and innovations in the high tech sector are
required (Gosens, Kaberger, & Wang, 2017). The Chinese government set out ten primary high tech industries.
1. The next generation information technology
Next generation information has the highest priority in the 13th Five Year Plan (Kennedy, & Johnson, 2016) as it is the most dynamic sector worldwide with substantial increasing importance of AI, Internet of Things and cloud computing. Therefore the Chinese government is actively stimulating the integration of the Internet with traditional sectors of the economy as well as all kind of Internet-based innovations, including those in industrial organisations, business models, supply chain and logistics. By building a fast mobile information network (5G network), transportation and mail delivery networks will be increased stimulating economic growth (Hong, 2016).
Key Economic Targets Key Non-Economic Targets
Annual GDP Growth: 6.6% Increase non-fossil fuel use to 11.4%
Increase Urbanisation to 60% Reduction of energy use per unit of GDP: 15% Increase service sector contribution to GDP to 56% Improve air quality to PM 2.5
Increase spending on r&d to 2.5% of GDP Increase waterways suitable for drinking and fishing to 70%
Reduce poverty from 85 million to 55 million Life expectancy increase of one year
Increase invention patent to 12/1000 people Invest 6 - 10 trillion in environmental initiatives Increase labor productivity >120.000 Yuan Reduction of major pollutants 12.5%
2. Numerical control tools and robotics
Robotics are used in a wide variety across industries. Robotics work in dynamic environments with humans lacking extensive knowledge of robot programming, therefore these robotics need to be simplified to understand user interaction (Stenmark, & Malec, 2015). Integrating AI (aritificial intelligence) into robotic systems, simplifies user interaction, making robotics work autonomous and reduces programming costs. Since, sales of robotics is increasing exponentially up to 294,312 units in 2016, which is an increase of 16% compared to 2015 (IFR), understanding and
manufacturing these industrial robotics is important to become a leader in the high tech industry. China’s robot density is still below world average. The average robot density is 74 for every 10.000 employees, while South Korea has the highest robot density of 631, compared to 68 in China.
3. Aerospace equipment
After the USA, Russia and the EU, China is the 4th nation that was able to send working space equipment into space. Th complexity of aerospace programs make its an indicator that China is rapidly developing its the high-tech industries (Enjie, Kunsheng, Liangyuan, Yan, Yinxuan, Hongtao, & Jian, 2017). Furthermore, the growing pressure to develop China’s own defensive systems plays a big part in China’s goal to develop aerospace equipment, as these are crucial in modern warfare (Bitzinger, 2016). The growing air plane industry in China makes it also attractive for Chinese manufacturers to develop their own planes and compete with Airbus and Boeing. In 2014, China handled 392 million passengers and 5.9 million tonnes of air cargo, which is a 10.7% and 5.9% increase from the previous year (Jiang, & Zhang, 2016). This increase brings
opportunities for aerospace companies.
4. Ocean engineering equipment and high-tech ships
The ‘One Belt One Road’ initiative and the Maritime Silk Road aims on connecting and setting up trade routes from China to Southeast Asia, Oceania and North Africa (Ferdinand, 2016). In 2010, major ocean industries contributed to $239.09 billion dollars of its GDP, employing 9 million workers (Zhao, Hynes, & He, 2014). 85% of its international trade moves over sea, and is considered to be of major importance for further international trade. The maritime silk road, comprises a maritime trade route stretching from China to Africa and Europe and provides China access to Southeast Asia, South Asia, and the Middle East (Clemens, 2015). The plan costs $40 billion dollar and rises business opportunities to strengthen China’s ocean engineering equipment, which can also be applied to enhance China’s military defence systems.
5. Railway equipment
Increasing collaboration between China and the world has put priority in the 13th 5 Year Plan (Five Year Plan). China’s ‘One Belt one Road’ project focuses on the connectivity and cooperation of Eurasion countries. The project covers more than 65% of the world population and 40% of its global GDP (Pu, 2016). Furthermore, China is heavily investing in upgrading its railway infrastructure connecting 80% of the major cities, which will enhance connectivity and further economic growth. The development of high speed rails in China require new techniques. The expected costs are $150 billion (MOR, 2008), rising opportunities for Chinese enterprises.
6. Energy saving and new energy vehicles
China signed the Paris agreement to reduce carbon dioxide emissions by 65% in 2030. The 13th 5 Year Plan has announced to increase its non-fossil fuel share to 15% in 2020 (Gosens, Kaberger, & Wang, 2017). However it is predicted that the need for energy is to grow with 3.6 to 4.8% a year, but that the increase in renewable power production is expanding at a faster rate and is likely to take up a total of 27% of total energy supply by 2030. From 2011 - 2015, China further reduced its energy use per unit GDP by 18%. For the next, 5 years, China aims to reduce energy per unit GDP by 15%. These targets can only be met by new energy efficient techniques and require expertise and innovations (Mathews, 2015). Innovations in energy efficient products reduces the use of energy per unit GDP. Furthermore, China aims to manufacture and sell 5 million new electrical vehicles by 2020, stimulating the creation of Chinese electric vehicles companies.
7. Power equipment
Part of the Paris Agreement in 2015 was that China will reduce its carbon dioxide levels per unit of GDP by 65% compared to its 2005 levels (Gosens, Kaberger, & Wang, 2017). China is developing cleaner, renewable energy generation methods to rely less on fossil fuelled energy. To do so, China is investing in nuclear, hydro, wind, bio power and solar energy. Water, wind, solar, nuclear and biofuel are sustainable ways of generating energy. Investments in green energy exceeded investments in thermal energy by 40% in 2016. Total green energy investments reached $32.81 billion dollars, generating 25% of the total energy in 2017 (Mathews, 2017)
8. New Materials
The need to recycle, and increase durability requires different techniques and new materials. New materials are also needed to secure energy security, food and water and health care security (Miodownik, 2007) Between 1997 and 2005, the number of different materials have grown to 120.000, with estimates of 160.000 in 2015. Nano-materials are stronger, lighter and more durable.
Nano materials provide more functionality and flexibility and are a main component of the lithium batteries used in electrical cars. Food and water security developments focus on desalination technologies, such as membrane separation based on nano technology. Developing new materials enhances the development of recycling and food security and also provides competitive advantages over other countries. This enhances China’s international position as more countries rely on their invented materials (Wang, Jiang, Chen, You, & Zhu, 2016).
9. Medicine and medical devices
China’s health care system increased in size with 50% between 2009 to 2012 ($70 billion dollars in 2009 to $122 billion dollars in 2012). Increasing life expectancy with one year at the end of 2020 compared to 2016 provides opportunities to develop new medicine and medical devices (Yip, & Hsiao, 2014). As new medical devices and medicines improve treatment and increase quality of life, costs of China’s health care system is increasing. Therefore, government subsidies of $52 billion dollars lower health care costs. Furthermore, developing own medicine and medical devices would enhance international status (Torsekar, 2018). Most global medical device companies are USA based companies. 9 out of the 15 biggest producers are based in the USA. The other 6 companies are European based. However, the increasing health care market in China and in Asia, rises opportunities for Chinese producers to create their own medicines and medical devices.
10. Agricultural machinery
Demand for food is rising and with 19% of the world population living in China, it has only 8% of the worlds arable land. Furthermore, China faced a 50% decrease in agricultural workers between 1970 and 2010 (Kang, et all. 2017). Therefore, it is critical to increase crop intensity in order to improve crop productivity. Rising wages and low supply of workers increased the importance of the use of machines in agricultural productivity (Wang, Yamauchi, & Huang, 2016). In 1980, 28% of sown area were mechanically plowed compared to 63% in 2011. The continuous off-farm
employment and rising wages, enhances importance of next generation agricultural machinery, using Internet and data to increase efficiency and output.
2.3 Made in China 2025
Since 1978, China’s economic reform created millions of jobs and achieved the biggest working middle-class in the world (Li, 2017). This achievement is followed up by China’s increase in manufacturing output surpassing any other country in the world. A study in 2015 showed that China’s world wide share of producing personal computers exceeded 90%. Not only that, 80% of all
air conditioners were also produced within Chinese borders. However, a new manufacturing era has arisen with new opportunities and challenges. The continuing increasing wages resulted that China is no longer the low-cost producer it was eleven years ago. In fact, further emigration of production facilities to Vietnam, Cambodia and Laos already has negative consequences on China’s labour forces . Furthermore, constraints on the use of resources, environmental impact and environmental responsibility, makes it inevitable to rethink China’s manufacturing strategy.
Therefore, China set out their Made in 2025 plan. This industrial plan launched a three phase plan to transform China’s industrial industry from labor intensive work to knowledge intensive manufacturing. (Wübbeke, Meissner, Zenglein, & Ives, 2016). The first phase covers eleven years, from 2016 to 2025. In this period, China focuses to improve the quality of Chinese products, strengthen and expend the presence of Chinese companies in the world market and build solid high-tech manufacturing companies advancing in ten high-tech technology industries. These industries are prioritized; The next generation information technology, numerical control tools and robotics, aerospace equipment, ocean engineering equipment and high-tech ships, railway
equipment, energy saving and new energy vehicles, new materials, power equipment, medicine and medical devices and agricultural machinery. At the end of the 2025, China will launch its second industrial plan. The second phase covers 2026 to 2035 and is intended to achieve medium level in the world’s manufacturing power camp. (Li, 2017). In these years, further quality improvements and Chinese presence in high-tech industries should be achieved. In the third phase, covering 2036 to 2049, China’s aim is to become a world-leading high-tech manufacturing country.
China’s massive experience in implementing nation wide strategies, aids in transforming its industry structure. For its Made in China 2025 plan, they rely on a previous success method. Many transformations started of with a pilot city or region. In 1978, Shenzen became the first city with free market business models, providing subsidiaries and taxes to attract foreign businesses (Li, 2013). For its Made in China 2025 plan, Ningbo was selected to start transforming its ecological ecosystem, speeding up the construction of the industrial and manufacturing capability, introducing personnel training and policy support systems. Following Ningbo’s success an additional 20 to 30 cities will be selected to implement the system.
2.3.1 4th Industrial Revolution - Implementation of AI, CPS and IoT
The first Industrial Revolution started in the 18th century and introduced automatisation processes that changed the work landscape by substituting man labour and increasing productivity levels by the use of machines (Ago, Morita, Tabuchi, & Yamamoto, 2017). An industrial revolution is
characterized by the change of economic and social systems in industry (Dombrowski, & Wagner, 2014). The increasing wages and increased globalization, enhanced competition, which stimulated to produce more and to lower the costs. The introduction of industrial machines lowered the costs per unit and decreased prices, while offering a greater variety of products (Braguinsky, Ohyama, Okazaki, & Syverson, 2015). However, the second industrial revolution (1870 - 1914) introduced new ways of communicating and decreased transportation time. This was done by the invention of the car (1886) and telecommunication (1876). The improved transportation times and
communication from a longer distance resulted in the existence of conglomerates and the
outsourcing policies of manufacturing processes to low wage countries (Quinn, Brian, & Hilmer, 1994). From 1960 to 2004, 60% of non-agricultural jobs were substituted. In the same period, service jobs increased by 27%. Recently, the term fourth industrial revolution has emerged to indicate massive progression in technological advancement. Huge technological developments has been recognized in cyber physical systems, internet of things and AI. Cyber physical systems can record and store information, while also communicate independently among themselves. They combine physical operation with information technology networks. The internet of things is characterized by the global availability of information about technical systems and cloud-based software solutions (Covington, & Carskadden, 2013). It is assumed that devices are in ongoing contact with the Internet and provide real-time information. Artificial intelligence is a group of disruptive technologies that automate activities, associated with human thinking, including decision -making, problem solving and learning. These technological concepts and solutions are to realize a combination of economies of scope with economies of scale. This is also called mass customization and is characterized by achieving a high level of complexity with the integration of products and production processes. The 4th industrial revolution aims to implement collaboration between man-labour and robotics. This results that the technological progress made in communication and information technologies leads to a shift in job profile of employees and therefore require new, different competencies. It is expected that there will be an increasing demand for jobs within regulatory activities, while a decrease in competence required jobs like technical or professional skills is expected. Since robotics can handle more processes at a faster rate and in more creative ways than humans can do, 47% of the current jobs in the USA are under threat of becoming substituted (Frey, & Osborne, 2013). This process, also called lean process is related to the use of less human activities in the manufacturing process, reducing the investments in tools, needing less inventory, fewer defects in production and stimulating a wider variety of products (Womack et al., 1990). The continuing increase of global competition, put prices of products in many industries
under more pressure, thus relying on innovative technologies that will improve efficiency and production to lower costs. However, the availability of technology is happening at a faster rate than existing companies can adopt to these new technologies, therefore cost disadvantages arise for companies that don’t continuously innovate. Many companies still rely on old business models with high costs structure systems (Dijkman, Sprenkels, Peeters, & Janssen, 2015). Therefore, companies that do not adapt to the new globalisation system will have a disadvantage. Despite, companies that do invest in new technology and adapt themselves to the new globalisation structure gain
competitive advantages. China’s Made in 2025 plan heavily focuses on the development and integration of CPS, IoT and AI in the Chinese business world. Its scope is broadened to consolidate existing industries, while also promoting diversity and expending the range of various industries, implementing regional cooperation systems by using internet of things, to improve and innovate new products. (Gorkhali, & Xu, 2016). An important priority is to develop advanced collaborative industrial robotics, that will enhance productivity, communication and quality.
2.3.2 AI Leadership 2020
To reduce the economic impact of rising wages, China supports AI as a strategic area by developing AI integration plans using quantitative outcomes. These plans stimulate inter-ministry coordination, increase government funding for r&d, support workforce development and support international collaboration and expansion. Systems using AI surpass human-level performance, increasing productivity levels and lowering costs per unit (Brynjolfsson, Rich, & Syverson, 2017) Since 2014, China surpassed the US in volume of AI research. The Robotics Industry Development Plan
(2016-2020) set out a five year plan with technology targets and government strategies to develop the robotic industry:
-
Annual volume of Industrial robot production by Chinese indigenous brands will reach 100.000-
Annual sales of service robots in China will exceed $4.36 billion-
There will be 3 globally competitive enterprises in robotics-
There will be 5 AI-related industry clusters in China-
The MTBF (MeanTimeBetweenFailure) for industrial robotics produced by Chinese companies will reach 80.000 hours.-
The quality of the core components of robots will be on par with counterparts in the global market-
Robot density for prioritised industries will reach 150 per 10.000 employees.The quantitative targets, makes it easier to find results. However China’s Implementation Plan for Internet Plus Artificial Intelligence 3-Year Initiative outlined nine key engineering areas in AI between 2016 and 2018 (He, 2017). 1. Public Information Service Platforms. 2. Smart Homes 3. Smart Vehicles. 4. Smart unmanned transportation applications. 5. Smart security 6. AI-enables end user applications 7. Smart wearable devices 8. Smart robots and 9. Core AI Technologies. Besides specifying the strategies of the key areas, this plan also outlines strategies the government should take to stimulate the development of AI r&d. These government strategies aim to increase r&d spending, increase government support for workforce development, enhance the development of higher education enrolment, and focus on increasing collaboration between Chinese and foreign companies. The Chinese government provides five platforms for r&d funding to stimulate the investment of Chinese companies in high-risk and long-term projects in the field of AI. These include:
1. The fund for Industrial Restructuring and Upgrading. The purpose of this fund is to support smart manufacturing and new model applications. The budget for this fund is $404.3 million. 2. Central Basic Infrastructure Budget. This fund has set up to directly support Internet
infrastructure projects and key projects in emerging countries. The budget for this fund is $766 million.
3. Central Financing for Science and Technology. This fund should enhance smart manufacturing and robotic projects as well as the integration of AI systems in smart products.
4. Multiplied Pre-Tax deduction of Research and Development Expenses for Enterprises. This fund will refund between 150% to 250% of the r&d expenses incurred during the development of AI technologies. Large enterprises will be refunded 150%, where SMEs will be refunded up to 175% and those that develop an intangible product will be refunded 250%.
5. Insurance Compensation for First Key Technology Equipment. This fund reduced the costs incurred of insurance premiums paid to cover the first run of key technology equipment against quality and safety issues.
