'Made in China 2025'

Faced with slowing economic growth rates, rising wage costs, and growing competition from other emerging markets, Chinese leaders have been seeking new ways to upgrade the country's manufacturing sector - a key industry that has largely driven China's economic rise over the past three decades.

And it seems that those efforts have now yielded major results: Headed by Premier Li Keqiang, the country's cabinet, the State Council, recently unveiled "Made in China 2025," a sweeping national strategy designed to enhance competitiveness in this sector through automation and overall improvement in technology.

It is part of a Chinese vision of an economy driven less by exports and investment and more by services and smart industrial production.

The 10-year strategy involves moving the Chinese economy away from labor-intense and low-value production towards higher value-added manufacturing, and includes plans to improve innovation, integrate technology and industry, strengthen the industrial base, foster Chinese brands and enforce green manufacturing.

It is also set to promote breakthroughs in 10 key industries where China wants to be a leader in the future, including information technology, robotics, aerospace, railways, and electric vehicles. To achieve this, Beijing plans, among other things, to continue a trend of state-directed innovation, proposing to establish 15 manufacturing innovation centers by 2020, which would be expanded to 40 by 2025.

Behind this new vision is the Chinese leadership's realization that it needs to transform the country's manufacturing industry to enable it to keep up or stay ahead of that of other countries.

Some low-wage industries that have been important for the Chinese manufacturing sector over the past decades - such as low-cost textiles and basic electronics assembly - have begun to shift to other Asian locations such as Cambodia, Vietnam and Bangladesh.

"The new measures reflect the increasing competitive pressures Chinese manufacturing is facing from other Asian emerging markets due to rising manufacturing wage costs in China," Rajiv Biswas, an Asia-Pacific chief economist at the global analytics firm IHS, told DW.

German-inspired

A major source of inspiration for the broad-based strategy has been the German "Industry 4.0" concept - a plan released last year to boost the European nation's competitiveness through globally interconnected production chains and factories.

"Germany's 'Industry 4.0' is substantially shaping the domestic debate in China on industrial modernization and competitiveness, and both countries are cooperating closely in this field," Jost Wübbeke, research associate at the Germany-based Mercator Institute for China Studies (MERICS), told DW.

Beijing and Berlin have enjoyed strong bilateral relations for some time now. China is one of Germany's biggest trading partners and Germany is one of China's most important sources of technology and know-how.

In January 2014, China opened its first European chamber of commerce in Berlin with a view to further promoting economic relations and investment. In 2015, China was also the official partner country at the CeBIT technology trade fair, at which many Chinese companies were represented.

In fact, Germany's ambassador to Beijing, Michael Clauss, said in a statement last month that given the great potential for innovation and growth of "Industry 4.0," the governments of China and Germany had agreed that 2015 would be the year of innovation, "with the advancement of industry 4.0 at the core of our common agenda."

A host of challenges

But can China truly achieve this goal so quickly? To do this, the country would first have to overcome numerous challenges, including improving data and cyber-security and providing faster Internet speeds required to keep up with the steeply increasing data flows. According to a 2014 poll by the European Union Chamber of Commerce, the slow Internet speed negatively affected 86 percent of responding companies. More than 70 percent of respondents stated that Internet environment had even deteriorated.

Moreover, as analyst Wübbeke points out, China's innovation system is still afflicted by a raft of problems such as an inefficient use of funding, weak quality management and frequent scandals of scientific misconduct that weaken knowledge production. "While China is quite strong with regard to certain figures such as R&D expenses and patent grants, it has so far not been able to turn its resources into a qualitative improvement of its innovation capacity," said the expert.

Jörg Wuttke, President of the European Union Chamber of Commerce in China, also points to the fact that while the "Made in China 2025" strategy is not short on highly specific, measurable goals - featuring a table with 2015, 2020 and 2025 projected targets - the mechanisms for achieving these goals are lacking, and it is not clear which specific agencies are responsible for achieving the goals.

And according to Nicola Casarini, a senior fellow for Asia at the Rome-based Istituto Affari Internazionali, the main challenge facing China is related to its capacity to create an environment conducive to innovation, since this is connected to the creation of an open system with all the political implications that this entails.

Industrial superpower by 2049?

All these reasons explain why many analysts argue that while the country can make significant progress towards this goal over the next decade, the process of transforming China's manufacturing sector towards higher value-adding will only be partially completed within ten years.

But Beijing seems to have considered this and is already planning two further stages designed to make China the world's leading "industrial superpower" - a goal analyst Wübbeke views as realistic.

"Although there is a huge technology gap compared to industrial nations, the highly dynamic development in China will push industrial innovation very much. China will be able to make cutting-edge innovations in the future and to produce technology that can equally compete with leading technology-providers," said the MERICS expert.

A double-edged sword

But what does this mean for the world? There seems to be a host of advantages related to an upgrade of China's manufacturing sector. As Wuttke points out, there will be more benefits for customers around the world, better and cheaper products derived from a more sustainable green growth pattern in manufacturing as well as more engagement and cooperation possibilities for business.

But one important by-product will be increased competition, which is why some argue this new strategy may prove to be a double-edged sword for industrialized nations which currently have the edge in advanced manufacturing sectors, particularly Germany.

"China promotes these industries in particular because it believes that they will be decisive for the future competitiveness of economies. As China also promotes international expansion in these areas, this might have a huge impact on German core industries such as mechanical engineering," said Wübbeke.

This view is also shared by Casarini: "If China achieves these goals, it will put pressure on Germany as well, since Beijing will become a serious competitor in a whole series of industries where today Germany has an edge. Other industrialized nations will also feel the competition coming from China, but it is Germany that will likely suffer the most."

According to Biswas, this increased level of competition is already evident in some advanced manufacturing segments such as high speed rail, where China is competing with the EU and Japan for orders in developing countries that are planning to install high speed rail networks.

Stepping up reforms

However, this doesn't necessarily bode badly for Germany, especially since growing competition from China may create opportunities for German businesses and force Berlin to step up structural reforms aimed at boosting innovation.

"German providers of industrial software, automation and system integration are likely to benefit very much from the Chinese investment in advanced manufacturing technology," said Wübbeke.

Yet, if Germany fails to increase innovation and productivity in the coming years, some of its industries run the risk of being priced out by Chinese competitors.