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Made in China 2025: Midea's Takeover Offer of Kuka Gives Insight Into China's Future Industrial Innovation Policies

POSTED 05/24/2016  | By: Jeffrey Hibbard, CEO

Made in China 2025: A Look Inside China’s Latest Industrial Innovation Policy

Last week, China-based home appliance maker Midea made a profound statement with its 4.57 billion euros ($5.17 billion) takeover offer for German industrial robot maker Kuka, one of the world's biggest 4 robot suppliers. Without context, it seems like a pretty hefty price to pay just to avoid the costs that Midea would incur from a tool supplier, especially when you consider that the offer of 115 euros per share is a breathtaking 60% premium to the share price this February, when the Chinese company first disclosed it had lifted its existing stake in Kuka to 10.2%. 

But there is a method to Midea’s madness. In fact, Midea’s move is not founded from a desire to vertically integrate to reduce supplier costs. Instead, their rationalization for the significant investment in Kuka surely stems from the incentives created by the Made in China 2025 initiative (MiC 2025).

Clearly, the Chinese see robotics as a strategic way to counteract slowing economic growth rates, rising wage costs, and growing competition from other emerging markets. Replacing people with machines and robots will help push China up the manufacturing value chain. Low-cost manufacturing drove the first wave of economic growth in the People's Republic as workers moved from the fields to the factories. Now rising living costs in the cities and low wages are driving factory workers home. This means that mega-manufacturers that relied on endless waves of low-cost factory workers have seen that resource drying up. Of course, automation is the answer.

The Chinese robotic movement started in earnest in 2011 when Foxconn declared that it would deploy 1 million robots over the next 3 years. This audacious statement sent a message for the direction of China’s leading manufacturing company, and that morphed into a country-wide, government-sponsored initiative. 

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. The goal is to transform Chinese manufacturing capabilities from being the world’s biggest manufacturer, based on low cost, to becoming a world-class manufacturing power based on quality and innovation.

Made in China 2025 (MiC2025) is a government-based initiative to comprehensively upgrade Chinese industry. The initiative draws direct inspiration from Germany's "Industry 4.0" plan, which was first discussed in 2011 and later adopted in 2013. The heart of the "Industry 4.0" idea is intelligent manufacturing, i.e., applying the tools of information technology to production. In the German context, this primarily means using the Internet of Things (IoT) to connect all the small and medium-sized companies more efficiently in global production and innovation networks, so that they can not only more efficiently engage in mass production, but just as easily and efficiently customize products.

"Made in China 2025" differs in multiple ways from previous China-based industrial policy initiatives. First, it focuses on the entire manufacturing process and not just points of innovation or cost cutting. Second, it promotes the development of not only advanced industries, but also traditional industries, from the supply chain to manufacturers and modern services. 

Consequently, there is still a focus on state involvement, but market mechanisms are more prominent than in Strategic Emerging Industries (SEI) of the past. For example, instead of focusing on top-down, unique domestic technical standards, the attention is on self-declared standards and the international standards system. Finally, there are clear and specific measures for innovation, quality, intelligent manufacturing, and green production, with benchmarks identified and goals set for 2020 and 2025. 

“Made in China 2015” 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.

China recognizes that the entire supply chain must innovate because the chain is only as strong as its weakest link. The scope of MiC 2025 specifically points out goals. In the machine automation and robotics industries, for example, the robot supply chain typically delivers hardware like servo drives, motion controllers, machine vision, and PLCs to name a few.  To align with MiC 2025, the robot supply chain must rethink its traditional hardware-based approach and consider software-based alternatives by providing real-time operating systems (RTOS) on standard IPCs, soft motion control, EtherCAT protocol, soft PLC, software-based machine vision and more.

Among the many measurable goals, the MiC 2025 plan identifies the goal of raising domestic content of core components and materials to 40% by 2020 and 70% by 2025. To ensure this happens, Chinese bankers report that tax breaks and cheap credit will flow to companies that buy and invest in technology that aligns with the goals the state wants to achieve. This is powerful motivation for manufacturers that have large capital requirements.

Which brings us back to Midea’s decision to purchase Kuka. Midea can put robots into its own manufacturing processes, and sell them to other companies seeking to do the same. It will profit from the business itself, can double down from the tax breaks and cheap credit, and can expand its business at lower costs because it will receive preferential financing from making a strategic investment aligned with MiC 2025. 

And what can companies in the Chinese supply chain for the 10 targeted sectors in the MiC 2025 document learn from Midea’s example? Given the powerful incentives that the Chinese government is creating, they would be wise to follow the lead of Foxconn and Midea: learn the mission for MiC2025, and align with its goals.