Made in China 2025: China Industry Superpower

“Made in China 2025”: China Industry Superpower. The rest of the world left behind
By Wolfgang Müller
[This article posted on March 06, 2025 is translated from the German on the Internet, https://www.isw-muenchen.de/online-publikationen/texte-artikel/5351-made-in-china-2025-china-industrie-supermacht-rest-der-welt-abgehaengt.]

In the first days of February, DB Research, a think tank of Deutsche Bank, published a study on China's economy with recommendations for investors and stock market investors. The title of the study: “China eats the World”. (available online at: https://www.binance.com/en/square/post/19949464618449)

The key messages: “We believe that 2025 is the year in which the investor community will realize that China is overtaking the rest of the world. It is increasingly difficult to ignore the fact that Chinese companies in many industrial sectors and, increasingly, in services, are delivering more and often better quality for the same price...

Investors pay for market power. We therefore expect the “China discount” (i.e. on China equities, WM) to disappear. Moreover, with a policy favoring consumption and likely financial liberalization, profitability should soon exceed expectations...

China first dominated in textiles and apparel and toys. Then China took the lead in electronics, the steel industry, shipbuilding, and most recently in household appliances and solar energy. Without any explicit advance notice, China is now also leading in industries such as high-end telecommunications, the nuclear industry, the arms industry, and high-speed trains. These technological successes have so far been ignored by investors...

China's current economic situation is often compared to the economic stagnation in Japan after the bursting of the Japanese real estate bubble. This overlooks the fact that the Chinese economy continues to grow at a rate of around 5% and that China – unlike Japan – is politically, economically and financially independent.

Finally, China's population decline is often cited as evidence of the economic stagnation to be expected. But from DB Research's point of view, this is not valid: “But many countries have this problem. We believe this argument completely ignores important facts. China has two advantages: 1) it leads in automation, accounting for 70% of all industrial robots installed, which boosts productivity and thus per capita incomes; 2) it has a huge potential market thanks to the Belt and Road Initiative, which involves Central Asia, West Asia, the Middle East and North Africa in its development process...
DeepSeek: China's “Sputnik Moment” for the wealthy West?

From the perspective of the analysts at DB Research, however, the trigger for a reassessment of the Chinese stock markets and the rise of the Chinese economy has been missing until now. The appearance of DeepSeek, a Chinese AI language model comparable to OpenAI and ChatGPT from the US, is now this catalyst. DeepSeek offers comparable performance to Western AI models – at a fraction of the computing effort. Furthermore, the development effort of DeepSeek, at around $6 million, was tiny compared to the investment costs of its Western competitors, which ran into the hundreds of millions for many thousands of expensive Nvidia chips. The publication of DeepSeek is therefore the “Sputnik shock” not only for the AI industry and Silicon Valley, as tech investor Marc Andressen explained. But for the rich West and especially for the US.

DeepSeek is unlikely to be a Chinese flash in the pan. More and more Chinese companies will be at the forefront of technology. In 2023, China accounted for almost half of all patent applications worldwide. This trend is likely to continue. China has more STEM (science, technology, engineering, and mathematics) graduates than all other countries combined, except India. In addition, many graduates in other countries are also Chinese citizens.
“Made in China 2025” industrial policy program

Almost 10 years ago, the Chinese government launched the “Made in China 2025” program. China wanted to become less dependent on high-tech imports in important future-oriented industries and catch up with the world leaders. The funding of the AI industry and quantum computing was part of the program.

When it was announced, the program was considered very ambitious in the West. The assumption was possibly that much of the program would not be realized anyway. A negative example at the time was China's semiconductor industry, which, despite many programs and enormous government investment, lagged far behind the announced targets and lagged far behind its competitors from Taiwan, South Korea, Japan and, above all, the USA. China's chip imports continued to grow. Others saw “Made in China 2025” as a challenge, particularly for German industry and its technological leadership. But in the following years, the challenge posed by “Made in China 2025” no longer played a major role in Europe.

In China, too, the “Made in China 2025” program was increasingly “dismissed” and hardly mentioned at all in government and party documents and at party congresses. It was probably better not to stir up any sleeping dogs in the West. But all levels of government, from the central government in Beijing to local governments, have systematically pursued the goals of “Made in China 2025”.

The details of “Made in China 2025” were set out in hundreds of official documents. A committee of engineers and scientists defined the program's goals for 10 industrial sectors with hundreds of sub-sectors in a “Green Book”. The program was designed to make China a green and innovative industrial power, one that was based less on comparatively cheap labor and Western supply chains and more on automation and new technologies developed in China. In some cases, the defined goals were vague, but for some sectors there were statistical benchmarks.

Now, in the spring of 2025, it can be seen that China has largely achieved the program's goals. According to Nikkei Asia (20.12.24), it cost trillions, but for the Chinese government, every penny was worth it. China has caught up considerably in almost all of the ten industrial sectors defined. China's spending on research and development has increased very rapidly and is almost on a par with the average of the 38 OECD countries. Today, China is less dependent on technological inputs from abroad. Imports of manufactured goods such as machinery or cars fell from 10% of economic output (GDP) in 2016 to 8.5% in 2021.

The country is a world leader in electric mobility and solar technology. According to a 2015 plan, Chinese companies should sell 3 million electric cars in 2025. But by 2024, Chinese carmakers had already sold over 10 million electric cars. BYD has replaced Tesla as the leading manufacturer of electric cars. In the solar industry, Chinese companies were already producing 65% of all solar panels and 47% of batteries in 2015. Today, the corresponding figures are 90% and 70%. Chinese products are driving the “green revolution” all over the world. The German solar industry, still a global leader 20 years ago, barely exists anymore. This has little to do with labor costs and more to do with failed industrial policy. A similar situation applies in the US, as a Bloomberg study has shown (http://www.bloomberg.com/graphics/2024-opinion-how-us-lost-solar-power-race-to-china/).

In the field of industrial robots, the market share of Chinese products was expected to reach 70% this year. The goal was not achieved, but the market share is now still over 50% (excluding KUKA, which was bought by the Chinese company Midea). In the aviation industry, previously controlled by the duopoly of Airbus and Boeing, Comac has emerged as a challenger whose passenger aircraft are now in scheduled service in China and will soon be in service throughout Asia. In shipbuilding, Chinese shipyards now have a 70% market share, even though business with particularly lucrative special-purpose ships (cruise ships, LNG tankers, etc.) is still being done elsewhere.

The targets of “Made in China 2025” were clearly missed in the semiconductor sector, an Achilles' heel of the Chinese economy. As early as 2020, 49% of the country's semiconductor needs were to come from its own production, rising to 75% by 2030. In 2020, however, barely 17% of the chips consumed in China were produced domestically, and in 2023 it was only 20%. Here, China is vulnerable to blackmail, as the US economic war against China shows, which is mainly focused on chip sanctions. In addition, semiconductors account for the largest share of China's imports in terms of value. In the coming years, the Chinese government will do everything in its power to finally become more independent in this sector as well.

The Chinese government's philosophy was explained by Xi Jinping in a speech in June last year: “A country prospers when science and technology prosper. Strong science and technology are cornerstones of a strong nation. China's modernization relies on scientific and technological progress. The high-quality development of the nation depends on our ability to create new growth drivers through innovations in science and technology.” (Nikkei Asia, Dec. 20, 2024)

Even today, there are no public references or official assessments of the 2015 initiative. It is obviously counterproductive for China's foreign and especially trade policy to talk about achieving quantitative and qualitative targets for substituting foreign products. But the spirit of the program to strengthen China's technological independence still applies.

China has reduced its technological gap and established its industrial leadership with the program, according to the head of an economic research institute in Shenzhen in southern China. For the economic researchers at the Berlin-based Merics think tank, China has made extraordinary progress in all areas of the 2015 program. From a Chinese perspective, the country does not have to be at the forefront of all future technologies. But there should at least be competitive Chinese alternatives (Nikkei Asia, 20.12.24). In 2026, China's high-tech sector will contribute about 19% of the country's total economic output (GDP). If electric cars, batteries and solar panels are included, the share rises to 23%.
China shows that industrial policy can work

In the past 30-40 years under the ideological dominance of neoliberalism, industrial policy was a dirty word in Germany and in the EU. Industrial policy was considered a hobbyhorse of the French mercantilists, who had fallen out of time. The globalizers relied on the invisible hand of the market, which would regulate everything. When China joined the WTO at the beginning of the 2000s, the “China price” caused the relocation of entire industries and technologies from Western Europe and the USA to China. This affected not only mature technologies, but also the optical industry and later telecommunications and mobile communications.

Now the German and European key industries of automotive and mechanical engineering are under pressure. China's industrial policy has allowed it to catch up and take the lead in e-mobility and storage technologies (batteries). It didn't have to be this way. But when, for example, the German metalworkers' union IG Metall called at a congress in 2011 for the promotion and establishment of battery cell production in Germany, the car managers smiled. The resolution was consigned to the wastebaskets of corporate headquarters and government ministries.

The doctrinaire rejection of industrial policy – too expensive and a waste of money; civil servants cannot foresee innovations and the development of markets, etc. – has been practically refuted by China's economic successes. Incidentally, Silicon Valley, as the current world center of IT, AI and chip development, only came about through funding from the US Department of Defense, as economic researcher Marianna Mazzucato has demonstrated. The commercial applications of semiconductors only began to flourish once the military market had become too small for the new tech companies.
China's industrial dominance and export surpluses

There is no doubt that China is now the industrial superpower. The “Made in China 2025” program, which focuses on high-quality industrial products, has helped to further consolidate China's dominant position. China now accounts for 34% of global industrial production, three times as much as the US. China produces more industrial products than the nine other industrialized countries in the ranking put together. In 2010, after the financial crisis, China's share of global industrial production was only 19%. But even then, China was already being referred to as the “factory of the world”. The same picture emerges for manufactured goods exports: China's share was already 20% in 2020; in 1995, it was just 3%. In recent years, the export machine has picked up speed: in 2024, Chinese exports grew by another 12%.

Adjusted for prices, China's current export surplus in relation to economic output (GDP) has reached a new high, exceeding the previous peaks in 2007 and 2008. The cause of this huge export surplus lies primarily – as Chinese economists have shown – in the collapse of the real estate sector, which caused domestic demand to collapse not only for steel, but for durable consumer goods of all kinds, such as furniture, household appliances, etc. Chinese companies then turned to foreign markets. In addition, the aftermath of the pandemic has further dampened domestic consumption in China. These are the internal causes of the current overcapacity and the Chinese competitive pressure on industries in other countries.

Can this continue in the long term? Not only in the West, tariffs and other restrictions are being imposed on Chinese industrial products. The Economist (14.2.2025) reports that many countries in the “global South” want to protect the development of their own industries against Chinese exports. These are mostly countries that cooperate with China politically and economically. India, with its huge market, whose government has launched an industrial policy program called “Made in India,” also took measures against the Chinese export offensive years ago.

The Chinese government has recognized the international mood against China's export offensive. Last fall, at a meeting with Chinese and foreign business leaders, including Tim Cook of Apple, Premier Li Qiang referred to 18th-century Adam Smith and his book “The Wealth of Nations”: China believes in the rationality of a global division of labor between countries. The event was probably part of the Chinese government's marketing campaign and was intended to present China as a champion of globalization (Financial Times, December 6, 2024).

The larger Chinese industrial companies are now focusing on capital exports and are building production facilities not only in Southeast Asia, but also in Latin America, Europe and Africa. They want to escape the limits of the Chinese market with its enormous competitive and price pressure and at the same time circumvent the growing tariff barriers against imports from China. This in turn leads to the protectionist game of cat and hedgehog, with the new Trump administration, for example, focusing particularly on Mexican exports of Chinese cars for the US market.

But not all Chinese companies are pursuing this path of international expansion. One example is Ecovacs, a company based in Suzhou near Shanghai that produces household robots (vacuum cleaners, lawn mowers, etc.) and has a 30-40% market share in China and 20% on the global market. Ecovacs is not currently planning to relocate. The reason: nowhere else in the world is there such a pool of technical specialists and such a network of specialized suppliers for manufacturers of high-quality products to quickly develop and launch a new product, the Financial Times (6.12.24) quotes an Ecovacs manager as saying.
Has China's industrial model reached its limits?

Depending on the calculation method, China now accounts for well over 30% of global industrial production. The country's economic output, which also includes agriculture, the extractive sector, construction and all services, accounts for 18% of the world's economic output (GDP). China's share of global consumption is 15%. The population accounts for about 17% of the current world population. Clearly, there are massive imbalances here.

For Chinese economists, it is clear that China's exports are meeting with increasing resistance internationally and also in the Global South. China's development model, which has so far been based on promoting industrial production at the expense of social and private consumption and which critics also characterize as state-led industrialization (see Au Loong-Yu in his blog post “The Tyranny of State-Led Industrialization”, available in English at China-Watch, 22.3.24), has reached its limits.

Tu Xinquan, dean of a Beijing business school, said: “China's share of global exports is high enough... for our further economic development, we should focus more on domestic demand. It is now time for China to change its economic strategy.” (Financial Times, Dec. 6, 2024)