PARIS – When Western politicians and business leaders discuss China’s manufacturing prowess, they typically invoke images of colossal steel mills flooding global markets, dark factories run by robots, and state-owned champions sustained by subsidies. This supports the view that tariffs and anti-subsidy measures can erode China’s industrial dominance. But while this logic may be comforting, it is wrong.
China owes its manufacturing leadership not to a few national champions, but to profound industrial density. At the end of 2023, China was home to 4.1 million manufacturing enterprises, employing around 105 million people. Of these firms, 3.6 million report less than 20 million yuan ($2.85 million) in annual revenue. Most employ about ten people and possess limited fixed assets (144,000 yuan per employee). An additional 18.4 million self-employed workers operate at the margins of the formal corporate manufacturing sector. These companies are largely excluded from government subsidies.
These firms are not necessarily on the technological cutting-edge. About 58% report a maturity level of one (out of five) in developing “smart manufacturing,” putting them at the “planning level.” While this group has shrunk considerably – by 27 percentage points – since 2019, only 17 percent of Chinese manufacturing firms have made it to level three (integration), four (optimization), or five (leading).
China’s real industrial advantage lies, first and foremost, in the connections among firms, which are organized into thousands of regional clusters. In a typical cluster, dozens of companies can produce a similar component, but each has slightly different capabilities, suppliers, knowhow, and customer relationships. This is crucial, not least because of market churn: entry is relatively easy for producers, but margins are thin, and bankruptcy is common.
Nonetheless, when a legal entity fails, engineers and managers quickly find positions in a new vehicle, which uses and builds upon their knowledge. This combination of repetition, competition, labor mobility, and incremental upgrades in tooling and organization fuels a dynamism, with clusters often serving as a springboard for high-growth companies, from Bambu Lab to Roborock. Insta360, a camera company, first reached $1 billion in annual revenue ten years after its founding.
China’s government has supported this process with its “Little Giants” policy, introduced in 2018, which aims to cultivate specialized, sophisticated, and innovative firms in strategic tech sectors. Each of the 14,600 “little giants” holds more than 22 patents and has an average R&D intensity exceeding 7 percent. Some 46 percent of them are concentrated in 178 national high-tech industrial-development zones, such as Zhongguancun in Beijing, Zhangjiang in Shanghai, and East Lake in Wuhan. Taken together, these zones account for 14 percent of national GDP and about half of China’s total R&D spending.
Chinese industry also benefits from scale. Western strategies often assume that Chinese manufacturing would crumble without export demand. But when China’s government supports producers of electric vehicles, solar panels, batteries, or industrial machinery, it is not only targeting foreign markets; it is fostering domestic demand, procurement channels, national standards, and infrastructure build-outs to create volume early. China is the world’s largest exporter of manufactured goods, but in many sectors, it is also its own best customer.
The third key reason for China’s industrial advantage is the one Western observers get the most wrong: financing. The Western narrative insists that Chinese firms owe their dominance almost entirely to subsidies. But China’s central government has tightened the rules that govern local industrial support, because uncontrolled local subsidy races are wasteful.
Instead, Chinese manufacturing firms benefit from cheap capital, delivered through a mix of debt and equity-like public funds, within a system that makes use of financial repression and tolerates very low returns for long periods. Government entities mobilize capital, but outsource recipient selection, at least partly, to professional managers and co-investors.
Crucially, decisions are not based on which firms can deliver the biggest financial returns the fastest. According to China’s National Bureau of Statistics, industrial enterprises worth more than 20 million yuan operated with business costs of about 85 yuan per100 yuan of revenue, and expenses of about 8.5 yuan per 100 yuan of revenue, in 2023. This leaves little room for shareholder value.
Source: Korea Times News
