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Shakeel Ahmad Ramay


Hilal English

Chinas Transition from Industry 3.0 to 4.0

June 2024

President Xi Jinping's vision for new quality productive forces is propelling China towards becoming a global hub of innovation and technology. Despite challenges, China's comprehensive approach, focus on R&D, and environmental considerations position it to lead the next industrial evolution.

President Xi Jinping coined a new term, “new quality productive forces,” during his visit to the northeast of China. The term has become a buzzword at the two sessions. The leadership and policymakers are exploring the terminology and developing plans to achieve the objectives of the new quality productive forces concept. Before delving into whether China will be able to achieve this goal, it is necessary to understand the evolution of the Chinese economy and industrial development. This understanding will help us comprehend the idea and assess China's ability to achieve the goal of new quality productive forces.
It is common knowledge that since the introduction of reforms, China has been moving up the development ladder step by step. Modernization became a vital goal of these reforms, focusing on four key areas: agriculture, industry, defense, and science and technology. The first step of the reforms was to transition from Industry 1.0 to Industry 2.0. This was one of the most challenging tasks, as China had to change the basic philosophy and methodology of industrial development. The country needed to transform from a socialist production system to a capitalist production system while maintaining socialist values. China achieved this transformation by adopting an innovative “responsibility contract” model, with town-village enterprises leading industrial development and open market competition. The primary factor in this success was the transition from reliance on massive labor, resources, and capital to an efficient production system.

China is investing generously in the development of high-quality human capital. Thanks to the government's dedicated efforts, China now has the largest pool of science, technology, engineering, and mathematics (STEM) graduates. According to Georgetown University, China surpassed the USA in producing STEM graduates in 2007. 

After the initial success, China initiated the second transition, moving from Industry 2.0 to Industry 3.0. This process was accelerated by the Central Committee of the Communist Party of China (CPC) decision on the Reform of the Science and Technology Management System in 1985. Pursuant to this decision, in 1986, China started the 863 strategic programs in the fields of biotechnology, space technology, information technology, laser technology, automation technology, energy, and advanced materials. This laid the foundation for the second transition. The process was further fast-tracked after the launch of the Go Global Policy and China's accession to the World Trade Organization. China successfully transitioned from Industry 2.0 to Industry 3.0, establishing itself as a world factory or industrial hub and completing the automation and computerization of industry.
Since the 18th National Congress of the CPC, China has kick-started the third transition. President Xi Jinping was convinced that to keep China on a growth and development trajectory, it had to move from Industry 3.0 (automation, computerization) to Industry 4.0 (cyber-physical systems). Thus, he envisioned a comprehensive philosophy and vision to lead this transition, culminating in President Xi's Modernization Era. In pursuit of this third transition, President Xi launched the Made in China (MIC) policy in 2015. The MIC policy aims to achieve its objectives step by step. It was decided that China would achieve a domestic content target for core materials of 40 percent by 2020 and 70 percent by 2025.
However, this would not be possible without building modern research and development (R&D) infrastructure, investing in R&D, and creating quality human capital. Therefore, it was decided to build 40 modern Research and Development Centers by 2025. Simultaneously, China has increased its allocations for R&D. Although the process began at the start of the reform era, it has accelerated during President Xi’s tenure, with allocations for R&D rising from 1.9 percent of gross domestic product (GDP) in 2012 to 2.6 percent in 2024. Additionally, the 14th Five-Year Plan has explicitly focused on R&D. International organizations predict that China will increase R&D allocations by 7 percent annually. Recent data supports this projection; for example, in 2023, China allocated USD 420.9 billion for R&D, a 10.1 percent increase from the previous year.
Chinese companies are also following in the footsteps of the government. Thanks to government incentives and policy support, Chinese companies have significantly increased their investment in R&D. In 2021, they surpassed European companies in R&D investment, with Chinese companies investing EUR 195.9 billion compared to EUR 192.8 billion by European companies. The information and communication technology sector attracted a major portion of this spending, with nearly 44.4 percent of the EUR 195.9 billion allocated to this sector. China's global share of R&D investment was calculated at 17.9 percent, second only to the USA. This marks a significant achievement for China, as its contribution to global R&D was only 4.3 percent in 2012.
However, China is cognizant of the fact that quality human capital is a prerequisite for modernizing and building an innovation base. High-quality human capital is essential for establishing a strong foundation in primary scientific research, which in turn develops the capabilities to create knowledge and lead innovation. Consequently, China is investing generously in the development of high-quality human capital. Thanks to the government's dedicated efforts, China now has the largest pool of science, technology, engineering, and mathematics (STEM) graduates. According to Georgetown University, China surpassed the USA in producing STEM graduates in 2007. Furthermore, it is projected that by 2025, the number of STEM graduates in China will be double that of the USA.
President Xi also introduced the New Philosophy of Development and the idea of high-quality development. These initiatives were designed to modernize the production base, enhance the role of green production and consumption, provide equal development opportunities, and build a modern society. The efforts are paying off, and China is now emerging as a leading player in technology innovation and development. The Australian Strategic Policy Institute, a think tank based in Australia, compiled a list of the most innovative countries in 44 critical technologies. The list indicated that China has become a leader in 37 of these 44 critical technologies. This marks a massive turnaround for a country once considered a laggard in technology development. China is moving quickly and acquiring the capability to become a hub and superpower in many areas, including defense, space, robotics, energy, the environment, biotechnology, artificial intelligence (AI), advanced materials, and key quantum technology.

China believes that development will not serve humans without giving importance to environmental needs. Thus, it strives to create harmony between human development and environmental needs. 

On the other hand, China is equally focused on modernizing the agriculture sector. China has launched numerous programs under the Made in China, Rural Revitalization, Modern Protected Agriculture Development Plan 2023-2030, etc. China envisioned that science and technology would drive innovation and green, protected, and smart climate-smart agriculture. 
However, China is aware that without investing in R&D, the dream of agricultural modernization cannot be realized. Therefore, China is directing substantial resources towards agricultural R&D. Data from the Organization for Economic Cooperation and Development (OECD) shows that the average allocation for public sector R&D in agriculture increased from USD 1.3 billion between 2000-2002 to USD 6.6 billion between 2019-2021. This investment has boosted agricultural production values, which are recorded at USD 1.6 trillion at the farm gate.
Against this backdrop, we can now assess China's capability and capacity to pursue and achieve the objectives of new quality productive forces. The assessment indicates that multiple factors suggest that China can pursue the objectives. First, China is a leading force in innovation and technological development. It is leading in the most critical technologies like artificial technology, nanoscale material and manufacturing, smart materials, advanced explosives and energetic materials, advanced radiofrequency communications (including 5G and 6G), hydrogen and ammonia for power, electric batteries, photonic sensors, drones, swarming and collaborative robots, synthetic biology, etc. Second, China has applied a comprehensive plan. It focuses on all areas of the economy, defense, and society. Third, China is equally focused on the environmental needs. China believes that development will not serve humans without giving importance to environmental needs. Thus, it strives to create harmony between human development and environmental needs. 
In conclusion, based on the above discussion, China will likely be able to pursue the idea of new quality productive forces and achieve its perceived objectives. It is expected that this will create new opportunities for the world, as China is now a hub of the global economy, connectivity, and trade. China has already established various programs and mechanisms to share the dividends of development and prosperity, such as the Belt and Road Initiative (BRI) and the Global Development Initiative (GDI), further strengthening this argument.
However, the path to new quality productive forces will not be easy. It will be full of hurdles such as technological wars, sanctions, and trade barriers. China will have to fight on two fronts: on one hand, it will need to invest in modernizing productive forces, and on the other, it will need to combat deglobalization, anti-China forces, and malicious campaigns.

The writer is CEO of Asian Institute of Eco-Civilization Research and Development. 
E-mail: [email protected]

Shakeel Ahmad Ramay