China’s New Digital Industrial Transformation

China’s New Digital Industrial Transformation In 2020

China’s Demand for Tech Flourishes as the Economy Contracts

The severe decline in China’s gross domestic product (GDP) in 2020 has been largely due to weak domestic consumption. Following the COVID-induced lockdown, China’s households have opted to save rather than spend. Retail sales hit their lowest point, a 20.5 percent year-on-year drop, in January, during the lockdowns. The sector has only gradually improved over recent months, with May registering a year-on-year decline of 2.8 percent. The trade sector has been even more depressed. Imports plunged by 16.7 percent in May, the worst monthly performance this year, on the back of contracting investment in both private and state sectors.

Notably, not all trade sectors reflected this dismal picture. Crude oil imports rose by an annual 19.2 percent in May, which was a monthly all time high, although that followed an even greater drop of 50.2 percent in prior months.

The standout sector displaying consistently robust import growth since the beginning of the year has been technology. Purchases of overseas-made electronic components, from January to April, were up by 10.1 percent. With a value of $115 billion, electronics imports reached a record high over the period. Some of the more advanced tech subsectors have performed even better. Integrated circuits gained 11.2 percent with a value of $99 billion. Imported audio and visual equipment surged by 30 percent, also reaching a periodic record high value of $4.5 billion. Other subsectors to report robust import demand have been lithium batteries, insulated cables, and electrical equipment.

Launching a New Digital Era for the Economy

The sharp rises in technology imports at a time of overall depressed import demand begs the question as to what accounts for such starkly contradictory sets of economic data. In part, it’s because China’s demand for foreign technology has been relatively strong for years. The government has initiated a string of policies on technological advancement to boost a process of catch-up with more advanced economies.

However, shortly following the lifting of coronavirus-induced shutdowns across the country, and the consequent steep declines in economic output, China’s policymakers decided to change course and significantly deepen their technological upgrading. In early March, President Xi Jinping delivered a keynote speech on the deployment of prevention and control measures for COVID-19 pandemic. This included major initiatives in the development of the “industrial internet,” including policies for the construction of a new digital industrial infrastructure.

Accordingly, China’s large telecoms operators were called on to build high-quality communications networks covering all the country’s regions and cities. As a starting point, Xi announced the creation of 20 showcase examples of digital networks available for connecting industrial enterprises.

The policy speech also invoked a digital upgrade of China’s top 100 industrial companies and required up to 1,000 leading services enterprises to enable industrial internet and intranet transformation. 5G networking would become the cutting-edge technology applied in transforming China’s industrial internet across large vertically-integrated industrial enterprises.

In line with Xi’s policy direction, one of China’s leading internet operators, Alibaba Cloud, has been constructing 10 industrial internet platforms for various industry sectors, including textiles, clothing, food and beverage, processing, home appliances, electronics, and textile printing and dyeing.

According to Wei Wei, head of Alibaba’s Cloud Industrial Internet Platform, the newly-applied technology provides for integrated product development, manufacturing, sales, logistics, warehousing, and energy management – essentially creating a singular digital service ecosystem.

The Future Implications of China’s Digital Transformation

The longer-term ramifications of mounting U.S. sanctions on the development of China’s technology sector may raise more significant barriers in its striving for world-leading industrial connectivity. On the other hand, the new digital transformation of China’s vast industrial sector could prove an unstoppable force.

Xi’s digital policy drive has certainly been given further impetus by the sudden appearance of new coronavirus cases in Beijing, requiring parts of the capital to be put under lockdown with numerous flights into and out of the city being cancelled. Somewhat ironically, this newly-reported outbreak only reinforces the government’s stated justification for the digital transformation, as industrial remote connectivity may be the key to avoiding serious disruptions in the sector’s output from ongoing coronavirus risks.

Indeed, the policy raises questions over whether Beijing anticipates COVID-19 to be only the latest – and not the last — in a long line of virus-driven pandemics. These stretch back to the SARS contagion — which, like the coronavirus, also originated in China — during the early 2000s, followed by an almost regular occurrence of globally-mobile new viruses since that time. The upshot of it all may be that China’s policymakers now consider global virus risks to have become the norm, perhaps due in part to accelerated climate change. If so, China’s latest government-directed and large-scale industrial digital transformation, harnessing the resources of multiple sectors of society, may be a lesson for all policymakers around the world to take on board.

Bob Savic is a visiting professor at Nottingham University’s Asia Research Institute and a senior research fellow at the Global Policy Institute in London, U.K.