China’s race to innovate

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China’s race to innovate

Henry Cai, Deutsche Bank’s former head of corporate finance in Asia, has been dubbed one of Asia’s best “rainmakers” by Euromoney magazine. In finance and business terms, he brings on the rain, or business. The man who spent the last decade raising funds for China’s state-run and private firms suddenly left the international bank. He resigned as a senior executive of a well-established international bank to set up a fund focused on developing China’s new generation of industries.

The fund will invest in German small and medium-sized enterprises (SME) in intelligent manufacturing, high-end equipment, advanced materials and medical technologies. He will be partnering Chinese capital with German next-generation skills, technologies and innovations. An initial $1 billion was raised through Chinese state funds. The fund is a part of Beijing’s Made in China 2025 plan - a strategy designed to lead China to cutting-edge innovations and a more advanced manufacturing of products.

Cai has foreseen profits in the partnering of labor-intensive China and technology-advanced Germany. Economically, China is closer to Germany than the United States and Japan. Leaders of the two countries have met four times over the last two years. Their agenda is entirely focused on cooperation in innovation.

Under the Made in China 2025 slogan, China intends to veer the Chinese economy away from low-value-added and labor-intense production towards higher-value-added manufacturing over the next decade. In a video address to this year’s Center for Office Automation, Information Technology and Telecommunication conference in Hanover, Chinese Premier Li Keqiang said Germany’s Industry 4.0 initiative and Made in China 2025 shared the same concepts and goals of paving a new era of industrial production and pledged partnerships in the common goals.

He admitted that his country’s roadmap for new economic growth engines was inspired by Germany’s Industry 4.0 outline released in 2013, which is intended to boost the European nation’s competitiveness through globally interconnected production chains. The two countries are constructing a joint-venture Intelligent Equipment Manufacturing Park in Shenyang, Liaoning. The world’s industrial and technology powerhouses have joined hands to redefine industrial production based on smart technologies.

The plan suggests China has set its vision beyond Asia. Over the last three decades, China’s economic partners were primarily Japan, Korea and Taiwan. It relied on technologies and parts from these countries to sell cheap industrial products to the United States and Europe. Having localized most of the technologies and obtained sufficient confidence about their standards, China no longer needs to import parts from neighboring countries. It will have no further need to seek cooperation from its traditional Asian partners now that it has a partnership pact with the European technological powerhouse. Chinese enterprises will pose formidable competition to Korean and Japanese manufacturers.

China’s transformation could affect Korean companies. Doosan Infracore, which runs a factory in Yantai, supplied 15 percent of the forklifts sold in China as of 2010. In that year alone, it sold more than 20,000 units. Its market share has now been halved due to the fast ascent of local rivals. Sany, a Chinese manufacturer of heavy machinery, has seen its share of the market jump to 17 percent from 6.6 percent in 2010.

Sany gets its technology from Germany. China has been shopping for German factories and engineering technologies over the last several years. In 2012, Sany acquired Putzmeister, an SME specializing in high-tech concrete pumps. Mittelstand is what Germany calls its small and medium-sized family groups that comprise the backbone of the German economy. “In technology quality, Sany is an equal to Korean companies,” said a Doosan official. But it does better in the market because it offers unmatchably low prices.

Korean companies will be challenged by Chinese ones when they become competitive in technology as well as pricing. Korea was outpaced in steel and petrochemicals and is under pressure in the smartphone field.

The world is in an intense rivalry over innovation. The U.S., France and Japan are all vying to refurbish their industrial bases and orient them toward smart technology.

Commercialization is as important as innovation. Regulations must go. But legislation to axe regulations are stuck in the National Assembly. Can Korea Inc. survive the competition? In the old days, we brushed aside China as the world’s OEM factory. Korea is lagging in the innovation race. We could one day end up as China’s OEM factory.

JoongAng Ilbo, June 29, Page 28

*The author is the director of the JoongAng Ilbo China Institute.

by Han Woo-duk

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