Create Conditions for High-End Equipment Manufacturers’ Technological Accumulation

Equipment manufacturing is the central part of industrial engineering. In the current international environment, we believe China is at risk of facing bottlenecks on key technologies. We think it is prudent for China to elevate the level of the domestic equipment manufacturing industry, segments of which generally have large scale owing to sizable market demand, a sufficient labor force including engineers, and advanced infrastructure. However, the competitiveness of these segments has diverged: China’s new energy equipment and high-speed railway (HSR) industries have secured dominant positions in the global market, while its machine tools and large aircraft industries lag that of other countries. We believe assessing the underlying cause of the imbalance is important to investors as it helps clarify the pattern of development and policy orientation of the equipment manufacturing industry. In this chapter, we analyze the factors boosting the equipment manufacturing industry’s development based on substantial evidence and theories, and we proffer policy suggestions. Industry overview: Limitations in highly sophisticated equipment and core components apparent. Horizontally, China’s equipment manufacturing industry has a large output value: Real estate infrastructure equipment, metalware, flexible units, and energy equipment represent a relatively high proportion of global supply. However, we see an insufficient supply of high-grade, high-precision, and advanced products in China. Vertically, domestic suppliers generally have weak capabilities in core components despite the strong deliverability of complete machines, in our view. Most of the domestically made components are at the lower ends of the smile curves (The smile curve represents the seven-step manufacturing value chain, demonstrating that value across a production cycle is largely derived from early stage R&D, design, and post production activities (i.e., distribution, sales, and after-market service activities.) along the industry chain. We expect the added value to increase in the future. Industry chain changes: Complete machine manufacturing being relocated from developed regions to China. Looking at the changes in representative industries over the years, we note that market demand has become a prerequisite for industrial layout, while supply capacity and policies affect the distribution pattern of specific industries or segments. China has received a large number of industrial transfers from developed countries as the domestic market expands; however, most of these transfers are complete machines. Core components are not available through industrial transfer and require independent R&D. To chase the technological frontier, China must accumulate manufacturing techniques essential for the equipment manufacturing industry’s development, in our view. China’s success in this regard is dependent upon: (1) The initial technological gap; (2) characteristics of downstream demand; (3) core supporting resources and competitive pressure from foreign capital; and (4) relevant policies, which could bring changes to the former three factors and create opportunities for companies to accumulate technologies. These factors influence the development paths and outcomes of different industries. Policies should be formulated based on actual conditions of industries. Looking ahead, with the restructuring of the global industrial value chain, we believe policies for industries with different strategic positions will vary based on industrial relocation. For weak industries, reducing the costs borne by downstream companies replacing overseas equipment with domestically made products (hereinafter referred to as “trial-and-error costs”) and strengthening supply protection could help enhance competitiveness, in our opinion. For robust industries, we think it is necessary to strengthen their technological leadership and ensure companies’ global expansion.