Smart Manufacturing

The smart manufacturing industry stems from the manufacturing and logistics industries, which is crucial to the formation and sustainability of an innovation economy. The manufacturing sector can support innovation activities, promote the industrialization of innovative products and services, and propel the innovation cycle. Furthermore, development of the logistics sector can significantly boost trade by lowering transportation costs, and can support complex supply chains. In addition, the logistics industry’s digital transition may have accelerated during the COVID-19 pandemic, and logistics plays a key role in supporting innovation in the digital economy. China's manufacturing industry has developed rapidly since the 1990s, and its innovation capability has improved significantly. However, Chinese manufacturing companies are less active in pursuing innovation, as evidenced by their output and their revenue from innovative products. Reasons behind the weaker innovation include insufficient R&D investment, fragmented investment structure, and mismatch between R&D and production as well as between production and application. We also see deeper reasons for weaker innovation capability. China's manufacturing industry is export-oriented. The emphasis that companies place on capacity expansion also weighs on the innovation capability of the manufacturing industry. We also examine the cost efficiency of domestic logistics, and find that while China has low logistics costs, efficiency could be improved. First, China is able to achieve low logistics costs at the expense of profit margin. Second, China’s labor efficiency remains relatively low. We attribute the low efficiency of China’s corporate logistics businesses to three factors: Low automation rate, low transport efficiency, and a lack of integrated transportation. Furthermore, China is not a strong player in international logistics, which limits its ability to build reliable supply chains. Innovations in digital technologies present new opportunities for China’s smart manufacturing industry. For the manufacturing sector, we expect more engineering-based innovation and business model-related innovation to emerge in China given there is a new round of technological revolution and industrial transformation in the making with the integration of the digital economy and the manufacturing industry, and a possible flattening of the smile curve. The logistics sector may benefit from a large domestic market with stronger economies of scale, and technology could play a greater role here. We think logistics companies’ increasing R&D expenses and China’s leading 5G and AI technologies may help the country catch up in the area of logistics. There is also opportunity for China to develop its international logistics system as the competitive landscape of international logistics may evolve.