China is facing massive pressures – internal and external – regarding environmental issues, resource availability, social and economic inequality and more. In many ways, the People’s Republic is facing an imperative to change its economic model and advance not only its methods of production, but what it’s producing. Two examples are China’s foray into nuclear energy and its imminent entry into the commercial aerospace sector.
If Mao’s China was China 1.0 and today’s low-cost manufacturing powerhouse is China 2.0, this new China will be China 3.0. As Chinese policy-makers confront the prospect of slowing growth and the middle-income trap, more business leaders and policy makers are noting everything China buys is becoming more expensive and everything China sells is becoming cheaper. This is one reason why the imperative to master advanced industries is gaining strength: the promise of higher value addition combined with the desire to demonstrate national capability. These developments are significant in their respective industries, but in a more fundamental sense, they are symbolic of a new emerging China – one that is focused on mastering advanced industries that embody complex technology and systems integration.
Given the significant environmental issues that China confronts today and the overwhelming public pressure for cleaner air, the People’s Republic is facing a clean energy imperative. In response, China is undertaking a massive expansion of its nuclear power plants; there are currently 28 units operating or under construction, but more than 200 are planned for the next 30 years. By way of comparison, there are only about 450 or so nuclear reactors worldwide today, of which the U.S. has more than 100.
In 2007, China purchased the rights to use Westinghouse nuclear technology within China, and the first of these state-of-the-art reactors will go online in the next year or so. In a unique development, this means the brand-new American-made technology will be used in China before it appears in the U.S. China’s nuclear operators will thus have the benefits of advanced insights and key lessons ahead of other countries.
China may be relying on Westinghouse’s technology in part, but not in entirety. One nuclear power producer, CGN, enjoyed a strong IPO in Hong Kong in last month, and a second, CNNP, is also expected to, and both have developed proprietary reactor designs that are being marketed overseas. It was reported in early September that Argentina has signed an agreement with CNNC to buy technologies and services in this area.
Nuclear power is not the only advanced industry China has its eye on. No one who has used the country’s vast high-speed rail network can doubt its capability in that sector. An even more ambitious effort is China’s planned entry into the large commercial aircraft market. Boeing and Airbus have enjoyed a duopoly for decades, but China has recently entered into strategic partnerships with western companies (such as GE for its jet engines) to assimilate technology and master its production. COMAC, another state-owned enterprise, is currently building its first product, a regional jet, in a research and production facility outside Shanghai. This jet will be followed by the C919, a planned competitor to Boeing’s best-selling 737. Keep in mind that Boeing is among the U.S.’ top exporters and that China accounts for 15 percent of the market for commercial aircraft. If COMAC’s plans work out, it could mean a significant dent in Boeing’s and Airbus’ potential sales – first in China and subsequently in other markets.
Of course, China will experience its share of bumps in the road. It takes decades to develop and refine the kind of complex capabilities required to master systems integration industries such as commercial aircraft and nuclear power. These industries will require the development of many skills, including everything from technology capabilities to project and supply chain management. Process discipline is paramount and it will require time to develop and institutionalize these soft skills in Chinese enterprises, networks and ecosystems. However, incumbents in these industries have developed mature templates and there is no reason to believe that any intrinsic barriers will prevent China from eventually overcoming these challenges.
The challenge for American companies will be figuring out an appropriate response: Balancing the need to play with China, which often means sharing technology and expertise, and the need to stay ahead of the rising rivals by innovating and investing. What we know about China 2.0 may not help us much in responding to China 3.0 – we need to recalibrate the taken-for-granted assumption that Western dominance in advanced industries is inherently invincible.