With the rapid growth of the smart manufacturing in China market in recent years, ARC Advisory Group receives many questions from our clients about this market, especially about the extent and impact of government subsidies.
Smart manufacturing is just one element of “Made in China 2025,” a national strategy initiated by China’s government in 2015. In addition to smart manufacturing, Made in China 2025 also encompasses technology innovation, development of core components and materials, and other elements. Clearly, while not the sole focus of the strategy, Made in China 2025 has helped to boost smart manufacturing, IIoT, and automation in general within the country.
How Does the Government Subsidize Smart Manufacturing In China’
Both the Central Government and many regional governments in China help subsidize smart manufacturing initiatives, but in different ways. Both have dedicated funds to help manufacturers implement smart manufacturing for both greenfield and brownfield (upgrade) projects.
The MIIT (Ministry of Industry and Information Technology of China) oversees the smart manufacturing fund pool for the Central Government. Since 2015, government has supported two types of smart manufacturing projects: “smart manufacturing pilot demonstration projects,” and “smart manufacturing special projects.” The latter mainly target applications of smart manufacturing solutions, but some projects focus on related technology standardization and test sites.
Significantly, MIIT only funds special projects, with no subsidies for pilot demonstration projects. ARC believes this may be because most pilot project applicants tend to be larger state-owned enterprises that do not lack their own budgets for innovation, as opposed to smaller special projects applicants that may be more budget-constrained.
For regional governments, ARC observes that some provinces and larger cities have begun to establish dedicated funds to support smart manufacturing projects in their regions in recent years.
The approval processes for government-funded projects are very similar. Every year, manufacturers seeking government financial subsides must apply for these by completing documentation that provides detailed project information, e.g. total spending, spending in software and information systems, application level, and so on then submit this to MIIT. MIIT has established specific criteria for review and qualifying projects. Once approved, several rounds of reviews follow. Manufacturers need to achieve several pre-defined business targets after implementation before the project can be declared to be successfully implemented. In 2016, over 600 projects applied for MIIT funding and 133 projects went into the final special projects list.
What Is the Annual Value of the Smart Manufacturing Subsidies?
For the central government, MIIT stated that it had provided 2.15 billion RMB (approximately $340 million) to help fund 93 special projects in 2015. The average subsidy for each project is about 23 million RMB. In 2016, MIIT provided about 5.2 billion RMB for 133 special projects in 2016, with the average subsidy for each project at about 39 million RMB. This demonstrates significant growth of total funding from 2015 to 2016.
It’s very difficult to accurately determine the total amount of the subsidies provided by the regional governments. For example, while we know that provinces such as Fujian, Guangdong, Guizhou, Hubei, Jiangsu, Zhejiang, and several of China’s larger city entities do fund projects, the amount varies widely. We roughly estimate that, cumulatively, the total smart manufacturing subsidies awarded by all local governments is a little larger than the Central Government’s current amount.
How Do the Government Subsidies Impact China’s Industrial Automation Market?
ARC estimates that, in 2016, the total financial subsidy from both Central and regional governments was at least 10 billion RMB.
In recent years, the total China industrial automation market size has been in the area of 60 to 80 billion RMB (based on the somewhat limited scope of automation defined in ARC’s process automation and discrete automation studies). However, it is important to keep in mind that only a percentage of the available government smart manufacturing-related subsidies apply to automation revenues. Based on this, we estimate that the government subsidies account for just 2 to 3 percent of the total industrial automation market, still a significant percentage. In coming years, ARC anticipates that this percentage will likely continue to increase.
At the same time, it’s also important to keep in mind that, even with the government subsidies, the manufacturers themselves account for the majority of smart manufacturing-related project funding. For example, in 2015, the total subsidy from MITT was 2.15 billion RMB to support 93 special projects. However, the total spending for these projects was about 11 billion RMB, which means that 8.85 billion RMB were borne by manufacturers.
In fact, it’s entirely possible that indirect government drivers – such as encouragement, education, and knowledge transfer – have a greater impact on the smart manufacturing/industrial automation market in China than do the direct subsidies.
Can Multinational Companies Participate?
All government-funded smart manufacturing projects require a certain degree of localization, providing greater potential for Chinese suppliers (with qualified products or solutions) to participate. However, there is some flexibility here for joint ventures between Chinese and MNC suppliers to participate in government-supported smart manufacturing projects.
Do All Automation Products Benefit Equally?
While all automaton products will benefit from the booming smart manufacturing investments in China to a certain degree, as the core of smart manufacturing is industrial data connectivity and analytics; software, smart sensor, and information-related products are likely to benefit the most. Examples include historian, MES, PLM, SCM, simulation, operational analytics, and so on. Industrial cybersecurity solutions are another important focus and ARC observes that many smart manufacturing projects have specific cybersecurity requirements. Many automation suppliers may also have to supplement their current offerings with additional hardware (such as sensors and field instrumentation), software, and data management/analytic solutions.
ARC believes that, while it’s important everywhere, this is the best time for Chinese manufacturers in particular to get on the “Made in China 2025” bandwagon by learning from and adopting the latest smart manufacturing technologies. With the significant support from the Central government, regional governments, and even some city governments, manufacturers in China have access to appropriate technologies and solutions from Chinese and other suppliers and many excellent opportunities to increase competency in smart manufacturing and related areas.
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Keywords: China, Government Subsidy, Made in China 2025, Smart Manufacturing, Multinational Company (MNC), ARC Advisory Group.