SpirE-Journal 2012 Q3

Are you invested in China’s sunrise industries?

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Are you invested in China’s sunrise industries?

China’s GDP, in terms of purchasing power parity (PPP), has increased from USD350 billion in 1980 to nearly USD8 trillion today. Millions of new consumers have been lifted out of poverty and up into the growing middle class. Mindful of the “middle income trap”, China’s leaders are trying to chart a new economic direction with their 12th Five year Plan – favoring domestic consumption, environmental sustainability and scientific discovery as the engines for the next phase of economic growth. Is your company poised to take advantage of these emerging government backed business opportunities in China?

The Chinese State Council approved the 12th Five-Year Plan on National Emerging Industries of Strategic Importance in March 2011, and has outlined the directions and major tasks for seven strategically important emerging industries: environmental protection, information technology, biology, high-end equipment manufacturing, new energy, new material, and new energy automobiles. The central government has established a clear goal to grow these seven industries from 5 percent of GDP in 2010 to 8 percent by 2015 and 15 percent by 2020. Given the fact that China will be the world’s largest economy in PPP terms in a few years, this shift is incredibly important to international businesses today.

The new plan is aimed at fostering sustainable long-term growth, with a heightened emphasis on being Green. Specifically, the new plan states that China will launch and support 20 major projects related to the seven mentioned industries. Though the plan was not specified what these 20 projects are, there are some clear indications of what those projects could be and where the new hotspots in China could lie.

1. Environmental protection

A recent World Bank report titled “Cost of Pollution in China” found that up to 760,000 people die prematurely in China every year due to air and water pollution. As the world’s largest polluter, Chinese officials saw the need to address protecting the environment as the first of the seven strategically important emerging industries.

The plan focuses on encouraging major breakthroughs in three main areas: energy conservation, pollution prevention, and resource recycling and reuse. Support and incentives are offered for Green products and low carbon technologies to accelerate the formation of environmental protection as one of the country’s pillar industries. “China will make new policies and carry out projects to solve environmental problems, such as heavy metal pollution and the growing discharge of pollutants in rural areas,” stated Wu Xiaoqing, Vice Minister of Environmental Protection.

Presently, China has the largest market share of clean energy investment in the world; spending over USD35 billion in 2009. They are looking to increase that spending dramatically over the next five years to USD450 billion.

Some underlying investment opportunities in the environmental protection industry include:

Bohai Sea marine conservation

The provincial government of Hebei is investing USD2.4 billion to protect the Bohai Sea marine environment.

Bamboo Forest Planting

An industry leader shared that China’s flourishing bamboo industry is becoming one of the pillar sectors in the country’s forestry industry, and also a key in the country’s efforts to establish a low-carbon economy. China is leading the world’s bamboo industry with 5.38 million hectares of bamboo plantations and an annual increase of 100,000 hectares.

2. Information technology

With over 1 billion mobile phones in use and half a billion internet users, China is dealing with enormous demands for large-capacity high-speed information technology networks. China’s goal is to meet this challenge through fostering breakthroughs in the fields of high speed fiber-optic communication, wireless communication, advanced semiconductors and new displays over the next five years.

The Ministry of Industry and Information Technology has drawn up a plan for the development of the Chinese Internet, making it the first dedicated government-level plan for the Internet, and the blueprint for Chinese Internet policy and management over the next five years.

3. Biology

China has gone through a demographic rollercoaster ride, as it introduced a one-child policy to combat overpopulation in 1979; setting the stage for a colossal challenge. In the next few years, all “second generation only children” will go from being spoilt by two parents and four grandparents, to becoming the sole supporter of these six. This will require a massive improvement in China’s social welfare programs, and the development of biological advances.

The development of China’s biology industry will primarily serve public health, agricultural development, as well as environmental and resource protection. These include developing key technologies such as biological resource-sharing and furthering equipment development to accelerate the construction of a modern biology industry.

Industry initiatives in the biology sector will likely feed into geriatric care and general public health, which is already undergoing a revolution as the central government pushes for more state financial support and healthcare provision across the country.

4. High-end equipment manufacturing

China is seeing rapid growth in the high-end, high-tech manufacturing industry. Some highlights include the growth and development of modern aviation equipment, high-speed rail networks, satellite technologies, oceanic engineering, and general manufacturing of intelligent equipment. According to the Plan, China’s target is to raise the industry sales revenue to USD951 billion by 2015.

The Plan will affect some higher value-added industries, including the following:

Aviation industry

China’s aircraft manufacturing industry is booming, with a big part of that growth in Beijing. In the next 20 years, China will need approximately 4,000 new planes. The Plan also aims to build the world’s largest international airport in Beijing. Other than bragging rights, China is depending on the new airport to cater to the huge increase in demand. In two years’ time, the old international airport will be at maximum capacity with 75 million passengers annually.

High-speed railway industry

The high-speed railway industry has seen great investments in the past decade, and will receive USD100 billion worth of investments each year in the near future. The high-speed railway industry will receive USD100 billion in investments each year. The new goal is to stretch the length of China’s vast high-speed railway network to 45,000 km. Additionally, the two largest train-makers in China are exploring the United Kingdom market with four deals worth USD799.4 million. This is a massive business opportunity – for suppliers to China’s domestic market as well as international firms seeking a manufacturing base for export.

The high-speed railway industry will receive USD100 billion in investments each year.
5. New energy

To leverage the growing market for Green-tech and acknowledging its massive carbon footprint, China has set new goals to increase its usage of nuclear, wind, solar and hydro power to 15 percent of its primary energy consumption by the year 2020. The plan is to help cut coal-based energy production and reduce carbon dioxide emission per unit of GDP by 40 percent of its 2005 level by the year 2020. New energy sources are planned to replace hundreds of millions of tons of standard coal every year.

Some investment opportunities pertaining to the energy industry include:

Nuclear energy

China had planned to build 28 new nuclear power plants. However, after the Fukushima Daiichi nuclear disaster in Japan, plans have been temporarily suspended until a higher level of safety can be assured.

Solar and Hydro power

China is actively seeking to consolidate and upgrade the industry to increase the safety and reliability of solar technology, so as to increase popularity and usage. The construction of large-scale hydropower plants will also gain momentum in southwest China.

Wind energy

As China is rich in wind resources, the potential of energy produced by wind by the year 2020 would be around 150 million kilowatts.

As China turns the corner from producer to consumer, its growing energy demand will have to be met by more diverse and renewable energy sources.

6. New materials

Rare earth materials, of which China is the world’s leading source, have become increasingly important for modern electronic devices. China will be placing more focus on developing this industry. China’s rare earth sales accounted for nearly 90 percent of the global market from 2011 to 2015.

In the Plan, China aims to promote 30 key types of new materials to reach an output value of RMB2,000 billion, leading to an average annual growth of more than 25 percent. A major emphasis will be on high-strength light-weight alloy materials, high-performance steel materials, functional film materials, new battery materials, carbon fiber composite materials and rare earth functional materials.

7. New energy automobiles

Rising living standards have created pressure to deliver cleaner air and lower emission transportation options – hence the important role of clean energy automobiles and supporting technologies in the Plan . China has singled out the advancement of key spare parts such as high-quality batteries and electric motors . China has singled out the advancement of key spare parts for Green cars, such as high-quality batteries and electric motors.

China, is, and will continue to be, one of the fastest growing car markets in the world. Based on the Plan, the production output target up through 2015 is 1 million new-energy automobiles annually. To achieve this goal, the Chinese government will be investing USD15 billion up through 2020 in this growing industry. Under the new plan, China will focus on the development of new-energy passenger vehicles, compact pure-electric vehicles, and mini-hybrid vehicles with energy-efficient power-trains.

The government has devised a series of incentives to promote this growth. In the coming years, the government is planning on improving the EV charging infrastructure and introducing tax cuts on new-energy automobiles. Private electric car buyers can get incentives up to RMB55,000 (USD8,800) in the five leading cities: Beijing, Shanghai, Shenzhen, Chongqing and Wuhan. Another incentive being tested in Beijing is to issue license plates to new-energy automobiles without having to participate in the License Lottery. This, along with other incentives, is designed to convince Chinese customers to buy new energy efficient automobiles.

China has singled out the advancement of key spare parts for Green cars, such as high-quality batteries and electric motors.
What is the government’s rationale in developing the seven emerging industries?

The cabinet’s official statement said that the development of emerging industries would help China’s economy, while it faces “increasing downward pressure.” In the first quarter of 2012, China’s economic growth fell to a nearly three-year low of 8.1 percent. It fell further to 7.6 percent in the second quarter. The International Monetary Fund is forecasting 8.2 percent growth for the entire year. But government spending on public works should help drive some degree of economic rebound in the second half of the year.

In the longer-term, Chinese leaders want to transform their enormous factory and farmer’s economy into a profitable creator and consumer of sustainable high-technology products. Industries, such as renewable energy would also serve strategic national security goals by reducing the dependence on imported fuel.

What programs will be designed to propel these industries forward?

Officially, the cabinet said it had approved plans to launch 20 “major projects” for emerging industries, but gave no details of what support they might receive. However the government is reportedly prepared to spend more than RMB4 trillion (well over USD 600 billion) on these industries during the period of the Plan . Previous technology development efforts have included subsidies, tax breaks and other governmental support.

However, some trading partners in the past, including the United States, have complained that such state support violates free-trade principles. Some previous government efforts to promote new industries such as solar and wind power have prompted complaints that Beijing used improper subsidies and trade barriers, as well as pressured foreign companies to hand over technology. These are speed bumps to watch out for as the Plan unfolds.

How can companies leverage this opportunity in China?

This transformation and new direction in China is opening a new score of opportunities and hotspots across the country. There is an abundance of opportunities within each of the seven strategically important emerging industries. These industries will be boosted by 20 major projects which will be launched and supported by the Chinese government. Additionally, in this transformation, the nation’s officials have sought to open additional doors to foreign investment. The National Development and Reform Commission (NDRC) announced in its latest notice that no threshold should be set when private enterprises invest in China’s emerging industries of strategic importance.

Overall, the governmental policies are favorable and in many ways, the time is right for investment in these seven emerging industries. However, as always in China, the main precaution to be taken is Intellectual Property Rights protection, especially as relates to scientific R&D. Nonetheless, these vast early-stage opportunities in the world’s largest market merit full investigation and investment.

In order to foster high growth rates and maintain social peace, China must transform the country’s economic engine from a grimy factory to a Green, clean consumer. The new Plan provides a roadmap to make China an urbanized, innovative, green, wired, and consumer powerhouse in the years to come.

In order to foster high growth rates and maintain social peace, China must transform the country’s economic engine from a grimy factory to a Green, clean consumer.
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