By Shen Hengchao

Research Report Vol.21 No.2, 2019

China’s manufacturing sector is massive with a complete system, but not strong enough. In traditional manufacturing industries in particular, innovation capabilities are weak and production and management efficiency is low. With the country’s cost advantage for manufacturing being in decline, enterprises can only survive and thrive by continuously improving product quality and production and management efficiency and building up competitiveness. Digital transformation is just an important way of boosting product quality and production and management efficiency in the manufacturing sector. Though achievements have been made in recent years in integrating big data, cloud computing, artificial intelligence (AI) and other digital technologies into manufacturing, there are still many problems yet to be solved.

I. What Does Digital Transformation of China’s Manufacturing Sector Mean?

The digital economy is a new economic form after the agrarian economy and the industrial economy; it has digital resources as its primary factor of production, and digital transformation as its main driving force. More and more countries are pursuing a digital economy as an important way of spurring economic growth, giving priority in their digital economic strategies to moving towards greater integration of new-generation information technology and manufacturing as well as vigorously developing advanced and intelligent manufacturing. In developed countries such as the United States and Germany, because of their highly developed manufacturing industries and advanced digital technology, digital transformation efforts are focused on building networks and intelligent operation, as in the case of Industry 4.0 in Germany and the Industrial Internet in the United States.

Most of Chinese manufacturing enterprises remain at a quite low stage of development and have a lot of “homework” to do. The digital transformation of manufacturing in China includes not only taking manufacturers at the stage of Industry 1.0 or 2.0 to Industry 3.0 through informatization (digitalization), but helping those already at the stage of Industry 3.0 to achieve Industry 4.0, i.e. the stage of networked, intelligent development, by applying big data and AI among other digital technologies to the areas of supply, manufacturing, marketing, services, etc.

II. Progress and Major Problems in Digital Transformation of China’s Manufacturing Sector

Despite certain progress made in the digital transformation of Chinese manufacturers, problems still exist which hinder further advancement, including, among others, the lack of authoritative data standards, data security concerns, inadequate data openness and sharing, and insufficient information infrastructure.

1. Progress in Digital Transformation of Manufacturing

To expedite transformation and upgrading of the manufacturing sector, including traditional manufacturing industries, China has kept improving its institutional environment with a series of strategic plans and policy measures. In recent years, the Chinese manufacturing sector has seen an increasing level of digitalization, as manifested by an expanding application of frontier industrial Internet technologies.

(1) Improved Institutional Environment for Manufacturing Transformation and Upgrading.Since 2015, the Guiding Opinions on Strengthening the Integrated Development of Manufacturing and Internet among other policy documents that the State Council issued to encourage the digital transformation of manufacturing, has played a significant role in stepping up efforts in this regard.

(2) Digital Transformation Outpacing Networked and Intelligent Development.The Made-in-China Informatization Index (MCII), co-published by China Info 100 and CSAIII (Contemporary Service Alliance for Integration of Informatization and Industrialization), shows that the Chinese manufacturing sector is on the whole at a stage of transition from Industry 2.0 to Industry 3.0. According to surveys, large enterprises are much closer to Industry 3.0 than small ones. According to the Report on Digital Development of Chinese Enterprises in 2018 published by IDC, while the level of digitalization is quite high in the Chinese consumer sector, that in the manufacturing sector is relatively low - with more than 50% of manufacturing enterprises still at a stage of single-point experimentation or partial application.

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In recent years, China has seen a increasing level of integration of informatization and industrialization, as shown in Fig. 1. Specifically, indicators for digitalization in such areas as research and development (R&D), manufacturing, and marketing had higher values than those for integrated interconnectivity and intelligent synergy, as shown in Table 1, suggesting that in the manufacturing sector progress in informatization (digitalization) outpaced networked and intelligent development[]①. According to data from China Info 100, in 2007, 44.8% of the production equipment in China was digitalized, and 30.9% of it was networked; ERP (enterprise resource planning) systems, of more general uses, had a penetration rate of 55.9%, while that of highly customized MES (manufacturing execution systems) was 20.7%; and 31.2% of the enterprises achieved networked synergy for research and development.

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(3) Expanding Applications of Frontier Industrial Internet Technologies.The industrial Internet is the application of frontier technologies in the digital transformation of manufacturing and has become the focus of industrial powers to secure a commanding position in manufacturing competition. According to estimates by the Alliance of Industrial Internet based in Beijing, China’s industrial Internet in 2017 had a direct industrial size of about RMB570 billion, which is expected to grow to RMB1 trillion in 2020. China’s industrial Internet market had a size of RMB467.7 billion in 2017 which was expected to grow to RMB692.9 billion in 2020, according to the Report of Prospects and Investment Strategy Planning Analysis on China Industrial Internet Industry published by the Qianzhan Industry Research Institute. CCID Consulting projected China’s industrial Internet to reach a market value of RMB696.5 billion in 2020.

Industrial Internet technologies are mainly used in the areas of product development, production management, and product services. Enterprises that use industrial Internet technologies in the area of production management are focused on building a digital factory or intelligent factory, while those using industrial Internet technologies in the areas of product development and services are devoted to developing intelligent products and providing intelligent value-added services. Surveys showed that enterprises using industrial Internet technologies in products and services far outnumbered those using industrial Internet in production management. There are mainly four models of application: first, intelligent product development and extensive personalization, as in the case of Xiaomi Corporation which has developed intelligent home products surrounding its smartphones, TVs and routers, and of Red Collar Group which offers highly personalized products with its innumerable design elements and design combinations; second, intelligent production and management, as exemplified by Suzhou GCL Company which uses Alibaba’s ET Brain to analyze production process data and optimize production procedures, and has thus increased the conforming product rate by 1%; third, intelligent after-sales services, as illustrated by Sany Heavy Industry Co., Ltd. which analyzes working data on its concrete pump trucks, cranes, road construction vehicles and other equipment sold worldwide and prompts its clients to service the parts and components - a value-added service as a major source of corporate profit for the company; and fourth, industry chain synergy, as in the case of CASICloud which shares with more than 600 companies design models, professional software and over 13,000 devices, with the resource utilization rate growing by 40%.

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