China, explained.
Outside the Apple Store in Shenzhen, Guangdong Province, China (Cheng Xin/Getty Images)
As manufacturing’s share of the economy shrinks, Chinese policymakers are eyeing the more lucrative work behind it – producer services.
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Can China create the next Apple or Nvidia?Can China create the next Apple or Nvidia?
Governments in the West and in East Asia have stopped kidding themselves regarding the competitive threat posed by Chinese manufacturing.
Manufacturing and, increasingly, exports are playing an ever more important role in China’s growth model. In what the Rhodium Group has felicitously described (Opens in new window) as an “industrial policy of everything”, China wants to retain and upgrade traditional industries, stop relying on foreign suppliers, and make breakthroughs in frontier sectors.
Now that ambition is spreading to a new area: “producer services” – the behind-the-scenes services that support producers, such as industrial design and intellectual property (IP) development. Apple and Nvidia, who outsource physical production, are quintessential examples of companies who make their money from software, design, and IP.
China wants a piece. Building on earlier policy releases, the State Council (Opens in new window) in April specifically called on the services sector to prioritise providing manufacturers with services such as logistics, supply chain finance, research and development (R&D) design, software, and data/IT work.
It’s incredibly difficult to imagine many companies in China adopting Apple’s model.
This represents a recalibration of Beijing’s attitude towards services. Previous five-year plans called for the expansion of the services sector, but in 2020 Beijing removed specific targets for the services industry.
The timing was no accident. From 2015 to 2020, Beijing had a courtside view of the baleful consequences that deindustrialisation wrought on Western politics. Another crucial factor was the sense of vulnerability engendered by sweeping export controls on Huawei (Opens in new window) and the first Sino–US trade war.
None of this means Beijing has suddenly embraced Western-style consumer capitalism. But it has made a concession of sorts to an economic reality: as people become richer, they typically spend (Opens in new window) a greater portion of their income on services than manufactured goods. Manufacturing’s relative share of economic output eventually declines.
China has been unable to defy economic gravity – despite anemic consumption and the gargantuan state support lavished on producers, manufacturing’s share of GDP has fallen (Opens in new window) from around 30% in 2017 to just below 25% in 2024.
So as China’s industrial base naturally shrinks as a share of the economy, leaders want to ensure that it still builds (Opens in new window) strong “producer services” services – which will support manufacturing and help China retain its position as a global industrial leader.
There’s a simpler motive too: Beijing wants a bigger share of the profits.
Apple provides a powerful example. Despite producing less than 20% of global mobile phones, it captures around 80% (Opens in new window) of the industry’s overall profits. The Chinese suppliers who account for around a quarter of the iPhone’s bill of materials compete fiercely for the privilege of serving Apple, often operating on wafer-thin margins.
Beijing also sees producer services as being integral to job creation (Opens in new window), which remains politically salient given stubbornly high youth unemployment and the rapid automation of manufacturing. China’s leaders also figure that producer services can help drive growth (Opens in new window), as traditional growth pillars face exhaustion.
A BYD Denza Z in action during the Goodwood Festival of Speed in Chichester, England (Simon Galloway/Getty Images)
Can China succeed in developing world-leading producer services?
In some sectors, this is already occurring.
Manufacturers such as BYD (electric vehicles), Huawei (telecommunications, semiconductors, and self-driving vehicles), Xiaomi (smartphones, electric vehicles, and appliances), and WuXi AppTec (contract R&D, and manufacturing for life sciences) have globally competitive R&D, design, and software capabilities.
Companies providing research, tech, and software services have recently recorded the fastest growth of any sector among entrants to China’s so-called “Little Giants (Opens in new window)” program – which aims to develop SMEs with world-leading capabilities in niche markets. Chinese exports of knowledge-intensive activities – such as those needed to service overseas infrastructure projects, or increasingly “smart” goods such as wind turbines – have also grown (Opens in new window) appreciably.
However, while American companies were very happy to hand over production to China, they have every incentive to retain the producer services that comprise the most profitable part of the value chain.
Furthermore, China’s usual industrial policy playbook of heavy subsidies, currency manipulation, preferential procurement, and tech transfer is not particularly well-suited (Opens in new window) to producer services.
Companies such as Apple, Nvidia, and Google are undeniably jewels in the crown of US capitalism. Their origin stories are distinctively American, including their roots (Opens in new window) in Silicon Valley’s freewheeling venture capital scene. However, they are also inherently global companies, characterised by a largely unfettered openness to talent, technology, capital, and ideas.
This raises a deeper question: can companies like this arise in a country whose economic culture is based on security and self-sufficiency?
An offshoot of this ethos is an obsession with hardware and vertical integration. It’s incredibly difficult to imagine many companies in China adopting Apple’s model – designing everything in-house but outsourcing the manufacturing to whichever supplier does it best.
Even those that are trying, such as the Chinese companies aspiring to compete with Nvidia, face a cocktail of export control restrictions (Opens in new window) and political pressure to use domestic suppliers.
While China will continue to produce cutting-edge producer services, replicating the success of companies like Apple and Nvidia may test the limits of Chinese economic exceptionalism.
About the author
Henry Storey
Henry Storey is Manager - Projects, Research and Analysis at Dragoman with a focus primarily on Asia and the South Pacific.
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