Beijing May Score Its Biggest 5G Win at Home

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An hour west of Shanghai, in Nanjing, now one of China’s largest industrial centers for advanced manufacturing, an automated assembly line in a retooled factory churns out 5G radio technology every day of the year but one: Chinese New Year. Self-piloting carts whir racks of components across the factory floor. Artificial intelligence spots faults quicker than humans, using cellular technology to monitor, among other things, about 1,000 high-precision smart screwdrivers and squads of robotic arms that twirl in formation.

Enabling this 21st-century ballet are hundreds of base stations — radio equipment that provides wireless connectivity — around Nanjing, where smart streetlights surround the local temple, and one of the metro lines boasts full 5G coverage. Indeed, as Sweden’s Ericsson AB has said, it modernized its Nanjing factory “in preparation for the introduction and rapid deployments of 5G in China.”

Beijing is attempting this upward shift across China by emplacing a vast network of fifth generation infrastructure. When it is fully operational, Chinese netizens will have faster internet connections to stream yet more videos or to download high-definition movies in under 10 seconds. Internet penetration will rise rapidly. Connected self-driving vehicles could ply the streets of urban centers like Shanghai and Hangzhou. Heaps more information will be transmitted over clouds.

Although the quest to build such fifth generation networks is global, in the case of China and the U.S., it has set off a technological arms race, sharpening a strategic competition that threatens a replay of Cold War era tensions. The administration of President Donald Trump has tried to stymie China’s attempt to become the global 5G standard-setter by blocking the commercial inroads of Huawei Technologies Co., which is now the world’s largest manufacturer of smartphones and largest supplier of telecom equipment. It has tapped fears of Chinese cyberespionage, surveillance and dominance of a high-tech supply chain to win over reluctant allies. The U.K. recently said it would strip Huawei of its role in networks there. France may deter operators from using the Chinese telecom giant’s equipment. India is mulling shutting China out of efforts to build its 5G architecture.

Yet even if this U.S.-led campaign blunts Huawei’s global commercial advances, a successful domestic 5G build-out would still amount to China’s most ambitious industrial policy, laying the groundwork for factories of the future and cementing the country’s status as a global tech-enabled manufacturing center. Telecommunication companies may have touted 5G’s thrills for the consumer, but manufacturing is expected to be the biggest beneficiary of 5G-enabled industrial output over the next decade and a half.

Tapping that potential will enable China to retool supply chains ripped up by Trump’s trade war, and to add more value to its manufacturing. But first, China will have to surmount some steepening economic challenges, avoid the big-ticket mistakes that have blighted past industrial policies and solve a 21st-century riddle: How to build the leaner and more automated factories of the future without adding legions to the ranks of the unemployed.

State planners are staring at their gravest challenges yet. Gone are the days — and the easy returns — when a shot in the arm of credit helped to build tens of thousands of miles of highways and rail lines, putting millions to work. Beijing now faces a rising unemployment rate and the threat of social unrest. A record number of graduates will tap the job market this year, with too few opportunities awaiting them. Covid-19 has put millions of Chinese export-related jobs at risk. As China’s population grows older, the labor force shrinks and unemployment ticks up, the state’s social safety net is falling short. Public spending on social insurance is just over 5% as a portion of its gross domestic product and unemployment coverage is low, with only about a fifth of the jobless population receiving benefits.

In China’s industrial hinterland, confidence was crumbling even before the viral outbreak. The number of loss-making enterprises rose sharply throughout 2018 (on average, 24% every month), and it continued to rise the following year. As a crisis of confidence brewed, manufacturers weren’t investing in their businesses even as Beijing was drip-feeding stimulus measures. Instead, they parked their cash in industrial land, and capital expenditure growth slowed to 2% to 3% a month. State loans and forbearance haven’t helped lift sentiment; the issuance of trillions of yuan of special municipal bonds ended up driving only some construction activity.

China’s labor-intensive manufacturing sector has waned as the production of lower-value goods like textiles has shifted out of China. Unit labor costs doubled over the two decades to 2017; inward foreign direct investment fell from 4% of gross domestic product in 2010 to 1% in 2018. China’s share of global exports in sectors that were labor intensive fell by up to four percentage points between 2019 and 2015, according to Goldman Sachs Group Inc. Almost 20 million jobs have been lost in China’s secondary industries that include manufacturing and assembly processes since 2012.

Yet Beijing is intent on keeping intact its central role in global supply chains, despite the turmoil that China’s ascent along the value chain and shift toward automation is bound to cause in its labor market.

Mindful of potential unrest, it turned its attention to supporting the labor market: “Employment” was one of the most mentioned words in the 2020 Government Work Report, compared with the precedence given to “investment” and “construct” in previous years. State planners have promised subsidies for hiring in research and development departments, boosted tax incentives for employers and encouraged graduates to work in national projects among other such measures. At the same time, they are encouraging reskilling through vocational training programs, designating 16 new professions such as intelligent manufacturing engineering technician, virtual-reality engineer and artificial-intelligence trainer as priorities in its recent employment policy.

Building out 5G infrastructure is critical to realizing its factory-of-the-future vision. Fifth generation networks will enable greater connectivity — almost 100 times faster than the existing 4G — and data transfer, boosting the efficiency of machines and altering the way factory floors churn out goods. The advantages will come from the integration of production lines, data platforms, factories and suppliers — the embodiment of the so-called Industrial Internet of Things, along with the reams of information that will be collected and analyzed.

Chinese manufacturers constrained by their balance sheets will be able to make more with the same fixed costs. The commercial use of this wireless technology is expected to draw in 10.6 trillion yuan ($1.5 trillion) in terms of economic output over the next five years, while adding 8 million jobs and 6% to gross domestic product over the next decade, according to the China Academy of Information and Communications Technology.

The benefits are already apparent at factories like Ericsson’s Nanjing venture, where maintenance work costs have been slashed in half. The company says that it has seen savings on capital expenditures, and that the first year showed a 50% return on investment.

Once bedeviled by workers’ frequent repetitive strain injuries that can end up sidelining them for weeks, factories will instead rely on sensors that monitor robotic arms for wear and tear. When impaired, joints are replaced right away. Supplies and the arrival of inventory and components on trucks are tracked to the second, which speeds the production process. The application of such technologies and methods to semiconductor production could make a huge difference: According to Alexious Lee, an analyst at Jefferies LLC, a 1% change in productivity and efficiency or decrease in waste could increase profitability by up to 10% in some precision-dependent industrial applications.

No wonder, then, that Beijing wants more than 100 factories that operate like the Ericsson venture in Nanjing, a partnership with the Chinese government through Nanjing Panda Electronics Co. and its parent company. Over the next two years, China wants the biggest of industrial parks to be fully covered by 5G networks so that companies can showcase how they’re using 5G. The city of Guangzhou already has more 5G base stations than all of Europe.

To augment this bold plan, Beijing is nurturing an ecosystem of companies that make parts for base stations, transistors, sensors and the like. It hopes to have the underlying architecture ready as manufacturing companies increasingly get on board.

Ambition, though, has never been Beijing’s weakness. Such big-ticket technology plans have come and gone, or been relabeled, over the years. Plans for dominating the memory storage industry — led by companies like South Korea’s SK Hynix Inc. and Samsung Electronics Co Ltd. — haven’t had much luck, facing manufacturing hurdles because the processes are complicated. Beijing has long had its eyes on semiconductors and chips, but companies have struggled to gain market share.

The controversial Made in China 2025 plan released in early 2015 to boost domestic content of materials and parts across key industries shows that these national goals often have created more hype than results. Billions of dollars were pledged for innovation and for research and development. Yet, here we are halfway there and the results are hard to see. Part of the problem with previous plans has been the top-down goal-setting when the underlying infrastructure just didn’t exist — in effect, pushing factories and people to produce and innovate when they didn’t have the right tools. It wasn’t just about the capital commitments and subsidies that created misaligned incentives.

Beijing is learning from its mistakes, trying to anticipate the shortcomings it could face as it takes on 5G technology and its application. This year, the Ministry of Industry and Information Technology and the National Reform and Development Council laid out steps for local governments to set up area networks to boost production, expedite research and development in chips and other telecom equipment and industrial systems — the nuts and bolts for next-generation networks.

It is also trying to disperse the financial risk. True, as it did through previous industrial policies, Beijing is making it easier for China Inc. by providing some unconditional subsidies, tax relief and grants to make up for a big stumbling block: Companies tend to hold back when defined returns are largely unknown. But this time it has roped in big private players like Alibaba Group Holding Ltd., which has said it will invest 200 billion yuan over the next three years in research and development in areas like chips and networks that can ultimately be used in industrial applications. That could also help stave off overinvestment by provincial governments. In addition, pilot projects are in places like Shanghai and Guangzhou, developed urban centers with an infrastructure to handle the next step.

China also has another advantage gleaned from past stumbles in introducing its 3G and 4G networks: It is no stranger to developing supply chains as technology evolves. Almost a decade on, when the world was beginning to evolve from third generation cellular technology and data to the LTE and the 4G era that would ultimately kick off the rise of iPhones, China started building out base stations to support its ambitions. The rapid rollout led to the rise of telecom equipment manufacturers like ZTE and Huawei and smartphone parts suppliers like Sunny Optical Technology Group Co. Capturing that opportunity well before the world did, Chinese companies were well positioned to leverage the rise of Apple’s iPhones and products. Companies that were able to master the manufacturing of the tiniest of parts came out on top.

Much as it did when taking over the world’s manufacturing, China is setting itself up for the next wave. If it can build a vibrant 5G-enabled domestic manufacturing base before anyone else, that’s one more big reason for multinational companies like Ericsson to stay in China and reap the technological and commercial benefits of a vast network of suppliers and a huge market, rather than pulling up stakes and going home. Because here’s the thing: Beijing isn’t just looking to create its own national champions; it is looking to build and foster companies that will prop up global leaders in future technologies. All while the world isn’t paying full attention.

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