Achievements and Challenges of China's Industrial Policy

Key Insight

China's industrial policy largely succeeded in its goals: establishing a broad range of industries, producing increasingly technologically sophisticated and higher-value goods, and enhancing global competitiveness. The country transformed from a producer of low-end textiles and cheap consumer goods in the 1980s to a global leader in automotive, shipbuilding, machinery, electronics, chemicals, and precision instruments. Studies confirm a rise in the research and development intensity and technological sophistication of Chinese exports. Furthermore, domestic firms have progressively captured market share; for most of the 2000s, foreign enterprises accounted for over half of exports and up to two-thirds of the trade surplus, but by 2014, the foreign share had fallen below half, with the aggregate trade surplus of China's nonstate enterprises becoming twice as large as that of foreign enterprises.

Despite these successes, China's industrial policy faced limitations, particularly in ensuring Chinese-owned firms control higher-technology goods production. The FDI model meant certain industries were built primarily by foreign firms, making it difficult for local companies to penetrate. The automotive industry exemplifies this: while China has been the world's biggest passenger car market since 2010, foreign joint ventures dominate industry revenues and profits, controlling around 80 percent. Chinese firms primarily produce low-end vehicles with thin profit margins and have struggled to make inroads in developed countries. Despite a stated policy since 1990 to consolidate automakers into three giants, the number of assemblers remained around 120, and major state-owned automakers largely profit from foreign joint ventures rather than their independent brands. Successful Chinese car companies, like private firm Geely (which acquired Volvo's passenger-car company in 2010), have typically been smaller, upstart ventures.

The electronics industry presents another case study. While a spectacular success in export volume, accounting for over 40 percent of global electronics goods exports by 2000, most activity in China remains low-margin, final-stage assembly, largely controlled by foreign, especially Taiwanese, firms like Foxconn. The highest-value components—design and marketing, integrated circuit design, and original software development—remain with global giants such as Apple, Samsung, Intel, and Microsoft. Chinese government efforts to foster local challengers have largely failed, with few globally significant software firms. Successful Chinese hardware companies like Huawei and Xiaomi often operate on an '80 percent of the quality for 60 percent of the price' model, enabling high sales volumes but low profit margins, positioning them as technology followers rather than leaders, caught at the 'bottom of the smile' in the value chain, where manufacturing and assembly yield low profits compared to core technology design and product distribution.