Introduction

China’s economic success over the last four decades has been built upon its manufacturing might. In the wake of Deng Xiaoping’s economic reforms launched in 1978, China rapidly turned itself into the world’s factory. The country capitalised on cheap and plentiful labour to embark on a rapid process of industrialisation that has transformed the East Asian country into the world’s second largest economy. China’s GDP grew by an average of close to 10% per year until 2014, lifting 800 million people out of poverty. But times have changed – and so too has China.

China’s working-age population, those aged 15-64, has been shrinking ever since it peaked at 1,005 million in 2013, according to China’s National Bureau of Statistics (NBS) data. The labour pool shrank to 998 million in 2017, the first time it was below one billion since 2010. At the same time, the country’s middle class has expanded in response to decades of rural mass migration to the country’s cities. This all means that China can no longer count on a cheap and endless supply of labour to drive the manufacturing sector.

Moreover, the manufacturing sector’s increasing sophistication has meant that the opportunity for productivity leaps through knowledge transfers from foreign operators is becoming rarer and Chinese companies must now focus on innovation to drive growth.

“There’s such pressure on price,
scalability and efficiency. Now, consumer
demand is what drives a lot of the
industrial innovation.”

Made in China

Aware of this paradigm shift, the central government launched a 10-year blueprint for the manufacturing sector’s development in 2015.

The Made in China 2025 Plan targets emerging industries such as robotics, autonomous and electric vehicle manufacturing, artificial intelligence (AI), biotech and aviation. The state provides these industries with subsidies, low-interest loans, rent-free land and tax breaks with the aim of optimising the structure of Chinese industry by emphasising quality over quantity.

The blueprint stresses “indigenous innovation” and “self-sufficiency” and has set a target of increasing Chinese technology suppliers’ overall domestic market share to 70% by 2025. It also aims to cut operating costs, production cycles and product defect rates by 50%.

At the same time as developing its domestic agenda, the government has embarked on the Belt and Road Initiative (BRI), which aims to create a global web of trade routes and relationships with China at the centre. With this network, the central government aims to export excess industrial capacity as the economy shifts away from a reliance on heavy industry towards demand-driven growth. This rebalancing saw China’s GDP grow by just 6.6% in 2018 – its lowest level since 1990. Made in China 2025 and BRI represent opportunities for manufacturers to expand domestic and foreign market shares by travelling up the sophistication curve.

Survival of the fittest

China is already widely viewed as a leader in IIoT applications within the Asia-Pacific region. The rapid development of the manufacturing sector has created heightened competition, with players exploring IIoT in the pursuit of efficiency gains.

Bay McLaughlin, the co-founder of accelerator, manufacturing studio and distribution company Brinc.io, said: “There’s such pressure on price, scalability and efficiency. Now, consumer demand is what drives a lot of the industrial innovation.”

Telecommunications equipment manufacturer Ericsson has implemented IIoT applications at its assembly factory in Nanjing. In partnership with China Mobile, the company converted the facility into a smart wireless manufacturing plant by connecting more than 1,000 high-precision screwdrivers using narrowband IoT (NB-IoT) and Long Term Evolution (4G), category M1 (LTE Cat-M1) networks to communicate with integrated motion sensors, with the data analysed in a secure cloud omy shifts away from a reliance on heavy industry towards demand-driven growth. This rebalancing saw China’s GDP grow by just 6.6% in 2018 – its lowest level since 1990. Made in China 2025 and BRI represent opportunities for manufacturers to expand domestic and foreign market shares by travelling up the sophistication curve.

The screwdrivers had required routine calibrations and lubrication based upon the amount of usage, which had previously been manually recorded.

Warren Chaisatien, Ericsson’s global head of IoT customer engagements, said: “Once those screwdrivers were connected, we could then monitor how they were being used, the force being applied, etc. Not just for maintenance purposes, but also to monitor how efficient they are, as well as for training and replacement purposes.”

Chaisatien added: “In our Nanjing plant, we have realised significant savings: a 50% maintenance workload reduction and a 10-12% cost reduction, which is quite substantial.”

The company revealed in 2018 that the project reached break-even in less than six months and delivered a 210% return on investment (ROI) within its first year.

Premium electric vehicle maker Byton, was founded in 2016 and has been built from the ground up to deliver intelligent vehicles for the future that integrate advanced digital technologies with a focus on user experience and connectivity. Byton has seven locations worldwide, with R&D, design and manufacturing operations in China, a design studio in Germany, an R&D centre in the US, as well as an investors relations unit in Hong Kong. Gerald Krainer, Byton’s director of digitalisation, said: “We are definitely working on manufacturing standards 4.0 in order to have a fully-connected plant and manufacturing process. It’s not about different departments working on individual requirements. In the end, it’s one architecture, one infrastructure that is going to ensure all the systems and the cloud infrastructure are connected from end to end.”

Narrowband IoT (also known as NB-IoT or LTE Cat-M2) is a low-power wide-area network (LPWAN) technology that operates outside of the licensed LTE (4G) spectrum.

NB-IoT’s main advantages lie in its power efficiency, thanks to its use of a simpler waveform, as well as the low cost of device creation. The technology also enjoys lower bitrates and better link budgets compared to LTE Cat-M1.

Long Term Evolution, (4G), category M1 (LTE Cat-M1) is used to connect battery-driven devices directly to a 4G network without a gateway. Devices use less expensive chips, because they are half-duplex and have a narrower bandwidth, and can enjoy a battery life of up to 10 years on a single 5WH battery.

Half-duplex systems allow data to be transferred in both directions, but restrict information flows at any given time to a single direction.

“China is moving at lightning speed and
as we think about technology and even
developers and such, China just has so
much more innovation going on.”

E-commerce

As China’s manufacturing sector has grown, so too has its need for more sophisticated logistics providers. Beyond shipping to wholesale international and domestic buyers, China’s status as the world’s factory eventually led to the emergence of the country’s colossal e-commerce industry. The country’s e-commerce giants have been quick to embrace IIoT, understanding the inherent efficiency gains that the technology offers.

Brinc.io’s McLaughlin described JD.com and Alibaba as leaders of innovation, saying: “The level of innovation and what they’re willing to try [in order] to shave off a second or a penny; it’s mind boggling. They’re approaching a point of full system integration, where it’s automated from the point you pick a product at the warehouse right through to delivery to the end user.”

In July 2017, Alibaba launched a smart warehouse in Huiyang using IIoT to leverage 60 automated guided vehicles (AGVs) into handling 70% of the facility’s workload. The AGVs, which can travel at speeds of up to 1.5 metres per second and carry up to 500 kg, are responsible for picking warehouse items and transporting them to a human clerk who then packs and ships the items. Alibaba claimed the new system meant that a human warehouse worker was able to sift through 3,000 products during a 7.5-hour shift, up from 1,500 products when they had been required to pick the orders themselves. The worker’s step count was also dramatically reduced from 27,924 steps to 2,563.

The e-commerce giant’s success at Huiyang prompted it to set up another smart warehouse in Wuxi in October 2018, with close to 700 AGVs. The warehouse is part of Alibaba’s Future Park initiative, a 160,000-square metre IIoT-powered logistics complex.

Steve Suh, CEO and co-founder of e-commerce logistics provider Floship, said: “Taobao, Alibaba and JD.com have been doing e-commerce for a very long time and thus a lot more e-commerce infrastructure has been developed in China.”

Efficiency gains

The push for greater automation is reducing workforce size, with McLaughlin noting that several mainland factories had been able to reduce their workforce significantly – in some cases, from 120 to 20 workers.

Further efficiency gains are also being pursued by the country’s e-commerce giants, which are now working to integrate their end-product vendors into internal automation systems. McLaughlin said: “On one hand, the vendors don’t really have a choice but to follow. On the other, it’s also better for everyone involved in the supply chain to integrate.”

Suh added: “China is moving at lightning speed and as we think about technology and even developers and such, China just has so much more innovation going on.”

But while the e-commerce sector is beginning to change the face of Chinese manufacturing and logistics, McLaughlin warned that another huge portion of the sector was not being touched by the more consumer-driven supply and demand chain. “While labour is expensive, the transition costs of a lot of these solutions are also really expensive and fairly complicated.”

The challenge for China is not to encourage those leading the race, but to win over those still to get off the starting blocks. Government initiatives such as subsidies and rent-free land will go some way towards achieving this.

Outlook

IIoT adoption costs are not inconsiderable, but China’s manufacturers cannot afford to count on historical advantages – such as low-cost labour – in the long term.

Lower cost manufacturing hubs throughout South and Southeast Asia, as well as in Africa, are springing up and will continue to do so thanks to China’s BRI, which focuses on developing a web of global trade corridors that lead back to China.

E-commerce players are pushing the envelope when it comes to efficiency gains in the logistics sector, and their sheer size will help push their suppliers up the technological curve. But e-commerce will only encourage one aspect of China’s manufacturing sector to embrace IIoT; for example, industrial manufacturers will remain untouched by speed-to-market pressures and thus will have less reason to invest in greater connectivity. But beyond simple operational efficiencies, IIoT offers manufacturers the opportunity to switch from being producers to service providers. China has long been pushing to transform its industrial-driven economy to one led by services, and IIoT technologies offer factories the chance to roll out Manufacturing as a Service.

Guohua Zhang
Co-Managing Partner,
China
T: +86 21 6279 8808
guohua.zhang@oclegalchina.com

China is the world’s largest manufacturer. Nevertheless, its manufacturing sector still lags behind that of developed countries, for example in its level of innovation, the implementation of essential technologies and in reducing energy consumption. Against this backdrop, the ‘Made in China 2025’ initiative was launched by the government as a national strategy. The initiative calls for improving China’s innovative capability; integration of industrialisation and information technology; and green development, by identifying ten key sectors for growth. As a result, we have seen various programmes supporting specific sectors, including robotics, smart manufacturing, and updating industry generally.

While the launch of this initiative means a tremendous opportunity for emerging industries, China’s legal framework presents a major challenge. Booming innovation relies, among other things, on a clear, reliable and predictable legal environment, not only in relation to the law itself – for example IP protection, labour law, environmental and healthcare regulations – but also the role of government and the courts. And this very much depends upon the continued reform and restructuring of China’s legal system.

Another concern of many foreign companies is their role in the implementation of Made in China. While the government has clarified that it will allow the market to play a decisive role and both foreign and domestic companies will be entitled to the same preferential treatment under the initiative, this has yet to be tested in its implementation.

Will Robertson
Partner, UK
T: +44 117 917 3660
will.robertson@osborneclarke.com

E-commerce, retail, logistics. Increasingly they are one and the same thing. Consumer demand for a quality product, good price, and reliable and swift delivery continues to rise, as does the willingness of consumers to shop online and with less regard for physical borders. This provides huge opportunity for Chinese e-commerce players and logistics providers alike to feed both local and overseas growing markets, with IIoT applications being central to much of this progress.

Consumer confidence concerns can be met with IIoT and blockchain-based solutions that trace product history, confirm product authenticity and enable live shipment tracking. IIoT innovation is helping achieve time and cost savings in warehousing and delivery activities through real-time inventory management, predictive analysis, clever data analytics and automation. And international laws are generally moving in the direction of global trade and removing artificial barriers to online sales – for example Europe’s Digital Single Market initiative, which increasingly provides a level international playing field for web-based sales, and China is hungry to have its share. However, this doesn’t come without legal challenges, as laws protecting consumers are still an international minefield for businesses selling and shipping internationally. Product returns, cancellation rights, impacts of late delivery, warranty periods, and health and safety obligations, are just some of the international legal considerations.

IIoT is driving huge change (and indirectly keeping many online shoppers very happy) but we see the longer-term beneficiaries in China being those entities who manage their legal positions appropriately and adopt IIoT technologies with this in mind.