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The Truth About Chinese Manufacturing

Yesterday we brought your attention to a recent NIST report (PDF) examining China's manufacturing sector and setting it up as a benchmark for America.

The short answer is: they're not winning yet, but they're on track to.

The biggest thing to understand about Chinese manufacturing was their "Made In China 2025" (MIC) program. This had two goals.

The first goal was to replace foreign products, by reaching 80% of domestic production in key industries. In other words, China was no longer just going to manufacture cheap goods for export, but it was going to manufacture high tech goods, for export and for internal self-sufficiency.

The second, less advertised but perhaps even more crucial, was not just to replace foreign products but foreign manufacturing technology as well. MIC targeted a 50-70% domestic share in high-end CNC machines, robot core components, industrial software, and smart manufacturing IT.

This is what would make China totally self-sustaining in manufacturing. As both sides know, China manufactures a lot, but they do it with Western (largely German) equipment, which means that in case of a conflict between the two blocs, while the West would undoubtedly suffer a financial hit, China's manufacturing ability would also be paralyzed.

So, how do things look?

Since launching MIC in 2015, China has established at least 33 Manufacturing Innovation Centers (MICs), approaching their goal of 40 by the end of this year. MICs are R&D hubs for inventing new production methods, based on the German Fraunhofer-Gesellschaft concept, a national government-backed foundation that supports regional manufacturing R&D institutes. MICs were backed by a $300 billion investment from 2016-2020 alone, with state banks pledging an estimated $1.5 billion annually in ongoing support.

The results? There are definitely results. China now leads the United States in 9 of 11 global manufacturing subsectors. Their manufacturing sector has grown at a 5.3% compound annual rate over the past five years, while ours limps along at 1.5%. They've gone from producing 3% of global advanced industry output in 1995 to 25% in 2020. In 2023, China accounted for nearly 30% of global manufacturing value-added, compared to America's 22.7%.

What's more, according to the report, in critical sectors like electric vehicles and batteries, China has achieved genuine technological leadership. They registered 60% of global EV sales in 2023 and exported over 4 million electric cars, making them the world's largest exporter.

Are we doomed? Not yet.

Despite massive investments, only 37% of Chinese manufacturers have achieved even basic levels of digitalization and industrial intelligence, and only 4% have leading-edge capabilities, according to NIST. They remain "highly dependent on imported high-end machine tools" for advanced manufacturing, and their struggles with technology adoption across their manufacturing base mirror our own challenges with small and medium-sized manufacturers.

Quality concerns persist too. In the "Made-in-Country Index," Germany ranks first, the United States ranks tenth, and China ranks forty-ninth. Having the capacity to make things is different from making things well.

But they are clearly headed in the right direction, and fast.

The lessons? What makes China's approach effective is systematic coordination. Unlike our Manufacturing USA program, where 18 institutes operate with different federal sponsors and varying levels of support, China's MICs function as integrated hubs within a nationally-directed strategy.

The model is straightforward: the Ministry of Industry and Information Technology identifies critical technology gaps tied to strategic industries. MICs are then established, often as for-profit entities with 10-20 equity owners including government, state-owned enterprises, and private companies. These centers integrate with "State Key Laboratories" at leading universities and coordinate across provinces to leverage regional strengths.

Take electric vehicles as an example. Beijing hosts the National Power Battery Manufacturing Innovation Center and the National Innovation Center of Intelligent and Connected Vehicles. Hefei, known as China's "EV capital," got the National Innovation Center for Basic Components of General Machinery. Each center addresses specific technological bottlenecks, while coordinating in a hub-and-spoke model that connects research, development, and production.

This is in some ways an adaptation of the German model, which encourages close cooperation between local and federal government, companies, and research institutes.

There's another takeaway from the report: overcapacity. China has built enough solar panel factories to supply global needs, enough auto factories to produce every car sold in China, Europe, and the United States, and is on track to build as many petrochemical plants in five years as currently exist in Europe, Japan, and South Korea combined. There is no economic logic there.

What there is, instead, is economic imperialism. The goal is very simple: to flood the market with enough cheap products to bankrupt Western competitors, and thereby establish dominance over markets.

This shows how vain the free trade ideology has been. It's not possible to have free trade with a country that refuses to let market forces dictate its production because it has overarching geopolitical goals.

As in many other ways, China's rise in manufacturing isn't the product of some great new insight. Instead, it's applying recipes that work (mostly the German model), doing it very efficiently, and using the power of a highly competent, active government to do it relentlessly and at mind-boggling scale.

There's still time. But they are catching up.

Policy News You Need To Know

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#YIMBY #FamilyPolicy — Very good article by Lyman Stone over at the Institute for Family Studies on the ROAD to Housing Act. Basically: encouraging more housing is good, but it should be encouraging pro-family, pro-natalist housing, that is to say, single-family homes, which studies show is what people prefer, rather than studios and apartments, which studies show are anti-natal. "If barriers are removed to building small apartments but not for family neighborhoods, the result is the bulldozing of family homes for apartments and falling fertility, which is what we’ve seen nationwide," Stone writes, correctly in our view.

#AI — Google has announced that one of its AI models "generated a novel hypothesis about cancer cellular behavior, which scientists experimentally validated in living cells." In other words, an AI came up with a genuinely new scientific idea. If this proves to be more than a one-off, it is indeed a groundbreaking moment. Thus far, AI has been good-to-excellent at organizing and using existing ideas, but absolutely terrible at generating new ones.

#Healthcare — Well, we already know this, but it's good to communicate on it. The White House has revealed a number of illegal immigrants who received Medicaid as part of its communications around the shutdown.

#VotingRights — We'd be remiss if we didn't mention the pending VRA Supreme Court case. Racially-gerrymandered districts are obviously un-American; if nothing else, they are an anachronism from the peculiar post-Civil Rights era. Louisiana v. Callais, which is pending before the Supreme Court, challenges whether the state's congressional District 6, drawn to create a second majority-Black district under Voting Rights Act Section 2, unconstitutionally prioritized race over traditional redistricting factors, as ruled by a lower court. The district's serpentine shape, spanning roughly 250 miles from Shreveport to New Orleans, combines urban Black populations across north and south Louisiana, in a way that looks transparently absurd on a map. We'll note here: the word "gerrymander" comes from a Massachusetts governor named Gerry (which is why it's pronounced with a hard 'g') who drew a district shaped like a salamander, which the press then called a "gerrymander." What should we call the New Orleans snake? We'd also note something else: these affirmative action districts have not even helped the African-American community, as those types of handouts never do. They have instead ensured that most black politicians in America are either extremists or corrupt machine hacks. It's no coincidence that the most successful African American politician in history, Barack Obama, could not get elected in one of those districts and had to seek his political fortunes in a different way. Americans deserve fair representation.

#America — The State Department is revoking visas from foreigners who publicly celebrated the assassination of Charlie Kirk. This is not only very good, the reaction is telling. There are so many, still, on the left who simply reject the very notion of a nation state. There is no "free speech" issue. Everyone in history has understood that if you travel to a foreign country you are a guest there and therefore you should behave like a guest should—and guests who behave poorly get kicked out. The fact that there is any controversy at all, or that people absurdly invoke "free speech," is sadly symbolic of the extremism on the left.

#Immigration — In a significant win for the rule of law, the great guys at America First Legal secured a complete dismissal of an ACLU-led lawsuit challenging Bucks County Sheriff Fred Harran's 287(g) partnership with ICE. The Pennsylvania Court of Common Pleas ruled that the sheriff's cooperation with federal immigration authorities is not only lawful but "reasonable and necessary" for public safety, while crucially affirming that Pennsylvania sheriffs operate as independent constitutional officers who don't need county commissioner approval for such agreements. From a policy perspective, this decision is a game-changer: it establishes important precedent that 287(g) agreements function like any other multi-agency law enforcement task force, shields local officials from activist lawsuits attempting to obstruct immigration enforcement, and reinforces that elected sheriffs answer to their constituents rather than to county boards or outside pressure groups. Notably, the court found the plaintiffs, including the NAACP Bucks County Branch, lacked standing because they could only demonstrate "speculative future injuries based on speculative future events," effectively raising the bar for sanctuary-style legal challenges and protecting the operational integrity of proven force-multiplier programs that help remove illegals.

#Immigration — This is not directly relevant to US policy, although it is. In a stunning moment of candidness, former UK Prime Minister Boris Johnson admitted on a podcast that what is now known as the "Boriswave," his extraordinary opening of doors to immigration under his tenure, was done under the advice of his Treasury civil service to counter "inflationary wage pressures." This conforms to what we have heard from sources. Of course, another word for "inflationary wage pressures" is "tight labor markets that reward workers." And indeed, post-Brexit, British labor markets were tightening and wages rising. That Treasury civil servants, like so many of their peers in the global leadership class, saw this as an obvious ill that should be remedied by flooding the country with immigrants from third world country is…well…we can't really find a word for it. But it's something.

#K12 — The good folks at RAND have done a survey of school principals and pupils on cell phone bans in schools. Shocker: administrators like it, kids don't. While 67% of schools now enforce bell-to-bell phone restrictions and 86% of principals report safety benefits including reduced cyberbullying and improved school climate, only 11% of students support all-day bans, although, notably, 60% do back restrictions during class time. The primary concern driving student opposition echoes parental anxieties: 81% cite the need for parent-child communication, particularly during emergencies, as their top reason against blanket bans. Or at least that's what they say…

NEW: CS3D Is Just One Way In Which Europe Exploits American Economic Vitality — Second in our article series on the EU directive CS3D and how it affects American business, in collaboration with Baron Public Affairs. Read and share!