China, a once thriving manufacturing powerhouse, is struggling to keep this title. China entered 2016 encumbered with a weakening economic outlook that has cast a shadow on its struggling industrial sector, with growth numbers at 7%, the lowest since 1990. The challenges faced by the Chinese industrial sector have been, in part, attributed to a culmination of decelerating technological progress and inadequately equipped factories. Conversely, China’s decline as a manufacturing frontrunner has been further exacerbated by foreign market entrance barriers created by China’s strict data surveillance regulations and data theft concerns that have hindered foreign investments, which are limiting the potential of China's industrial rate of growth. China has continually implemented strict regulations for foreign companies, as these entities have been frequently subjected to invasive audits that have made them vulnerable to economic cyber espionage. Yet, it is becoming evident that China’s protectionist policies are not only creating barriers for foreign companies but are increasingly showing to be self-destructive to its own economy.

China has struggled in adapting to the age of industrial digitization, as many of its factories lack industrial software and robotics necessary for more effective production mechanisms, creating a need for improved manufacturing capabilitiesChina’s purchasing manager index (PMI), the most significant indicator of a country’s economic health in the manufacturing sector, was below 50 for the greater part of 2016, indicating a decline in factory activity. Furthermore, industrial statistics published in 2015 indicate that Chinese factories are lacking in industrial software as well as robots utilized for manufacturing processes. China’s industrial automation is limited and this is becoming a growing challenge as manufacturing capabilities cannot progress without the advanced technology and production mechanisms. Tech innovation and computer science are being integrated into industries such as the automotive sector and medium-sized machine manufacturing--sectors in which China has struggled to keep up. Although China is increasingly dependent on foreign technology to improve its infrastructure, high tech manufacturing presents a security issue for the protectionist Chinese government.

China’s tight grip on its national security has created a trade barrier which has begun to affect its own economy. The increasing concern for the safety of intellectual property and commercial data expressed by foreign companies in the U.S. and Europe has been exacerbated by Chinese cyber legislation that gives Chinese authorities direct access to their data. Chinese cyber laws give the Chinese government full reign to sift through foreign companies' IP, affecting the manner in which foreign companies approach business in China. In that respect, while there is a need to supply China’s production sector with adequate technology systems, such as automated machine tools and robotics, its protectionist data surveillance practices have led to reluctance by foreign entities to set up companies in China, frequently forcing them to seek alternative production locations in countries such as South Korea, Japan and Vietnam.

However, Germany, which has become one of China’s most significant trading partners, has actively strived to tackle the obstacles incurred by Chinese protectionist cyber laws, while providing a window of opportunity for other countries looking to operate in China’s deficient manufacturing sector. According to international trade statistics, Sino-German trade has increased exponentially in the past few years, making Germany a credible reference point for other countries with business interests in China. Germany has recognized the demand in China’s manufacturing sector, and is for that purpose actively trying to circumvent economic cyber espionage concerns through the establishment of a cyber-security platform.

In October 2015, German Chancellor Angela Merkel met with Chinese government officials to discuss preparations for a cyber-security platform that will potentially cease risks relating to the exposure of industrial data flows that may also benefit companies in the international market place. The Chinese and German governments successfully reached an agreement to work on economic cyber spying, thus making strides to finalize an as-yet-unnamed cyber security deal by June 2016 that would bring the two countries closer in finding a common solution to ease IP protection concerns of companies operating in the industrial sector. These regulations will help companies looking to operate in China, as they will set in place guidelines for the standardization of automated systems and data flows which should lessen the economic risks for companies in the international market place. Industry insiders believe that this business partnership is part of China’s industrial development strategy, also known as “Made in China 2025,” a plan created by the Chinese government to achieve technological and industrial advancements in an effort to upgrade its production facilities.

The necessity of increased data flow in an effort to stabilize the manufacturing sector through foreign investments and joint ventures will require continuous efforts by China to find mechanisms to eliminate economic cyber espionage. China’s overbearing need to keep a tight grip on its national security has backfired and it needs to loosen its regulations even further if it wants to regain stability. The German government’s dialogue with China related to standardizing regulations for the advancement of technological cooperation should be viewed as a primer to other foreign companies, who can take advantage of opportunities in the country with adequate precautionary measures and risk assessment strategies.  

by Sara Djuric
Senior Project Manager