Photographer: Brent Lewin/Bloomberg

China Prods Industry to Make a Great Leap

A new plan favors enterprises that are green and less labor-intensive

China’s addiction to coal doesn’t just foul its air. It pollutes the ground, too, because power plants often dump leftover ash in landfills. Yulong Eco-Materials has found a use for that plentiful waste. The company, based in the central Chinese province of Henan, uses the ash to make bricks. “The material is easy to get,” says Sam Wu, chief financial officer of Yulong, which had sales of $44.5 million in the fiscal year ended June 2014.

Premier Li Keqiang wants more companies to address China’s environmental problems and bolster the struggling manufacturing sector. In August, a closely watched gauge of factory output fell to its lowest level since 2009. The slump contributed to the collapse in share prices, with the Shanghai index down almost 39 percent from its high in mid-June.

In May, the State Council endorsed a 10-year manufacturing plan aimed at fostering innovation, promoting the creation of more local brands, and encouraging greener production. Headlined Made in China 2025, the blueprint identifies 10 strategic industries, including robotics, IT, aerospace, and new-energy vehicles. It also sets ambitious targets: Spending on research and development by Chinese manufacturers is to rise to 1.9 percent of revenue by 2025, up from 0.9 percent in 2013. The carbon dioxide intensity of industrial output must fall by 40 percent over the course of a decade. “Pollution control is now even more important than GDP growth,” says Fielding Chen, a Bloomberg economist in Hong Kong. Politically sensitive issues such as smog “are the things that people care about.”

The blueprint “is born out of necessity,” says Karel Eloot, a senior partner at McKinsey in Shanghai. To remain competitive in manufacturing, “China needs to find a new wave of productivity improvements,” he says. Low-wage, low-skilled labor fueled the first phase of China’s industrial revolution, but workers are no longer as plentiful or cheap. Because of the success of the one-child policy, population growth has slowed dramatically and the workforce is shrinking. And so the industries named in Made in China 2025 are less labor-intensive than those that powered almost two decades of double-digit export growth.

While the plan is short on specifics, policymakers will likely rely on a combination of regulations and incentives to achieve their goals. Makers of alternative-energy cars and buses already benefit from extensive government support. Sales of such vehicles soared more than fourfold last year, to 75,000, aided by consumer subsidies that knock 30 percent to 60 percent off the sticker price, according to data compiled by Bloomberg. Also, Beijing currently requires that electric vehicles make up about 30 percent of new purchases for official use in 88 cities.

Zhengzhou Yutong Bus, which in 2012 opened a plant dedicated to making electric buses, has received more than 3 billion yuan ($471 million) in government subsidies, according to its website. Of the 60,000 buses it sold last year, 10,000 were alternative-energy vehicles. Yutong Bus will register an almost 17 percent increase in profit this year, to 3.1 billion yuan, on sales of 27.6 billion yuan, according to forecasts by China International Capital, an investment bank. Even after the market rout, Yutong’s shares are up 26 percent this year.

Five electric double-decker buses made by BYD will be in service in London by the end of the year. The Shenzhen-based manufacturer of rechargeable batteries and electric vehicles is part-owned by Warren Buffett’s Berkshire Hathaway. Speaking to reporters on Aug. 27, BYD’s chairman, Wang Chuanfu, said, “China has the highest sense of urgency” when it comes to electric vehicles.

Beijing is also using the tax code to promote greener manufacturing. In February, it introduced a 4 percent tax on industrial paints and coatings that contain high levels of volatile organic compounds, a source of air and water pollution. “There’s a massive push to accelerate the conversion of the industry to using more waterborne paints,” says Charles Shaver, chief executive officer of Axalta Coating Systems, a Philadelphia-based company that makes paints for General Motors, Ford, BMW, Volkswagen, and other automakers. The company opened a $50 million water-based facility in Shanghai last year and a $30 million R&D center in the city in April.

Despite the considerable resources at Beijing’s disposal, the success of its latest manufacturing strategy isn’t assured. Consider China’s lack of success in fostering an indigenous semiconductors industry, an effort begun in the late 1980s. The nation has too many “inefficient plants” that wouldn’t survive without government subsidies and cheap loans from state-owned banks, says Michael Murphy, managing director of consulting firm AlixPartners in Hong Kong.

Yulong Eco-Materials doesn’t fall into that category. The company, which benefits from local government mandates that construction projects make use of recycled materials, is diversifying. In April, it opened a factory that can make bricks out of rubble from demolished buildings. “The concrete, the cement, the sand, the stone,” says CFO Wu. “Everything.”

—With Annie Lee

The bottom line: China’s 10-year manufacturing blueprint sets some ambitious environmental targets but is short on specifics.

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