According to China's 12th five-year plan (FYP), the central themes for the development of China's manufacturing sector during the 2011-2015 period are building competitive advantage based on science, technology, and innovation; upgrading industrial structures; and moving up the global value chain. The plan identifies seven "Strategic Emerging Industries" (SEIs) as key areas of growth and the government expects their contribution to China's GDP to increase from 2 percent in 2010 to 8 percent by 2015 and 15 percent by 2020. This means that the SEIs will need to grow more than 20 percent annually over the next decade.
Since these SEIs are still at an embryonic stage of development, governments at all levels are expected to use preferential tax, financial, and procurement policies to facilitate their growth. Governments will also partner with the private sector to spend approximately $1.7 trillion on the SEIs in the 12th FYP period, presenting huge market potential for both domestic and foreign businesses in the decades ahead.
Targets and Planned Investment
The seven SEIs include energy-saving technology and environmental protection, new energy, new-energy vehicles, next-generation information technology, biotechnology, advanced equipment manufacturing, and new materials (Appendix 1). The first three industries align with China's goal of improving energy efficiency and achieving sustainable growth while the other four reflect the ambition of moving up the global value chain.
Environmental Protection and Energy-Saving Industries
Over the past few decades, China's heavy reliance on manufacturing and exports to fuel economic growth have placed increased demand on the energy sector, especially on carbon-intensive fossil fuels such as coal and oil. These sources accounted for more than 80 percent of China's energy consumption in recent years and have been a major source of pollution. The cost of addressing China's environmental problems to the current standards of advanced nations is estimated to be more than 2 percent of its GDP.
Figure 1 – Historical Energy Use in China by Type
One target in the FYP is to cut the amount of energy and carbon dioxide emissions needed for every unit of economic output by 16 percent and 17 percent respectively. Another is to push renewable energy's share of the country's total energy use from the current level of 8 percent to 11 percent by 2015 (Figure 1). To accomplish these goals, China plans to spend $450 million on energy conservation and environmental protection within the plan period and invest $850 million in the power industry (half will be invested in power plant construction and half in power grid construction).
Nuclear power and hydropower are prominent items on the agenda while the expansion of wind and solar power may moderate in the coming years because of concerns about high generation costs and weak competitiveness. While authorities initially prepared to approve 10 nuclear power projects, the planned construction of four reactors was suspended for a safety review following the Fukushima crisis in Japan. Only recently did the government signal the resumption of nuclear power development; the pace, however, is now less ambitious. Nuclear power is expected to produce 5 percent (rather than 8 percent) of the country's total power capacity by 2020, compared with 1 percent in 2010.
As China became the world's largest auto market, soaring petroleum use and congestion-related air pollution have prompted the government to control the production capacity for vehicles with traditional engines and encourage the development of alternative-energy vehicles, with a focus on pure electric and hybrid-electric vehicles. Under the FYP, China will invest $15 billion over the next 10 years to support production of alternative-energy vehicles and advance key technologies related to batteries, electric motors, and electrical control systems. By 2015, the nation will have the capacity to produce 200,000-300,000 electric vehicles annually and have 1 million electric vehicles on the road, becoming the largest new-energy vehicle production country in the world.
High-Tech Manufacturing Industries
Despite impressive growth over the past three decades, China is still on the low end of the global value chain for most industries, with processing exports accounting for approximately half of total exports. Further, the share of domestic value-added in exports is far below that of developed countries. Promoting the technological progress of enterprises and expediting industrial upgrading have been policy objectives since the 11th FYP.
The latest plan highlights several industries that are fairly new even in global terms. For the biotechnology industry, which includes applications for pharmacology, agriculture, and engineering, the government plans to spend more than $300 billion over the next five years on developing and manufacturing biotech drugs, establishing biotech industrial centers, and strengthening intellectual property rights. The industry is expected to generate more than 1 million jobs and help China reach many social targets included in the plan, including extending life expectancy and reducing infant mortality.
China's new materials industry lags well behind those of developed countries. The self-sufficiency rate is fairly low, with the majority of domestic demand for high-tech new materials still relying on imports. The plan has set forth an average annual growth rate of more than 25 percent for the industry's output value over the next five years. Other goals include promoting 30 types of new materials and implementing 10 major demonstration projects. Another, establishing numerous well-equipped industry bases and industrial clusters, focuses on high-strength lightweight alloys, high-performance steel, functional film materials, new battery materials, carbon fiber composites, and rare earth functional materials.
Equipment manufacturing is the largest industrial sector in China, accounting for approximately one-quarter of total manufacturing output and dominating global markets in low-end products. Encouraged by the FYP, Chinese manufacturers are trying to step into high-end markets and accelerate the development of equipment in computer intelligence, aviation, aerospace, high-speed rail, and ocean engineering. By 2015, sales revenue for high-end manufacturing equipment is expected to reach more than $970 million and account for more than 30 percent of total sales revenue in the equipment industry.
Another emerging sector targeted in the plan is next-generation information technology, which covers broadband, mobile communication networks, artificial intelligence, and other high-end software.
Although there are still many uncertainties regarding whether China can achieve its ambitious goals for the SEIs, the direction in which leaders hope to move the country is very clear. The plan will have significant effects on China's economic and business environment, presenting both opportunities and challenges for foreign companies. American firms are likely to see increased procurement opportunities from Chinese companies, especially in areas where homegrown technologies are still being developed. On the other hand, foreign firms are strongly pushed to invest in the SEIs, and several related areas have been added to the "encouraged" list in the recently released "Catalogue for Guiding Foreign Investment," the country's principal document for regulating foreign investment (Appendix 2). The government strongly encourages foreign firms to build and extend their R&D centers in China, cooperate with local companies on innovation, and allow more technology transfers to the nation in return for a larger share in the domestic market. Overall, foreign firms will need to adopt markedly different mindsets than those of their forebears and analyze their strategies in holistic terms to succeed in China over the next decade.
Appendix 1 – Subsectors, Investment, and Market Size of China's SEIs
Source(s): Deloitte, "China Strategic Emerging Industries Development and Financial Policies," Dec. 2010
Appendix 2 – China's Revised Catalogue for Guiding Foreign Investment
Source(s): Covington and Burling LLP, "China Releases Revised Catalogue for Guiding Foreign Investment," Jan. 2012
 China became the largest emitter of greenhouse gases in 2007 and its air quality is among the worst in the world; this has had incalculable adverse effects on public health. China is currently home to 13 of the world's 20 most polluted cities.
 Reuters, "China Hydro Push May Slow Wind, Solar Growth," December 1, 2010,http://af.reuters.com/article/energyOilNews/idAFTOE6B004V20101201.
 Xinhua News, "China to 'Safely and Effectively' Develop Nuclear Power," March 5, 2012,http://news.xinhuanet.com/english/china/2012-03/05/c_131448151.htm.
 China recently discontinued preferential treatment for foreign automakers as related to their Chinese plants as part of measures to avert overcapacity in the industry. Bloomberg News, "China to Curb Auto Production Capacity, Promote New-Energy Cars," March 4, 2012, www.bloomberg.com/news/2012-03-05/china-to-curb-auto-production-capacity-promote-new-energy-car-development.html.
 A detailed discussion on value-added trade will be available in a forthcoming MAPI publication, Understanding International Trade in an Era of Globalization: A Value-Added Approach, PA-105, MAPI, March 2012.
 Xie Hui, "New Material Industry Booming in China," Qiushi Journal, November 3, 2011,http://english.qstheory.cn/sci_edu/201111/t20111103_121583.htm.
 China has budgeted more than $100 million annually for the next few years to build and upgrade railway systems and rail transportation equipment, and plans to invest $600 billion in smart grid construction and $45 billion in offshore drilling equipment. For more details, see Who Will Benefit from China's 12th Five-Year Plan?American Century Investments, http://bit.ly/x6h5Jl.