China’s recently announced 12th five-year plan aims to transform the world’s second-largest economy from an investment-driven dynamo into a global powerhouse with a steadier and more stable trajectory. The plan affects domestic and foreign companies in all industries. To help senior managers decode and understand its provisions, we analyzed the potential impact on 33 industries. Two dimensions stood out: the effect on their profit pools and competitive landscapes. (For a detailed look at this analysis, see the interactive exhibit, “The economic impact of China’s 12th five-year plan.”
The plan’s likely impact on profit pools was categorized as either favorable (for example, sensitive to an increase in domestic demand or specifically targeted for special treatment), unfavorable (subject to restrictive policies), or neutral. For the effect on the competitive landscape, we looked at the intensity of regulation.
Five groups emerged from the analysis. New strategic industries are singled out for global leadership. Domestic-consumption engines drive consumer growth in the homeland. Restructurers are under government mandate to change. Reinventors are mature industries that must innovate and reinvest to close the gap with global leaders. Social utilities are large state-owned enterprises managing significant components of the national infrastructure.
New strategic industries
The plan characterizes a handful of industries as emerging battlegrounds where countries will be competing for technological leadership during the next wave of development. These industries, including new energy sources and biotechnology, are distinguished by their high profit growth potential and moderate state oversight. In these areas, the government has dedicated itself to incubating national and global champions by helping them gain leading technologies and expanding their commercial capabilities.
China’s government aspires to increase the share of GDP these industries contribute from about 1 percent today to 8 percent by 2015 and to 15 percent by 2020, presenting a huge market potential for domestic and foreign businesses alike. Although significant uncertainties remain in such young markets, companies that compete in them should focus on building core competitiveness in technological and commercial capabilities, as well as on gaining recognition as local innovators. Domestic players should concentrate on acquiring leading technologies and building relationships with local governments. Foreign companies must bring advanced technology and be seen as trusted partners for local innovation.
Competition, its texture defined largely by regulatory decisions, will be fierce. The central government could further shape the competitive landscape by specifically identifying technology paths, industry standards, market entry criteria, and partnership models. Given the fragmented markets that developed around early favorites such as wind and solar power, the government will become increasingly selective in its policies, looking for avenues to expedite consolidation and to identify national champions quickly.