Mexico s dilemma: rising exports, low value-added China-Mexico trade gap around $14 billion Both have growing IT exports, but Mexico imports about 90% of the intermediate inputs, as opposed to China s 55-60%. Despite NAFTA, Chinese IT exports to the US have gained share. In IT, Mexico s industry is more capital-intensive than China s. But the input of skilled labor is the same very low compared to the input of unskilled labor. 1
Contents I. China s growth story II. Capturing more of the IT value chain III. Benefits and liabilities of the core IT policies IV. Lessons 2
China continues to post aggressive, export-led growth Sustained 7-8% growth rate for a decade, 9.8% in 2005 2005 GDP US$2.26T, just above Italy (after restating the contribution of services) Per capita income in major coastal cities of $5,000, roughly equivalent to Poland, Chile, and Malaysia Bank deposits US$1.7T FDI over US$55B annually Hyper-growth in: Telecom users Internet users Auto sales Construction/housing Insurance Travel Exports 3
Proportion of High-Tech Exports China no longer just about basic assembly 35% USA USA 30% China 25% 20% 15% 10% 5% 0% China India 1995 2003 India In 2004, US ran a $36 bn Advanced Tech. Product (APT) Deficit US-China Security Review Commission, USITO 4
Electronics Industry Growth, 1997-2005 1600 45% Revenue (Rmb bln) 1400 1200 1000 800 600 400 40% 35% 30% 25% 20% 15% 10% Growth Rate 200 5% 0 1998 1999 2000 2001 2002 2003 2004 2005E 0% USITO 5
Major Economies Real GDP and Growth (USD Trillions, 2003) Ave RGDP per capita growth 1991-2003 8 6 4 2 0-2 India $2.69 t China $5.6 t Brazil $1.19 t Mexico $0.81 t 0 5000 10000 15000 20000 25000 30000 35000 Russia $1.15 t UK $1.40 t France $1.42 t Real GDP per capita 2003 Germany $1.98 t Japan $3.12 t Canada $0.84 t US $9.5 t Sources: World Bank China, USITO 6
China has become the world s most significant manufacturing base for the international market. Chinese China Proportion Production of World of Selected Electronics Electronics Production 20022004 Product China Production % of world production Washing Machines (2002) 14.43 million 24% TV sets N/A 43% Refrigerators (2002) 12.79 million 16% Air conditioners (2002) 18.27 million 30% Cameras 55.14 million over 50% Microwave ovens (2002) 12.57 million 30% VCD players (2002) 20 million 70% DVD players 92 million 90% Mobile Telephones 230 million 31% Telephones (2002) 95.98 million over 50% Notebook computers N/A 40% Displays N/A 50% Radios (2002) 240 million 70% Disposable batteries (2002) 17 billion 40% Sources: MII, Global Sources 7
Contents I. China s growth story II. Capturing more of the IT value chain III. Benefits and liabilities of the core IT policies IV. Lessons 8
Seeking paths to growth China s leadership wants to emerge from the squeezed middle of the value chain to capture more value within China Excessive focus on capital investment (not employment or productivity) plus unrealistic growth targets have attracted high-capital, low-yield investments. Many Chinese believe that developed countries, which themselves did not pay retail costs for IP, and which avoided other intangible costs (environmental responsibility, consumer liability, etc.), are now demanding full tariffs from developing countries for the same intangibles, to the benefit of the developed world. Within the confines of international commitments, they do not want to pay either. 9
Regional clustering has been an important accelerator for IT growth
Regional Distribution of China's IC Design Industry Central/ Western Region 9% Pearl River Delta 18% Yangtze River Delta 42% Bohai Bay Area 31% Source: CCID Consulting 11
Investment in higher education since 1998 may be the most important driving factor behind tech growth. In 1990, less than 2% of Chinese between 18-22 were in university or technical school. Now the percentage is close to 20%. University enrollment grew about 25% a year in 1998-2002. Aggressive supports have encouraged the emergence of institutes for software and IC design, animation, and other encouraged areas. Dramatically lesser investment in primary and secondary education. Much of the educational system has been privatized. Universities actively invest in and manage subsidiaries, especially in high-tech and electronics. The top universities derive substantial income from their IT enterprises. 12
China s Policy Instruments WTO and other agreements make old policy tools obsolete (industrial plans, pricing guidelines, export requirements, dual currency, etc.) But the bureaucratic machinery favors short-term plans with quantitative measurements SC 18 (2000) to promote ICs and software Government procurement Anti-Monopoly measures Patent pools and encouraged standards Anti-dumping actions The support programs favor companies with political, not intellectual or commercial capital and therefore create new market distortions. 13
Policies to promote high-tech Name Implementation Four Preferences : R&D exemption of 10% of sales, zero tariffs for capital equipment and testing equipment for nationally recognized technology projects, exemption on product tax, and 5 years of income tax exemption/reduction Special Treatment for Special Requirements of Large Projects Decision Regarding Improving Technological Renovation, Developing High Technology, and Accomplishing Industrialization Promoted private ownership of high-tech companies and tax breaks for high tech, stipulated provisions for incorporation of companies by national research centers, promotion of venture capital, sharing out IP royalties to individuals Catalogue of Industries, Products, and Technologies Whose Development Is Currently Encouraged by the State Catalogue Guiding Foreign Investment in Industry 2000 7 th -8 th Five Year Plan (1986-1995) 8 th -9 th FYP (1991-1999) IC Development Strategy From 1998 SC Doc. 18 Policies Encouraging the Development of Software and IC Industries 2000 Tax Policies Encouraging the Development of Software and IC Industries 2000 Regulations Protecting IC Layout Design 2001 Management Methods for Certifying IC Design Companies and Products 2002 Very Large IC and Software Projects 2002 Working Group on Standardizing IP Blocs for ICs 2002 Local government policies From 2000 1999 2000 14
Tax policy and financing: central State Council Document 18, Policies to Encourage the Development of the Software and IC Industries, June 2000: Simplifies approval processes, lowers VAT on domestically manufactured semiconductors to 6%, later dropped to 3%. Ministry of Science and Technology (MOST) designates the IC industry a high priority in the 863 Plan, which supports research and development of key technologies. About 100 design firms were subsequently seeded. The 909 Project, also managed by MOST, allocated over $1.2 billion in 1996-2000, heavily tilted toward semiconductors. State Administration of Taxation Doc. 25 sets procedures for returning VAT paid on local ICs in excess of 3% of the company s sales value, and extends policy to 2010: September 2000. Foreign investment catalogue places semiconductors in the encouraged category, indicating accelerated approval: August 2000 SAT Doc. 70: State Administration of Taxation Document 70 reduces the total permissible VAT load on IC companies to 3 percent: 2002. State Council 51: Document 51 adds incentives for venture capital in the semiconductor industry, including expedited listings: 2002 15
Tax policy and financing: local Shanghai Doc. 54: Policies and Regulations Related to the Development of the Software and IC Industries recognized the production line concept in IC production, extending benefits to design facilities and packaging and testing facilities. December 2000 16