PARIS – When Western politicians and business leaders discuss China’s manufacturing prowess, they usually conjure images of massive steel mills flooding global markets, dark factories run by robots, and state-owned enterprises propped up by subsidies. This supports the view that tariffs and anti-subsidy measures could erode China’s industrial dominance. But although this logic may be comforting, it is wrong.
China owes its manufacturing leadership not to a few national companies, but to deep industrial density. At the end of 2023, China was home to 4.1 million manufacturing companies, employing about 105 million people. Among these companies, 3.6 million companies report less than 20 million yuan (US$2.85 million) in annual revenue. Most of them employ about ten people and have limited fixed assets (144,000 yuan per employee). An additional 18.4 million self-employed workers work on the margins of the formal corporate manufacturing sector. These companies are largely excluded from government support.
These companies are not necessarily at the forefront of technology. About 58% of them reported a maturity level of one (out of five) in “smart manufacturing” development, which places them at the “planning level.” While this group has shrunk significantly – by about 27 percentage points – since 2019, only 17% of Chinese manufacturing companies have managed to reach level three (integration), four (improvement), or five (leadership).
China’s real industrial advantage lies, first and foremost, in the linkages between companies, which are organized into thousands of regional clusters. In a typical cluster, dozens of companies could produce a similar component, but each has slightly different capabilities, suppliers, knowledge, and customer relationships. This is crucial, not least because of market volatility: entry is relatively easy for producers, but margins are slim, and bankruptcy is common.
However, when a legal entity fails, engineers and managers quickly find jobs in a new vehicle, which uses their knowledge and builds on it. This combination of redundancy, competition, labor mobility, and incremental updates in tools and organization fuels the dynamism, with clusters often serving as a springboard for high-growth companies, from Bamboo Lab to Roborock. Insta360, a camera company, first reached $1 billion in annual revenue ten years after its founding.
The Chinese government has supported this process through the “Little Giants” policy, introduced in 2018, which aims to nurture specialized, cutting-edge and innovative companies in strategic technology sectors. Each of the 14,600 “mini-giants” holds more than 22 patents and their average R&D intensity is 7%. About 46% of them are concentrated in 178 national high-tech industrial development zones, such as Zhongguancun in Beijing, Zhangjiang in Shanghai, and East Lake in Wuhan. Together, these regions represent 14% of national GDP and about half of China’s total R&D spending.
Chinese industry also benefits from scale. Western strategies often assume that Chinese manufacturing will collapse in the absence of export demand. But when the Chinese government subsidizes producers of electric cars, solar panels, batteries, or industrial machinery, it is not just targeting foreign markets; It is strengthening domestic demand, purchasing channels, national standards, and building infrastructure to create scale early. China is the world’s largest exporter of manufactured goods, but it is also its own best customer in many sectors.
The third main reason for China’s industrial advantage is one that Western observers get wrong: finance. The Western narrative insists that Chinese companies owe their dominance almost entirely to subsidies. But China’s central government has tightened the rules governing domestic industrial subsidies, because uncontrolled domestic subsidy races lead to a waste of resources.
Instead, Chinese manufacturers benefit from cheap capital, delivered through a mix of debt and equity-like public funds, within a system that benefits from financial repression and tolerates very low returns for long periods. Government agencies mobilize capital, but outsource the selection of beneficiaries, at least in part, to professional managers and co-investors.
It is important that decisions are not based on which companies can achieve the greatest financial returns the fastest. According to the National Bureau of Statistics of China, industrial enterprises worth more than 20 million yuan will operate with business costs of about 85 yuan per 100 yuan of revenue, and expenses of about 8.5 yuan per 100 yuan of revenue, in 2023. This leaves little room for shareholder value.
Instead, capital is flowing toward companies capable of enhancing China’s industrial capabilities, expanding domestic employment, and improving the strategic position of the economy. Of the six little dragons of Hangzhou – robotics champion Unitree and Deep Robotics, AI leader DeepSec, gaming studio GameScience, spatial design platform ManicurTech, and BrainCo, a brain-computer interface company – half are located in the science and technology innovation corridor in western Hangzhou, and several have benefited from the “3+N” industrial fund cluster announced in 2023.
The Chinese model may not be the most efficient, but it is powerful. That is why the Western consensus on how to “de-risk” deserves a more serious look. Reducing dependence on China is not as simple as switching a few suppliers; It requires similar industrial intensity cultivation. Efforts to build rare earth supply chains independent of China show that this is easier said than done. Since China suspended its exports of processed rare earth elements to Japan in 2010, Japan has made significant progress in building its supply chain. But the Japanese-funded Malaysian facility, run by Australian mining company Lynas Rare Earths, has been criticized for its waste management practices and concerns about radioactivity.
The United States also began paying attention to the risks of rare earths in 2010, with the Department of Energy launching its first Critical Minerals Strategy in December of that year. Rare earth mining in California resumed the following year, but was abandoned after four years. Although it was restarted in 2017, production is still shipped to China for refining. Although the United States now gives high priority to rare earth elements, even threatening to annex Greenland in order to gain access to them, it has a long way to go.
Ultimately, the West is supposed to be able to “decouple” from China. But that doesn’t matter much if it can’t rebuild its industrial density, including supplier networks, skills, tools, and patient financing. Tariffs may buy a little time. But only powerful industrial ecosystems like China can buy influence.
Robin Rivaton is the CEO of Stonal, a European technology company, a member of the French business federation AI organization MEDEF, and an affiliate of the Paris-based research firm Fondapol. He is the author of eight books. This article is distributed by Project Syndicate.
