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Where ‘Made in China’ Means Flying Cars and Automated Pharmacies Guangzhou, a major manufacturing hub, is doling out subsidies and free land as it sets out to retool its economy.

Where ‘Made in China’ Means Flying Cars and Automated Pharmacies
Guangzhou, a major manufacturing hub, is doling out subsidies and free land as it sets out to retool its economy.

By Dexter Roberts | November 21, 2017
From Bloomberg Businessweek

On a sunny afternoon in early November, several dozen software engineers and designers are anxiously preparing for a test flight of the EHang 184, a compact metal and glass pod outfitted with eight propellers. The self-steering, single-passenger craft could begin buzzing through the skies of Dubai as early as next year, says Hu Huazhi, the 40-year-old chain-smoking founder, chairman, and chief executive officer of EHang, a Guangzhou-based maker of drones. The rulers of the Arab city-state want one-quarter of all transport to be autonomous by 2030 and are in talks with EHang about supplying a fleet of air taxis.

Earning bragging rights for building one of the world’s first flying cars is not just a corporate goal. “Our company’s development is also an integral component of the Guangzhou government’s plan” to move up the technology ladder, says Hu as he shows visitors around the company’s offices and flight command center, which are housed inside an abandoned amusement park devoted to the wonders of space travel.

Some 19 miles away, at a factory complex owned by Guangzhou Automobile Group Co. (GAC), rows of orange-and-black German-made industrial robots pivot and plunge as they assemble and solder Trumpchi-brand SUVs, with few workers in sight. With the blessing and support of local officials, the state-owned carmaker is building a $6.5 billion industrial park nearby to produce connected new-energy vehicles. “The economic structural transformation you see here is not only for the benefit of enterprises—we also have a responsibility to the country,” says GAC President Feng Xingya in an interview at company headquarters. “We are trying to achieve innovation-driven development, and we must carry out the government’s policy to succeed.”

Guangzhou, a sprawling port city on the Pearl River that’s home to stodgy state-owned enterprises (SOEs) as well as scrappy textile and electronics producers, is starting to look like the poster child for China’s current effort to transform its economy. “Made in China 2025,” an initiative unveiled by President Xi Jinping’s administration two years ago, directs cities and companies to shift out of low-cost, labor-intensive manufacturing and into higher value-added production. State planners want companies to become globally competitive in established industries such as autos, as well as dominate new ones like drones and artificial intelligence. “China wants to raise productivity in every part of the economy. And that includes improving the quality of human talent, how capital is used, and how technology is developed,” says Scott Kennedy, director of the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies (CSIS) in Washington. “They think that doesn’t happen naturally. The government has to put their finger on the scale to make that transition happen in a way that is productive for the country.”

Made in China sets ambitious targets for things such as the deployment of Chinese-made robots and domestic content in the production of advanced electronics. The job of delivering on those goals falls largely to provinces and cities across the country. As China’s third-largest municipality by gross domestic product and an important manufacturing base, Guangzhou was destined to play a starring role in the implementation of Beijing’s blueprint. Earlier this year the city unveiled a plan that aims for trillions of yuan in revenue from information technology, artificial intelligence, biomedicine, advanced manufacturing, shipping, new energy, and other industries by 2021. City officials have traveled to Singapore, Chicago, and Silicon Valley this year to tout Guangzhou’s attractions as a business and manufacturing hub.

Technology companies are heeding the call. Foxconn Technology Group started construction in March on an $8.8 billion LCD manufacturing facility. And in April, Cisco Systems Inc. held a groundbreaking ceremony for a multibillion-dollar “smart city project” and an internet research and development center.

Guangzhou’s efforts should get a lift from Beijing’s push to create a “Greater Bay Area” by linking the nearby territories of Hong Kong and Macau with Guangdong province. Guangzhou, the provincial capital, is supposed to serve as an administrative and logistics hub for neighboring Pearl River Delta manufacturing cities such as Foshan and Zhongshan. While the idea predates Xi’s rule, it appears to have fresh momentum. “Guangzhou will take full advantage of the Guangdong-Hong Kong-Macau Greater Bay Area to strengthen cooperation with cities involved in this national-level development blueprint,” said Guangzhou Party Secretary Ren Xuefeng, speaking at the 19th Communist Party Congress in Beijing in October.

To speed the transition, the Guangzhou government is offering companies an array of incentives, including subsidies, low-interest loans, and tax exemptions. Municipal authorities have set up four 10 billion-yuan ($1.5 billion) funds to support new industries and upgrades at old ones and are doling out one-time payments to factories that automate. The land where Guangzhou Auto is building its vehicle factory was provided free of charge, according to Feng. “The rapid development of GAC could not be achieved without preferential policies from Guangzhou, Guangdong province, and the central government,” he says. “This is the most supportive environment we have ever experienced.”

China’s determination to become a force in artificial intelligence has thrust the mainland’s startups into a global competition for tech talent. To boost recruitment efforts, iFlytek Co., which specializes in voice recognition, opened an office in Silicon Valley this year. Based in Hefei, Anhui province’s capital, iFlytek is getting support from authorities in Guangzhou, where it’s just opened its South China headquarters; the city offers tens of millions of yuan to support R&D projects set up by graduates with Ph.D.s from top universities around the world. “If the government provides human resource subsidies that can help reduce the burden on enterprises and make it easier to lure talent, this allows us to move even more quickly with our R&D,” says Du Lan, a senior vice president at iFlytek.

Ironically, Guangzhou may benefit from the larger role that state-owned enterprises play in the local economy: They account for 40 percent of industrial assets, compared with just 17 percent in Shenzhen, a Pearl River Delta city that’s become a tech hub, according to Bloomberg Intelligence estimates. Xi wants state companies to become “bigger and stronger,” as reiterated in the 19th Party Congress. To upgrade its SOEs, Guangzhou is encouraging them to enter into ventures with private companies, so they can tap into their business and technical know-how. IFlytek, for instance, is collaborating with Guangzhou Pharmaceutical Holdings Ltd., a more than century-old company, on a network of health centers that will rely partly on artificial intelligence for diagnosis and treatment.

Midea Group Co., a privately owned maker of appliances that this year acquired German robot maker Kuka AG for $4 billion, is also cooperating with Guangzhou Pharmaceutical. “We will first introduce fully automated drugstores where medicines can be picked and sorted all by machines,” said Midea Chairman and CEO Paul Fang in an interview with Bloomberg Television. “Everything we do today, from industrial automation to robot making, all closely link to AI. More and more AI technologies have been and will be used in our business and products.”

The plans of Guangzhou and other Chinese cities to dominate emerging industries could go awry, if no-strings-attached financial support leads to the same overcapacity problems that devastated the global solar panel industry years earlier. Solar panel prices have fallen by more than 70 percent since 2010, according to the Solar Energy Industries Association. Companies such as Suniva Inc. in the U.S. and SolarWorld AG in Germany cited competition from low-cost Chinese rivals as the main reason they were forced to file for bankruptcy this year.

Already at least 98 billion yuan in investments in electric-car factories have been announced, raising China’s annual capacity to 2.9 million units—six times the number of plug-ins sold in the country last year, according to data compiled by Bloomberg. Says CSIS’s Kennedy: “The worry that people have is China Inc. on steroids is going to kill profits, not only for companies but for industries as a whole.”

—With Tom Mackenzie, Haze Fan, and Rachel Chang

BOTTOM LINE - The city of Guangzhou and its surroundings are becoming a test bed for President Xi’s ambitious industrial policy.