How China aims to lead R&D in the industries of tomorrow

This post originally appeared on Eurobiz.com.

China is emerging as a global leader in research and development (R&D). This is thanks to Beijing’s foresight in creating regulatory frameworks and policy ecosystems that stimulate R&D in ‘next-generation technology sectors’, something that especially rings true for artificial intelligence (AI). APCO Worldwide analysts Kaj Malden and Caroline Meinhardt show that China’s push for AI development reflects an evolution in Chinese industrial policy implementation and a sober awareness of the gaps in its development.

Ambitious plans and abundant cash

China is increasingly considered an innovation hub and global leader in R&D. In recent years, China has consolidated its efforts to become the global front-runner of next-generation technology. Chinese R&D investment has grown at an average annual rate of 11 per cent, and the country’s R&D intensity (R&D expenditures as a percentage of gross domestic product (GDP)) reached 2.1 per cent in 2016, narrowing the gap with the Organisation for Economic Co-operation and Development countries’ 2.4 per cent average.

These numbers reflect the growing strength of Chinese innovation in cutting-edge technologies and suggest that the often-told narrative of China being a nation comprised of ‘copycats’ is rapidly changing. Nowhere is China’s push for technological innovation more visible than in its support for AI technology. For Beijing, Chinese innovation in AI will enable the country to transform traditional industries like healthcare and education and become a pioneer in autonomous vehicles and robotics.

This opportunity has driven China’s leaders to push for increased AI R&D. In the work report Premier Li Keqiang delivered this month at the 13th National People’s Congress, he called for the Party to advance economic growth by “stepping-up next-generation artificial intelligence R&D and application”, to “transform and upgrade traditional industries” and move China closer to becoming “a country of innovators”.

Premier Li’s call to action echoes Beijing’s wider goal to move up the industrial value chain in high-technology sectors, a goal that has been repeated often by President Xi Jinping. This goal has gained immense momentum since the announcement of the China Manufacturing 2025 (CM2025) initiative in 2015. For Chinese policymakers, technological innovation in areas like AI is key to achieving “national rejuvenation”.

This top-down approach is nothing new in China. Beijing has long made use of state-led industrial policy to drive economic development, historically combining central planning with hefty state financing. The question is whether this approach will do for next-generation technologies, such as AI, what it has done for China’s successful efforts in high-speed rail and aviation infrastructure.

The answer is a mix of yes and no. PricewaterhouseCoopers estimates that the sector could contribute approximately United States dollar (USD) 7 trillion to the Chinese economy and account for 26.1 per cent of its GDP by 2030. Yet, unlike the construction of high-speed rail, the success of AI development hinges in part on the viability and performance of the private sector, which has been investing in, researching and developing this technology for some time.

Seeking global leadership

For China’s policymakers AI provides an opportunity to be a global leader in a nascent form of technology. Rather than trying to catch up to the West, China enjoys several structural advantages when it comes to spearheading AI development.

First, China has unparalleled amounts of data and data fuels AI applications. China has nearly double the number of internet users as the European Union (EU), with 800 million netizens using online applications (apps) such as WeChat and Alipay to do everything from ordering food to sharing bikes. Information collected by these apps are easily available to companies and regulators due to weak government restrictions on data privacy and sharing.

Second, Chinese tech giants like Baidu, Alibaba and Tencent are driving innovation through sizeable investments in their own research departments. The number of innovative, AI-related start-ups has surged in recent years, supported by a well-funded and active venture capital ecosystem. The success of companies such as Didi, Toutiao, Face++ and iFlytek demonstrate that China is now a source of ground-breaking technology.

Third, and most crucial, the Chinese Government is supporting AI R&D. In July 2017, the State Council of the People’s Republic of China (State Council) released the national Next Generation AI Development Plan. While this did not constitute the first mention of AI in a Chinese policy document, it was the first plan dedicated to AI that outlined China’s strategic vision for this technology. This plan has been followed by a series of related polices and guidelines. It calls for China to become a global leader in AI and the world’s primary innovation centre by 2030, detailing a variety of sub-sectors where different AI applications should be pursued.

This comprehensive strategy helped illuminate China’s top-down approach to industrial development. Becoming a leader in AI is central to Beijing’s wider ambition to become a “world class technology and innovation country” – an ambition pronounced in the 13th Five Year Plan and consistently reiterated in reports presented by President Xi Jinping and Premier Li Keqiang.

However, Chinese leaders also recognise that basic research in AI needs to catch up with work being done by foreign counterparts. In response, the central government has launched a variety of AI-related R&D programs in the pursuit of bolstering development. Provincial and municipal governments are following suit with their own big announcements, such as Beijing’s planned renminbi-yuan (CNY) 13.8 billion (approximately euro (EUR) 1.76 billion) AI development park.

Many analysts predict that this powerful combination of expansive data, financial firepower and government backing will help the country win the global AI ‘race’. Despite this prediction, a lack of government support for R&D, an anaemic domestic talent pool and absence of appropriate infrastructure will take time to correct. Most AI applications in China still rely on imported hardware. Additionally, Chinese universities still only have a handful of specialised AI academic programs that could improve the country’s R&D.

More importantly, China’s investments in AI-related R&D have been driven by China’s private sector, not the government. China’s tech giants have been spearheading innovation in cutting-edge technology, including AI, since 2009. Government support for the sector will only be as valuable as the amount of expertise already employed by China’s tech giants. At the same time, those tech giants are beholden to the central government’s will and have added incentive to align AI development with the government’s national goals.

Realistic about strengths and weaknesses

China appears to be innovating its industrial policy by testing different ways to promote R&D in AI. Chinese governmental support for AI focuses more on creating mechanisms for guiding and coordinating AI development rather than mandating targets companies must reach. Recently established implementation offices and advisory committees led by key government ministries, such as the Ministry of Science and Technology of the People’s Republic of China (MOST), bring industry, academia and government together under one unifying mission.

At the same time, China admits to its own shortcomings. These AI-related policy plans are forthright in acknowledging development gaps in China’s R&D and providing solutions that address them. For instance, China recently provided preferential visa terms in order to attract global talent in AI for Beijing’s new research park. With this new talent attraction program, coupled with plans to build national labs for basic research, China is making it clear that it understands what its weaknesses are. Because of this, China’s forthrightness and ambition could see the country overcome its AI shortcomings in the near future.

China also demonstrates foresight regarding the challenges that come from making advances in AI. The Next Generation AI Development Plan calls for the creation of a regulatory framework to govern AI development and application. While this regulatory framework might contrast with models preferred by the West, at the moment China is one of the only countries driving policy conversations concerning AI governance. Similar efforts have been made by China in other emerging and hard-to-govern technologies, such as the inaugural Global Cross-Border E-commerce Conference earlier this year.

China’s ambition and push to lead the creation of mechanisms governing AI development spells different things for the European business community in the short and long term. In the short term, opportunities to share expertise and technology could enable EU businesses to engage with Chinese regulators during the AI standard setting process. This dialogue is essential, given China’s push to play a global leadership role in AI standard setting, and because of its importance, Europe should try to be a part of the deliberations. Additionally, China’s supportive ecosystem for AI development is unique and in need of expertise, which European businesses could provide. In doing so, EU companies could benefit from that ecosystem by developing and testing their own technologies in China’s fast-moving market.

However, in the long term, European businesses need to be aware of China’s shift towards indigenous innovation in technology. Long-term policy prescriptions, like those made in CM2025, are explicit in their calls for domestic champions in high-tech sectors. Recent anti-trust investigations into companies like Microsoft and Qualcomm hint at European firms that operate in China being put at a strategic disadvantage and even being pushed out of the market. In Europe, AI-related firms are at danger of having their talent and technology poached or bought out by Chinese investments.

It is too soon to predict China’s AI success. Previous state planning efforts hint at the possibility that China’s AI development will be speedily developed at the expense of wasted resources. Despite these concerns, it is clear that China has the ambition and momentum to succeed in AI. With the possibility of President Xi leading China beyond 2023, European businesses would be wise not to question Beijing’s burning drive to succeed.

Kaj Malden
Kaj Malden

Kaj Malden is a project consultant in APCO Worldwide's Shanghai office and a co-editor of APCO's China Reform Watch. Read More

Caroline Meinhardt APCO
Caroline Meinhardt

Caroline Meinhardt is a policy analyst in APCO Worldwide’s Beijing office. She specializes in government affairs and policy monitoring and analysis and is a co-editor of APCO's China Reform Watch. Read More