IoT GUIDE

This article was originally posted in the Gongkong news center and is part of a new series aimed at raising awareness of China's Industry 4.0 Initiative.

The NDRC has issued the Summary of Innovation and Development of the Service Sector (2017-2025). The document is of great significance to the opening up of the service sector to foreign economies, and deepening the reform of the service sector. Guidelines not only provide clear direction for the development of the service sector, but also provide new ideas for the development of the manufacturing industry, hence facilitating the combined upgrading of both sectors. This article discussed the characteristics of production-related service secotrs and manufacturing sectors to explore the roadmap and strategic measures for the combined progress of both these sectors.

1) The production service industry provides great support for the transformation and upgrading of the manufacturing sector

In today's global production network system, fragmentation and specialization has been increasingly evident in manufacturing processes. As the industry shifts towards towards the medium-to-high level, production value is also shfting from manufacturing process to service processes.  Product development, sales and maintenance services are gradually becoming more significant. Today, we see that 70% of the country's GDP has been contributed from the service sector, while the production service sector accounted for 70% of GDP contributed by the manufacturing sector. Globally, 56% of Fortune 500 companies come from the service industry. From these statistics, it is evident that the strong growth of the service sector can serve as a strong support for industrial transformation and upgrading.

Since reform and opening up, China's has leveraged on its labor cost advantage for rapid growth as the world's factory, ranking first in the world for manufacturing capability. However, China's industry has greater focus on lower end value chain processes of assembly and manufacturing, while high-value activities such as R&D, industrial design, marketing and branding are controlled by other developed countries. If this pattern continues, China faces the risk of being stuck at the low end in the global production value chain.

Presently, China is in the middle-to-late stage of industrialization. To promote the transformation and upgrading of the manufacturing sector through the development of production-related services, knowledge-intensive manufacturing value-added service elements should be leveraged to enhance the value chain towards high-end activities, which is the inevitable choice due to China's current situation and industrialization goals . Production-related services will help drive the expansion of employment since the number of jobs in the service sector created from the investment is about 2.5 times of the industrial sector. Energy consumption is also reduced and helps in achieving sustainable development, since for each yuan of added GDP value, energy consumption is only 25% of the manufacturing sector. Therefore, demand-oriented industrial transformation and upgrading should be encouraged, and the industry should speed up the development of production-related services, in order to support the manufacturing sector in improving competitiveness and promoting industrial sectors to higher ends of the value chain.

2) The integration of manufacturing and service industry is an important trend in China's global development

The new generation of information and artificial intelligence technology continues to generate breakthroughs and are widely used, influencing a wave of service innovation and upgrading. Industry boundaries are blurring, and trend of integrated sector development is becoming more evident, which in turn generated new demands for the synergised development of the service and manufacturing sectors.

(A) The nature of service and manufacturing sectors are changing.

- With further development of global value chains, services and manufacturing sectors have shown new unique characteristics. Manufacturing production integrate more and more services as intermediate input factors and require many complementary services in the later end user purchase process. hence the trend of manufacturing converging with the service sector.

- The phenomenon of service sector becoming more production-oriented becoming increasingly prevalent, with more services adopting industrial production methodologies, thereby increasing productivity and economies of scale.

- For example, leading services companies in the global value chain provide R & D, design, management, sales channels and other services along with partnering OEM manufacturers and its stores to provide comprehensive services to consumers.

- Other examples include research and development companies holding their own patents, design agencies create their own innovative design, logistics companies owning their transport network, etc. These companies hold control over the high-end of the value chain and own manufacturing plants.

(B) The boundaries between services and manufacturing is becoming increasingly blurred.

- With the deepening segregation between labor services as well as service innovation and a continuously expanding service sector, the trend of combined development of the services and manufacturing sectors has become more and more evident.

- The effect of production-related services and other new services on the overall manufacturing production value chain is mainly seen in many innovative business models in the development of the production value chain, such as the servitisation of the manufacturing sector, increasing manufacturing-orientedness of the service industry, as well as outsourcing-driven business models.

- In the United States, where the services sector is consider the most well developed globally, 58% of manufacturing companies have some form of manufacturing and service integration. General Electric's Technology + Management + Service business model to create business value has accounted for more than 2/3 US's industry GDP value.

- Given this convergence trend, the integrated development of the services and manufacturing sectors shall play a guiding role in the overall industrial development.

3) Follow along and promote industrial convergence trends between services and manufacturing sectors

Globally, the transition from production-oriented manufacturing to service-oriented manufacturing, as well as the transformation of the value chain from being manufacturing-centric to service-centric, has become important trends in industrial transformation and upgrading. Moving along this trend, the acceleration of the development of production-related services and the integration of manufacturing and service industries should follow the following paths:

(A) Encourage clearer demarcation of manufacturing development away from services.

Manufacturing sector to specialise in strengths, while production-related services which are part of manufacturing processes need to establish themselves as independent professional services to become a strong support for pushing across goals of Made in China 2025, through focusing on the following aspects:

- For science and technology R&D, large-scale manufacturing enterprises should be encouraged to set up their own R&D and technology centers and platform to establish seperate professional service companies that are highly competitive in terms of technical R&D services, and gradually work towards establishing system of technological innovation in the industry.

- Modern logistics services companies should be encouraged to set up a unified logistics and distribution process using existing production capacity and warehouse storage, transport vehicles as well as raw materials and other assets.

- Established manufacturing enterprises should be encouraged to set up independent trade and marketing enterprises and leverage on branding advantages to carry out third-party trade.

- Financial leasing services companies should be encouraged to use advantages in strong branding, channels and finance as well as leverage on other resources and networks to provide customers with professional financial leasing services via joint financial services institutions.

- For design planning services, established manufacturing companies should be encouraged to reorganise their design, consutling, planning, marketing, industrial innovation and other services into a seperate design planning enterprise that is able to provide these services with more value-add

- For professional services, manufacturing companies should be encouraged to reorganise internal service capabilities such as after-sales services, maintenance and warranty, and training into a seperate independent company entity that can package these capabilities into professional services.

(B) Promote the extension of the manufacturing value chain.

- Continue to strengthen R&D, engineering, operations management, customer service, maintenance and repair, inspection, service, financial leasing and other high-end services sectors, and aim to value-add through an industrial chain of services.

- In the transformation process of servitization of the manufacturing sector, complete solutions should be provided. For example, in the equipment manufacturing industry, in addition to providing customers with the main production equipment, other services such as system design, system equipment provided, system installation, and contracting  for infrastructure, plant and other supporting facilities should be available to provide the customer with professional maintenance and constant remote monitoring services for their equipment's operational status.

We see that service-oriented manufacturing capabilities will become a key contributing factor to the competitiveness of manufacturing enterprises. Companies should enhance its current efforts in promoting this to solve two problems:

1) Accelerate the setup of the "Internet +" and production services ecosystem to integrate the use of the Internet with aspects of R & D, production, distribution, management, human resources development, after-sales service, in order to promote collaborative research and development network, modern supply chain management, customization, and remote diagnostics and maintenance functions.

2) Quickly create several high-end service development districts, based on established high-end industrial manufacturing bases and focusing on expanding the field of high-end manufacturing services, in turn attracting related industrial chain businesses and promoting the overall upgrading of the manufacturing value chain.

Using the equipment manufacturing industry as an example, industrial clusters and parks which act as service-oriented manufacturing bases are to focus on the development of high-end equipment remanufacturing technology, establish recycling systems, reduce manufacturing costs and consumption, and at the same time involve themselves in efforts to attract companies involved in high-end equipment manufacturing R & D, system integration, turnkey engineering solutions, installation, repair and maintenance. They are to be supported by logistics, information management and other services.

It is a difficult but inevitable challenge for Chinese traditional manufacturing businesses to shift from simple production of material goods to focus on other parts of the industrial value chain in transit into integrated manufacturing service solution providers. However, it is important to note that this trend of servitisation should not be considered as a crossroad from manufacturing into services, but as a new strategy to upgrade the Chinese manufacturing industry through the strategy of the combined progress of both the services and manufacturing sectors.

4) Policy recommendations to promote the combined development of the services and manufacturing sectors

The integrated growth of the services and manufacturing sectors is largely based on industry integration. Traditional industry boundary limitations must hence be overcome for effective synergy and interaction between these two industries. Innovation must happen for factors such as management models, administrative supervision, market access, tax policies, public environmental measures, and industry parks for the services sector. This would provide more freedom for the services and manufacturing sectors to synergise and grow.

(A) Establish overall strategic plan for the development of manufacturing and services.

- To breakthrough traditional product definitions and classifications overlook differences in services and manufacturing, but instead acquire a profound understanding of how the services and manufacturing sectors are similar and can complement each other.

- To establish the concept integrated growth of services and manufacturing sectors in the industry.

(B) Clearly specify market access requirements to companies from new industries born from industry convergence.

For new industries such as e-commerce, internet culture and IoT that are born from industry convergence, regulations usually involve multiple supervising departments. Hence, there is a need for these departments to adapt to reduce administrative regulations to lower barriers to market access and reduce government intervention. This helps to support development of new ecosystems, business models and services from industry convergence in an environment with greater freedom from regulations.

(C) Develop tax policies that favour industrial integration and development.

Industrial integration involving different sectors can involve multiple tax policies. The government needs to refer to current industrial integration development trends to actively develop and implement suitable tax policies and incentives for companies providing highly specialized services and companies with a high level of industrial integration. Tax policy areas include ecommerce and internet payments, among others.

(D) To develop a conducive public environment for industry convergence.

New services arising from industrial integration require corresponding supporting public infrastructure. Examples include the intelligent transportation industry which requires open real-time traffic data and geographic information data; intellectual property service providers which need access to intellectual property databases; telecom value-top-up service companies which require regulations to aid the access to major telecom operators.

(E) To develop a number of industrial parks for production-related services industry

Cluster development is an important feature and current trend for production-related services. Companies based in such industrial parks with high focus on manufacturing services generally achieve greater growth and have greater competitiveness. Suppliers, service providers, manufacturers of related industries, research institutions, related associations and companies from other related industries with such a geographical advantage can synergise and complement each other better. The government should refrain from arbitrary arrangement of companies in these industrial to allow market forces to work by itself. Instead, the government should play a guiding role in the construction planning of the clusters, and place particular importance in developing the public information platform, technology platforms as other communications infrastructure, in order to establish standards for such industrial parks.