Industrial Digitalization in China

Digitalization is a developing trend that is practiced across different levels - individual, organization, industry or country. Oxford English Dictionary (OED) defines digitalization as the “adoption or increase in the use of digital or computer technology. Underlying digitalization is the process of digitization, defined by OED as the “action or process of digitizing the conversion of analogue data into digital form”. Some notable examples of digitization are the shift from film negatives to digital photos and from music cassettes to digital music. Digitalization has changed the way we connect with one another. It was not too long ago when we shifted from postal service to electronic mail or when gadgets like the computer, phone and camera became rolled into a device small enough to fit into our pockets. While there has been a lot of talk about digitalization in the consumer setting, what is it when applied in the industrial setting is less clear.

What is Industrial Digitalization?

Figure 1: General Electric’s Depiction of the Industrial Internet Data Loop

Source: General Electric

Industrial digitalization is a broad concept that goes beyond just automation. In 2012, General Electric introduced a vision of what they termed as industrial internet. In that report, it is said that the next wave of industrial development will be powered by intelligent machines and advanced analytics. These are the result of advances in machines technology, development of connected facilities and networked manufacturing as well as significant improvements in computing, information and communications systems. The use of sensor technologies has made the digitization of analogue data at the device level not just possible but also economically viable. This in turn propelled end users to adopt more of these intelligent machines. Accessing and harnessing these data then became the next new frontier for China’s industries. 

Key Enablers of Industrial Digitalization

The industrial revolution was powered not just by the initial discovery of the steam engine. As it evolved, other innovations or technologies like electricity made mass production possible. Electricity also gave rise to the usage of computers and communications technologies that unleashed the digital age. Now, we are at the start of another stage in industrial development. Thanks to the trillion fold increase in processing and GPU power and the falling cost of cloud computing, fast parallel processing of large amounts of data and deeper machine learning is fast becoming popular.

At the device level, the ubiquitous use of electronics, sensors and actuators enabled it to be connected together into a network. At the network level, connected devices and machines can be automated and optimized, freeing up labor for higher value-added tasks. Wireless network connectivity and network security solutions opened up door for the development of Internet of Things or IoT. IoT allows remote monitoring of industrial assets and equipment. Technicians can now pre-empt malfunctions and improve machine efficiency more effectively. With these pieces now in place, the next phase is about how to make sense of the enormous amounts of data collected. In this respect, pioneers in this field are looking to use artificial intelligence (AI) to perform deep learning and industrial analytics.

What does Industrial Digitalization Look Like in China?

In China’s power generation sector, sensors installed in wind turbines allow the collection of tens of thousands of data points per second. These data are then used to evaluate the performance and efficiency of wind farms and help operators make decisions regarding maintenance and parts replacement proactively and instantly.

In the chemical sector, China’s Yitai Group is working with ABB to build an intelligent coal chemical plant. The integration of operational, plant management data with supply chain data will be used for constructing predictive models for better asset management and strategy making over the plant life cycle. In automotive manufacturing industry, Siemens is helping South East (Fujian) Motor (SEM) to go beyond digitization, to achieve enterprise level connectivity via digitalization solutions and what is termed a data backbone. This enables SEM to integrate all peripheral systems – such as enterprise resource planning, computer-aided design, manufacturing execution system, supply chain management, etc - across an entire product lifecycle. 

Digitalization technologies are fast expanding to areas beyond manufacturing and figure 2 below lists examples of applications in other sectors. One prominent example is the use of blockchain technologies. Pharmaceutical manufacturers faced with the problem of counterfeit drugs can use the distributed ledger technology to track products throughout production and delivery processes. Apart from the pharmaceutical sector, blockchain is also used by the logistics sector. In March, Chinese e-commerce giant JD.com announced that they will be using blockchain technology for goods tracking. By letting consumers track the supply chain routes of imports like food, JD.com is engendering greater assurance in food safety. 

Figure 2: Applications of Digitalization Across Different Sectors

 

Source: GCiS

Industrial digitalization in China is supported by 2 key national directives. The Chinese government introduced the Made in China 2025 initiative in 2015 to push for comprehensive industry upgrade and foster the development of 10 key strategic sectors. One key push is for the greater usage of industrial robotics and automation, which will lay the foundation for further digitizing of China’s industrial sector.

The Made in China 2025 initiative aims to address the slowdown in China’s economy after the 2008 financial crisis, via structural improvements in China’s manufacturing sectors. Figure 3 shows the trend of China’s industrial sales output between 2000 and 2016. After the implementation of this initiative, China’s industrial sales output edged up slightly in 2016. To carry out these 2 national level directives, individual provinces and cities have come up with a myriad of implementation policies and incentive structures (see figure 4.

Figure 3: China’s Industrial Sales Output (2000-2016)

 

Source: China Statistical Bureau

Figure 4: Provincial Policies on the Usage of Intelligent Machines or Industrial Robots

Source: GCiS, China Provincial Government.

Another parallel effort on industrial digitalization is the Internet Plus Plan - aimed at integrating the use of internet into traditional industries to modernize and help fuel growth. Here, apart from subsidies by the Chinese government, Chinese mobile operators also play a critical role. In April this year, all 3 China mobile operators launched mobile IoT commercial networks known as the Narrow Band Internet of Things (NB-IoT). This development is said to be a critical piece in the development of 5G networks in China. And 5G network is the infrastructure behind ‘widespread IoT’, which will further enable smart cities, industrial automation and other applications involving large numbers of connected devices.

It is difficult to predict whether or when industrial digitalization in China will take off, but given strong government support, there is great momentum for the industry to grow in the near future. On the demand end, healthy profit level is one of the precursors for companies to undertake capital investments such as the purchase of an industrial robot or intelligent machine. Figure 5 shows the levels of operating profits as well as operating profits growth rates by sector in 2016. Based on statistics from China Statistical Bureau, operating profit growth rates in 2016 have improved for most of China’s manufacturing sectors, compared to 2015. The petrochemical and metal fabrication sectors saw the fastest operating profits growth in 2016 – in part due to the government’s efforts to reduce excess capacity and the closure of less efficient firms.

Figure 5: 2016 Operating Profits & YoY Operating Profits Growth Rates

 

Source: China Statistical Bureau

With improved profit levels and governmental subsidies, digitalization should continue to expand across different industry verticals and become even more embedded in different industrial processes. Assuming that most industrial sectors can maintain healthy profit levels, upgrade to better and more intelligent machines will continue. This will create demand for analytics software and network security solutions. As a start, strategic sectors like equipment/machinery manufacturing, new energy vehicles manufacturing, biomedicine, new materials, pharmaceutical and medical devices will see strongest demand growth.

Assuming that changes in property-related asset value affect all sectors, relative growth rates in fixed asset value amongst different sectors can also be used as an indicator of the propensity of investments in new equipment or machines (see figure 6). In 2016, fixed asset values in the pharmaceutical manufacturing sector have grown by around 13%, one of the fastest growing amongst all other manufacturing sectors. In larger sectors like petrochemical industry, we are also seeing robust growth rates in fixed asset accumulation.

Figure 6: 2016 Value & Growth Rates of Fixed Assets across China’s Manufacturing Sectors

Source: GCiS, China Statistical Bureau.

Note: Only selected manufacturing sectors are highlighted above.

Going Forward

Industrial digitalization in China will continue to evolve. Apart from efforts by the Chinese government in pushing for structural investments, there is tremendous interest from industrial end-users themselves. Companies are harnessing potential synergies of digitalization technologies and venturing into new markets. In many ways, the operating landscape will change significantly going forward. For one, companies will be offering very different products and services. For instance, in the aviation sector, GE no longer directly sells aircraft engines. Instead, they sell engine flight hours, and provide services like real-time aircraft diagnosis and dynamic maintenance, fault prediction, and fuel line planning. Separately, Alihealth (a subsidiary of Alibaba) is going into the healthcare sector by piloting blockchain solutions for health treatment in Changzhou. The potential for the market of digitalization technologies, equipment as well as analytics & network security solutions to grow in the near future is tremendous. To adequately prepare for the next stage of information and digital revolution, companies should explore the relevance as well as the potential benefits of digitalization to their business.