(Yicai) Feb. 11 — When Western politicians and business leaders discuss China\u2019s manufacturing prowess, they typically invoke images of colossal steel mills flooding global markets, dark factories run by robots, and state-owned champions sustained by subsidies. This supports the view that tariffs and anti-subsidy measures can erode China\u2019s industrial dominance. But while this logic may be comforting, it is wrong.<\/p>\n
China owes its manufacturing leadership not to a few national champions, but to profound industrial density. At the end of 2023, China\u00a0was home<\/a> to 4.1 million manufacturing enterprises, employing around 105 million people. Of these firms, 3.6 million report less than CNY20 million (USD2.85 million) in annual revenue. Most employ about ten people and possess limited fixed assets (CNY144,000 per employee). An additional 18.4 million self-employed workers\u00a0operate<\/a> at the margins of the formal corporate manufacturing sector. These companies are largely excluded from government subsidies.<\/p>\n These firms are not necessarily on the technological cutting-edge. About 58%\u00a0report<\/a> a maturity level of one (out of five) in developing \u201csmart manufacturing,\u201d putting them at the \u201cplanning level.\u201d While this group has shrunk considerably \u2013 by 27 percentage points \u2013 since 2019, only 17% of Chinese manufacturing firms have made it to level three (integration), four (optimization), or five (leading).<\/p>\n China\u2019s real industrial advantage lies, first and foremost, in the connections among firms, which are organized into thousands of regional clusters. In a typical cluster, dozens of companies can produce a similar component, but each has slightly different capabilities, suppliers, knowhow, and customer relationships. This is crucial, not least because of market churn: entry is relatively easy for producers, but margins are thin, and bankruptcy is common.<\/p>\n Nonetheless, when a legal entity fails, engineers and managers quickly find positions in a new vehicle, which uses and builds upon their knowledge. This combination of repetition, competition, labor mobility, and incremental upgrades in tooling and organization fuels a dynamism, with clusters often serving as a springboard for high-growth companies, from Bambu Lab to Roborock. Insta360, a camera company, first\u00a0reached<\/a> USD1 billion in annual revenue ten years after its founding.<\/p>\n China\u2019s government has supported this process with its \u201cLittle Giants\u201d policy, introduced in 2018, which aims to cultivate specialized, sophisticated, and innovative firms in strategic tech sectors. Each of the 14,600 \u201clittle giants\u201d\u00a0holds<\/a> more than 22 patents and\u00a0has an average R&D intensity exceeding 7%.\u00a0Some 46% of them\u00a0are concentrated<\/a> in 178 national high-tech industrial-development zones, such as Zhongguancun in Beijing, Zhangjiang in Shanghai, and East Lake in Wuhan. Taken together, these zones\u00a0account<\/a> for 14% of national GDP and about half of China\u2019s total R&D spending.<\/p>\n Chinese industry also benefits from scale. Western strategies often assume that Chinese manufacturing would crumble without export demand. But when China\u2019s government supports producers of electric vehicles, solar panels, batteries, or industrial machinery, it is not only targeting foreign markets; it is fostering domestic demand, procurement channels, national standards, and infrastructure build-outs to create volume early. China is the world\u2019s largest exporter of manufactured goods, but in many sectors, it is also its own best customer.<\/p>\n The third key reason for China\u2019s industrial advantage is the one Western observers get the most wrong: financing. The Western narrative insists that Chinese firms owe their dominance almost entirely to subsidies. But China\u2019s central government has tightened the rules that govern local industrial support, because uncontrolled local subsidy races are wasteful.<\/p>\n Instead, Chinese manufacturing firms benefit from cheap capital, delivered through a mix of debt and equity-like public funds, within a system that makes use of financial repression and tolerates very low returns for long periods. Government entities mobilize capital, but outsource recipient selection, at least partly, to professional managers and co-investors.<\/p>\n Crucially, decisions are not based on which firms can deliver the biggest financial returns the fastest. According to China\u2019s National Bureau of Statistics, industrial enterprises worth more than CNY20 million\u00a0operated with<\/a> business costs of about CNY85 per CNY100 of revenue, and expenses of about CNY8.5 per CNY100 of revenue, in 2023. This leaves little room for shareholder value.<\/p>\n Instead, capital flows toward firms that can enhance China\u2019s industrial capabilities, expand local employment, and improve the economy\u2019s strategic positioning. Of the six little dragons of Hangzhou \u2013 robotics champions Unitree and DEEP Robotics, AI leader DeepSeek, the game studio Game Science, spatial-design platform Manycore Tech, and BrainCo, a brain-computer interface company \u2013 half are\u00a0located<\/a> in the\u00a0Hangzhou West Science and Technology Innovation Corridor, and several\u00a0have benefited<\/a> from the \u201c3+N\u201d industrial-fund cluster announced in 2023.<\/p>\n China\u2019s model may not be the most efficient, but it is robust. That is why the Western consensus on how to \u201cde-risk\u201d deserves a harder look. Reducing dependence on China is not as simple as switching a few suppliers; it demands the cultivation of comparable industrial density. Efforts to build rare-earth supply chains that are\u00a0independent of China<\/a> show that this is easier said than done. Since China\u00a0suspended exports<\/a> of processed rare-earth elements to Japan in 2010, Japan has made considerable progress in building its own supply chain. But\u00a0the Japan-funded Malaysian facility operated by Australian mining company Lynas Rare Earths has\u00a0come under fire<\/a> over its waste-management practices and radioactivity concerns.<\/p>\n The United States also began paying attention to rare-earth risk in 2010, with the Department of Energy releasing its first\u00a0critical-minerals strategy<\/a> that December. Mining for rare earths was resumed in California the following year, but abandoned four years later. While it was restarted in 2017, output is still shipped to China for refining. Though the US is now placing a high priority on rare earths, even threatening to annex Greenland to\u00a0gain access<\/a> to them, it has a long way to go.<\/p>\n Eventually, the West presumably could \u201cdecouple\u201d from China. But that matters little if it cannot rebuild its own industrial density, including supplier networks, skills, tooling, and patient finance. Tariffs may buy a little time. But only industrial ecosystems as robust as China\u2019s can buy leverage.<\/p>\n Robin Rivaton is CEO of Stonal, a European technology company, an AI sherpa to the French business confederation MEDEF, and an affiliate of the Paris-based think tank Fondapol. He is the author of eight books.<\/p>\n