China's strategic emerging industries

Independent and self-reliant innovations (自主创新) take centre stage in the development of the SEIs. The term “independent and self-reliant innovation” refers to innovations that are independently created, not merely improvements over foreign technology. This shows China's ambition to own the next generation of technology and the IP associated with it.

The overarching principle for the development of the SEIs is stated in the Circular as “innovation-driven and open development”. China will develop independent and self-reliant innovation, foster original innovation, and integrate innovation. While innovation based on technology imported is still important, it is no longer a priority. The Circular also envisages taking full advantage of global innovative resources to strengthen international exchange and cooperation and exploring the possibilities of international cooperation to develop a new model for open innovation and international development.

Development goals

Increasing the innovation capacity of Chinese industries is a clear goal. The benchmarks for achieving the goal include building internationally competitive innovation platforms, developing strategically important core technologies and commercialising these technologies. Moreover, there will be substantial improvement in the quality and quantity of invention patents for these technologies. Certain key enterprises in the SEIs will invest more than 5% of their total revenues in R&D.

It is anticipated that the SEIs will achieve an average annual growth rate of more than 20% up to 2015, and the total value-added output of the SEIs would account for around 8% of China's GDP by 2015, up from 2% in 2010.

By 2020, the strategic emerging industries will have become an important driving force in China's economy, representing an increased share of 15% of its GDP, with certain industries and key technologies attaining the highest international standards. Those businesses involved in clean energy, information technology, biotechnology and high-end equipment manufacturing will become pillars of the national economy. In the meantime, the industries providing alternative energy, new materials and new energy vehicles will become leading forces in the national economy.

Policies and measures

The Chinese government is thinking of supporting the SEIs through tax and financial policies. Fiscal policies will be formulated to encourage the increase in the number of R&D investment projects. By strengthening policies relating to technological innovation and human resources, the government plans to enhance the capacity for corporate technological innovation. The formation of an industrial technology innovation alliance by leading technology companies is being considered. The members of this alliance will be encouraged to form patent pools and establish high technological standards. In fact, developing and strengthening domestic technological standards relating to the SEIs is a pillar of the policies.

The government will establish a system that further protects intellectual property by formulating policies appropriate to the development of the SEIs. To help domestic enterprises involved in foreign trade and investment, the Circular calls for the rapid establishment of an early warning system for overseas infringement and a mechanism to deal with overseas rights and dispute settlements. Moreover, the Chinese government plans to further promote the commercialisation, transfer, valuation and financing of intellectual property.

Biotechnology

During the 12th Five-year period (2011-2015), the biotech industry is targeted to grow at an annual rate of more than 20%. Four sectors are in focus: biopharmaceuticals, biomedical engineering, bio-agriculture, and bio-manufacturing.

Biopharmaceuticals

The Circular places a clear emphasis on innovative drug research and development, especially the discovery of commercialisation of new chemical entities. The Circular also mentions improving China's capabilities in the development and large-scale production of generic drugs. Specific goals are set for developing genetically engineered drugs, new vaccines, antibodies, new chemical drugs, and modernised Chinese medicines.

During the five-year period, China will establish a national genetic resource library, a protein library and a biological sample library. Key technology platforms include chemical pharmaceutical formulations, efficient expression and large-scale cultivation of animal cells, recombinant therapeutic antibodies, synthesis of peptide drugs, stem cell therapy, gene therapy, and translational medicine. Based on these platforms, China will target innovative drug developments for the treatment of AIDS, viral hepatitis, malignant tumours, cardiovascular and cerebrovascular diseases and diabetes.

By 2015, more than 30 new drugs with self-reliant intellectual property will have been commercialised in China. More than 200 pharmaceutical formulations will have been marketed internationally. By 2020, more than five innovative drugs will have been registered and marketed internationally. Pharmaceutical formulation products will have been marketed on a large scale internationally.

Biomedical engineering

This sector focuses on the development of medical devices for prevention, diagnosis, treatment and rehabilitation, medical emergency equipment, and key technology or core components of new biomedical materials. The Circular also calls for the development of digital medical systems, telemedicine and home monitoring, community care, personal health maintenance and related products. Emphasis is on the development of high-performance diagnostic imaging equipment; highly-integrated, high-sensitivity, high-specificity and high-stability clinical diagnostic and treatment equipment and associated reagents; tissue engineering, intervention and minimally invasive treatment, rehabilitation and other products; and digital, mobile medical systems, especially those that can be used cost-effectively in primary health care institutions and high-end clinics.

Bio-agriculture

Centred on food safety and agricultural modernisation, the bio-agricultural industry will focus on the development of high-yield, high-quality, multi-resistant and highly efficient new animal and plant varieties. Moreover, it also will promote the development and industrialisation of bio-veterinary drugs and vaccines, bio-pesticides, bio-fertilisers, bio-feeds, and other agreed agricultural products, with the aim of improving the competitiveness of the Chinese seed industry. The Circular envisages the formation of a number of modern bio-breeding and agricultural bio-products innovation platforms. By 2015, China will have developed 20 new animal varieties and 180 high-yield, multi-resistant, highly efficient new plant varieties with coverage of 500 million mu (about 34 million hectares). By 2020, one to two Chinese seed companies will have become global top 20 players. There will be 10 to 15 agricultural biotech products companies that have global competitive advantages. Key technology areas include: new genetically modified plant varieties, space breeding, molecular marker-assisted breeding, heavy ion irradiation breeding, prevention of major diseases and their associated vaccines, bio-fertilisers, and other green agricultural products.

Bio-manufacturing

Green manufacturing technology is the central theme, with an emphasis on enzyme and fermentation technology for the production of bio raw materials, such as bio-alcohols, bio-esters, and bio-acids. These raw materials will promote the industrialisation of bio-plastics, bio-fibre, and other biological materials. Green biotechnology will be widely used in chemical engineering, pulping, printing, dyeing, and leather tanning.

By 2015, a substantial portion of China's industrial chemicals will be bio-based. Specifically, organic chemical raw materials and industrial biological materials, such as polylactic acid, polybutylene succinate, will reach a production capacity of 100,000 tons. New biotechnology processes will be used in chemical engineering, pulping, printing, dyeing, and leather tanning on a large scale.

By 2020, bio-based materials will account for 12% of the total industrial chemical output. The biological fermentation industry output and technology will have reached the international level. Thirty percent of the chemical engineering, printing, dyeing, tanning and like industries will have used biotechnology, which will result in a large-scale reduction in pollution and energy consumption.

To facilitate the development of the biotechnology industry, China will focus on improving the administration of biologic product safety, the registration and administration of pharmaceuticals and medical devices, pricing regulation, centralised bidding and purchasing, and safety evaluation and oversight. It will develop and implement policies incentivising the development of green bioengineered products.

A statement of intent

As shown by the specific targets for the biotechnology industry, China's push for the SEIs presents tremendous opportunities. Although the Circular's stated objective is to merely match the international innovation environment, the quantifiable goals it sets out are ambitious. One cannot help but wonder if China has set its sights far beyond catching up with the West on innovation. As the West is still indulging in rhetoric about China's innovation barriers, like technology inferiority and a weak IP environment, China has charted a clear innovation course to move forward and even surpass the West.

Many of the current leaders have engineering backgrounds; a greater level of expertise in this area of industrial planning has produced a plan that is substantiated by technical knowledge. Given China's consistent record of accomplishing its economic goals through the well-defined guidelines and policies of its Five-year Plans, foreign enterprises should not dismiss the plan as merely aspirational. With careful planning, foreign firms stand to gain from this endeavour.

China's path to innovation presents challenges to foreign firms and demands a thoughtful approach, but it is not necessarily a zero sum game. When the guiding principles for the 12th Five-year Plan were first approved in 2010, a major concern from the foreign community was its ability to participate and invest in the development. The Circular makes it clear that there are opportunities for foreign firms to invest in the SEIs and that foreign-invested entities in China are eligible to participate in the SEIs. All companies, especially multinational companies, should reformulate their China strategy to participate in the SEIs.

The Chinese government should also pay due attention to small- and medium-sized enterprises (SMEs), which should be treated equally with state-owned enterprises and should receive the same governmental support. Market experience has shown that a number of SMEs have performed relatively well in SEIs, such as information technology, biology, new energy and new materials. In July 2012, the National Development and Reform Commission issued a circular titled Implementing Opinions on Encouraging and Guiding Private Enterprises to Develop in the Strategic Emerging Industries Sector (关于印发鼓励和引导民营企业发展战略性新兴产业的实施意见). It contains rules to encourage private enterprises to enhance their innovative ability and also to use new types of financing tools. Past international and domestic practical experience has shown that around 70% of new products are innovations of SMEs; in which case, SMEs must not be ignored in the strategic emerging industries sector and must be provided with adequate access to venture capital funding.

China hasn't yet experienced a true innovation revolution in its recent history; however, the perfect storm for this revolution is brewing. It will take some time for China to transfer from incremental innovation based on technology transfers to breakthrough innovation. But it may take less time than most Westerners believe. As shown by the Circular, the Chinese government will play a decisive role in that process, promoting domestic champions. Some multinational companies will benefit from the revolution, while others will be left out.

Benjamin Bai and Cecily Zhang, Allen & Overy, Shanghai