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China Insights

For foreign companies, understanding China’s annual plans is critical

Chinese governmental programs not only define what is “forbidden” and “allowed,” but also determine to which regions and industries investments will be directed, and which projects will be given priority

Tslil Kleiman 14:1712.10.20
The president and CEO of Teva Pharmaceutical Industries, Kåre Schultz, recently targeted the Chinese market as the next destination for the company’s future development. Teva plans to enter the world's second-largest pharmaceutical market based on a list of drugs that the Chinese government has published. The cost of these drugs alongside the lack of lifesaving treatments in the list aroused public dissatisfaction in China. In response, the government published a list of drugs that will be allowed to be fast-tracked. Teva already produces some of the drugs on the list.

 

Regulations that define do's and don'ts exist in every country, however, Chinese governmental programs go far beyond these regulations. The Chinese plans determine which geographical areas and which industries will enjoy investments and a flow of finance in the coming years, which projects will receive national priority, and which will be neglected. These plans heavily influence the business decisions of private corporations. When the government desires to promote the local chip industry, for example, giants like Alibaba hurry to launch R&D activities in the field. Therefore, becoming acquainted with the relevant governmental programs are critical for Israeli companies operating or planning to operate in China.

 

Chinese President Xi Jinping tours Beijing. Photo: Reuters Chinese President Xi Jinping tours Beijing. Photo: Reuters

The government's top economic plan is called the “Five-Year Plan” and it defines national goals and the sectors that the country will focus on over the next half-decade. In the 13th Five-Year Plan, from 2016, the Chinese government emphasized innovation, social equality, environmental protection, and economic openness as its main values. The 14th Five-Year Plan is currently in the planning stage and is due to be approved and published in early 2021. The details of the new program are still unknown but are expected to focus on fields such as basic scientific research, robotics, automation, and strengthening of China's technological independence in the wake of the trade war with the United States.

 

Based on their defined goals, the Chinese government ministries and districts publish programs, which are relevant for Israeli companies operating in China. For Israeli tech companies, the most important document to come out is the Ministry of Science and Technology’s five-year plan. The ministry's latest plan defined sectors that will receive increased government support, such as chips, renewable energy-driven cars, biotechnology, and aeronautics. Each sector was allocated government funding and long-term government goals were defined. For example, China has announced the construction of 10-20 biotechnology parks that will generate a total output of $1.45 billion.

 

Israeli 3D printer manufacturer Stratasys, for example, sells tens of millions of dollars a year to 6,000 Chinese companies and international corporations that manufacture in China.

 

Stratasys has employees whose job it is to keep up to date with China’s government plans and understand which areas the government intends to invest in. Two years ago, China’s president called for improving the local health system by using 3D printers. The announcement, accompanied by government plans, was a sign for Stratasys to allocate more resources to the Chinese medical sector, which began to receive increased budgets.

 

Companies can also learn from the five-year plan whether it is worth contacting potential customers and when. AST, a company that deals with solutions in the field of water treatment, operates in China and collaborates with government authorities and private companies on large projects. When the local government puts out a program that requires companies in a particular field, like gas and oil, to upgrade their systems, AST immediately experiences a sharp increase in the number of referrals coming from that field. These referrals offer the company a chance to close significant contracts.

 

One of the key areas of the 13th Five-Year Plan is advanced chips development, where China is trying to bridge its significant gap with the West. Israeli companies can use such information to attract investors. Newsight Imaging, for example, manufactures advanced chips. Understanding the plan and the Chinese needs derived from it, helped NewSight recruit its first Chinese investor early in the company’s seed phase. Today almost 100% of NewSight investors are Chinese government and private entities.

 

The programs can help Israeli companies receive benefits and incentives. Cognata, which develops a simulation system for autonomous vehicle companies, has been operating in China for more than two years with a local team. Due to its team’s understanding of the government programs that support green vehicles, Cognata was able to secure tax benefits and incentives in preferred areas defined as test zones for autonomous vehicles.

 

Monitoring government programs in China requires the allocation of resources and is certainly not an easy task for small and young companies. To regularly monitor government programs the company is required to hold local employees or work with organizations like the Chambers of Commerce which have a permanent presence in China. But in a complex business reality such as in the Chinese market, and given the government’s dominance in determining the path of the local economy, reading and implementing government plans is almost mandatory.

 

Buffeted by the unprecedented impact of the Covid-19 pandemic, this year’s annual gathering of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Congress (CPPCC), known as the Two Sessions, focused on stability, employment, and resilience.

 

Beyond guaranteeing jobs and basic living, the Two Sessions plans aim to strengthen China by accelerating investment in scientific and technological innovation, and promoting the digital economy, intelligent manufacturing, healthcare, and new materials. Such policies, alongside strengthening the domestic economy and commitments to further open it up, may be enough to attract more overseas investment. The importance of a domestic, demand-driven recovery is emphasized by weakening foreign trade and an increasingly complicated international environment.

 

Although few details on the themes of the next Five-Year Plan were released at this year’s meetings, the effects of Covid-19 have put Beijing under pressure. The government’s decision to become more economically self-reliant is crucial, and its move to untangle domestic demand, while emphasizing opening-up and reforms, will certainly characterize government strategy in the years ahead. Companies must review their playbooks as the tactics they are currently using are not guaranteed to work in this environment.

 

The author is the GM at ViaMeshi -an NPO dedicated to assisting Israeli companies in their business in China, and a former Marketing DGM at IsCham- the Israeli Chamber of Commerce in China.