Beijing is betting on producer services to drive the next phase of manufacturing growth

Beijing has a new economic priority – and it’s one that will reshape China’s growth model for decades to come.

Policymakers are increasingly convinced that the next phase of China’s development requires a dramatic expansion of producer services – that is, the ecosystem of support that sits behind and around manufacturing.

• Think less call centres and coffee shops, more industrial design, patents, software, and finance.

This is a significant pivot. For much of the last decade, policymakers viewed services as a drag on productivity: It’s much easier to increase efficiency on a factory floor – through automation or machinery upgrades – than it is in, say, a hospital or school.

• This productivity concern led Beijing to shun its service industries and double down on manufacturing during the previous Five Year Plan (2021-2025).

So why the change of heart?

First, there’s growth potential.

• China’s economy is slowing, and policymakers are desperate for new growth drivers.
• Producer services account for up to 30% of GDP in the US – China doesn’t provide a comparable figure, but the role of producer services is significantly less. 
• Beijing sees that gap not as a weakness, but as an opportunity – a massive, untapped source of growth.

Second, there’s jobs potential. 

• Manufacturing employment has expanded in recent years , but China’s manufacturing base is becoming increasingly automated, threatening to hollow out blue-collar employment faster than new jobs are created. 
• At the same time, a record number of university graduates are entering a job market that doesn’t have enough white-collar positions to absorb them. 
• Producer services – think engineers, designers, software developers, and supply chain managers – are precisely the kind of high-skilled, high-paying jobs China needs more of.

Third, there’s value potential. 

• Beijing doesn’t just want China to make things – it wants China to own the value that wraps around them. 
• Think about Apple, which captures the lion’s share of the value in every iPhone it sells not through assembly, but through design, software, and IP. Beijing wants Chinese companies to do the same. 
• Huawei – with its sprawling portfolio spanning smartphones, base stations, EVs, and robots – is the closest thing China has to that model today. But Huawei remains heavily focused on hardware and vertical integration. 

What Beijing is really after is companies that generate value primarily through services wrapped around manufacturing, not just sophisticated manufacturers with strong in-house R&D.

• In other words, China wants its own Apple.

The challenge is that Beijing’s tried-and-tested playbook for building world-class industries – subsidies, cheap credit, support for exporters – won’t work as well here. 

• Producer services thrive on deregulation, open competition, and deep pools of talent. Those are things China’s policymakers have been trying to cultivate for years, with mixed results.

I discuss all of this in more detail in this week’s Trivium China podcast – including what success might look like and how long it could take to get there. 

Subscribers to our Markets service can also read the full report. If you aren’t already a subscriber, you can sign up for a free 30-day trial here.

Dinny McMahon, Head of Markets Research, Trivium China