China was once called the "factory of the world." On the back of cheap labor and a vast domestic market, it served as a global manufacturing base and stood at the center of the world's supply chains. But China is now rapidly evolving beyond a mere production base into a "techno state" leading advanced fields such as AI, robots, and electric vehicles.
In particular, it is accelerating an AI transformation (AX) that is smartening production by introducing AI and industrial robots at scale on factory floors. The strategy is to leverage its manufacturing competitiveness to dominate even advanced industries.
We recently spoke with Professor Kim Chang-hyun of CEIBS about China's manufacturing and AX strategy and how Korea should respond. CEIBS in Shanghai has consistently ranked at the very top globally in the Financial Times (FT) MBA rankings and has long held the unshakable No. 1 spot in Asia as a prestigious business school.
Kim built field experience researching industry and the real economy at LG Economic Research Institute and elsewhere, went on to Singapore Management University (SMU), and now serves as a tenured professor at CEIBS, where Kim researches and teaches in strategic management.
Kim said it misses the essence to explain China's rise simply as state-led industrial policy.
Kim explained, "China has built a unique system in which the central government sets the direction, local governments compete, and corporations fight for survival in the market."
In particular, Kim said, "The most intense competition in the world today is taking place in the Chinese market," noting, "Rather than the state picking winners in advance, support concentrates on the corporations that survive in the market. This 'competition first, support later' structure is the driving force behind China's technological rise."
Kim said, "China is evolving into an advanced manufacturing power by combining AI and robots with its manufacturing base," citing Xiaomi as an example. "Xiaomi's Beijing smart EV factory applied AI and robot systems to achieve 100% automation in core processes," Kim said. Kim added, "The historical pattern is reemerging in which the nation that seizes the factory of the world ultimately secures innovation and hegemony." The following is a Q&A with Kim.
— Many view the competitiveness of 'the factory of the world' China as stemming from cheap labor.
"If you explain the competitiveness of Chinese manufacturing simply by low-wage labor and a huge domestic market, you miss the essence. The real core is China's unique 'full-set industrial structure' and 'supply chain completeness.' China is the only country that holds almost all manufacturing sectors classified by the United Nations (UN), having built a structure that can produce everything from the foundational industries that machine screws to the advanced technologies that launch spacecraft without relying on other countries.
This competitiveness did not emerge overnight. For about 20 years after reform and opening, China kept unit labor costs in manufacturing low and stable, absorbing the world's manufacturing capabilities like a sponge. Manufacturing corporations from around the world flocked to China, and China went beyond simple assembly to amass manufacturing capabilities across materials, parts, and equipment, achieving today's supply chain competitiveness."
— In your recent book "Techno State China," you said China's rise should not be interpreted merely as state-led industrial policy. What is the core of China's development model?
"The core principle that drives China is not ideology or dogma. Today's China is an 'engineer-led' nation, run by a strict technocracy. Many of the country's top policymakers are former engineers who studied physics, chemistry, or electrical engineering. They view running the country not as a political discourse but as a 'massive engineering project' that must be constantly optimized based on data and technology. This massive engineering system operates as a tight triangular formation that fuses macro-level planning with a wild market."
— Explain the triangular formation in concrete terms.
"The first pillar is the central government's long-term strategy, and the second is fierce competition among local governments that execute it. The central government lays out the big picture and a technology roadmap like the 'group headquarters' of a conglomerate. The actual speed of innovation is set by some 40,000 local governments. Local officials who lead each province and city move like 'subsidiary CEOs,' mobilizing funds, land, and pools of capital to attract promising corporations with relentless proxy tactics."
— And the last pillar?
"It is the extreme competition that plays out in the market. The most intense survival-of-the-fittest in the world right now is in China's market. In almost every area—EVs, AI, and e-commerce—corporations wage extreme competition known as 'neijuan.' The state never scripts the winners in advance. The state presents the macro direction, but the market ultimately decides which players survive in the ring. Only after survival is proven does policy support converge on those corporations—this 'competition first, support later' structure is the true substance of China's technological rise."
— You can't leave out Huawei when discussing China's tech rise.
"Huawei is a symbol of China's technological rise, but it was not a corporation that grew under state protection from the start. When China opened its telecom market in the 1980s, Huawei survived a brutal '400-to-1' wild competition to emerge as the last winner against global giants. What deserves more attention is the 'paradox of sanctions' sparked by U.S. restrictions. The United States tried to squeeze Huawei by cutting off supplies of advanced semiconductors and software, but it ultimately spurred the self-reliance of China's semiconductor and AI technology ecosystem."
— What is China's manufacturing AX strategy?
"It is less simple factory automation and more the building of an 'intelligent manufacturing infrastructure' that connects production sites to the digital world in real time. The Chinese government designated Beijing, Shanghai, and Shenzhen as AI innovation pilot zones and minimized regulations to rapidly commercialize new technologies such as Autonomous Driving, drones, and Humanoid Robot.
China's particular strength is smart factories that apply AI and big data across the entire production process. About 40% of the world's Lighthouse Factories are in China, and 'dark factories' where AI integrates production and quality control are spreading fast. In research and development, China leverages large-scale talent and data, and on the production floor, AI and automation systems run 24 hours a day. That is the core of China's manufacturing innovation."
— Industrial robots are also cited as a key pillar of China's manufacturing innovation.
"Korea still holds the world's No. 1 rank in robot density (industrial robots per 10,000 workers), but China's recent catch-up is very rapid. More than half of the world's new industrial robot installations are now concentrated in Chinese factories, and on that basis China has risen to No. 3 in cumulative robot density, overtaking Germany and Japan. It is going beyond simply purchasing many robots to rapidly expanding in-house production capacity and on-site application capability. As AI-based smart factories combine with robotic automation, China is simultaneously boosting productivity and expense competitiveness across manufacturing."
— Which Chinese corporations are successfully driving manufacturing AX?
"Xiaomi. Xiaomi grew with an asset-light strategy focused on design and platforms while outsourcing production, but it fundamentally changed its manufacturing strategy after entering the EV business. Concluding that vertical integration of platforms and hardware is essential in the EV and AI era, it is increasing its share of in-house production and making large investments to internalize key technologies, including Autonomous Driving algorithms and its own chip development. These changes are spreading beyond smartphones to automobiles and home appliances.
Xiaomi's smart EV factory in Beijing symbolically shows this. By applying AI and robot systems across the plant, it has built a dark factory with 100% automation in core processes and more than 90% overall automation. Xiaomi, once a platform corporation, is evolving into a hard-tech corporation that fuses direct manufacturing with AI."
— Are there concerns about social side effects, such as job losses, from AX?
"Driving AX and automation so hard in China reflects a national strategy to 'defend manufacturing.' China watched the United States and the West experience deindustrialization, weakening industrial competitiveness and supply chain stability. For that reason, it views manufacturing as the core foundation of national competitiveness and is aggressively introducing AI and robots to keep production bases at home despite rising wages and demographic shifts.
What is interesting is that despite expanding automation, China has not lost competitiveness in labor-intensive industries. Typically, when wages rise, industries like footwear, apparel, and toys should transfer to Southeast Asia or India, but China has introduced AI and automated equipment at scale to boost productivity and cost competitiveness, maintaining its dominance in global markets. In the end, China's AX strategy does not stop at fostering advanced industries. By using AI and robots, it aims to protect advanced manufacturing such as EVs and semiconductors and traditional labor-intensive sectors at the same time, strengthening its grip on global supply chains."
— How should Korean corporations respond?
"Fleeing China's pursuit by heading only to the ultra-high-end premium market is not a fundamental solution. It could repeat the 'premium paradox' that Japanese manufacturing faced. If you cede the mass (volume) market to China and focus only on premium segments, profitability may rise, but factory utilization and asset turnover can fall, hurting overall corporate profitability. A flexible restructuring approach is needed. Move away from a heavy, production-equipment-centered structure to an 'asset-light' strategy, and ride the Chinese and Taiwanese supply chains to also defend dominance in the cost-effective volume market.
As U.S.-China tensions reconfigure the world economy into 'two worlds,' the process is both a crisis and an opportunity for Korea. A pragmatic approach of 'Korean essence, Chinese-Western utility' is needed—cooperate with the United States in security and advanced technology, while leveraging China's efficiency in markets and manufacturing supply chains."