A new fund that focuses on developing China's next generation of industry - so-called Industry 4.0 - through investment in German small and medium-sized enterprises (SMEs) will soon have its initial $1 billion raised, its founder says.
Henry Cai, 61, a native of Shanghai, resigned as a senior executive at Deutsche Bank in February to set up the fund, which will invest in intelligent manufacturing, high-end equipment, advanced materials and medical technologies.
The term "Industry 4.0" was first used in 2011 at the Hanover Fair. It refers to a fourth industrial revolution, following on from steam, electricity and information technology, and is based on cyber-physical systems connecting machines to minimize problems and costs.
Production powerhouses have already moved to develop Industry 4.0, namely Germany with its manufacturing industry and the U.S. with its Internet technologies.
On May 19, the central government unveiled its Made in China 2025 plan - a strategy intended to lead China to cutting-edge innovation and high-quality industrial products.
Cai said that he set up the fund after China and Germany signed cooperation guidelines covering many sectors of Industry 4.0 in October, when Premier Li Keqiang visited the European country.
The fund has gained the fundraising support of China's sovereign-wealth funds and some Middle Eastern countries.
Cai said the fund will play a key role in promoting the country's 10-year plan to upgrade its manufacturing capacity by facilitating cooperation between Chinese and German companies. However, he warned that China will face many challenges in the course of reaching the advanced levels of the global production chain.
From 2.0 to 4.0
China starts its Industry 4.0 revamp from a complicated background, Cai said. Most parts of the country and most of its companies have not finished the transformation from the electricity phase to automated production, he said. Meanwhile, Germany has basically finished the third phase of industrial revolution, and is well on its way to 4.0.
Miao Wei, the minister of industry and information technology, has said the latest Internet technologies will help China go straight from the electricity phase to intelligent manufacturing.
hina can make 525 types of products and is the world largest producer of 223 types, Miao said, but he pointed out that these goods are on the low end of the global industrial chain.
China could leap to Industry 4.0 with its advanced Internet network, Cai said. The country has already built technology companies such as Xiaomi Inc. and Huawei Technologies Co. 002502, +9.00% and Internet firms like Alibaba Group Holding Ltd. BABA, -2.67% , Tencent Holdings Ltd. 0700, -0.84% TCEHY, -1.05% and Baidu Inc. BIDU, -1.33%
Some Net companies get attention from venture capital and private-equity companies and go public overseas, Cai said, but manufacturing companies hardly win any investment.
Chinese entrepreneurs have paid little attention to upgrading manufacturing to a high level and only want to make money quickly through buying shares or investing in websites and smartphone applications, he said.
"Many people want to make fortunes by building a website or developing a mobile application, which is only a dream," Cai said. "In Germany, it is different. A lot of people participate in researching and developing products."
China also lacks engineers, technicians and skillful workers, Cai said. Its companies have imported entire production lines, a move that has lowered demand for skilled laborers from rural areas.
"China has enough lawyers, accountants and bankers in developing Industry 4.0, but it lacks of thousands of good engineers, technicians and skilled workers," he said.
Cooperation difficulties
Having Chinese companies cooperate with German SMEs and major research centers for manufacturing is the best way to upgrade production levels, Cai said.
However, cultural differences form a major barrier to cooperation, he said, which is why he set up an international team at the fund tasked with bridging these obstacles.
Leaders of German companies say Chinese businessmen make unprofessional decisions in production and resort to random activities in operations, according to a report from accounting firm PricewaterhouseCoopers.
Chinese businessmen were seen as having little experience in controlling the entire process of international projects and had no feedback system or backup measures in places. Cooperation was hindered by not only language, culture and social development, but also in work styles.
Cai built his fund team with members who used to work for international companies, such as Carlyle Group CG, -0.75% to help Chinese and German companies get to know each other better and avoid cultural and management problems.
The fund also has as consultants German government officials and Chinese businessmen, such as Wang Chuanfu, chairman of Shenzhen-based BYD Auto Co. 1211, +0.29% BYDDF, -3.94% 002594, +1.91%
Another problem is that few German companies want to transfer technologies and patents to their Chinese peers because intellectual property is poorly protected in China, Cai said.
In China, people who copy technologies and products are not heavily punished, Cai said, and in this environment no one is devoted to developing technologies and products.
The country has made advancements in its legal system and protection of intellectual property, Cai said, but more needs to be done.
