China’s next wave of global competition is a wake-up call

It might only have been 700 miles, a relatively short commuter hop for a modern jet. Even so, the first commercial flight by the C919 was still a significant milestone. China finally has a domestic jetliner that can compete with Boeing and Airbus. But the country’s advances do not stop there. The auto manufacturer BYD has just overtaken Volkswagen in domestic car sales, and along with its rivals is pushing out into the rest of the world. Beijing has even announced plans for its first Moon landing. Add it all up and one point is clear. China has embarked on its second great wave of industrialisation. It has moved a long way past basic manufacturing, and it is now taking on industries such as aerospace, where the West complacently assumed it had an unassailable lead.

That should be a wake-up call for the UK, the US and for the rest of the European economies. China is about to overturn the established order in a whole range of industries. There is no point in thinking that we can compete with subsidies, tariffs or industrial strategies. We are not nearly as good at any of that as the Chinese are. Instead, we need to double down on innovation and entrepreneurship, the things we are good at, and we can only do that with lower taxes and light regulation. And if we don’t make a start soon, China will have already raced so far ahead of us it will be impossible for us to catch up.

The established plane-makers understandably put a brave face on the debut of the C919.

“For us to get overly anxious about that, I think it’s a silly prospect,” said Boeing’s chief executive, Dave Calhoun, when questioned about the likely competition from a plane that will compete head-on with his company’s 737 and the Airbus A320. Well, good luck with that view, Dave.

It will be very hard for Boeing and Airbus if they lose their Chinese sales, as they inevitably will. Let’s keep in mind that there are 1,700 Airbus planes operating in China, and a similar number of Boeings, so that is hardly a market that can be allowed to slip away without both companies suffering huge falls in output.

And, of course, all the sales both companies make to developing countries dependent on Chinese debt to stay afloat will almost certainly buy the new plane as well.

Both companies are facing a tough fight over the next two decades. That matters. Both the US and Europe, including the UK, have poured huge sums of money and lots of political energy into building their aerospace industries over the last 50 years. Now the duopoly is under serious threat for the first time. It is the same story in cars. Few people have paid attention yet, but led by BYD a new generation of Chinese auto manufacturers are starting to dominate their home market, and using those vast domestic sales to make attractive, competitively priced cars that they can take into the global market.

China is already the world’s second largest exporter of cars, shipping a million vehicles to the rest of the world during the first quarter of this year, a 70pc year-on-year increase. For mid-market manufacturers, such as Renault or Ford, that is a hugely threatening challenge. The Chinese have a huge domestic market they can use to refine products, and lower costs, and can then take those out into the rest of the world. It will not be long before industries such as pharmaceuticals, telecoms, retailing, consumer goods, and financial services are under the same kind of pressure, with a vast new range of Chinese competitors confronting them in their core markets. To take just one example, China is already in second place to the US on pharma R&D, accounting for 20pc of the total global spend, compared to 50pc for the US. It has not made huge progress yet, but it won’t be long before it is challenging the likes of Pfizer and GSK.

The first wave of Chinese industrialisation was mostly about supplying the developed countries with cheap manufactured goods. Indeed, it often helped established manufacturers, since they could lower production costs by sourcing goods from China, as well as taking their existing brands into the country. The second wave getting under way now will pose a direct challenge. Sure, some of the competition may well be unfair – the C919 for example does look remarkably similar to an A320 – but that doesn’t mean it won’t be effective.

The West needs to wake up to the threat posed by China’s march into the sophisticated, knowledge-intensive industries that it thought it had a monopoly on. It is no good thinking that we can compete with subsidies and industrial strategies, even if they are in vogue right now.

President Joe Biden can pour hundreds of billions into green energy and chip manufacturing if he wants to, with the European Union scrabbling around to match his spending (while the UK offers a few lame grants that make no difference to anyone). But it is ridiculous to pretend we can match China in either.

They are already too far ahead of us, and they are good at mobilising resources behind national industrial priorities. Instead, we should be doubling down on deregulation, lower taxes and innovation. The one way the West has of keeping up with China, and occasionally outwitting it, is by unleashing entrepreneurship, creating new products and new ways of making things that will maintain their edge even as Chinese companies move into industries that the US and Europe thought they would permanently dominate.

But if we don’t start now we will fall too far behind to ever catch up – and the maiden flight of China’s first commercial jet last week should have brought that home to everyone.

‘The West needs to come up with new ways of making things’