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The industrial digital transformation dilemma in China

Many manufacturers do not know why and how to invest in digital transformation

Crisis or opportunity: Why and how should manufacturers undertake a digital transformation

As the digital economy expands, the scope of its integration with real industries broadens, leading to increasing industrial digitalization. For manufacturers, undergoing digital transformation is only a matter of time. It is the basis for achieving smart manufacturing and the prerequisite for moving toward carbon neutrality. However, many manufacturers do not know how to invest in digital transformation, how to promote it, and how to evaluate it. Their dilemma is whether they should proceed — while the potential of digital transformation is substantial, huge investment and lagged benefits act as deterrents.

In this article we will take a close look at manufacturing in China, and its specific dilemma over digital transformation. China is the largest manufacturing economy in the world today, but the challenges it faces are universal – like rising labor costs, aging population, growing environmental pressure. The answers to meeting these challenges, and how China can maintain the competitiveness of its manufacturing sector, could also provide useful references for other regions.

To present a more comprehensive picture of Chinese manufacturers’ digital transformation, particularly their pain points, difficulties, and selected paths, Schneider Electric China’s Institute of Business Value surveyed 115 medium and large businesses across more than 10 different industries and conducted in-depth interviews with their chief executives in charge of digital transformation. By presenting real-world cases and data from the interviews, we aim to help manufacturers gain control of their digital transformation process instead of responding to external changes, thus speeding up the process that ultimately leads to smart and green manufacturing.

Digital transformation at a tipping point: From concept to value realization

On the ground, the overall digitalization level of Chinese manufacturers is relatively low, including in some of the medium and large companies we surveyed. In fact, 20% of executives surveyed admitted that their organization’s digitalization level was low. It is, however, gratifying to note that more than 30% of companies have accumulated a wealth of information and tools, and nearly 30% have achieved the interconnection of existing information systems. Though, only 13% have been able to acquire value through data mining.

According to the report Digital Economy Development in China published by the China Academy of Information and Communications Technology, China’s digital economy has maintained a high growth rate of 9.7%, reaching RMB 39.2 trillion in 2020 and accounting for 38.6% of GDP. Covering 21% of the secondary industrial sectors, the digital economy has become a key stabilizer of economic growth.

These developments suggest that the digital transformation of China’s manufacturing sector has moved beyond the initial conceptual bombast and is making solid progress toward advancing value realization.

Forces driving digital transformation: The biggest motivation for transformation comes from within the company

During the survey, respondents identified their company’s development as the primary factor driving digital transformation and rated external ecological, competitive, and policy pressures as most important.

  • Internal driving forces: Chinese companies have a strong endogenous drive for digital transformation. Not only do 91% of the respondents believe that development of the company drives digital transformation, as many as 70% are of the opinion that their current digitalization level cannot meet their company’s development needs in the next 3 to 5 years, indicating that there is a general consensus among Chinese companies to promote their own development through digital transformation.
  • Ecological pressure: 61% of companies believe that the key factor driving their own digital transformation is the needs of industries and businesses up and down the industrial value chain. The advent of the digital era demands that different companies along the entire chain are connected digitally to form a larger ecological system. The need to keep up with developments across the ecosystem encourages companies to digitally transform through risk of being left behind by the rest of the community.
  • Competitive pressure: Similarly, 59% of companies believe that the driving factor of digital transformation stems from competition within the industry. The executive interviews suggest that this means more than the gap in production efficiency and effectiveness as a result of digitalization. This is reflected in numerous areas such as product development, production optimization, supply chain stability, marketing, and talent retention and training. Ultimately, companies that are digitally transforming are gaining an overwhelming advantage in every aspect.
  • Policy pressure: The role of central and local macro policies in driving digital transformation should also not be underestimated, with nearly 40% of respondents listing these as their main drivers of digital transformation. For example, national carbon peaking and carbon neutrality goals have placed higher requirements on companies to save energy, reduce emissions, and improve efficiency, and the need for digital transformation is particularly evident in heavy energy-consuming industries.

Insights for successful for digital transformation in industries

The insights from the more than 100 surveyed companies and Schneider Electric’s digital transformation practices can be summarized into four guiding principles for enterprise digital transformation.

  • Planning first: The transformation and reconstruction of the entire value chain, systems, and platforms through digital transformation is by no means a one-day task and involves huge risk. High-level and integrated planning is undoubtedly needed to identify problems early and gain experience successes and failures.
  • Focusing on scenarios: The design and management of each scenario as a relatively independent unit can be a key lever for achieving digital transformation results locally. As a series of key scenarios are digitalized and business value is created, companies’ determination to drive transformation is strengthened.
  • Agility and resilience: Agility and resilience require that companies be adept at not only making changes themselves but also responding to changes in the environment and finding the right balance between these. Therefore, a flexible path with clear objectives is an effective model to ensure that a company’s inputs and outputs can be relatively balanced.
  • Ecological synergy: In the digital transformation process, we need both interdepartmental collaboration and integration of external resources to supplement our own shortcomings. From this perspective, whether internal or external, building an ecosystem is critical to driving digital transformation.

There are many more insights available in our free report: How are Chinese Manufacturers transforming themselves? Click here to download.

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