Source: Economic Information Daily

In 2015, the State Council printed and distributed a circular entitled Made in China 2015, which clearly defines the objective, time sequence and path for China to become a great power in the manufacturing industry, and it is a guide for China’s action to build itself into a modern great power in the manufacturing industry. After being approved by the State Council, the National Development and Reform Commission printed and distributed Innovation and Development Outline for the Service Industry (2017-2025). This document is of great importance for directing innovation and development, and expanding external opening and deepening reform of the service industry. It proposes "promoting mutual promotion and joint development of China Service and Made in China"; moreover, it points out the future direction of development of the service industry, especially, the productive service industry, and it proposes new thoughts and new paths for development of the modern manufacturing industry; in addition, it grasps the "key" for promoting converging and upgrade of industries.

The manufacturing industry and service industry are important constituents of the modern industry system. In order to build a strong modern industry system, China must have an advanced manufacturing industry and a modern service industry as supports. After studying the development history of the manufacturing industry and service industry, and many cases of successful development of enterprises in the manufacturing and service industry, we can come to the following conclusion: The productive service industry is an important force in promoting transformation and upgrade of the manufacturing industry, and servitization of manufacturing and service based manufacturing are an important path to implement the "win-win" strategy of Made in China and China Service.

The productive service industry is an important support for achieving transformation and upgrade of the manufacturing industry.

In the current global production network system, the production process is getting increasingly fragmentized and specialized. In the past more than 30 years, with a big advantage in the cost of labor, China quickly permeated to the assembly and manufacturing link in the global value chain system, and became a true "world factory", and steadily held the position as the largest country in manufacturing industry in the world. But, the basic landscape featured with large scale, low added value, and lacking well-known brands has not substantially changed. China has been at the low end of the value chain for a long time, while, Western developed countries control the high end links at the upstream (i.e. research and development, design) and downstream (i.e. marketing, brand) of the value chain. If this situation continues, China may be "locked at the lower end" of the global value chain.

China has entered in the accelerated development stage in the middle and later period of industrialization. Currently in China, there is much dispute in academia over the choice of direction of transformation and upgrade of the manufacturing industry. Some scholars are of the opinion that, transformation and upgrade of manufacturing must be driven by vigorously developing the productive service industry. The content of "added value" of manufacturing industry must be increased by incorporating knowledge intensive service elements in the manufacturing industry, so as to achieve "intelligent manufacturing, flexible manufacturing, and coordinated manufacturing", and climb up to high end of the value chain; other scholars are of the opinion that, the direction of upgrade of manufacturing should still mainly be a development of the heavy and chemical industry. To develop the heavy and chemical industry, and the reform and upgrade of traditional manufacturing industry, is still the main task that China faces in the current and future period. In the dispute, each side has their reasons for their argument. However, from the perspective of the objective laws of the industrialization process and industry evolution, and the current situation of the industry's development in China, the view that the transformation and upgrade of manufacturing industry should be driven by productive service industry is more desirable and more practical.

China's manufacturing industry is in a critical period of transformation and upgrade. As China's industry continuously climbs up to the high end of the value chain, huge demand for service products will be generated. In addition to stripping the productive service industry off the manufacturing industry and the constant increase of the marketized degree of service industry, the servitization process of manufacturing is significantly accelerated. The transition from production based manufacturing to service based manufacturing is not only an important and brilliant transition in this period, but also an important means to solve various contradictions that exist in the transition process of the economic development mode of China. For example, the flexibility of employment in the service industry is significantly higher than that in the manufacturing industry. The number of job positions created by unit investment in the service industry is about 2.5 times that of the heavy and the chemical industry, which can help solve the problem of inconsistence between economic growth and labor employment growth that has existed in China over the years. In the New Normal of China's economic development, China’s economic growth rate has fallen to about 6.85% over recent years, but the problem of employment has been generally solved. To a large extent, this attributes to the development of the service industry, especially, the continuous emerging and development of new services and new business types. Moreover, the consumption of energy of the service industry is far lower than that of the manufacturing industry. Therefore, developing service industry can help better meet the requirements of sustainable development. For example, for every 10,000 yuan of GDP, the energy consumed in the service industry is only 25% of that consumed in the manufacturing industry. Therefore, we should encourage industry transformation and upgrade-oriented development, and further accelerate development of the productive service industry, and should guide enterprises to give up the "big and complete" and "small and complete" operation model, and separate and outsource those non-core businesses, and extend their value chain to the high end, so as to promote China's industry to gradually transmit from productive manufacturing to productive service, to improve the competitiveness of the manufacturing industry, and promote manufacturing to climb to the middle and high end of the value chain.

In a word, to choose the aforesaid development path is a "win-win" strategy, which not only finds a new driving force for transformation and upgrade of manufacturing industry, and for building a country with a strong modern manufacturing industry, but also expands new spaces and new areas for development of the modern service industry, especially, the productive service industry.

Converging of the service and the manufacturing industry is an important trend of industry development across the world

The constant advance, converging, permeation and wide application of the new generation of information technology, artificial intelligence, and other technologies, lead to the innovation and upgrade of the service industry, and make the boundaries between industries even more blurry, and the trend of converging becomes even more obvious, which raises new requirements and new challenges for mutual promotion and joint advance of the service industry and manufacturing industry.

With the in-depth development of the global value chain, the global service industry and manufacturing industry are displaying some essential characteristics that are clearly different from before. On one hand, more and more services are incorporated into production of industrial products as middle input elements, and a large amount of supporting services are consumed in the consumption process of the products, which means manufacturing industry is gradually servitized; on the other hand, the manufacturing oriented development of the service industry is getting increasingly notable. The service industry is expected to get rid of the small-scale production means used in the past, and incorporate more industrial production means, so as to improve the scale economy and productivity of the service industry, and to overcome the "low efficiency" problem that has plagued the service industry for a long time. For example, the service industry chain is gradually extending to the manufacturing industry, so as to form a whole industry chain. Some service-based enterprises enjoy a dominating position in the global value chain, so they take their advantages in research and development, design, management and sales channel, and engage themselves into manufacturing by such means as OEM, and chain operation, so as to jointly provide service for their consumers. Research and development enterprises have their patented inventions, and design entities have their innovative designs with copyright, and logistics companies have their transportation network, these enterprises may establish their own manufacturing factories based on their control at the high end of the industry so as to seek added value along the whole value chain in the industry. In a word, the internal structure of enterprises is changing, and manufacturing enterprises are not purely conducting manufacturing activities any more, and service companies are not purely providing service activities any more. The servitization development trend of the manufacturing industry, and the productization development trend of service industry, are becoming increasingly more apparent, which to a large degree, oversets the traditional concept about manufacturing and service.

In the background of the information technology revolution, the development mode of the manufacturing industry is experiencing a profound change: on one hand, many new manufacturing means, i.e. intelligent manufacturing, flexible manufacturing, virtual manufacturing and green manufacturing, are continuously emerging and rapidly popularized; on the other hand, the traditional boundary between the manufacturing industry and the service industry is rapidly disappearing, and the development trend of converging of the manufacturing industry and the service industry is becoming increasingly more prominent. Generally speaking, a great change is expected to occur to the internal structure of the enterprises in China in the future: manufacturing enterprises will not purely conduct manufacturing activities any more, and service companies will not purely provide service activities any more. With the boundaries between industries gradually disappearing, the converging of different industries based on a further division of labor, and converging development, mutual promotion and joint development of the productive service industry and the service industry will become the main trend of industry development. As the boundary between the service industry and the manufacturing industry is getting increasingly more blurred, mutual support and mutual aid are needed to achieve mutual promotion, joint advance and win-win development of Made in China and China Service.

The bonding point of Made in China and China Service

(I) Servtization of manufacturing

Manufacturing industry is the mainstay of industry, and it is the physical base and backbone of a country’s national economy, and the main force to drive a country to go from agricultural civilization to industrial civilization. Currently, China is faced with many new problems and new challenges in the industrialization process. Among them, one of the most prominent problems is the new challenges brought by the continuously increasing element cost in China's industrialization process and the continuous upgrade of the global industry value chain. The extensive industrialization development mode based on high resource consumption and low labor cost cannot meet the requirements of new industrialization any more, and cannot keep up with the pace of evolution of the global industry. Faced up with the new environment and new situation, many manufacturing companies are confronted with high pressure, and are looking for new approaches and trying to make new breakthroughs. In such a context, one important option is service oriented transformation of manufacturing.

With the industry is developing to the middle and high end, the value distribution in the manufacturing industry is shifting from the manufacturing link to the service link, and the percentage that the value of such service activities as product development, improvement, sale, maintenance and recovering in the total value is getting increasingly higher. In developed countries, the "dual 70%" phenomenon can be widely observed, namely, the output value of the service industry accounts for about 70% of GDP, and the output value of the manufacturing service industry accounts for about 70% of the output value of the whole service industry. 56% of the World Top 500 companies are in the service industry. In the US where the degree of servitization of manufacturing is the highest, those companies converging manufacturing and service account for 58% of all manufacturing companies. In GE, the output value created by the "technology + management + service" model accounts for over 2/3 of the company's gross output value. And IBM has completely transformed into a global supplier of information system solutions.

To promote servitization of manufacturing, China must make good efforts to solve the following two problems:

Firstly, encourage separation and development of the service industry from the manufacturing industry, and promote specialization and socialization development of the productive service links; and make the productive service industry an important driving force to support implementation of the "Made in China 2025" strategy, and the innovation and development strategy for the service industry. Separation and development of the modern service industry in manufacturing enterprises must be encouraged to cultivate some specialized enterprises in the productive service industry.

Secondly, promote manufacturing industry to extend the industry chain, and to add more service elements in the final products, so as to achieve servitization of the industry chain. Such high end service links as research & development and design, engineering design, operation management, customer service, maintenance and repair, inspection and test, after service, and financial lease shall be strengthened constantly, so as to increase added value of products. In the servitization transformation process of manufacturing companies, it’s better to provide overall solutions. Taking the equipment manufacturing industry as an example, besides providing customers with main equipment, supporting equipment (including system design, system equipment and installation and commissioning of the system) and engineering contracting (including construction of foundations, factory buildings, and supporting facilities) must also be provided. In the meanwhile, specialized maintenance and renovation service must be provided to customers; manufacturers of equipment must provide maintenance, inspection & repair, upgrade and rebuilding of equipment, and provide the customers with specialized remote equipment status management service to monitor equipment operation comprehensively.

(II) Service-based manufacturing

Driven by the new technology, the capability of conducting service based manufacturing has become a critical aspect in determining the competitiveness of a manufacturing company, and the main source of its profit. The focus of business of many traditional manufacturing companies is shifting from productive manufacturing to service based manufacturing. The global manufacturing industry is displaying a servitization trend, namely, it is transiting from being production centered to service-based manufacturing. The Made in China 2025 strategy points out that "China should accelerate coordinated development of the manufacturing industry and the service industry, promote innovation of business mode and business type, promote transition from productive manufacturing to service-based manufacturing", and consider development of service-based manufacturing industry an important task in development of the manufacturing industry. The Innovation Development Outline for the Service Industry (2016-2025) issued by the National Development and Reform Commission stresses once again "development of service based manufacturing", "orderly promoting two-way converging of the manufacturing industry and the service industry, and promoting manufacturing companies with required conditions to transit from productive companies to production and service companies". We can see that, the issue of two-way converging of manufacturing and service and the issue of service based manufacturing has attracted high attention of relevant ministries and commissions of China.

To promote service-based manufacturing, we must make good efforts to solve the following two problems:

1. Accelerate building of an "internet+production and service system". Under the driving of the information technology, servitization of manufacturing and service-based manufacturing mainly display a trend of high degree of integration with the internet, which has become an important feature of industry 4.0. The business model is also displaying an innovation trend, i.e. large scale personalized customizing, C2B, and cloud-based manufacturing, etc. We must firmly grasp the trend of developing from the digitalization age to the intelligentization age, in the context of " internet +",stress the permeation of "internet +" to the productive service area, and comprehensively integrate internet into all links, i.e. research & development design, production, circulation, management, human resources development and after sale service. We should develop digitalized design, internet-based coordinated research & development, modern supply chain management, personalized customizing, on-line testing, remote diagnosis and maintenance, and other internet and information technology based service and function innovation, accelerate establishing of an "internet +" based production and service system, promote change of production mode and organization mode, and form a new internet based, intelligent, service based and coordinated form of industry development.

2. To accelerate building some high end service based manufacturing bases is an important means to improve China's service based manufacturing capability. Based on the industry bases of the high end manufacturing industry in areas with a developed manufacturing industry and their surrounding areas, we should lay stress on developing service-based manufacturing. Centering around the industry characteristics of the high end manufacturing industry, we should promote clustering of enterprises in the relevant industry chain, and extend the value chain of manufacturing industry.

That the transformation of enterprises that only produce material products, to comprehensive suppliers of service solutions with an extended value chain, or adopting the path of service based manufacturing, constitutes a huge challenge for traditional manufacturing enterprises in China, but this is a hurdle that we must cross over. We advocate servitization transformation of the manufacturing industry and following a path of service-based manufacturing, but we definitely do not advocate giving up the manufacturing industry or the so-called "de-manufacturing", but just advocate building an "updated" version of "Made in China".

Policy suggestions about implementation of the "win-win" strategy of Made in China and China Service

The core content of the "Made in China" and "China Service" strategy is mutual promotion and joint advance of the productive service industry and manufacturing industry, and its theory base is the converging of industries. In order to achieve "win-win" and "mutual promotion and joint development", we must make good efforts to solve the problem of "bad bonding" between the productive service industry and the manufacturing industry. The two industries should be organically bonded together, so as to break the traditional boundary between them, and a policy system should be innovated so as to encourage converging of industries, and to find a means to promote the manufacturing industry and the service industry, to develop the ecology commerce system.

1. Establish the converging development strategy with the "dual driving forces" of the manufacturing industry and the service industry. Considering the development trend of converging of the service industry and the manufacturing industry, we should innovate the traditional product definition and statistical classification, and should not focus too much on the difference between the service industry and the manufacturing industry, but should try to get a deep understanding about the increasingly strengthening similarity and complementariness of the service industry and the manufacturing industry, and establish the idea of converging development of the service industry and the manufacturing industry, while adhering to the strategic thought of "dual driving forces".

2. Clearly define the market entry rules for cross industries that are derived from converging of industries. Some cross industries that are created out of converging of industries, i.e. e-business, internet culture industry, and internet of things, etc, usually involve more than one supervision department. Therefore, it requires coordination of different supervision departments, so as to clearly define such aspects as market entry, and the supervision model. We should reduce administrative control, and reduce the threshold for entry as much as possible, avoid excess intervention from the government, and encourage natural growth of new businesses and new services that may be created out of converging of industries.

3. Develop taxation policies that are favorable for converging development of industries. Converging of industries involves different industries, and these industries may involve different taxation policies. Therefore, we need to, based on the development trend of converging of industries, actively develop and implement taxation policies and detailed rules about tax preference that suit such characteristics as high specialty, high degree of converging of industries and crossing of different industries, of the productive service industry, i.e. the taxation policies for e-business, and the taxation policies for internet-based payment.

4. Create a public environment that is favorable for converging of industries. Development of the newly emerging service industries created by converging of industries requires a good public environment. For instance, the intelligent transportation industry requires that the government provide open access to real time traffic data and geo information data; electronic medical records system requires coordination of various departments of health authorities and hospitals; intellectual properties service requires open access to intellectual property databases; value added telecommunication services requires control on the monopoly positions of large operators. So, we should develop relevant policies, and build a good public environment for converging of industries.

5. Promote clustering of industries and build some cluster areas of productive service industry or functional zones, so as to drive upgrade of the manufacturing industry by clustering of the service industry. In choosing the path of clustering development, we must respect the independent choice of enterprises, and governments’ will cannot replace market-based behaviors; a good play should be given to the government's guiding and directing role, and directing of planning and building of cluster areas of service industry should be strengthened; moreover, high importance should be attached to establishing of public information platforms, technology platforms, important telecommunication infrastructures, and establishing of a criteria and appraisal system for the clustering areas, etc.

6. Accelerate cultivation and introduction of inter-disciplinary talents. With the boundary between manufacturing and service getting blurred and disappearing, continuously emerging of new economies, new areas, new businesses and new models, the problem of inadaptability of current talents is getting increasingly more notable. Converging of industries brings new challenges to the traditional talent training model. We should gradually improve the talent training and stimulation mechanism, for example, innovate the campus-enterprise joint talent training model, and should make changes to the curricula and teaching materials of such talent training institutions as colleges and higher vocational colleges, raise the percentage of interdisciplinary courses, encourage students to choose and study courses of different disciplines and different majors, and encourage the training of application type, skill type and inter-disciplinary talents.

(The author is the Deputy Director and research fellow of the National Academy of Economic Strategy, CASS, and supervisor of master and PhD students of Shanghai Academy)