At the end of March, China’s State Council (in essence the administration’s cabinet) promulgated a new vision for Chinese industry -- “Made in China 2025.” It hits the notes that one would expect: greener and more high-tech, value-added manufacturing is the centerpiece.
Notably, as China continues to move beyond its heavy industry-led growth model, the new program for industry is focused especially on the internet of things and its integration into manufacturing and the supply chain.
Sectors singled out for special attention in the plan include information technology, automation, green vehicles, and biotechnology. The Premier noted: “China’s traditional manufacturing industry must improve its quality, become greener and more intelligent, as well as adapting to the trend of being increasingly integrated with the internet.” To us, that was a call to integrate the factory with the internet of things (IoT), a development we have discussed several times in these pages.
China’s move parallels other high-level strategies elsewhere along the same lines, such as Germany’s 2013 “Industrie 4.0,” which explicitly invokes the theme of the internet as a “fourth industrial revolution” (after steam, electricity, and assembly-line production). The U.S. government has jumped on board with its own Supply Chain Innovation Initiative, aiming to support the same developments -- automation, advanced sensors, secure supply chain management, process optimization through big data capture and analytics, cloud computing, etc.
The head of global business development for NXP Semiconductors NV (NASDAQ:NXPI) recently commented that industry is “in the early stages” of an integration of the IoT into manufacturing. NXPI’s near-field communication and security chips are in demand for the development of smart factories, and the company is forging ties with Chinese manufacturers such as Huawei Technology Co Ltd (SZ:002502).
For now, investors can seek exposure to companies like Huawei only through the limited number of ETFs holding Shanghai and Shenzhen stocks -- and since these tech companies are the most richly valued of any mainland stocks, they will certainly be vulnerable to volatility and corrections, even as the mainland bull market continues. ETFs holding Shenzhen tech stocks include the Deutsche X-trackers Harvest CSI 500 China-A Shares Small Cap ETF (NYSE: ASHS) and the Market Vectors China AMC SME-ChiNext ETF (NYSE: CNXT).
We continue especially to watch large U.S. and European companies for exposure to the theme of smart manufacturing and the IoT. At this juncture, we would wait for a correction in the U.S. and European markets to initiate a position.
Investment implications: We view companies such as Siemens AG NA (XETRA:SIEGn), ABB Ltd (SIX:ABBN), Honeywell International Inc (NYSE:HON), Cisco Systems Inc (NASDAQ:CSCO), and Rockwell Automation Inc (NYSE:ROK) favorably for this theme. An interesting smaller company in the “smart factory” space is Cognex Corporation (NASDAQ:CGNX), which focuses on machine vision systems in manufacturing. Speculative names include companies like Splunk Inc (NASDAQ:SPLK), which focuses on generating actionable information from machine data. While we believe these technologies will be integral to the transformation of manufacturing underway in the U.S., Europe, Japan, and China, exposure to smaller, richly valued companies comes with a commensurate level of risk. We do not currently own any of these companies except Cisco Systems Inc (NASDAQ:CSCO).