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China aims for its own Silicon Valley

Like the 'Asian tigers' before it, China is pushing into higher-end manufacturing and innovation.

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Stimulus measures aim to balance spurring the economy with not sacrificing hi-tech upgrading. The elimination last month of the value-added tax for capital equipment is a case in point, says Mr. Kroeber.

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Greener autos

Another example is an auto-industry aid package that halves sales tax on certain cars and subsidizes owners of high-emission vehicles who exchange them for more fuel-efficient, cleaner ones. It also includes a 10 billion yuan ($1.5 billion) fund to promote new technology, including the mass production of electric vehicles.

The Chinese government has deep pockets to help push manufacturing up the value chain, says the Commerce Ministry’s Mr. Mei – tapping an array of perks from subsidized infrastructure, tax breaks, investment, and generous government contracts.

Favored companies, like Huawei Technologies, China’s leading telecommunications equipmentmaker, got free or low-cost land and utilities, says Kroeber.

It also enjoyed liberal policies on resident permits for workers who had the right skills.

From Beijing’s perspective, the returns are worth the investment. The auto stimulus will benefit companies like BYD (“Build Your Dream”), a battery manufacturer-turned-carmaker that has advanced China’s green-car prospects and won it prestige as a globally recognized brand.

Already the world’s No. 2 batterymaker, it’s now the first company to have mass-produced hybrid, plug-in vehicles; it has also made an electric car.

“BYD is a key player in the world market,” says Duan Chengwu, an auto industry analyst with Global Insight, based in Shanghai.

The company’s international profile soared even higher last September when Warren Buffett bought a 10 percent stake in the company. At the Detroit Auto Show in January, BYD models got space on the main show floor – until then, Chinese carmakers had always been relegated to a basement or foyer.

Needed: workforce upgrade

In addition to putting massive resources into developing the infrastructure of high-tech upgrades, China needs to upgrade its workforce, says Liu Kaiming, head of the Shenzhen-based Institute for Contemporary Observation.

A lavish science park in Dongguan, a nearby factory city, illustrates the mismatch. The expansive campus – complete with apartments, hospital, school, mall, KFC, and a Hyatt hotel, all built around a natural lake and dotted with saplings and flower beds – is meant to impress.

But actually upgrading the “software” of manufacturing takes time. While some A-list companies like Huawei are setting up shop, many of the buildings remain uninhabited.

There are many “empty cages” these days, especially due to the economic crisis, says Mr. Liu. “But they are still waiting for the birds to come.”