Executive Summary

China's industrial strategy is undergoing a fundamental transformation. Rather than retreating in the face of mounting domestic and international pressures, Beijing is doubling down. State intervention across the economy is becoming broader and more consequential for global markets than ever. This report, based on the Rhodium Group's May 2026 study "China's Next-Generation Industrial Policy," examines how China's evolving approach is reshaping global competition and what it means for European businesses and policymakers.

Two overarching conclusions emerge. First, China's industrial policy is becoming more systemic and pervasive, extending across all layers of production from upstream inputs and industrial equipment to downstream applications, services, and frontier technologies. Second, these domestic dynamics are ushering in a new phase of global impact, characterized by accelerating trade dominance, deepening foreign dependencies on Chinese supply chains, and the rapid global expansion of Chinese firms. Beijing also increasingly deploys policy tools to entrench its dominant position in global value chains and counter foreign diversification strategies.

Introduction

A decade after the launch of Made in China 2025 (MIC25), China's industrial policy is entering a new phase. The earlier strategy focused on a defined set of strategic emerging industries—new energy vehicles, information and communications equipment, aerospace, and others. Today, the scope has broadened dramatically. China's next-generation industrial policy touches almost every major sector in the economy and their underlying supply chains.

This expansion matters profoundly for Europe. As a major manufacturing and export-oriented economy, the European Union faces direct competitive pressure from Chinese firms that benefit from extensive state support. Moreover, European industries have become increasingly dependent on Chinese supply chains for critical inputs, from rare earths to advanced batteries and solar panels. Understanding the new dynamics of China's industrial policy is essential for formulating effective business strategies and policy responses.

Main Analysis

The Shift from Targeted to Pervasive Intervention

China's industrial policy has evolved from a sectoral approach to what Rhodium Group describes as an "industrial policy of everything." While MIC25 targeted ten key sectors, current frameworks extend support across mature industries, foundational supply chain nodes, and frontier technologies alike. This includes upstream raw materials, industrial equipment, core components, and downstream applications such as artificial intelligence and digital services.

The scope of state intervention has expanded through a variety of tools: direct subsidies, preferential loans, tax incentives, preferential procurement, and regulatory support. China has also established a sprawling network of government-guided funds that channel capital into strategic sectors. These measures are coordinated through a multi-level governance system spanning central ministries, provincial governments, and state-owned enterprises.

Refining the Policy Playbook Under Tighter Constraints

Beijing has learned from the MIC25 experience. Policymakers have refined implementation mechanisms to improve effectiveness and limit waste. This includes greater emphasis on competitive allocation of funds, more rigorous performance evaluation, and stronger coordination between different policy tools. At the same time, China faces tighter fiscal constraints and growing international scrutiny of its subsidy practices.

Despite these constraints, the overall trajectory is toward deeper and more systematic intervention. The government has identified key vulnerabilities in supply chain resilience—particularly in semiconductors, advanced materials, and biomedical equipment—and is directing substantial resources to close remaining technological gaps.

Accelerating Trade Dominance and Global Expansion

China's next-generation industrial policy is producing tangible results. Chinese exports have surged in sectors targeted by industrial policy, such as electric vehicles, lithium batteries, and solar equipment. The country now dominates global production capacity for many green technologies, accounting for over 80% of solar panel manufacturing and more than 70% of lithium-ion battery production.

At the same time, Chinese multinationals are expanding rapidly abroad, not only in manufacturing but also in services, infrastructure, and digital platforms. This overseas expansion often benefits from state financial support and is increasingly accompanied by efforts to lock in supply chain dependencies. For example, Chinese firms are establishing processing facilities and logistics hubs in key resource-rich regions, deepening foreign reliance on Chinese supply chains.

Business Impact

Competitive Pressure on European Industry

European manufacturers face intensifying competition in both domestic and third markets. Chinese firms, backed by state support, are increasingly able to offer lower prices and more favorable financing terms. This is particularly evident in the automotive sector, where Chinese electric vehicle manufacturers are gaining market share in Europe, and in machinery and equipment, where Chinese competitors are moving up the value chain.

Supply Chain Vulnerabilities

European companies that depend on Chinese inputs must reassess their risk exposure. Reliance on a single source for critical components—such as rare earth elements, advanced batteries, or certain semiconductors—creates strategic vulnerabilities. Supply chain disruptions, whether geopolitical or economic, could have severe consequences for European production and competitiveness.

Opportunities for Strategic Realignment

The shifting landscape also presents opportunities. European firms with strong intellectual property and advanced technology can differentiate themselves through innovation, quality, and sustainability. There is also potential for collaborative ventures in areas where European and Chinese interests align, such as climate change mitigation and digital infrastructure development—provided these partnerships are structured to protect European strategic interests.

European Perspective

The Need for a Coordinated EU Industrial Strategy

China's next-generation industrial policy underscores the urgency of a cohesive European response. The European Union must strengthen its own industrial policy framework to foster competitiveness in strategic sectors. This includes increased investment in research and innovation, support for scaling up clean technology manufacturing, and measures to reduce strategic dependencies.

Trade Defense and Investment Screening

Europe needs to enforce trade defense instruments more vigorously to counter unfair subsidies and dumping. The recently adopted anti-subsidy regulation for foreign subsidies is a step in the right direction. Additionally, tighter screening of foreign direct investment in critical sectors and technologies is essential to protect European assets from state-directed acquisitions.

Building Resilience Through Diversification

Diversifying supply chains away from single-source dependencies is a strategic imperative. European and national initiatives to support near-shoring, friend-shoring, and stockpiling of critical raw materials can help mitigate risk. Partnerships with like-minded countries in Asia, Africa, and Latin America can also reduce reliance on Chinese supply chains.

Future Outlook

The Next 3-5 Years

Over the medium term, China's industrial policy will continue to shape global markets. The country's advantage in scale and cost will persist, particularly in mature manufacturing sectors. However, Chinese firms still face significant challenges in cutting-edge technologies, where Europe and other advanced economies retain leadership.

Policy and Market Dynamics

The European policy response will be crucial. If the EU can accelerate its green and digital transitions while maintaining a strong industrial base, it can carve out competitive advantages in areas like advanced manufacturing, circular economy, and high-value services. But if Europe fails to act decisively, it risks losing industrial capacity in key sectors, eroding its economic sovereignty.

Strategic Choices Ahead

European leaders face strategic choices regarding engagement with China. A balanced approach—combining cooperation on global challenges like climate change with robust defense of economic interests—is likely the most effective path. This requires clear red lines, proactive industrial strategy, and deeper collaboration with other market economies.

Conclusion

China's next-generation industrial policy represents a structural shift in global competition. Its breadth and depth are unprecedented, and its consequences for European business and policy are far-reaching. Understanding these dynamics is not optional—it is essential for strategic planning. European companies and governments must respond with clear-eyed analysis, coordinated action, and a commitment to innovation and resilience. The window for effective response is finite; the cost of inaction is rising.

Key Takeaways

• China's industrial policy has expanded from targeted sectors to an economy-wide approach, affecting virtually all major industries and supply chains.
• This expansion is accelerating China's trade dominance and creating deep foreign dependencies on Chinese supply chains.
• European manufacturers face intensified competition and supply chain vulnerabilities that require strategic responses.
• The EU must strengthen its own industrial strategy, enforce trade defense measures, and diversify supply chains to safeguard competitiveness.
• A balanced engagement with China—combining cooperation with robust protection of European interests—is essential for long-term economic resilience.