Let’s begin with an extract from one of my favorite books to have re-read this year, “Country Driving: A Chinese Road Trip”, by Peter Hessler:
At the end of the 1990s, the government of Wuhu, a city in eastern China’s Anhui Province, decided to set up a car company of their own. They hired an engineer named Yin Tongyao, who had previously been a star at Volkswagen. Yin had distinguished himself during the transfer of the VW Fox, when he helped move manufacturing equipment from Westmoreland, Pennsylvania, to northeastern China.
At his new job in Wuhu, Yin immediately put this international experience to good use. He first went to England, where he bought equipment from an outdated Ford engine factory. Then he traveled to Spain, where he acquired manufacturing blueprints from a struggling Volkswagen subsidiary that formerly made a car called the Toledo. The Toledo shared the same platform—the basic frame and components—as the Jetta. In secret, Yin moved the British Ford engine factory to Wuhu, incorporated the Spanish blueprints, and set up an assembly line. Strict national regulations forbade new auto manufacturers from entering the market, so the officials in Wuhu simply called it an “automotive components” company. The factory produced its first engine in May of 1999. Seven months later it turned out a car. It had a Ford-designed engine, a body that came from Volkswagen via Spanish blueprints, and many authentic Jetta accessories. The folks in Wuhu had simply tracked down Chinese parts suppliers who were supposedly exclusive to Volkswagen, and then they worked out deals on the side. Volkswagen was furious, and so were people in the central government.
Hessler, Peter. Country Driving: A Chinese Road Trip (p. 65). Canongate Books. Kindle Edition.
By the way, the next sentence in the book is one of my favorite sentences from it: “Everybody knew the basic principle of the Reform years: It’s easier to ask for forgiveness than permission”. If you are an Indian student reading this, and wondering what the big deal is, look up negative lists.
But anyways, the reason I began with this excerpt is because I was reminded of it when I read this:
Then, in 2007, the industry got a significant boost when Wan Gang, an auto engineer who had worked for Audi in Germany for a decade, became China’s minister of science and technology. Wan had been a big fan of EVs and tested Tesla’s first EV model, the Roadster, in 2008, the year it was released. People now credit Wan with making the national decision to go all-in on electric vehicles. Since then, EV development has been consistently prioritized in China’s national economic planning.
https://www.technologyreview.com/2023/02/21/1068880/how-did-china-dominate-electric-cars-policy/
“Industrial policy” is an easy phrase to bandy about, but very few countries have managed to successfully execute industrial policy. Whatever your opinion about the Chinese economy (especially in the present instance), even the most pessimistic China observer will happily admit to the fact that China deserves to be put in the small group of countries that has managed to successfully execute industrial policy for some sectors. And as we have covered earlier, the EV sector is certainly one of them. Remember how Volkswagen was “furious”, back in 1999?
In July, Volkswagen paid $700 million for a 4.99 percent stake in XPeng, a money-losing Chinese electric car start-up, putting a valuation of $14 billion on XPeng. Nio received assistance from the Hefei local government, but XPeng has acknowledged assistance from the local government in Wuhan, also in central China. Volkswagen announced in April that it would build a $1.1 billion car development center in the central China city of Hefei. VW will hire 2,000 engineers to do work previously performed at its headquarters in Wolfsburg, Germany, for cars manufactured in China.
So what exactly did China do when it comes to industrial policy regarding automobiles?
- They played the long game:
“They realized … that they would never overtake the US, German, and Japanese legacy automakers on internal-combustion engine innovation,” says Tu. And research on hybrid vehicles, whose batteries in the early years served a secondary role relative to the gas engine, was already being led by countries like Japan, meaning China also couldn’t really compete there either. This pushed the Chinese government to break away from the established technology and invest in completely new territory: cars powered entirely by batteries. - They hired the right people.
- They used the ability to provide subsidies in myriad ways: subsidies for production, but also an implicit guarantee of purchase of EV’s, and nudge-nudge, wink-wink tweaking of “regulations” to make sure demand for EV’s remained in place.
- Industrial policy is not a synonym for import substitution. In fact, foreign competition can often provide a benchmark of sorts for domestic producers: this is the standard you have to match, if not beat. And that cuts both ways – international producers benefit from ferocious domestic competition too!
- China utilized it’s home ground advantages judiciously when it came to economic geography.
- And if you’re looking for a metric that exemplifies the success of this industrial policy, look no further:
“Chinese automakers like BYD and Chery, and the European and Singaporean shipping lines that transport cars for them, have placed almost all of the orders now pending worldwide for 170 car-carrying vessels. Before China’s auto export boom, only four a year were being ordered, said Daniel Nash, head of vehicle carriers at VesselsValue, a London shipping data firm.
The incentive to build more ships is clear. The cost per day for an automaker to hire a car-carrying ship has soared to $105,000, from $16,000 two years ago, Mr. Nash said. BYD is spending close to $100 million apiece for the construction of what will be the six largest car carriers ever built. Most of the vessels are scheduled for completion in the next three years.”
And that brings us to the inevitable question: can we (India, that is) replicate what the Chinese did for their automobile industry?
“I think the interesting question is, would a country like India or Brazil be able to replicate this?” Mazzocco asks. These countries don’t have a traditional auto industry as strong as China’s, and they also don’t have the Chinese government’s sophisticated background in handling massive industrial policies through a diverse set of policy tools, including credits, subsidies, land use agreements, tax breaks, and public procurements. But China’s experience suggests that EVs can be an opportunity for developing countries to leapfrog developed countries.
“It’s not that you can’t replicate it, but China has had decades of experience in leveraging these [systems],” says Mazzocco.
https://www.technologyreview.com/2023/02/21/1068880/how-did-china-dominate-electric-cars-policy/
“The Chinese government’s sophisticated background in handling massive industrial policies” is a phrase I do not disagree with, but one of the many reasons to read Hessler’s excellent book is so as to understand that this sophistication was earned. It didn’t fall out of the sky:
When Deng came to power, China’s auto industry faced the same basic challenge that characterized so much of the Reform period: How do people learn to do something completely new? From the government’s perspective, it was critical to learn from foreign automakers, but nobody wanted to relinquish profits and control of the industry to outsiders. As a result, Deng invited foreign manufacturers to set up shop under strict regulations. In order to produce cars in China, a foreign company had to find a state-owned partner, and outside ownership was limited to 50 percent.
Hessler, Peter. Country Driving: A Chinese Road Trip (p. 63). Canongate Books. Kindle Edition.
The American Motors Company jumped at the opportunity. In January of 1979, less than a week after President Jimmy Carter formally recognized the government of the People’s Republic, AMC was already sending a delegation to work out a deal. Over the next decade they learned to regret their pioneering status. While other companies such as Toyota stayed out of China, biding their time, AMC forged ahead and got nowhere. The partnership structure was awkward: two sets of management, each with its own culture, goals, and values. The AMC experience became so notorious that it eventually inspired a book called Beijing Jeep by the journalist Jim Mann. It’s a story of one misunderstanding after another; the chapter titles include “Getting Nowhere,” “A Very Long Haul,” and “An Outpouring of Grievances.” Even the index conveys a sort of taut frustration—it begins with “Absenteeism” and continues through “Xenophobia,” an alphabetized testimony to cultural differences of the 1980s.
So sure, we can have Chinese engineers sneer at how long it takes Indian workers to come up to speed, but hey, we all have to start somewhere.
And if you ask me, the best place to start is to internalize my favorite sentence from Country Driving: sometimes, it is easier to ask for forgiveness than ask for permission.
Nike says it more pithily, and therefore better, but the message remains the same in either case.
EconForEverybody 