Industrial Policy in green technology vehicles

In the latest example of classic industrial policy, the Chinese government has decided to invest billions of dollars over the next few years to develop electric and hybrid vehicles in a grand plan to become a world leader in green technology. This latest announcement, which follows massive investments and considerable success with conventional and renewable power generation equipments, telecommunication equipments, urban metro-rail systems, and light-rails, is only the latest example of benign government guided-industrial development, an approach which is making a comeback with some vengeance, thanks singularly to the mandarins in Beijing.



In an effort to become a world leader in new energy vehicles, the state-owned Assets Supervision and Administration Commission (SASAC) - which operates under China’s cabinet and oversees about 125 of China’s biggest state-owned companies - has formed an alliance of sixteen the largest state-owned companies in the related sectors. They include the country's top three oil majors, top two power grid operators, several military and aviation companies, and two major automakers - China FAW Group Corp and Dongfeng Auto Corp.

The stated objective is to accelerate research and development of electric vehicles, fuel cells, and charging systems in China, create required industry inter-operability standards for vehicles in the sector, and build internationally competitive Chinese electric car brands. The government proposes to invest 100 billion yuan ($14.7 billion) on electric vehicles by 2012, making it one of the world’s most ambitious attempts (including in any private company) to develop more energy-efficient vehicles.

Though details of the plan were not released (and will probably never be), it is proposed to get atleast 500,000 energy-efficient electric and hybrid vehicles into the market over the next three years, and such vehicles are expected to account for 5% of passenger car sales in the the world’s biggest and fastest growing auto market.

The Times correctly describes this as another example of how China seeks to marshal massive amounts of resources and tackle new industries and create markets within a highly ambitious time-frame.

This follows a national campaign launched by the central government in early 2008 aimed at getting 1,000 electric vehicles on the roads in at least 10 cities each year to encourage people to buy electric cars. Underlying its commitment to combating pollution and reducing carbon emissions, China has already pledged to reduce its carbon intensity by 40-45% in 2020 from the 2005 level, and also set a target of raising the use of non-fossil energy to 15% of total energy consumption.

While India too has many similar policies to promote non-conventional energy, the difference is that China does it, certainly on a commercially meaningful scale and possibly without the overbearing bureaucracy that crowds out serious interested parties (and crowds-in those seeking to merely skim-off the subsidies). In fact, like the latest example of green technology vehicles, such policies are aimed explicitly at full-fledged market creation instead of being mere pilots for learning. Needless to say, the allocations for such industrial policy interventions in China are massive compared to the minuscule cosmetic allocations in India. Notice also the ambitious time-lines, just two years for the latest one, to incubate and commercially develop technologies.

It is inevitable with such policies that a not insignificant share of investments will get wasted, inefficiently mis-allocated, and/or even pilfered. By selecting a few big makers over the others, the government is clearly playing favorites among its own corporations, leave alone discriminating against private manufacturers (with all the attendant inefficiencies and incentive distortions). Further, contracts will get awarded to cronies and favorites.

But the global market ambitions, arising out of the desire (and explicit objective) to compete and capture global markets (like the earlier cases with power and telecom equipments, rail rolling stock etc), ensures that there is a considerable premium placed on the quality of these products. The scale at which such policy interventions are made effectively ensures that the producers have the economies of scale to both adapt and develop technologies, gain adequate market experience, and develop the expertise required to compete in the global markets.