The China Secret:Innovation, Energy, and Social Change in the World’s Most Dynamic Economy Dean Doug Guthrie GW School of Business April 26, 2011
Evergreen Solar plans to close its main American factory, in Devens, Mass., seen here in September, and lay off 800 workers. By KEITH BRADSHERPublished: January 14, 2011
Innovation and Change: What Can We Learn from ChinaTop 10 of GDP (2010)1. US $14.6 trillion2. China $5.9 trillion3. Japan $5.5 trillion4. Germany $3.3 trillion5. U.K. $1.8 trillion6. France $1.5 trillion7. Italy8. Brazil9. Canada10. SpainChina is second only to the US when adjusting for Purchasing Power Parity*(US=12.4 trillion; China=8.8 trillion).*PPP is a statistic that adjusts for cost of living differences by replacing exchange rates with relativemeasures of local purchasing power (i.e., the cost of purchasing one bowl of rice, or one bag or grain orone general unit, with local currency in a given country).
Yet, China is winning the race for innovation in cleantech… “China’s growth in renewables is astounding… My conclusion is that we are barely in the race today. My conclusion is China is winning.” —John Doerr, Kleiner Perkins
What Drives Sustainability Innovation? President Jimmy Carter, center, is surrounded by reporters and photographers as he inspected new White House solar hot water heating system located on the roof of the West Wing of the mansion, over the Cabinet Room, on June 20, 1979. (Note: the panels were removed in 1986.)
David Gray/Reuters“[China’s]… investment last year of $34.6 billion in the renewable energy industry exceeded that ofany other country in the world. Even so, officials acknowledge that its green energy push will take along time to bear fruit. Li Junfeng, deputy director of the Energy Research Institute of the NationalDevelopment and Reform Commission, the top Chinese governmental planning body, has said that newenergy has become ‘the most dynamic sector in the country.’”—The New York Times
Yingli Green Energy Holding Co., Ltd (NYSE: YGE)
Shenzhen, China: DuPont and Everbright Complete 1.3 MW Chinese Thin Film System DuPont, through its wholly- owned subsidiary, DuPontApollo and China EverbrightInternational have completed an on-grid 1.3 megawatt rooftop photovoltaic installation at the DuPont Apollo production facility in Guangming New District, Shenzhen. The project is considered the largest single structure thin film photovoltaic rooftop installation in China to date.
Evergreen Solar Among the incentives the state offered Evergreen Solar were a $15 million property tax break, a $7.5 million in state tax break, $2.7 million through a subsidized lease and $21 million in cash grants. Not to mention that the state spent $13 million in construction on roads and other infrastructure to support the plant.When Lehman Brothers wentbankrupt in 2008, Evergreen lostone-seventh of its outstanding sharesin a complex transaction involvingconvertible notes. They wereineligible for TARP funds… Butmany other Western solar powercompanies are also running intotrouble, as competition from Chinacoincides with uncertainty overprocurement prices; the Chinesegovernment often guaranteesprocurement prices; the US does not.
Chicago’s South Side to Get Biggest Urban Solar Power Plant in US by Brian Merchant, April 27, 2009 Business and Politics“Where once there was an abandoned industrial site, soon there shall be the biggest urban solar power plant in the USA.It shakes down like this: $60 million + 33,000 solar panels + 39 acres in the South Side of Chicago + Obama’s Stimulus =one solid, 10 megawatt producin’ solar power plant. And it should be up and running by the end of this year. That’s right,the stimulus is keeping the clean energy projects flowing—this time completely transforming unused acres in Chicago’sinner city into a much needed renewable energy source. That stimulus sure can work wonders—emphasize can. Thisproposed plant by solar company Exelon hasn’t been approved yet, it it looks about as promising as any solar projectinspired by the incipient renewable energy revolution…”
Breaking Down the Reform ProcessThe paradox of reform in China: if China’s institutions areso weak, how do we explain China’s dramatic success?Further, if a rapid transition to private property is thecornerstone of building a successful market, how should weunderstand China’s situation?Key institutional features of the reforms:1. Gradualism (experimentation)2. Decentralization (competition)3. Openness to foreign investment (interdependence)4. Gradual emergence of a private economy5. The “quiet” revolution of institutions
2a. Decentralization (leads to competition)• Decentralization is also one of the key features of economic reform in China.• To begin with, China was much more decentralized than the Soviet Union was. This meant that local control could be much more easily handed over to local officials.• Budget constraints were hardened for municipalities and townships. Local officials have incentives aligned (“Local Governments as Industrial Firms”).• Local competition emerges.
2b. Governmental Strategizing: The Case of SASAC True owner, (100% since 2003) 70% of shares 50% acquisition 20% 90% overall (purchase made direct (since 1999) August 25, 2008) shares (since 2003) 9-10% stake in shares (since 1999)COMPANY NEWS: BERKSHIRE HATHAWAY INCREASES STAKE IN PETROCHINA (Aug. 30, 2008)
2c. Cross Industry Strategizing and Coordination• Enticing foreign investment – Cash and the export market – Management and technology – Political interdependence
3. Foreign Investment:Attracting Investors, Building Partnerships
Interestingly, we have built industries in this way before; in fact, we led the world in it…
Institutional Innovation in China• In the US, we should drop the silly allegiance to the beauty of a free market; we don’t have the political will to live by it, and our failure to do so creates distorted incentives• We can learn a tremendous amount about innovation from China’s state-led investment: – China is a place of radical institutional change: It is radical both because of the objective material changes, but also because of the institutional innovation that is occurring there – Cross industry strategizing and state-led subsidization of industry is a crucial part of industrial development – This is not just a story of cheap labor; it is truly a story of state-led innovation