The right kind of mistake
By Benjamin A Shobert
Interested in beating the China at its own game? A lot of Americans certainly are; but if the collapse of solar manufacturer Solyndra is any indication, policy makers in Washington just got badly burned at an attempt to have the American government play a similar role as the Chinese government does with clean technology investments.
While the initial focus on the Solyndra deal will be specific to why this California company, which received some US$535 million in federal loan guarantees, went out of business and whether it received these loans because of its political connections to the George W Bush and Barack Obama administrations, the larger question about the role of the United States government as a financier of such businesses will have long-term political and policy repercussions.
Flowing from its 12th five-year plan for 2011-15, China has made a top-level commitment to clean technology. The Chinese government has made countless investments of the same size, scope and intent as the US government’s investment in Solyndra.
While the two governments share a desire to see green technology industries address mutual problems such as global warming and renewable energy, both also understand that showing leadership in this area will have larger geo-political implications.
The winning formula – whether state-led like China or private-industry led like the US – will gain in legitimacy and likely be deployed by emerging economies as they look for similar nascent technologies to propel their countries forward.
Beyond this strategic consideration, China has two more immediate objectives: first, to address the environmental damage its rapid industrialization has done to the country, and second, to make clean-technology one of the first high-technology industries where China has legitimate leadership claims against its Western counterparts.
The leadership in Beijing understands that its economy is close to a tipping point where, absent an ability to develop the domestic economy and use innovation to move up the value chain, they will be unable to continue growing. As a result of these two objectives, Beijing has aligned its politics and policies in such a way as to give every possible advantage to Chinese firms pursuing clean technologies.
The result of this alignment has been to create an incredibly hospitable environment for clean technology industries, whether started by Chinese or Western entrepreneurs.
Ken DeWoskin and Jim Mahoney of Deloitte’s CleanTech Group have written “For cleantech investors in China, the future is bright. There is an almost optimal alignment of government policy and commitment, consumer awareness, domestic and foreign capital, land, technical expertise, and entrepreneurs to create and sustain a very long run of successful investments.”
This sort of concentration of public policy, limited regulation, consumer demand, and large amounts of capital is all a result of Beijing’s unrelenting focus on the area of clean technology. It is a government-led, government-sponsored, and government-designed strategy.
Recognizing this sort of focus could spell trouble to American clean technology companies, the US-China Economic and Security Revision Commission (USCC) in 2010 released to congress their report which cautioned that, in the area of clean technology, “Energy analysts generally agree that Chinese policies on renewable energy research, development, and production are comprehensive and heavily funded by the government over the long term. This is in contrast to US policies that are too often uncoordinated among levels of government and subject to the uncertainty of the annual appropriations process on the federal and state levels.”
The implication is clear: because China’s internal political process assumes there is a strong role for the state to play, it is able to move faster and more forcefully than the American system, which is inherently suspicious of government’s involvement in the area of technology development.
The combination of American electoral politics, which has grown militantly defiant over the idea that additional government in any sector of the economy is a good thing, and the perceived failure of American public policy – seen most recently with the collapse of Solyndra – make for a profound challenge to entrepreneurs and policy makers in the United States whose focus is clean technology.
Unfortunately, the clean technology industry in the United States is already far along in its migration towards basing operations in China instead of domestically. Beyond the previously mentioned advantages, three additional factors are playing into this decision.
First, the Chinese government’s massive emphasis on this technology area has created some of the world’s best-educated scientists and engineers in the field of clean technology who hail from China’s universities.
Second, the streamlined regulatory environment in China means new clean technology ventures can get to scale faster than they otherwise could in more heavily regulated Western markets. As was seen during protests by Chinese residents of Haining this year over potential pollution related to production of solar panels by Jinko Solar Holding, these streamlined regulations are not always well received and may, in some cases, prove to be politically untenable even in China. Regardless, the overall emphasis on green technology industries in China means the government looks to stay out of the way, acting as a regulatory body only where absolutely needed.
Third, American companies looking into China are being greeted with much more, and much less expensive, capital than what they have been able to find in North America. A more educated and less expensive work force, minimal government interference, and access to more (and less expensive) money are a combination few entrepreneurs are going to be willing to pass up.
But as the Solyndra deal should illustrate, even in a reasonably transparent system like that of the United States, it is possible – and perhaps even likely – that much of the investments made by government into new technologies will prove to be useless.
The Department of Energy estimates that overall it will suffer an approximate 10% failure rate of loans it has extended to new clean technology businesses. No one really knows what the failure rate of loans extended by the Chinese government to clean technology businesses has been, and given the overall opaque nature of China’s state-sponsored banking system and its own legacy of non-performing loans, this percentage may never be known.
In China, at least as long as its economy hums along and it has the liquidity at its disposal to make these levels of investments, this sort of loss would not be a surprise, nor cause for a policy adjustment. In many ways, this type of failure is part of the process of moving forward; conversely, in America, this sort of failure is cause for congressional investigations, political recriminations, and the inevitable policy reversal away from government sponsored investments in new technologies.
The cynical mood of Americans will likely result not in refining how we make public investments in new technologies, but throwing out altogether the very idea that government has any contribution to make in new technologies whatsoever. Given the challenges American workers, consumers and policy makers face addressing China’s rise, this sort of response would be a terrible mistake.
The delicate balancing act to strike – and one that China may not be striking either – is between the right role for government versus no role for government. The prevailing attitude in the United States is that government has no role acting as an investor or providing incentives for new technologies; the prevailing attitude in China is that government has both the opportunity as well as the responsibility to act in just this way.
Where Americans believe their system elevates the market as the answer, the Chinese largely agree, adding only that the market speaks for technologies as they approach commercial readiness, and not before. As such, the Chinese believe the right policy approach is for government to get behind science before it is applied technology, and behind technology before it is commercially viable.
Will this create problems in China related to bad investments, non-performing loans, and technology dead-ends? Yes, but they expect that and have the political mindset to view this as a necessary cost.
Solyndra’s collapse may well be the first major scandal of the Obama administration. But as it becomes clearer whether government officials green-lit a loan package they should not have purely for political ends, the question should also get asked of whether Solyndra’s failure proves government has no role to play in these matters, or whether this was simply a bad investment that, while poorly evaluated, was part of the cost of developing an economic and investment strategy for how the United States will compete with China.
Before Americans drive government out of this part of our public economic policy, it is important that we have another answer, one that takes into account the enormous focus and resource base our primary competitor across the Pacific is putting behind these same questions, policies, and technologies.
Benjamin A Shobert is the managing director of Teleos Inc (www.teleos-inc.com), a consulting firm dedicated to helping Asian businesses bring innovative technologies into the North American market.
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