China’s Hidden Tech Revolution (CONTINUED)
SOLAR SUPERPOWER
One of China’s major tech triumphs in recent years has been in renewable power equipment. When a commercial market emerged for solar technologies early in the twenty-first century, most innovations came from the United States, and it seemed logical that U.S. firms would drive the industry. In 2010, however, China’s State Council, the central government’s executive branch, designated solar power generation as a “strategic emerging industry,” triggering a cascade of government subsidies and business creation, much of it aimed at expanding manufacturing capacity. In the process, Chinese firms learned the basics of solar photovoltaics and began to improve on existing methods of producing them. Today, Chinese firms dominate almost every segment of the solar value chain—from processing polysilicon used in solar cells to assembling solar panels. They have also advanced the technology itself. Chinese solar panels are not only the cheapest on the market; they are the most efficient. The breathtaking decline in solar costs over the past decade has been driven by manufacturing innovations in China.
Over the last few years, Chinese firms have also staked out strong positions in the production of large-capacity batteries that power electric vehicles. As the world moves away from internal combustion engines, advanced battery technology has become the most critical component in car manufacturing. China has led the way: CATL, a Chinese company founded in 2011, is now the biggest battery manufacturer in the world, partnering with major car companies such as BMW, Tesla, and Volkswagen. In addition to having far greater manufacturing capacity than its rivals—which matters for lowering costs—CATL has taken the lead in developing new and more efficient chemical mixtures, for example in its sodium-ion batteries, which can be produced without using scarce lithium and cobalt minerals.
A battery plant in Changzhou, China, November 2019
Aly Song / Reuters
The Biden administration has recognized the risks of depending on China for the critical technologies it needs for the United States’ green transition. But various rounds of U.S. tariffs, as well as U.S. investigations into forced labor allegations in China’s polysilicon supply chain, have failed to dislodge Beijing from its dominant position in the solar industry. One such investigation by the U.S. Commerce Department, which threatened retroactive tariffs on solar imports of up to 250 percent, threw American solar buyers into turmoil, and in June 2022, President Joe Biden was forced to issue an executive order forestalling any tariffs for the next two years. Meanwhile, although Biden’s Inflation Reduction Act, passed in August 2022, aims to dramatically accelerate the transition to electric vehicles in the United States, the legislation is off to a halting start because it has made many current EVs on the market potentially ineligible for federal EV subsidies. For now, the United States and many of its Western allies will remain significantly dependent on China in their drive to decarbonize.
China has not achieved dominance in such industries as solar components, EV batteries, and electronics in a vacuum. This rapid progress connects directly to the country’s strengths in manufacturing and quality control. From the early 1990s to today, the Chinese workforce has moved from producing simple toys and textiles to conducting the extraordinarily complex operations needed to produce sophisticated electronics such as the iPhone. Along the way, Chinese firms have often made significant advances of their own: in China, tech innovations have come not from universities and research labs but through the learning process generated by mass production itself. At the heart of the country’s ascendancy in advanced technology, then, is its spectacular capacity for making things.
BETTER CHEFS, BETTER OMELETS
By any account, China’s technological progress has come at enormous cost. In the most generous reading, Beijing has established the country’s position through a fantastic waste of government resources. These giant subsidies have a distorting effect: a study published in December by the National Bureau of Economic Research in Cambridge, Massachusetts, found that Beijing has a poor record of picking winners and the recipients of Chinese government subsidies tend to have lower productivity growth. More often, according to many critics, Chinese advances have been spurred by extreme protectionism and widespread intellectual property theft.
Although there is some truth to all these claims, they are not sufficient to account for China’s rise. For every example of a Chinese industry that has benefited from protectionism—such as the Internet platform Baidu, which thrived behind the Great Firewall—there is another, such as China’s car industry, for which such measures have failed to produce world class companies. Forced technology transfers and intellectual property theft may well have helped the development of some industries, and it is right for the United States and its allies to push back on these practices. But they do not explain China’s emergence in such fields as batteries, hydrogen, and artificial intelligence.
Instead, the most important factor in China’s burgeoning tech industries is its manufacturing ecosystem. Over the past two decades, China has developed an unrivaled production capacity for tech-intensive industries, one that is characterized by a deep labor pool, dense clusters of suppliers, and extensive government support. This strength draws in part on China’s industrial history. In earlier decades, the government gave industry special importance: disastrously during Mao Zedong’s Great Leap Forward, and more effectively under Deng Xiaoping in his Four Modernizations. Beginning in the 1990s, central government initiatives were less important than market drivers, with China’s manufacturing capacity taking off in the wake of the country’s accession to the World Trade Organization in 2001.
Over the past decade, Xi has put China’s industrial obsession into overdrive. Two years after taking office, he launched Made in China 2025—a sweeping policy framework aimed at lifting China’s manufacturing base from labor-intensive industries to high-technology sectors. And in 2021, in its latest five-year plan, the central government announced a campaign to turn China into a “manufacturing superpower.” That is not an idle goal: over the past few decades, Beijing has directed vast sums of cheap credit and energy to advanced tech firms, even when they are years away from profitability.
China’s tech innovations have been made in factories, not labs.
The solar industry is a case in point. By showering subsidies on all comers, the government encouraged too many firms to enter the field. But it also provoked greater entrepreneurial risk-taking, creating a brutally competitive industry in which the strong muscled out the weak. As a result, Chinese firms today dominate a strategic industry that the rest of the world depends on. This approach—promoting manufacturing to the point of excess capacity—is in sharp contrast to the economic orthodoxy in much of the West, which stresses high-value activities such as R & D and product branding while downplaying the value of physical production as something that can be done cheaply offshore, often in Asia.
Beijing’s manufacturing-driven approach has become critical to its ability to challenge the West in advanced technology. To understand why, it is crucial to recognize the forces that go into successful innovations. Producing new technology can be likened to preparing an omelet: ingredients, instructions, and a well-equipped kitchen are helpful, but they will not in themselves guarantee a good result. Even people with the fanciest equipment and the most exquisite recipe may not be able to make a delicious omelet if they have never cooked before. An additional element is required: practical experience—skills that can only be learned by doing. These skills can be referred to as process knowledge, and they are part of what has helped China become a major tech innovator.
Although process knowledge is difficult to measure, it can be gauged by a workforce’s general level of experience and by the creation of clusters of varied industrial activity. China has notable strengths in both. The country’s most significant technological achievement over the past two decades has been its development of a vast and highly experienced skilled workforce, which can be adapted as needed for the most tech-intensive industries. For example, Apple still counts on China as the only country that can call up hundreds of thousands of highly trained workers on short notice, quickly access dense networks of component suppliers, and rely on government support to help solve the manifold problems that come with producing millions of iPhones each year.
Equally striking, however, is the way that China has used foreign firms to help build industrial clusters, or what economist Brad DeLong calls “communities of engineering practice.” American firms such as Caterpillar, General Electric, and Tesla have become large employers in China. And most of Apple’s products are produced by contract manufacturers such as Foxconn and Pegatron, which manage workers in China. Unlike Japan, which maintained a mostly closed market during its decades of postwar growth, China has significantly boosted its industrial rise by learning directly from foreign firms. Despite U.S. President Donald Trump’s trade war, Beijing refrained from significant retaliation against U.S. firms in China, partly because it recognizes the managerial expertise they bring and their transmission of manufacturing skills to Chinese workers.