China’s “industrial policy” appears to be founded on choosing specific industries that are believed to be key future industries; then backing lots of firms; then letting them fight out who will be the winner. It seems to be accepted from the beginning that there will be many losers who will go bankrupt. In contrast to some Western models of industrial policy, where the government chooses a “national champion” company, China prefers a more rugged approach.
The fundamental Chinese insight is that “talk is cheap” and that “the proof of the pudding is in the eating.” That is, you can’t tell beforehand who is smart enough and ruthless enough to win-out in a new undertaking. So, give everyone who asks a bunch of money, wait ten years, and see who is drinking cheap wine while living in a refrigerator box under a bridge.
In the nature of things, a few producers who can maintain very low costs while producing large quantities of goods crush the many other less competitive, less efficient firms. The losers go out of business and sell off their assets. What is left are a few survivors: highly-efficient and large-volume producers who have achieved economies of scale and are ready to compete on world markets.
In about 2009, the Chinese government decided to make a major commitment of resources to the solar power industry. They saw a market not only in China, but even more in the world export market. Today, the vast majority of both the machinery to manufacture solar panels and the solar panels themselves are “Made in China.”[1]
Then a series of small, dark clouds appeared on the horizon. For one thing, China’s strategy produced massive excess-capacity. That is, China builds far more things than there is market for those things. The struggle for survival intensifies. Firms cut prices to very low levels. Currently, those prices are well below production costs. Companies are now shouldering serious losses.[2] Yet they don’t all stop building capacity. Instead, they are trying to sell their surplus abroad at these very low prices.[3]
For another thing, local governments made generous grants because of a booming housing market. This pumped up their revenue because they sold long-term leases to developers. Now, excess-capacity has developed in housing. Unable to sell or rent what they have already constructed, developers have cut back on new projects. Local governments don’t have the money for subsidies anymore. Within China, the economic losses are a problem for whoever provided the financing for the companies. In China, this is a complicated network of local governments, government investment funds, and government-supported banks.[4]
For yet another thing, the United States and Europe are fighting back against cheap Chinese imports that threaten their own solar-panel industries.
How do you get down off a tiger?
[1] Keith Bradsher, “China Rules Solar Energy Worldwide, but Its Industry at Home Is in Trouble,” NYT, 6 August 2024.
[2] For example, wholesale prices for solar panels fell by almost 50 percent in 2023 and another 25 percent in the first half of 2024.
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