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China Eyes Competitive Edge in Renewable Energy

Government’s Funding Proposals for ‘Strategic Emerging Industries’ Show Major Push for Green Technologies

SOURCE: AP/Alexander F. Yuan

A worker transports a cart of cements in front of a building covered in a wall of solar panels at a factory of Yingli Green Energy Holding Co. in Baoding, in northern China's Hebei province, June 20, 2011.

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China’s State Council (the national cabinet) is currently reviewing a set of massive funding proposals for seven key “strategic emerging industries”: environmentally friendly and energy-efficient technologies, next-generation IT, biotechnology, high-end equipment manufacturing, alternative energy, alternative materials, and alternative-energy vehicles. The Chinese identify these industries as the most optimum market environments for their indigenous innovation program, and the State Council is expected to approve and release the official package next month, including an overall 2011-2015 development plan for strategic emerging industries and individual funding and policy support plans for each industry.[1]

This package is designed to address China’s competitive disadvantages in technology innovation particularly with the United States. U.S. policymakers should pay close attention because if the Chinese succeed this will be a game-changer especially in the energy sector.

This new plan aims to address the fact that in many current market sectors the technology gap between Chinese firms and the current market leaders is so large that it’s almost impossible for the Chinese to compete. Either they manage to leap frog ahead on the technology side (often through assimilation and “re-innovation” rather than real bottom-up innovation) but then falter at the operational level (as in high-speed rail) or they simply cannot catch up at all.

The information and communication technology, or ICT, market is one example. Despite China’s impressive ICT market growth the United States still has a solid lead in ICT expenditures and installed capacity. That forces China to play technology catch-up, and those efforts have resulted in one embarrassment after another.

In mobile telecom, China’s home-grown 3G standard was so problematic that Chinese telecom operators passed the standard around like a hot potato and tried every political trick in the book to avoid being stuck with it. China’s homegrown internet filtering software was another embarrassment. It contained so many security vulnerabilities and intellectual property rights liabilities (from pirated codes) that most PC manufacturers refused to install it on their machines. China’s homegrown computer chip initially appeared to be a major success, but it turned into a major scandal when whistle-blowers revealed that it was actually a Motorola chip with the original brand name scratched off.

These innovation stumbles give foreign investors and foreign governments the impression that Chinese technology is still many years away from posing a serious market challenge. In the United States in particular, many assume that as long as we can force the Chinese to give us a level playing field—as long as we can keep them from stealing our own core technology and from blocking our access to their domestic market—our firms will dominate not only globally but also within China.

But it’s important to recognize that the competitive dynamics we are used to seeing in these current technology markets like ICT only apply when the United States already has a strong market lead. Now the Chinese have figured that out, and they are changing their strategy.

Instead of trying to beat the United States at its own game they are looking forward to the next round and shifting focus to direct their technology efforts toward the critical emerging market sectors where the United States is not yet dominant—the seven key “strategic emerging industries” mentioned above.

Among the seven, green energy is a recurring theme, not only because the Chinese are facing some major energy bottlenecks at home but also because that’s where the United States is really lagging behind.

Chinese leaders see green energy as a critical strategic opportunity. According to Chinese Vice Premier Li Keqiang, it is a major focus in China’s 2011-2015 development plan (the 12th five-year plan) because:[2]

Green economy, low carbon technology, etc. are emerging, and the global competition to seize the high ground in the future development of these sectors is getting more and more fierce every day. In some of these sectors, the gap between the emerging economies and the developed nations is relatively small. In that environment, all we need to do is to take advantage of these [market] trends; if we respond appropriately we can seize this opportunity, gain the upper hand, and push forward a new breakthrough in development. Otherwise, if we miss out on our opportunity, it will be harder to overtake [the developed countries], and we may lose the initiative and even fall behind.

The central government’s latest economic development policies all echo this assessment. Recent State Council legislation calls for an economywide focus on green energy and other strategic emerging industries and states that the relatively narrow gap in these sectors gives China a “historic opportunity” to finally take the top spot as the next global technology leader.[3]

China’s green push is already reshaping global energy markets. China surpassed the United States as the top country in the Ernst and Young indices for renewable energy investment attractiveness in August 2010—a position the United States had held since 2006. The Chinese brought in $48.9 billion in renewable energy investments in 2010, almost double the U.S. total. China also leads in installed renewable energy capacity (including wind, solar, small-hydro, biomass, waste-to-energy, geothermal, and marine) with 103 gigawatts in 2010—again, almost double the U.S. total.

At least some of China’s renewable capacity is overexpansion. Some wind assets, for example, are not yet connected to the grid. Chinese leaders, however, are already adjusting their policy programs to balance out those investment incentives, and China’s State Grid Corporation is already adding new grid connections to fill the gap.

U.S. enterprises are also making great strides in renewable energy, and the United States is actually leading in corporate R&D and venture capital investments. But whereas the Chinese use feed-in tariffs, renewable power generation targets, preferential tax rates, and other policies to create a stable and predictable investment environment across the entire renewable energy value chain, U.S. government policy support is still geared toward fossil fuels rather than renewables. Due to that imbalance, renewable energy deployment is seen as much riskier in the U.S. market, and financing is much more expensive and much harder to get. As a result, for many U.S. firms the only viable option is to license or sell their technologies to the Chinese.

For the moment, strong Chinese demand offers a great opportunity for U.S. renewable energy innovators. China’s end goal, however, is to develop their own core technology so that they can increase their profit margins and keep IPR revenues in-country. That is what China’s indigenous innovation and strategic emerging industry policies are all about: shifting the Chinese economy from low-cost manufacturing to higher-value-added technology innovation.

If they succeed on renewable energy it could shut U.S. firms out of the China market—either via protectionist industrial policy, more competitive Chinese technology, or a combination of the two. And if the United States doesn’t develop its own domestic renewables market, U.S. firms may find themselves shut out of this sector completely.

We must not let current U.S. dominance in ICT and other of-the-moment technology markets lull us into thinking that the Chinese cannot achieve these goals. Global market competitiveness is dynamic—staying on top requires continuous investing and reinvesting in the foundations of innovation and productivity. On renewable energy, the Chinese are currently doing a much better job than the United States at getting those foundations right, and that is turning renewable energy into a new and very different playing field. Instead of a U.S. leading edge in overall investment and installed capacity, the Chinese have already surpassed us, and for the first time it is actually the United States who risks being left behind.

What the Chinese have figured out is that they do not have to beat us at everything. If they marshal their resources and surge ahead in green energy and other strategic emerging industries, that success will give China a big overall competitiveness boost. The energy sector is particularly important because energy plays a critical role in overall economic growth and national security. That’s why the United States has benefitted so much from our dominant market position in fossil fuels. The Chinese are betting that renewables will be the next critical energy market, and they are positioning themselves accordingly.

As China well knows, all they really need is a good leading edge. Then the United States will be stuck in the same position that has undermined the Chinese for so long in ICT: trying desperately to close a market gap that gets bigger and bigger every year.

The Chinese understand that they cannot beat us at our own game. But if the United States does not adjust to these new market realities we may soon find ourselves on the losing end of theirs.

Melanie Hart is Policy Analyst on China Energy and Climate Policy at the Center for American Progress.

Endnotes

Note: All translations are the author’s own.

[1]. Fang, Jiaxi, “Qi da zhan lue xin xing chan ye shi er wu gui hua 9 yue ka shi gong bu” (Releases to Begin in September on the 12th Five Year Plan for the Seven Big Strategic Emerging Industries), Jingji Cankao Bao (Economic Information), August 4, 2011, available at: http://news.xinhuanet.com/fortune/2011-08/04/c_121809998.htm (last accessed August 23, 2011).

[2]. “Li Keqiang: shen ke li jie ‘jian yi’ zhu ti zhi xian cu jin jing ji she hui quan mian xie tiao ke chi xu fa zhan” (Li Keqiang: Deepen Understanding of the Main Themes and Threads in ‘The Proposal’ – Promote Comprehensive, Coordinated and Sustainable Social Economic Development), Xinhua, November 14, 2010, available at: http://news.xinhuanet.com/2010-11/14/c_12773751.htm (last accessed August 15, 2011).

[3]. “Guo wu yuan guan yu jia kuai pei yu he fa zhan zhan lue xing xin xing chan ye de jue ding” (State Council Decision to Accelerate the Development of the Strategic Emerging Industries), State Council General Office, October 18, 2010, available at: http://www.gov.cn/zwgk/2010-10/18/content_1724848.htm (last accessed August 15, 2011).

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