State-Led Development and Auto Battery Technology

An article in Business Week asks whether the U.S. government should get involved in helping U.S. automakers to develop battery technology. They raise this question because the U.S. suddenly finds itself playing catch-up in development of a new technology -- a position to which the U.S. is not accustomed.

Should Uncle Sam provide billions in loans and grants to a promising but unproven business? Or should the government wait for the market to sort things out before it backs a U.S. company? The risk is that by then another major industry could go the way of memory chips, digital displays, the first solar panels, and the original lithium-ion batteries used in notebook PCs and cell phones.

American scientists, funded by federal dollars, were at the forefront of each of those. Yet the industries—and the high-paying manufacturing jobs that go with them—quickly ended up in Asia. U.S. labor costs and taxes drove many operations abroad, but often industries fled simply because Asian governments, banks, and companies were more willing than Americans to risk big capital investments.

As the article points out, "the Asians" (I think they mean "East Asians") already have a couple of advantages in auto batteries: 1) a jump on lithium-ion technology on which the new generation of auto batteries are being built and 2) deep pockets from which to finance its further development.

What I find most interesting about this situation is that U.S. automakers are now struggling with some of the same questions that China's state-owned automakers struggled with 20 years ago as they developed their auto industry.

General Motors and Ford both assert that a domestic lithium-ion industry is vital if the U.S. is to be a major player in green cars. Otherwise, Detroit's fate would be in the hands of suppliers half a world away.

According to Eric Thun's Changing Lanes in China, back in the 1980s and early '90s, as the Chinese attempted to develop an auto industry, several development models surfaced:

• A local developmental state in which Shanghai's government coordinated the development of a local ("local" meaning Shanghai, not China) network of supply firms.
• A local laissez-faire state as typified by Beijing and Guangzhou's hands-off approaches that allowed assembly firms to take advantage of competition among supply firms.
• A centrally-controlled SOE model in which the Central Government and local municipalities did not coordinate development efforts.

Thun's analysis demonstrates that Shanghai's developmental state model produced the best outcomes and was most suitable for the initial stage of auto industry development.

Beijing and Guangzhou's willingness to allow supply firms to duke it out when assembly plants did not yet have adequate scale to support a supply network resulted in their assembly firms buying parts from wherever they could get them, and that included both Shanghai's parts suppliers as well as foreign JV partners. This defeated the whole purpose of trying to develop a "local" auto industry.

The centrally-owned SOE firms located in Changchun (FAW) and Wuhan (Dongfeng) had similar difficulties in that their local governments, who were motivated to spur their development, were unable to coordinate with the Central Government. The Central Government was far more concerned about development of their firms than of the local regions in which the assembly plants were located.

Without delving too much further into Thun's findings (hang on, I do have a point!) it is important to point out that these models were not selected by city officials from a menu of options. To a large degree, they were path dependent; each model could have been predicted based on local bureaucratic traditions.

My point here (whew!) is that, when a brand new industry was under development, and when it was taking place in a world in which other countries had already begun to blaze a path for that industry, Shanghai's coordinated model seemed to work best. It provided Shanghai with an auto industry that was increasingly self-reliant, and that produced the highest-quality cars in China (at the time).

Given China's experience with development of a new industry, do current conditions call for some sort of state-coordinated development in order for the U.S. electric auto industry not to be prematurely lost to those of other countries?

Does the fact that German, Japanese, Korean and Chinese firms have what seems to be a head-start in development of battery technology justify the intervention of the U.S. government?

Well, looking only at the example of China, we see that China's government is currently pouring a tremendous amount of funds into development of "new energy" autos. However, the only Chinese company currently marketing a plug-in hybrid is a private company, BYD, whose most prominent investor is none other than Warren Buffet.

What do you think? If Shanghai's coordinated model was most successful in giving its local auto industry an advantage, why wouldn't a similar model apply to the development of electric auto technology?