Arthur Kroeber: evaluation

Transcript context

…If you go back to the early 1990s, China recognized that pretty much every other country that had gotten rich had done so in large part by building up an automotive industry that then served as the mechanism for creating innovations in other sectors. Look at the US, Germany, Japan, even Korea which is very successful. They said, “We have to have a big auto industry. This is one of the key industries that we have to support.” So starting in the early 1990s, they had this strategy of bringing in foreign companies and making them do joint ventures on a 50/50 basis with Chinese auto companies. The theory was that eventually the Chinese companies would learn. You would be able to develop your own national champion auto companies and kick the foreigners out. Basically this failed. It failed massively. Over the next 25 years, foreign companies came in: General Motors, VW, Toyota, Honda and so forth. They did very, very well. The joint venture partners in China basically just sat around and clipped coupons from the dividends that these joint ventures were producing. All of the technological inputs continuously came from the foreign partners, all of the design ideas. The local partners were never able to succeed. In volume terms, you had a lot of smaller scale, locally sponsored vehicle companies in China building low-end vehicles. So a lot of the cars that wound up getting made in China were made by local firms. But if you look at the share of profits and total value in the system, it was dominated by these joint ventures, which were in turn dominated by the foreign partners. So China, circa 2010-2015, had been doing this for 25 years. They were basically no closer to having globally competitive conventional car makers than they had been 25 years before. So in the late 2000s, 2005-2010, they started thinking, "Well, this and other related industrial policies are not working very well. We are not generating the national champions that we thought would be. So what do we do about this?" Their answer was to leapfrog: “Let's try and figure out what is the next stage of technological development that people really aren't working on yet. Let's work on that and then maybe we can get in on the ground floor.” What they came up with in large measure was renewable energy and specifically electric vehicles. They started having a pretty comprehensive set of subsidies and other kinds of industrial support for companies like BYD to produce electric vehicles. BYD is basically a private company. This worked okay for 10 or 12 years. BYD got pretty good. Particularly what they started to figure out was the supply chain. They got very good at making the batteries. But by 2018-2019, BYD was still not that exciting a company. Most people in China really didn't want to buy electric vehicles. They seemed really inconvenient. The sexy cars were the big SUVs that the joint ventures were putting out and so forth. ing a company. Most people in China really didn't want to buy electric vehicles. They seemed really inconvenient. The sexy cars were the big SUVs that the joint ventures were putting out and so forth. Then in 2018, the Chinese government made the decision to allow Tesla to come in and build a wholly-owned Gigafactory in Shanghai. They had never approved a wholly-owned automotive company before. They started cranking out cars in 2019, which became immensely popular. It seems like one of the things that happened was that the Chinese companies by 2019 had gotten pretty good at the underlying technology of electric cars, specifically the batteries and the software systems that govern the cars. But they were terrible at consumer design. They had not figured out how to make appealing products that people would want to buy. Tesla did have appealing products that people wanted to buy. They were big status symbols. So BYD and its competitors said, “Okay, this is the part we have to figure out. How do we achieve this?” Basically, they recognized that they had to up their design game. Among other things, they went to Germany and loaded up on a lot of German car designers that were able to transform their technology base into much more appealing packages. Then by 2022 or so, they were able to compete with Tesla both on price and on quality. What that shows you is that, number one, the Chinese government made a pretty good bet on this leapfrogging idea: “There are technologies in the future. We need to get in early, subsidize the heck out of them.” Some of the estimates that have been made about the level of subsidies given to the EV industry and its supply chains range from $200-300 billion. It was a huge, huge amount of money that did not generate that much of a financial return for a really long time but they stuck at it. Then the thing that finally flipped the switch was this catalytic foreign investment that showed the Chinese companies what they needed to do to actually compete in the consumer market. Then they got very good at that very quickly. How much was the $200-300 billion actually relevant given the fact that BYD, as you mentioned, is a private company? How much of that was actually necessary or counterfactually important to creating this outcome?…

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