News Analysis

Don't fear China's industrial juggernaut, it's not as scary as you think

Employees working on a production line for domestic appliances at a factory in Jiujiang, Jiangxi province, on April 19, 2018.
Employees working on a production line for domestic appliances at a factory in Jiujiang, Jiangxi province, on April 19, 2018.PHOTO: AFP

BEIJING (BLOOMBERG) - Washington is working up a sweat over China's industrial policies.

There are fears that Beijing will build technology companies and advanced manufacturers capable of squashing American rivals by lavishing aid on favoured sectors.

Many of the tariffs the United States plans to impose are aimed at products generated by this state-led agenda, most of it under the "Made in China 2025" programme.

Yet, this is less scary than it sounds.

History shows us that industrial policies seldom foster innovative or competitive companies. In important ways, they can do more harm than good.

The concept was all the rage in the 1980s - not because of China, but Japan.

Some argued that these policies were the secret sauce behind that nation's meteoric rise on the world stage. They made the case that bureaucratic management and support for targeted industries created a super-competitiveness beyond the capabilities of the market. The US would have to copy Japan, or die.

The fad eventually fizzled with Japan's economy. After the asset-price bubble burst in the early 1990s and the nation tumbled into its "lost decades", its economic model no longer seemed a world-beater.

Some economists had argued all along that the superiority of industrial policies was an illusion: Their advocates were zeroing in on a handful of success stories and ignoring bigger failings.

Academics and authors Michael Porter and Hirotaka Takeuchi dissected Japan's programme and determined that only a few sectors fostered by the state - steel, shipbuilding and semi-conductors, for example - became internationally competitive. Others were busts, including chemicals, software and aircraft.

Meanwhile, many of Japan's most prominent industries, such as automobiles, motorcycles, video games, robotics and carbon fibre, were never directly targeted by Tokyo's bureaucrats.

The authors concluded that "the practices widely believed to explain Japan's success were far more prevalent and pervasive in its failures". Nor did all the successes maintain their global stature.

The Japanese chip industry was a world power in the 1980s, but has since withered, unable to sustain its competitiveness or technical edge despite continued state efforts.

China's own history helps prove the point. Beijing targeted renewable energy such as solar and wind as strategic sectors. The programme succeeded in creating big manufacturers of green-energy gear, especially solar modules, where China now dominates world production.

But that expansion didn't necessarily lead to much innovation.

The 2017 Global Cleantech Innovation Index ranks China a middle-of-the pack 18th out of 40, a gain of only one position from the previous list in 2014. That's the highest ranking of any developing country in the study, but still places it behind South Korea, Japan and Singapore.

Though China showed signs of improvement in its ability to create green technologies, especially an increase in early-stage investment, it still lagged in filed patents.

Similarly, a 2017 study by experts at Carnegie Mellon University on China's wind-turbine industry noted that domestic firms had relatively few international patents. The country had made great progress in capacity expansion, the authors said, but "in terms of innovation and cost-competitiveness, the outcomes were more limited".

An examination of Chinese green energy by the World Bank in 2017 drew a similar conclusion.

Past performance doesn't mean China's efforts will fail in the future. But the evidence is that there's no firm link between state support and innovation.

There's another way that industrial policies could hurt foreign competitors - by creating excess capacity that distorts prices.

In that sense, one can make a case that China's policies could hamper, not help, its technology ambitions.

In their Japan study, Professor Porter and Professor Takeuchi argue that by coddling certain industries, the government protected them from the competition necessary to spur success.

In China's case, heavy subsidisation of industries like electric vehicles could keep too many weak players afloat and crowd out better ones.

So China's industrial programme might prove scary. Just not in the way you think.

(Michael Schuman is a journalist based in Beijing and author of "Confucius: And the World He Created".)