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China's industrial incentive policy - from global factory to intellectual powerhouse

M Rokonuzzaman | Published: June 23, 2019 21:19:13 | Updated: July 11, 2019 15:54:07


China is known to be offering huge incentives to its private sector. Such perception is not incorrect. For example, according to a media report, "at an average subsidy of $10,000 per vehicle, China's central and local governments spent $7.7 billion on EV (electric vehicle) subsidies in 2017." Such deep subsidy in advancing industrial capacity is often cited in developing countries in favour of increasing subsidy for expanding the industrial economy. As a result, in most developing countries, support is given for increasing export and producing import substitution. But is there a difference between the purposes being served in China and many other developing countries in providing subsidy for enlarging the footprint of the industrial economy? What is the lesson for many developing countries to learn from China's incentive policy?

China's policy appears to be to incentivise the journey of absorption of technologies and innovations. Often such absorption capacity development is linked to the strategy of imitation. Along with the success of imitating, China keeps changing incentives so that companies are compelled to focus on the generation of intellectual assets and properties (IA/IP) to graduate from imitation to innovation. Through this graduation, firms keep acquiring the intangible assets (IA) for increasing quality and reducing cost, thereby reducing the dependence on subsidy in reaching to profit-key competence to sustain the journey. And to encourage such IA-driven growth strategy, China also keeps reducing firm-level subsidy, encouraging private sector R&D (research and development) through linking with incentives and increasing academic R&D fund allocation. Other strategic issues like the environment and national security are also linked in designing incentives scheme targeting particular industries.

For example, China's major cities, particularly Beijing, are suffering from air pollution. Among other factors, gasoline-driven cars are major contributors. On the other hand, with the rapid growth of automobile in the domestic market, China wanted to build the local automobile industry. Upon trying over a decade in building gasoline engine-based local automobile companies, China figured out that succeeding in a matured technology industry was almost impossible. To overcome such hurdle, California upstart Tesla working on battery-powered electric vehicle became music to the ears and minds of China's strategists. Planners started working on a strategy for taking the advantage of the discontinuity of the automobile industry, created by electric battery. Moreover, by succeeding in the electric vehicle industry, China would also solve the air pollution issue.

On one hand, China began creating a regulatory barrier on buying new gasoline vehicles, and on the other, started giving incentives to electric vehicles. Planners also figured out that by knowing how to make lithium-ion battery to power green cars would not lead to the success of building a globally competitive industry. To address this issue, China's incentive was focused on acquiring the capacity of continually building better as well as less costly battery. To address these conflicting variables, the only option is to produce intellectual assets and to integrate them with the product and also the process.    

To begin the intellectual asset-driven journey, incentive was directed to the acquisition of Japanese TDK's battery making spin-off for supporting the formation of CATL-Contemporary Amperex Technology.  The race started not only to make lithium-ion battery to power a growing number of electric vehicles but also to accelerate intellectual asset production to catch-up global industry leader, Panasonic's capability of continually producing better quality better at a lower cost. As a result, CATL's patent portfolio kept growing, making it one of the top performers. Among major Chinese players, CATL spent about 11 per cent of revenue and BYD spent 6.0 per cent of revenue on R&D in 2017. It's reported that R&D staff comprises a fifth of CATL's 18,000-plus workforce. To create IA/IP centric competence, China's incentive policy is directed to performance improvement, as opposed to just increasing volume. For example in 2017, as reported by Forbes,  "Battery pack densities of over 140 Wh/kg (Watt Hours Per Kilogram) receive up to 20 per cent more subsidy, while battery pack densities below 120 Wh/kg receive 40 per cent less. Vehicles with battery pack densities under 105 Wh/kg now receive no subsidy." And to encourage the growth in performance through IA/IP, subsidy-linked performance parameters are being pushed up continually.

Similar incentive policy is also building China's globally competitive mobile communication industry. The initial focus was just to succeed to imitate. But the intelligently designed incentive policy has been encouraging industry players to keep building intangible asset portfolio to graduate in innovation space. For example, Huawei's 5,405 patent applications to WIPO (World Intellectual Patent Organisation) in 2018 - all-time record by anyone - is highly intriguing indeed. In 1993, Huawei filed just 1 (one) patent to WIPO. Its applications overtook Japan's in 2017 and grew by a further 9.1 per cent to 53,345 in 2018. How did this company acquire so much intellectual firepower within such a short period of time is worth researching. In the emerging 5G technology, Chinese Companies own almost one-third of global patents, having Huawei at the top and ZTE among top 10 global 5G patent recipients.

China started its journey in the 1980s to step into a global industrial value chain. By leveraging low-cost labour advantage, and making a massive investment in infrastructure, China grew as the global factory. Like many other developing countries, China has been providing incentives to local firms to get into the advanced industries. Unlike many other developing countries, China's  incentives are not just to expand labour-based value addition capability. It's about absorbing emerging technologies and acquiring IA/IP so that China's value addition capacity upgrades from labour and infrastructure to intellectual assets.

As a sharp contrast to China's leadership in patent holding in mobile communication space, research finds that "despite the fact that more than 150 firms compete in the Indian mobile device marketplace, collectively, domestic firms hold almost no patents." Does it mean that Indians do not have technological competence, and Indians cannot innovate? Such an assessment would be unfair. It appears to be the incentive policy, which has created such a sharp competence contrast. Tax differential-based policy is enabling Indian firms to make money just by attaching the Made in India label on products assembled (adding only 2.0 per cent to 3.0 per cent value through labour) in India by importing components, mostly from China.

Incentives such as tax differential and cash subsidies for expanding the industrial base by leveraging low-cost labour is no longer sustainable. On one hand, labour content in industrial products and services has been decreasing, and on the other, intellectual asset-based competition has been growing in the globally connected competitive space. For most of the developing countries, it's time to connect incentives to enhance the performance of whatever they are producing by integrating IA/IP. Moreover, to leverage ever-growing university graduates, incentives should be given to expanding the local supply of intellectual assets targeting the competitiveness issue of local industry so that vibrant market of intellectual asset and innovation is created. Such success is paramount to keep the economy growing, and creating high-paying innovation jobs for an increasing number of graduates.  

 

M Rokonuzzaman PhD is an academic and researcher on technology, innovation ands policy. zaman.rokon.bd@gmail.com

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