Advantage China?

A spate of articles on China over the weekend, including one in the New York Times entitled, "China Leading Global Race to Make Clean Energy" got me thinking about our reaction to such reports. The Times article included some important insights about the role of relative scale and growth rates in fostering the emergence of global wind and solar power competitors from China. From a wider perspective, however, I worry that we're beginning to apply the same kind of mental inflation of competitor attributes that made "Japan, Inc." seem such an overwhelming juggernaut in the late 1970s and most of the 1980s, when it appeared that Japan would dominate every important industry and own every scrap of signature US real estate, starting with Rockefeller Center and Pebble Beach.

In the last decade or so I've watched attitudes toward China evolve from what I used to call "China Big"--an unprecedented opportunity for global companies due to the size of its emerging consumer and financial markets--to something like "China Smarter", which compares that country's growth and the policies that have sustained it to those that helped guide the mature US and European economies down the path of unsustainable asset bubbles. During this interval Chinese renewable energy firms have grown from low-cost suppliers of parts and raw materials to established EU and US equipment manufacturers, to become integrated competitors in their own right, capable of undercutting the German solar power industry in its home market--to choose just one example.

As the Times points out, China gains a big edge in renewable energy because its entire power sector must grow so rapidly to support economic growth that is expected to average 8% this year, after a decade of double-digit growth interrupted only by last year's dip to 6% or so. That means that while renewables are still more expensive than the coal power plants that have dominated the Chinese market, they don't have to compete head-to-head with them; there's enough growth for all. Contrast that to a US power market that has shrunk by an astonishing 6% since 2007, instead of continuing to grow at its formerly-dependable 1-2% per year pace. The size of China's domestic expansion and the urgency of keeping it going, together with the increasing sophistication of its low-cost manufacturing base, make it nearly inevitable that China would become a serious competitor in an industry for which the biggest factor governing market penetration--other than the degree of regulatory and subsidy support they receive--is making renewables more cost-competitive with traditional energy sources. The more that depends on experience-curve effects rather than technology breakthroughs, the more this competition will favor China, for now. Throw in concerns about access to the rare earths and metals required by much of this technology, and China's long-term advantage in renewables looks even bigger.

I don't want to seem blasé about the challenge this represents, but I also think we should keep it in perspective, as we often failed to do concerning Japan in the 1980s, when its keiretsu companies seemed 10 feet tall and business bestsellers touted Japanese management techniques and warned that Japan was on the verge of overtaking the US in the global economy. Again, consider renewable energy. In 2008 the value of all wind turbines installed globally was on the order of $70 billion and for grid-connected solar power hardware around $20 billion, out of global renewable energy investments of $120 billion. That puts global wind and solar equipment sales at roughly the level of US aerospace exports for 2008, and about half the size of the total US aerospace market. That's big enough to want to retain a meaningful share of the market, but not so big that the entire economy depends on it. Or does it?

The Times article included the worrying suggestion that the US might someday be as dependent on imported Chinese renewable energy gear as it currently is on imported oil from the Middle East--never mind that the latter made up just a fifth of net US oil imports and 12% of total US oil supplies in 2008. Yet even if that analogy were correct, there's a huge difference in the economic and security implications of these two positions. We understand from experience that even a partial suspension of US oil imports would create an immediate price spike and send a shock throughout the economy. It's hard to see how the impact of even a complete embargo on sales of wind and solar equipment from China to the US could ever approach that. Although curtailed renewable energy equipment imports might disrupt the activities of companies installing them and spoil the returns of those parties financing them, existing facilities would keep turning out power. Once you've imported a wind turbine or solar module and set it up, you own it and its output until it wears out. These risks simply don't equate in the manner the Times asserts. Moreover, they are naturally limited by the significant practical challenges faced by intermittent and cyclical power generation technologies. Just read the DOE's analysis of a 20% wind power scenario to see what's necessary to achieve even that threshold.

Unfortunately, concerns about China's advances in renewable energy carry extra weight, because they align with a larger pattern of China envy exemplified by the talk of a "Beijing Consensus" that Tom Friedman apparently encountered at the World Economic Forum in Davos. China's "Confucian-Communist-Capitalist" model certainly offers speed and clarity of purpose that our own system has matched only at times of immediate national crisis. However, it's worth recalling that in the 1930s the Soviet and Italian models had their admirers here, too, for their ability to get things done, compared to the messiness of a capitalist democracy. However discredited the US economy may look after a couple of bad years, I'll take that messiness, as long as we don't manage to kill the innovative spirit--and the incentives that drive it--that enabled us to adapt the best of Japan's ideas while continuing on a trajectory that eclipsed Japan's success over the last two decades, even when you factor in the Great Recession. I'm more worried about navigating the geopolitical challenges that China's rise will create over the next few decades, and ensuring that they don't end in the kind of confrontation that resulted from Germany's rise a century ago.