China’s Industrial Policies: Are They Effective?

Periodically, China announces a new industrial policy directed at one or another of its industries. During the past year, the government announced plans to consolidate both steel and automotive. The reason: too many players and too much fragmentation.

The announcement of these policies typically triggers a stream of questions about what this means for competitors in those industries. I always answer in the same way: in most industries, China operates as a free market. While government policies may call for consolidation, economic and market forces within China push industry structures towards more fragmentation.

In automobiles, for example, there have been two attempts to encourage consolidation –one in the mid 1990s and one this year. Neither has worked. More and more companies enter the competition every year.

It’s the same in steel. For background, refer to the article I wrote on this subject in March Consolidation of China’s Steel Industry: Don’t Bet On It and my follow-up piece in October, Consolidation in Steel: Still Waiting.

That’s why when my good friend Alexandra Harney, author of The China Price: The True Cost of Chinese Competitive Advantage and a consultant to investors in China and Japan, called to discuss my views for an article she was writing for Foreign Policy. I was only too happy to oblige. Alexandra had noted that, despite government support for its big state-owned car companies, independent car companies (and relative upstarts, I might add) like BYD, Geely, Great Wall and Chery are the fastest growing. “Why isn’t government policy more effective in creating the next Toyota,” she asked.

I answered in the best way that I could, with a sports analogy, which Alexandra included in her article.

Jack Perkowski, a former Yale University offensive lineman who founded an automotive components company in China in 1994, compares traditional industrial policy with football: The coach drafts plays, and the players execute them. Chinese industrial policy is more like soccer: free-flowing. “It’s kind of the players on the field that are making up the rules, that are making up how the game is played, not the coach,” he says. “The coach is staying on the sidelines hoping his team will win.”

Rather than try and create winners in the marketplace through industrial policy, Alexandra has another suggestion for the policymakers in Beijing.

Going forward, it will be crucial for China to relax its grip over sectors such as health care, education, and telecommunications and channel more loans to private companies. And perhaps, as Massachusetts Institute of Technology’s Yasheng Huang and others argue, China needs to allow its currency to appreciate not only to stop distorting its economy and global trade balances, but also to encourage innovation.

Alexandra’s article is well worth reading, written by someone who knows China.

No comments yet... Be the first to leave a reply!