Central Planning Versus Market Capitalism

As the dawn of the new century, a new technology promised to fundamentally change global economics. Government leaders in the United States and China, the two largest economies in the world, believed that companies from their respective countries should lead in the development of this new technology. By 2010, two national champions, one from each country, had emerged.

Founded by a young entrepreneur in the mid-1990s with approximately $300,000 of capital, Company A had become a global leader over a 10-year period in a related field. In 2002, Company A went public, gaining additional capital by listing its shares on one of the world’s major stock exchanges. Then, in 2003, Company A decided to diversify beyond its original business and develop new products using the new, game changing technology.

By late 2008, Company A had attracted the interest of a prominent global investor, a cold-nosed, savvy industrialist who regularly saw the most promising investment opportunities from all over the world. Proclaiming Company A’s technology to be the best that he had seen, his company invested over $200 million in Company A. With a long history of commercial success and profitability, Company A achieved revenues of nearly $4.0 billion, and earnings of $150 million, in 2008.

On the other side of the world, Company B came into being just after the turn of the century. Convinced by the vast potential of the new technology, the founders were a group of individuals who based Company B’s products on research done by one of the country’s leading universities. By 2006, Company B had attracted the attention of the country’s government and business leaders, and began receiving development grants from an industry consortium that was working in collaboration with a large government agency. Incremental investments from several of the country’s largest companies followed.

Company B’s breakthrough came at the beginning of 2009 when it won a $250 million grant from a government agency to build a new production facility in an economically depressed part of the country. In addition to wanting its country to lead the world in this new technology, the government was motivated by its desire to create jobs for its citizens.

With strong government support, Company B went public in late 2009 and raised an additional $400 million of capital. In 2009, Company B had revenues of $91 million, and a net loss of $87 million. By the end of 2009, it had accumulated losses of $239 million and had never earned a profit.

If you are a United States politician or business leader, or just a plain ordinary American citizen who is alarmed by this story and concerned with the way in which “China, Inc.” is competing unfairly in the global economy, well, guess again.

As improbable as it may seem, Company A is none other than BYD, the Chinese private company that quickly became the world’s largest rechargeable battery maker that decided to enter the market for passenger cars and electric vehicles several years ago. On the other hand, Company B, the recipient of the government largesse, is Massachusetts- based A123 Systems. Ironically, both companies received approximately the same amount of investment– at about the same time. BYD received a $230 equity investment from Warren Buffet’s Mid America Corporation in late 2008, while A123 received a $250 million grant from the U.S. Department of Energy in January 2009.

On Monday, September 13, 2010, A123 announced the opening of a large lithium-ion battery factory in Livonia, Michigan. The plant employs 300 workers, and is expected to employ up to 3,000 in several years.

President Barack Obama placed a congratulatory call to A123 executives and Michigan Governor Jennifer Granholm. “Thanks to the Recovery Act, you guys are the first American factory to start high-volume production of advanced vehicle batteries,” the President said. “This is about the birth of an entire new industry in America — an industry that’s going to be central to the next generation of cars. And it’s going to allow us to start exporting those cars, making them comfortable, convenient and affordable.”

The central planners in Washington must be feeling pretty good about themselves these days and the way in which they are single-handedly re-shaping the U.S. auto industry. The grant to A123 is part of a total of $1.4 billion of funding that the U.S. government is providing to nine Michigan companies to support advanced battery manufacturing and job training. This comes on top of the Department of Energy’s $465 million loan to Tesla, a maker of high priced electric vehicles, and the $50 billion bailout of General Motors. Now all the planners have to do is hope that these companies can produce products that customers want, and can afford.

Undoubtedly, the thinking on the part of the Obama Administration is that: “If China can use government funds to create national champions, so can we.” What they don’t understand is that this is not the way it works. Admittedly, state-owned banks still make loans to state-owned companies, but these behemoths are not the innovators in China 2010. Instead, hundreds of thousands of entrepreneurial Chinese companies, just like BYD, are driving innovation in the country in industry after industry.

China has obviously studied American economic history. Washington should do the same.

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