Fresh from releasing “Out of the Running?,” a report that compares clean energy investments in China, Germany, and Spain, senior staff including KateGordon and JulianWong, from the Center for American Progress brought a select groupof Senate staffers to visit China in April to meet with policymakers,academics, and companies to better understand China’s clean energyeconomic development strategy. The visit provided convincing evidenceto those involved that China has made large-scale investments in cleanenergy manufacturing and infrastructure, and that these signal China’sclear desire to lead the world in clean energy technology production,deployment, and eventually innovation. It also underscored the need for the United States to move aggressively to articulate our own cleanenergy strategy—one that builds on our historic strengths ininnovation, entrepreneurship, and high-value added manufacturing.
Market creation. Stable, long-termpolicies for promoting clean energy demand are key to spurringinvestment in innovation, manufacturing, and deployment activities inChina. The country’s national targets for renewable electricity (15percent of primary energy from nonfossil fuels by 2020) and energyefficiency (20 percent decrease in energy intensity from 2006 through2010) are translated into provincial and local targets, which creates a stable, long-term market signal to attract private capital investment. Local officials are also increasingly being held accountable by basing their promotion prospects at least partially on the fulfillment ofthese targets.
Infrastructure. China’s infrastructure investmentsare impressive, tangible, and breathtaking, and they’re driven by rapid economic growth and urbanization. Large-scale deployment of intercity high-speed passenger rail, intracity subway systems, and high-voltagegrid transmission wires left a particularly deep impression on ourgroup.
China has 54 national high-tech development zones (innovation andmanufacturing clusters), many of which focus on energy technologies, on top of dozens of provincial- and university-level clusters. Thesehigh-tech clusters create an industrial ecology that optimizesproductivity by co-locating different links of the supply chain(including R&D) and factors of production (supply of differentcomponents and a skilled work force). Regional governments administerthe clusters and provide generous financial incentives such as grants,tax breaks, and discounted land to attract industry.
All of these incentives are provided on top of what is perhaps themost powerful driver for infrastructure investments—cheap capital.
Financial capital. The conventional wisdom is thatChina’s competitiveness in manufacturing and infrastructure investments is fueled by low labor costs and an undervalued currency. But all our conversations with businesspeople convinced us that the ability ofstate-owned banks to mobilize vast sums of low-cost capital to preferred industries such as clean energy and infrastructure is at least just as important.
Cheap capital may have a downside, however: Our group met withBeijing-based economist Michael Pettis, who is concerned that China ismaking financial bets that may turn out to be uneconomic andunsustainable in the long run, increasing the risk of bad bank loans.
Human capital. China’s vast low-carbon developmentambitions will require the skills and talents of many trained workers. As a result, China is investing heavily in its workforce developmentsystem. Businesses we met with repeatedly lauded the fact that Chinais churning out high volumes of technically trained graduates fromuniversities and vocational institutes. But we did not get a strongsense of the country’s overall plan to prepare its workforce for themany occupations and sectors that make up the clean energy economy.
Based on what we heard, there is some level of local governmentsupport for workforce retraining under the national program of shutting down energy-intensive and pollution-intensive firms. But privaterenewable energy companies also take it upon themselves to train theirworkers with industry-specific skills. The government clearly supports these incumbent worker training programs, and it sometimes provides up to a year of public financial support for businesses to send workers as far away as Germany and the United States to acquire technical skillsin the wind and solar industries.
Since our trip, the central government has announced a broad visionfor a national talent and workforce development strategy, which willlikely result in more concrete government workforce programs at thelocal levels going forward.
Innovation. While keeping in mind the limitedexposure that a week-long stay in China provides, it was our generalsense based on the companies and technologies we visited that theUnited States still maintains an innovation edge over China. A solarPV company we visited, for example, relies completely on foreigntechnology for the capital equipment of their assembly line, while anelectric vehicle manufacturer we spoke to says they import 35 percentof their components from the United States.
China is working to close this gap: The government plans to increase its share of gross domestic product dedicated to R&D from 1.5percent currently to 2.5 percent by 2020. If China sustains its current pace of public and private investment in all areas of the clean energy value chain—R&D, commercialization, manufacturing, anddeployment—many of us believe that the technology gap between bothcountries will inevitably shrink. In fact, our group came away with the sense that China has perhaps as little as five years to catch up ifthe United States fails to act further to shore up its competitiveness.
The government officials we met on our trip emphasized the criticalrole of national R&D grant-making programs and university researchin technology innovation. The national, provincial, and universityhigh-tech clusters may also play a important role in commercializingemerging technologies by linking R&D to manufacturing activities.China has also learned the important lesson that innovation can takeplace on the factory floor as well as it does in the lab. For instance, one major solar PV producer we visited described how engineers areconstantly interacting with equipment operators on the factory floor to optimize their assembly line, and they are constantly providingsuggested improvements to equipment suppliers.
Looking ahead, China’s emerging clean energy sectors may be able todraw lessons from the television and semiconductor sectors: Forinstance, that cheap capital often causes manufacturers to relocate,leading innovators to then follow the manufacturing. As cheapmanufacturing of cathode-ray tubes led to the United States exiting the market, the subsequent innovations in plasma, LCD, and now LED are all taking place in Korea and Japan. It may be that relocation of cleanenergy R&D to China, where many suppliers and manufacturers are now located, is the next step.
Perhaps most tellingly, high-profile multinational companiesincluding Applied Materials (capital equipment for solar manufacturing), Novazymes (biofuels), and IBM (high-speed rail software controlsystems) are already opening major R&D centers in China. We met with Applied Materials representatives in China, who explained to us thatproximity to a stable market and customers (Chinese solarmanufacturers), and the availability of skilled human capital were keyfactors in their decisions to locate R&D activities in China.
Energy mix. China is currently heavily reliant oncoal and oil for its energy mix. Tsinghua University academicspresented modeling to us showing that even under the most optimistic of low-carbon scenarios, coal and oil will account for 55 percent of thecountry’s primary energy mix in 2050. This insight strongly suggeststhat China must optimize coal and oil use and manage increasing demandthrough energy efficiency and conservation. These practices will be asimportant as or even more important than China’s efforts in developing renewables, nuclear, and natural gas.
Further research for U.S. policymaking. It was impossible for us to gain a comprehensive understanding of China’s clean energy economy in a short five-day trip. We received a good introduction to a broad range of activities in the sector, but further research on the followingtopics may better inform U.S. policymaking:
- To what extent are subsidized capital and somewhat protectedmarkets actually undermining China’s development goals by misallocating resources to investment that will ultimately fail? And are Chinesefinancial regulators worried about an impending banking crisis caused by nonperforming loans as a result? If so, what is their strategy to deal with it?
- How does the government intend to translate its recently releasednational vision for talent development into concrete programs tocultivate a skilled workforce for a low-carbon economy?
- How does China negotiate the tension of welcoming foreigninvestment and honoring the principles of free trade as a World TradeOrganization member on the one hand, while trying to cultivate”indigenous innovation” and groom national champions on the other? What are the implications of this balance for U.S. businesses, and whatshould be the suitable U.S. policy response?
- Will China’s political structure remain flexible enough to allowtrue innovation and entrepreneurship, which is often the result of“creative destruction” rather than carefully planned economic growth?