Pearls and Irritations

Just released vehicle export figures for the first five months of 2023 indicated that China would be the world’s largest vehicle exporter in 2023.

The country exported 325,000 passenger vehicles and 63,000 commercial vehicles for a total of 389,000 vehicles in May, a 58.7 per cent year-on-year surge. For the first five months, nearly 1.76 million vehicles were exported, soaring 81.5 per cent year-on-year, and almost 30% of the vehicle exported were electric vehicles. China is projected to export 4.5 million vehicles this year, surpassing the erstwhile world vehicle exporting leader, Japan’s 4 million. Moreover, the sales of electric vehicles are surging worldwide, and the Chinese export momentum will likely put the Chinese dominance on vehicle export for some time. In addition, most parts of the exported vehicles, particularly electric ones, are produced in whole at China with few imported components. The booming vehicle export will contribute materially to Chinese economic growth and industrial upgrading.

The vehicle industry serves the movement requirement of people and, together with the food, energy, and housing industries, is considered a pillar industry of any country. It has extensive upstream and downstream linkages that put the industry squarely at the top of the global manufacturing chain. In addition, its product must meet the demanding driving conditions in different road and weather conditions. It is one of the most closely monitored durable goods in all families. Being the top vehicle exporter manifests Chinese manufacturing prowess and a stamp of approval for Chinese quality. The phenomenon is similar to how consumers’ perceptions of Japanese quality changed in the 1970s and Korean quality in the 1990s.

The Chinese achievement mimics the earlier success of Japan and South Korea in the global vehicle market with the caveats that it was achieved in a shorter time and the momentum based on the revolutionary electric vehicle technology than an improvement of mature existing internal combustion engine technology. The Chinese experience offers a valuable lesson to any country aspiring to jumpstart its economy in this age of the 4^th Industrial Revolution.

The Chinese experience

The first lesson is a country must understand the technology trend and be able to pursue an industrial sector development plan with persistence.

China started providing subsidies for electric vehicle purchases starting in 2009 and just phased out the subsidy this year. The original idea of providing subsidies to electric vehicles was to clean up vehicle air pollutants. The technologies at that time were immature. The battery then allowed only short-distance driving per charge, and charging took a long time. The electric vehicle appealed only to environment conscience users and not appealing to mainstream users. One should note that most advanced countries provided subsidies to electric vehicles at the same time, and no one successfully jumpstarted the industry as China did today. One cannot attribute the Chinese success to subsidies alone.

A more important success factor is understanding the technology trend. The country understands the inevitability of moving vehicles to new energy in the global decarbonisation drive. Besides working on the technical problems of battery range and quick charging poles, it also worked to build an industrial ecosystem from overseas lithium mine acquisitions to metal refining technologies and smart grid build-up. The resource commitment is significant even for the second-largest economy in the world, and understanding technology trends is a must to convince the myriad of players to pump in support beside government prodding.

The takeoff of the electric vehicle only happened around the turn of the decade when the electric vehicle range improved to more than 300 km per charge, and the country improved the electric grid to eliminate the charging barrier. The ability of the government to wait out the fruit of its industrial development policy for a decade shows the importance of detaching a country’s industrial development policy from its political electoral cycle, which runs from 4-6 years.

Industrial sector development policy was taboo to neo-liberal economists who despise any government involvement in development. They dismissed the earlier East Asian Miracle of Japan and four little tigers by claiming its success was built on adopting existing technology and infusing massive capital with cheap labour to gain market share. The neo-liberalist posited that the East Asian Model is unsuitable for generating innovations.

The Chinese success in the electric vehicle space proved neo-liberal economists wrong. The great majority of electric vehicle technologies are home-grown. The passing of the Chips & Science Act and Inflation Reduction Act stealthily return the US to its Hamiltonian tradition despite all its claims of private sector superiority.

The second lesson is that human capital development is critical to the success of leapfrogging. It is not coincidental that the Chinese success in the vehicle space coincided with the 4^th Industrial Revolution. The internal combustion engine was invented and put into commercial operation in the late 19^th century, and the product had gone through more than a hundred years of technological improvement. The incumbent leaders of the technologies have built a wide and deep moat around their products through proprietary technologies, manufacturing processes and patents. To dislodge an existing industrial leader based on old technologies is never easy.

The Chinese success in grasping the vehicle export leadership is based on the new technology platform of electric vehicles. It seized the historic opportunity of replacing the internal combustion vehicle with the electric vehicle. Seizing the economic development opportunity offered by new technology in the industrial revolution era is a classic case of leapfrogging. It happened when the Germans and Americans used internal combustion engines to replace the steam engine of the British in the second industrial revolution age, and the Americans used the digital revolution of the 1990s to wrest back leadership from the hardware-centric Japanese electronic industry.

Leapfrogging strategy can only happen in a country with good human capital, and it is not coincidental that the Chinese success in vehicle export happened when the country became the leader of scientific research in 2022, as the Nature Index has shown. The country now produces almost twice the number of STEM PhD annually compared to the US, and it topped the PISA test of 15 years old high-school students in 2018.

No country succeeded as much as the Chinese in developing its economy and lifting people out of poverty in the past 45 years. Setting aside ideological biases and looking at the Chinese success story offer valuable lessons to everyone.

Republished from The Manila Times June 13, 2023

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