How to Profit from China Politics. Think Suntech and State Catalysts. (Tech Strategy – Daily Article)

I did a podcast about how to assess the political risk of China tech. But really, I was talking about the Role of the State in different industries.

But that was all about downside, which is important.

What is more interesting is the upside. How do you profit from the active role of the State in China tech?

And make no mistake. The State is the mother of all catalysts in China. If it actively supports the development of an industry, it can increase in economic value very rapidly. Here’s an example from 2000-2010.

The Shocking Rise of Suntech Power

At its height, Suntech had approximately 15,000 employees and was the world’s largest solar panel manufacturer by both revenue and volume. It had over $3.4 billion in revenue and 13 offices worldwide. In 2011, it reached a record 2 gigawatts in annual solar cell production.

  • The MIT Technology Review listed Suntech as one of the world’s 50 most innovative companies.
  • Fast Company named Suntech as one of the top 10 most innovative companies in China.
  • Time Magazine listed then CEO Shi Zhengrong as one of its Heroes of the Environment.

And this was mostly about the Chinese government’s active support of the sector. It catapulted founder Shi Zhengrong from a professor to China’s richest person in about four years.

About Suntech Founder Dr. Shi Zhengrong (施正荣

He was born in a poor farming community in 1963 on Yangzhong Island. This is a small island in the Yangtze River about halfway between Nanjing and Shanghai. His parents, suffering through a famine and already raising two other children, gave him up for adoption.

Zhengrong’s adoptive parents supported him and he is reported to have excelled at school. His adoptive parents famously gave a banquet for his teachers upon his graduation from high school. From there, he went on to Changchun University of Science and Technology in Manchuria and later completed his Master’s degree from the Chinese Academy of Sciences.

Following the now common path of top Chinese students, he went abroad for graduate work and in 1989 arrived in Australia as a foreign exchange scholar. He eventually earned a doctorate from the University of New South Wales in photovoltaic and solar-electric technologies.

Enter the State as the Solar Catalyst

By 2001, governments around the world were becoming very supportive of solar and other renewable energy sources. They were offering subsidies to make it more affordable. They were supporting research. At that time, he solar industry was dominated by First Solar, GE and other major Western companies. There were few Chinese competitors.

However, China manufacturers have already achieved global scale at that point. “Made in China” was a common phrase. And Chinese manufacturers were beginning to move into more advanced products. The State was also offering increasing financial support, including cheap debt.

In 2001, Dr. Shi left his academic post in Australia and returned to Wuxi to start a solar energy company. This company would become Suntech. His approach was to take his own developed technology from his laboratory and mass produce it. Basically, he leveraged his technical expertise into China’s massive manufacturing scale.

He has stated his first goal was to drop the cost of a solar panel from $5 per Watt to $3 per Watt. When he presented this idea to Chinese government officials, he was told that if he could do that the entire market would be his. He accomplished his goal within the first year of operations. He also got financial support from the Wuxi government.

Suntech began getting traction selling to the China market. But Suntech also emphasized state-of-the-art innovations and focused on sales to Western markets. The goal was to compete head-to-head with the smartest Western companies in their own markets. And it was successful there as well.

Suntech’s Winning Formula

Over time, Suntech adopted a formula that many Chinese companies still use today.

  • Low-cost manufacturing scale
  • Technical expertise
  • Government support

For better or worse, Suntech did this on a far bigger scale than anyone else in solar. Having only been founded in 2001, it went public on the New York Stock Exchange in 2005. In 2006, Dr. Shi became the richest person in China.

At its peak, Suntech was the market leader in both China and the West – having dethroned Western solar players in their home markets and in a field that was a high priority for Western governments. Here were the solar leaders in 2010.

The Fall of Suntech

The solar industry declined in 2009-2012 and, as the leader, Suntech was particularly hard hit. The fairly bad economics of the industry were exposed.

  • There was too much manufacturing capacity, mostly built on cheap debt.
  • Margins were razor thin.
  • Most companies had significant debt.
  • The whole industry depended on Western and Chinese government subsidies that were disappearing.

Suntech’s revenue declined 48% between 2011 and 2012. In 2013, founder Dr. Shi was removed as CEO and Suntech Power (the main Chinese subsidiary) filed for bankruptcy. The New York Times aptly labeled Suntech the “Icarus of the solar power industry”.

There are some important lessons here:

  • The first is how powerful the combination of government support, brainpower and manufacturing can be. If we can see this in solar manufacturing, couldn’t we see this in trains, autonomous vehicles and planes?
  • The second is how rapidly competition emerged with the same formula. As Suntech rode a mega-trend to billionaire status, other Chinese companies quickly jumped in. The fierce price war between them (many were selling below cost) had a lot to do with the small margins, the big borrowing, and the government fueled overcapacity.
  • The third is that government support can make you both rich and poor. As State support was withdrawn, the artificially inflated industry collapsed. You have to know when the waves are coming, when to ride them and when to get off.

In my previous post, I said you need to understand the interests of the State. Is it active in an industry?

But you also need to understand the big top-down actions. You need to keep an eye on the big waves. Chinese companies are very good at this and can move fast to capture them.

Here’s the good news.

The Chinese State Is “All In” On Digital

Digital is a huge priority.

In 2015, China Launched “Mass Entrepreneurship and Innovation”

This was one of the big top-down announcements by the State. The President and State Council talk about mass entrepreneurship and mass innovation all the time. In 2015, there was a big decision to support an innovation-based economy. In practice, this meant lots of financial support and tax incentives. It also meant land allocation and development for innovation zones. Many of the tech focused business parks in cities today (such as Zhongguancun in Beijing) were allocated under this plan.

In 2017, China Announced a Plan to be the World AI Leader by 2030

This was the next big digital-related initiative. The goal is a domestic AI industry worth $150 billion. In practice, this means:

  • Multibillion-dollar investments to support “moonshot” projects, start-ups and academic research in AI.
  • To be at the level of the United States by 2020. And by 2030, to “become the world’s premier artificial intelligence innovation center.”

An example of this is Tianjin government’s plan for $5 billion fund for A.I. industry plus an “intelligence industry zone” on more than 20 square kilometers of land. That is what is happening in just one city.

Electric / Autonomous Vehicles Are Getting a Huge Push

China is already the world’s largest EV market – and it’s growing fast.

  • EV sales in 2018 were 1.2M – more than USA and more than rest of world combined.
  • China is the #2 market for Tesla (despite high taxes). Nio, Tesla and others are fighting for this market.

There is lots of government support for electric vehicles. It changes a lot but has included:

  • Consumer subsidy program
  • Exemption from purchase taxes
  • License exemptions
  • Aggressive rules on % of produced or imported cars that must be electric
  • Rapid build out of charging stations
  • 50% of government vehicles to be EV

China Is the World’s Laboratory for Smart Cities

A final example that nobody really talks about – the development of smart cities.

  • 500 of the world’s 1,000 smart city pilot projects are in China.
  • PingAn, Alibaba, Tencent and Huawei are the smart city national champions.
    • PingAn has tech capabilities.
    • Alibaba has online and mobile payment platforms.
    • Tencent has communication connections.
    • Huawei has smartphones and other hardware.

Example: Alibaba’s City Brain

This smart city project was launched in 2016. Alibaba’s City Brain makes live traffic predictions, optimizes traffic flow and detects traffic incidents. It uses data from video footage, traffic bureaus, and public transportation systems and mapping apps. As a result, Hangzhou dropped from 5th to 57th for China’s most congested cities.

Hangzhou City Brain 2.0 was launched in 2018 now covers 42 square kilometers, with traffic violations reported with 95% accuracy. It includes:

  • +110 autonomous alert capabilities and 1,300 traffic lights controlled by AI.
  • +200 police available through the platform to attend to traffic emergencies.
  • Rescue and firefighting teams can identify and monitor fire emergencies.
  • Automated emergency dispatching and help for emergency vehicles to find the quickest routes.
  • Provides information to firefighters, such as water pressure, the number and position of fire hydrants in a given area, the location of gas pipes and other details.

Over time, City Brain can learn traffic patterns and make recommendations to improve traffic efficiency, like the best ways to plan new roads, or change bus routes.

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So the good news is that big China initiatives are very focused on digital. It is getting tons of State support.

Why State Initiatives Often Work in China (and Not Elsewhere)

This is kind of the important question.

In most countries, big State initiatives don’t work that well. And are often fiascos. Like in California.

But in China, they often work. And especially if they are about infrastructure and construction. The State has fewer direct levers for action in areas like technology. Then it is usually about incentives and taxes.

But we can see a common pattern in China’s approach:

  • There is lots of testing. They use city-specific economic models (Chongqing, Shenzhen), free trade zones (Shanghai, Hainan) and national champions (Alibaba, Huawei, etc.). They do pilots and test.
  • China is already really good at building and rebuilding. China iterates based on what works.
  • There is a ferocious entrepreneurial environment.
  • Big data already happening.
  • The cost of cloud storage and processing are falling.
  • China has greater urban density. With more people moving in. This makes things easier.
  • Everyone is on a mobile phone. This also helps.

But most importantly, government at the provincial and national levels have +20 years of development experience. This is a seasoned team.

Recommendation: Read China Daily and Xinhua

These are both State-controlled publications. Just download the apps. They will give you a good indication of where the big initiatives are. It’s pretty easy to get a sense of the priorities. For example, here are some of the other big State initiatives you will hear about:

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That’s it for today. I hope this was helpful. Cheers from California, jeff

Related articles:

From the Concept Library, concepts for this article are:

  • Role of the State
  • Catalysts

From the Company Library, companies for this article are:

  • Suntech Power

Photo by Nick Fewings on Unsplash

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I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

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