Competing with China's solar export subsidies: Push-Pull disparity

As someone completely new to the subject, I’ve been reading up a bit on China’s government strategies regarding CleanTech exporters. These are my initial impressions and thoughts.

China’s solar and wind manufacturers benefit generally from conditions in China (low labor costs, faster and cheaper construction, expanding engineering base through universities), but also specifically from government aid targeted at their industry: land grants to companies, cheap state-supported loans (from government run banks), streamlined permitting, restrictions on rare-earth exports (raising costs for their foreign competitors), and currency manipulation (making their exports more economically favorable). Additionally, Chinese manufacturers have benefited from rapidly falling silicon prices. The Chinese market seems to be dominated by first generation solar technologies.

On one hand, the Chinese government seems to be doing everything right in promoting its manufacturing companies, which are growing rapidly (nearly doubling capacity each year). On the other hand, their practices may be hurting worldwide innovation.

The first thing to ask, regarding US companies, is whether the US government can replicate China’s success. Because some of China’s policies violate WTO and IMF rules, one response would be to claim that the US’s hands are tied in ways that China’s are not (because China is cheating). However true this may be, I think it is somewhat of a red herring. The US simply can’t compete with China in the “general” category. In the “targeted” category, the US government (federal, state, and local) could do so much more for solar startups before running afoul of WTO rules that China isn’t necessarily gaining an unfair advantage here. US solar startups are mostly filling domestic demand, whereas China’s companies are mostly filling foreign demand (95% of their solar panels are exported). The US could provide much better loan guarantees and tax breaks to CleanTech startups, replicating some of China’s success without running into the same export rules. Some of China’s policies are clearly anti-competitive, and US and European companies will benefit if they are successfully challenged.

One thing that is particularly disturbing about China’s policies is the disparity between their manufacturing subsidies and their consumer subsidies. They have done little to create demand for solar domestically, yet have poured massive resources into their manufacturers, feeding an export market. A significant factor in China’s solar export success, then, is deployment/use subsidies in the US and Europe. The US and Europe are providing the pull, and China is providing the push. The result is that US and European companies are being driven out of the market even while the market expands rapidly. This is clearly bad for innovation worldwide. Solar innovation depends on a push-pull ecology (of ideas, money, and products). The problem is two-fold: the US doesn’t support (and protect) its manufacturers, and China doesn’t support its citizens/consumers.

Another consideration is a technological disparity: most US solar startups are working with second and third generation solar technologies, while China’s companies seem to be focusing solely on first generation technology, presumably because it plays to their strengths: it is less encumbered by IP and can be manufactured in enormous quantities, benefiting from economy of scale. US companies, replying primarily on patent portfolios, cannot compete in the realm of manufacturing, unless their products are significantly cheaper or better than older-generation technologies (one of the promises of thin-film solar).

Here a potential solution presents itself: deployment subsidies in the US can be targeted more specifically at thin-film technologies, discriminating to a larger extent between different classes of solar technologies in order to correct the manufacturing imbalance. As long as all solar technologies are treated equal, China’s mass production of older technologies (combined with the current low cost of silicon) will prevail, leading to cheaper solar panels, but less innovation within the industry as a whole. Thus beyond emulating China’s strategies to some extent by supporting domestic solar manufacturing firms, the US government can indirectly help make those companies more profitable and competitive vis-a-vis China, and spur innovation at the same time, by creating larger deployment/use subsidies for thin-film and other advanced forms of solar.

The Mid-Term Effect on R&D Funding

Now what for science and technology funding?

The situation was already rather mixed.  Democrats failed to make a case for a major innovation boom based on a serious increase in public funding.  They left public spending in the twilight zone of the last-resort safety net, and now a repositioning will come too late. The Financial Times  reported that the Republican victory killed flagship elements of Obama’s innovation policy for at least for the next two years. In the FT observes that cap-and-trade and net neutrality are gone, to be replaced by coal-and-oil and the cable cartels.  The same goes for defense conversion, which would have helped research-and-development funding of the kind conducted at universities. The New York Times' Frank Rich has pointed out that neither party offered a coherent storyline in which clear solutions follow well-described problems. In spite of its favorable stance towards science, the Obama Administration does not have a serious innovation policy that aims at supporting the creation of both knowledge and middle-class jobs. And neither party has a plan for supporting and expanding public universities.

Is this what people voted for? There is no popular support for the abandonment of renewable energy, or for the economic inefficiencies of the recovery limited to the top end of the financial industry, or for a recovery based on the Fed reinflating asset bubbles, or for tuition increases at double to quadruple the consumer price index.  But the funding news is not good. The AAAS has a useful comment (scroll down to "Post-Election Outlook on Federal R&D Funding"). This table shows that energy research at the DOE would take a particular hit if the Republicans make good on their pledge.

Our ASU and CSPO colleague Dan Sarewitz has a good comment on the general issue, which is that funding levels get too much attention and social purposes not enough.

Boosting funds for basic research is also safer politics than actually tackling a national problem. . . . Doubling the NSF budget makes good politics. But what about good policy? Although few would question the value of a robust basic-science enterprise, we just don't know how marginal increases in basic-research funding affect a nation's capacity to solve social and economic problems. On the other hand, decades of research on the links between science and innovation in areas ranging from jet engines to medicines show that basic research best contributes to economic and social goals when targeted at areas that can directly benefit from additional fundamental knowledge.

If Congress wanted to allocate scarce new R&D resources wisely during a protracted period of budgetary austerity, it wouldn't adopt a doubling strategy, but would instead take a more surgical approach to set priorities. It would focus investments where links between science and application are well established, to deliver short- to medium-term benefits. Alternative energy, for example, offers many technological options where basic research can improve performance.

Sarewitz is here pitching "Pasteur's Quadrant" in vital areas rather than basic research. I think he hammers basic research mistakenly at the end ("I know that such an approach would be fiercely opposed by the leading voices of the scientific community, who will never abandon the long-falsified belief that basic research is most valuable to society as a bottom-up enterprise driven only by inherent scientific interest.")  But I share his distress at the refusal of politicians -- and science policy leaders -- to articulate social goals and then fund R&D that addresses them.

The U.S. is the only major power where socially-beneficial tech development is hamstrung by a deep political phobia about industrial policy.  Our lunch is being eaten in solar energy and other domains by the country with the most systematic industrial policy in the world - China.  This is a bad time to push for science policy rooted in social development -- something only public agencies can do.  But it is also even more urgent now than it was when Obama was elected two years ago.