Geoeconomic advantage through financing innovation: solar cells
Big business in the innovation game
To get from a new idea to a commercial product is a long game. It requires a lot of capital-the kind that does not shy away from risk and is there for the long term. Established, profitable companies, market leaders in their field, and committed to staying as such, tend to have access to this kind of finance and have thus produced significant, successful, innovations. Indeed, solar cells of the type we use today were first made at Bell Labs - the consolidated R&D unit of AT&T and Western Electric- in 1954. Bell Labs did fundamental research, meaning inventors were not constrained to have immediate market impact. In Germany, Siemens, a leading global company and one of the largest engineering companies in Europe, soon followed, inventing the Siemens process for high-purity polysilicon and producing its own solar cells. The US government, through NASA’s space program, was the first major customer. Sharp, Japan’s electronics market leader and the Mitsubishi Group, a manufacturing leader, entered. The former first put them on buoys and lighthouses and the latter focused on satellites for the Japanese government’s space program. But subsequently, both put solar cells in consumer electronics. All of these companies were private businesses with deep pockets. They also had access to developed financial systems. The US, Japan, and Germany were the main producers during the 1970s,1990s and 2000s respectively, but until the 2000s, the terrestrial market was small.
Business and bigness come in different forms
Enter China. Around the time of Bell Labs’ discovery, China was not at the forefront of research; nor was it to be at the forefront of production for another five decades. It was and is much poorer. Even by 2000, Japan, the US, and Germany had GDP per capita that was about 41, 38 and 25 times that of China respectively. China had been dominated by large state-owned firms (SOEs); by 2000, its liberalization had begun to bear fruit and large SOEs were soon joined by private firms that would eventually rise to international stature, either together as joint ventures with the state, or with state guidance and control. And China would become the world’s largest manufacturer and user of solar panels over the following years. With China’s rise and sustained predominance would come the unexpectedly quick demise of production in the initial innovators. How did all this happen?
When state-owned banks are your lifeblood… and people save at home
China found another way to finance its success. It had substantial financial resources -in absolute and relative terms- that were available domestically and under state control. These resources had unique characteristics: they were growing fast and were held in state-owned banks whose lending followed government priorities. Banking assets were already $15 trillion by 2010; the US banking sector had assets under $12 trillion (the Chinese stock market was much less developed than that of the US, but was growing fast). Households saved a lot, consumed much less than counterparts in countries with similar incomes, and deposited their substantial savings in these banks. These funds made up a substantial portion of domestic savings; retained earnings of firms were large too. Domestic savings to GDP averaged around 47%, 32%, 27%, 24% and 18% during 2000-2020 in China, India, Japan, Germany and the US, respectively. Certainly, the US had the most diversified and sophisticated financial market supporting innovation and private enterprise (think VC and capital markets). But government financing, stable and constant, reflecting strong public sector commitment to solar PV manufacturing and SOE dominance in capital markets was a principal advantage that Chinese producers had; VC activity rose only later.
At first only state-owned firms, borrowed from state-owned banks to invest in priority areas defined by government. So did state and local governments who had their own resources (such as land) and, in addition, owned special purpose vehicles through which they raised more funds. Private companies, as they materialized, and particularly since 2000, formed joint ventures with government entities to gain access to financing, before eventually looking to foreign markets, such as the NYSE. But importantly, as solar technology was new, commercialization and demand risk remained high in most markets, which meant that private financing, even in sophisticated markets, was not sufficient on its own to promote solar PV manufacturing and use.
Successful geoeconomics is about a steady line of sight
For swift commercialization of new technology, with all its attendant risks, sustained investment and sustained government support help. At the start, China focused on making solar cells and modules once the technology had stabilized, investing heavily in production for export. Eventually, government support to burgeoning private firms, also moved into more complex upstream segments: making high purity silicon and wafers for solar cells. China’s support to its solar industry has remained through volatile market conditions. In other countries, government support to their solar industries has wavered substantially. In the US for example, whilst overall demand from NASA remained, support to solar energy industry has waxed and waned, with fossil fuels (think shale oil) gaining the advantage. But now, again, private companies with assets, huge enough to take on governments, are doubling down on solar PV manufacturing– this time to produce energy for data centres and space satellites they own and/operate. In Europe, energy security and global warming concerns have battled with fiscal concerns. Now, energy security is at the forefront supporting a renewed focus on renewables. Among poorer countries, India, keen to diversify from Chinese imports and to export to others with similar goals, has joined the fray, exporting its more expensive modules with government support. However, it is dependent on China for inputs (see my next blog). In China, solar production and capacity moves inexorably and aggressively forward. In 2023, the IEA reports that China invested $220 billion into solar PV- almost half of the global total. China also produces 80% or more of polysilicon, wafer, cells, and modules globally.
A model for other high-tech industry? Some think so.