Geoeconomic advantage through innovation: what made- in-China solar PV cells reveal

To get from an idea to a commercial product is a long game. It is one that requires a lot of capital. Capital can come from many sources- but it cannot be shy or too afraid to risk the adventure, and it has to be there for the long haul. 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 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 and 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. NASA’s space program was the first major customer. Sharp, Japan’s electronics market leader and the Mitsubishi Group, a manufacturing leader, put solar cells in consumer electronics in Japan. All of these companies were private businesses. They were dominant actors in their respective markets that could use their own resources to innovate, diversify and grow. They also had access to developed financial systems. The US, and then Japan, the two main producers in the until the 1970s and 1990s respectively, were overtaken by Germany as the largest solar cell manufacturer by the early 2000s.

Enter China. Around the time of Bell Labs’ discovery, the Chinese government also funded some research into solar cells. But China was not at the forefront of research; nor was it to be at the forefront of production for another five decades. China was and is much poorer. Even in 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)in the previous decades. By 2000, China’s liberalization began to bear fruit and 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; both SOEs and private firms would be involved in production and installation. With China’s rise would come the unexpectedly quick demise of production in the initial innovators. China’s predominance would be sustained. How did all this happen?

Finance was the key ingredient. Innovation needs long-term funding and markets in untested products are unpredictable and risky.

China first entered the downstream market-making solar cells and modules-once the technology had stabilized, investing heavily in production for export. The success of China’s industrial policies was made possible by the extent of the financial resources -in absolute and relative terms- that were under state control and dedicated to solar PV manufacturing investments. China’s resources were not only substantial but were also growing fast and had unique characteristics. Its banking assets were already $15 trillion by 2010; the US banking sector had assets under $12 trillion (although stock market capitalization in the US was 4 times that of China at that time). Banks in China were (and are still mostly) owned by the state. Households have a very high propensity to save  and deposited their substantial savings in these banks (national savings to GDP averaged 43%, 29%, 18% and 25% during 2000-2020 in China, India, the US and Germany respectively). Companies, at first only state-owned, borrowed from state-owned banks to invest in  defined priority areas. So did state and local governments who had their own resources and, in addition, owned special purpose vehicles through which they raised funds. Private companies, as they materialized, and particularly since 2000, formed joint ventures with government entities to gain access to bank and other financing, before eventually looking to foreign markets, such as the NYSE. Foreign investors like growing companies too.

 Certainly, the US has had the most diversified and sophisticated financial market: venture capital, private banks, growth equity and capital markets have been active for decades, supporting innovation and private enterprise.  In China, banks were the only substantial players, but over time other financial institutions have bloomed. In the US, VC funding emerged and grew in the 1960s, China had some early state-led VCs, and increased activity in the 1990s, but VC activity, foreign and domestic, has only been substantial since the 2010s, rising with the pace of entrepreneurial activity and innovation. Chinese stock market capitalization has grown substantially too. Other rich countries, such as Germany and Japan, were somewhere in between. 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.

Bank financing, stable and constant, reflecting strong public sector commitment to solar PV manufacturing was a principal advantage that Chinese producers had, although today, different types of financial institutions have become important. China began in the downstream, more standardized parts of the production process, focusing on efficiency and process innovation to win markets-exposing firms to strong internal competition to this end, even as it subsidized industry. Such a strategy ensured that financing went to winners. Neither did global market volatility reduce ambition. Government support to their solar industries wavered substantially in other countries when they faced fiscal constraints and competing priorities took over. In the US for example, support to solar energy has waxed and waned – with fossil fuels (think shale oil) gaining the advantage. But private companies, with their huge assets, are doubling down on solar PV manufacturing now– for data centres and space satellites. In Europe, energy security and global warming concerns 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. Its future success remains to be seen. 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 the high-tech industry?