• In real life, the difference between "market" and "government" is not black and white, just combinations of different incentives. Since China began with a state-controlled economy, that's why local governments control lots of resources (land, finance, SOEs, etc.) and unavoidably get into the business of investing in real assets. Depending on the industry — steel is different from semiconductors, for instance — the cooperation between governments and corporations is very different. This chapter is on some landmark case studies, but does not necessarily mean they are the best.

1. BOE Technology & Government Investment

• In 2008, the price for a 70inch LCD TV would have been 400K RMB, or half the cost of an apartment in Beijing or Shanghai. In 2008, China's market share in the LCD sector was 0, by 2020, it was 40%. In this business, local government investment played a huge part.
  • BOE is the world's largest player. Its top 6 shareholders are government background investment companies from Beijing, Hefei and Chongqing, with collective shareholding of 23.8%. Some of them are conglomerates, and others are focused on the electronics sector, and one is a city investment company as described in the last chapter.
• LCD players in South Korea, Japan and Taiwan used to get together to collude on prices, and it wasn't until 2013 that the Chinese government fined them 350mm RMB; EU fined them 650mm euros, the US $1.3Bn.
• BOE was, at 2005, just 3 years behind industry leader LG's technology, having acquired a Korean company. It tried to take this project (a factory line) public failed, but production had already started, so the Beijing government stepped in, and along with CDB, gave BOE a $740mm loan, and another 2.8Bn RMB was also loaned by the government through an entity, which was later turned into equity.
• The first 2 years (2005-6) were very bad, and BOE lost a lot of money. The government couldn't help, and the banks agreed to extend the payback. The smallest bank initially refused and took a long time to agree. Because of this trouble, future funding was raised via equity.
  • In 2008, BOE expanded in Chengdu and raised money from the two city investment companies.
  • BOE tried to expand into Shenzhen, but competitor Sharp heard about the plan and convinced the government they could come in with better technology, scuttling the plan. (Sharp later quit the plan.) The same thing happened with Shanghai.
  • Now it was Hefei's turn. The government didn't have enough money so it even opened the financing to the market. It worked — 2 city investment companies put in 3Bn RMB, but 8 other entities put in 9Bn RMB.
• Local governments were investing into BOE by asking local banks to provide low or no interest loans (ie 0.01% 200mm RMB loan from Bank of Beijing or 4.95% loan from Chengdu but interest subsidized by the government).
  • BOE is not alone; TCL which is privately owned also used much of the same methods.
• There are lots of obstacles for companies abroad but it doesn't always mean that the government should unilaterally help domestic companies. It matters how big the market is domestically. If the country is small and dependent on exports, then investing in domestic enterprises is actually subsidizing foreign consumers. However, for LCD screens, China happened to be the biggest consumption market globally, so it made sense for the Chinese government to be supportive.
• Also, investing upstream has positive benefits downstream. That's what happened with South Korea's investment in steel, electronics, etc. against the advice of the World Bank. It led to their first class automotive sector
  • The Miracle of East Asia has one special characteristic: government helping domestic companies enter into high complexity industries, resulting in learning, scaling up, and technology spillover.
    • 2000-2018, China increased from 39th in world to 18th in terms of complexity of goods exported
  • For these new industries, where they set up factories doesn't matter too much, but once they are established, whole hubs are built because there are economies to building an entire supply chain in close proximity

1. Photovoltaic (PV) Development and Government Subsidies

• PV is just solar power. Around 2012, lots of Chinese PV businesses went bankrupt and this industry became the target of criticism for "failed government subsidies." But actually today China has the largest PV industry in the world, with about 80% of global capacity & 30% of installation, while helping drive down costs by 85% (2010-19).
• Suntech was founded in 2001, and Wuxi's 3 government investment platforms and 5 local SOEs invested a total of $6mm USD for 75%. But by IPO time in 2005, GS and other foreign investors had bought out the government's stake and Shi Zhengrong the founder owned 47% becoming the wealthiest man in China. Lots of similar entrepreneurs / investments followed such as LDK Solar. By 2010, over 20 Chinese PV companies had gone public abroad.
  • In 2011, the Wuxi government encouraged Suntech to double in size. At the time, 57% of Chinese PV was exported to Europe and 15% to US, China just 6% as it was uneconomical. Abroad Chinese PV especially benefited from feed-in-tariffs, but soon these diminished and Europe / US embarked on very unfriendly policies, leading to plummet in exports and many bankruptcies.
  • In 2011, the Chinese central government also started feed-in-tariffs. These declined over time in order to induce PV cos to improve efficiencies. By 2016-2017, Chinese was producing 73% of the world's PV but also installing 51% of it.
    • However, the attractive subsidies meant a lot of PV stations were built in the West where there was a lot of light but not enough consumption due to sparse, poorer populations. The subsidies were too much for the power companies to pay, and so projects would be abandoned. To fix this, the government instituted caps on domestic installations and reduced subsidies.
  • By late 2018, the EU also ended their policies that were unfriendly to Chinese PV companies. However, by this time, most European companies had already left the industry, but Chinese companies had accumulated enough knowhow by this time throughout the entire supply chain & were ready for the opportunity.
• To change to solar, the world had two choices: 1) increase taxes / costs for traditional energy sources; or 2) subsidize new energy sources. The second one makes much more sense, and it's how all countries did it. In fact, the US / Europe / Japan started on the technology earlier than China, began subsidies earlier, etc. The lesson here is that subsidies were absolutely necessary for the industry to take off, but they were not sufficient to produce a long-term viable industry.
  • The difference between East Asia & West is that East Asia focused on exports
• Local government subsidies can also lead to overcapacity. The PV industry is often used as a case to illustrate against this danger, especially "duplicate investing," which can happen because the next necessary technology is obvious, people are rushing for subsidies before they end, etc. But the benefits are that workers are trained, and there is more competition. The most important thing about government subsidies, therefore, is not whether or not there is wasted effort, but that competition is maintained. So local governments cannot protect local businesses — must let bankruptcy and restructuring happen.
  • LDK was a prime example of this where the government tried to protect it and made it worse. Suntech's bankruptcy, on the other hand, was much more market-oriented. Either way, China has a long way to go when it comes to exiting & reforming unproductive businesses (ie bankuptcy processes)

1. Government Industry Guidance Funds

• Government industry guidance funds are a sort of localization of Silicon Valley venture funds. They were mostly started in 2014 under the reforms of reducing capacity and leverage. According to Zero2IPO, y June 2019, there were 1,686 such funds with around 4Trn RMB in capital. According to Chinaventure, the number is smaller, 1,311 funds and 2Trn RMB.
• Compared to the traditional method of governments investing in companies, the guidance funds are different in the following ways:
  • Most act as LPs, investing in GPs, like a Fund of Funds
  • Sometimes the capital is directly given to a fund manager to manage
  • Most guidance funds are for new technologies like EVs or semiconductors, and cannot be invested in infrastructure projects
• They also take 3 main operating models:
  • Solely funded by the government like city investment companies in the last chapter
  • Hybrid ownership
  • For small cities, without the resources themselves nor money locally for a separate fund, they might just give the capital to a skilled manager to operate