Another great piece, very interesting to see a breakdown of these political relations. This sort of "relative autonomy" that's needed makes perfect sense as a requirement for good development. I think one of the biggest blockers of industrial policy success right now in the developed nations is no one wants to use the stick (and they barely use the right carrots). The Chinese state hasn't been without contradictions, but it's ability to discipline in some ways has been greater.
Also curious what program you're using to make graphics?
Thanks David. And yes, certainly there's not a lot of discipline of the type i'm referring to in developed countries, so by comparison China's situation may look far more effective.
I draft (and generally take notes) in Obsidian, and there's a built in drawing tool in the application. So that's what I use. It's nice for simple things, but try to do anything remotely complicated, and you'll have to switch to something else.
My experience in China indicates that ferocious price wars are common. Years back a guest piece in HBR explained price wars as a strategy and used the example of the microwave oven appliance industry. State directed capital has proven to be directionally effective, but the allocation of capital, as you clearly explain, is not efficient. There is no incentive for local governments to constrain their support for a local business that has a multiplier effect for the local economy. Perhaps this is where private investors, risking their own funds, could provide market discipline that the local government cannot. Private, market focused, VC-PE-Angel investors, would stop funding the weaker competitors earlier than a local government.
I'm trying to think through this framework of embedded autonomy. In some sense, this is basically arguing that the local governments should act like VCs. At least the good VCs need to be sufficiently embedded in the industry, and of course most of them don't get to interfere too much with the companies they invest.
What is interesting is that one could probably argue that VCs got to this stage by competition in the free market, as opposed to some higher-level grand design. This makes me think of Steven Ng-Sheong Cheung (张五常)'s theory of County Competition (县际竞争). It'd be curious to think about to what degree the local governments that are better at industrial policy can grow their investment relative to others and dominate, and to what degree this competition across local governments is disrupted by political reasons.
1. The idea of setting price floors was already tested by the China Association of Automobile Manufacturers, in the now-famous joint letter “汽车行业维护公平竞争市场秩序承诺书” co-signed by all major players.
Notably, the clause related to pricing floors was later removed—under pressure. But where did that pressure come from? My take: either the government had its hands tied, or it made a conscious choice to stay out.
2. Local government competition isn’t unique to China. Look at the U.S. or Canada—every time a foreign investor like Northvolt shows interest, provinces or states pull out all the stops to win the deal. And they tolerate failure—often more than they should.
But this margin of tolerance doesn’t necessarily improve the odds of picking a winner.
Conclusion: The real engine behind China’s industrial transformation lies elsewhere. Keep digging.
Another great piece, very interesting to see a breakdown of these political relations. This sort of "relative autonomy" that's needed makes perfect sense as a requirement for good development. I think one of the biggest blockers of industrial policy success right now in the developed nations is no one wants to use the stick (and they barely use the right carrots). The Chinese state hasn't been without contradictions, but it's ability to discipline in some ways has been greater.
Also curious what program you're using to make graphics?
Thanks David. And yes, certainly there's not a lot of discipline of the type i'm referring to in developed countries, so by comparison China's situation may look far more effective.
I draft (and generally take notes) in Obsidian, and there's a built in drawing tool in the application. So that's what I use. It's nice for simple things, but try to do anything remotely complicated, and you'll have to switch to something else.
That's the same application I use, I assume you use exalidraw then!
thats exactly it!
My experience in China indicates that ferocious price wars are common. Years back a guest piece in HBR explained price wars as a strategy and used the example of the microwave oven appliance industry. State directed capital has proven to be directionally effective, but the allocation of capital, as you clearly explain, is not efficient. There is no incentive for local governments to constrain their support for a local business that has a multiplier effect for the local economy. Perhaps this is where private investors, risking their own funds, could provide market discipline that the local government cannot. Private, market focused, VC-PE-Angel investors, would stop funding the weaker competitors earlier than a local government.
Great post!
I'm trying to think through this framework of embedded autonomy. In some sense, this is basically arguing that the local governments should act like VCs. At least the good VCs need to be sufficiently embedded in the industry, and of course most of them don't get to interfere too much with the companies they invest.
What is interesting is that one could probably argue that VCs got to this stage by competition in the free market, as opposed to some higher-level grand design. This makes me think of Steven Ng-Sheong Cheung (张五常)'s theory of County Competition (县际竞争). It'd be curious to think about to what degree the local governments that are better at industrial policy can grow their investment relative to others and dominate, and to what degree this competition across local governments is disrupted by political reasons.
Interesting—two observations:
1. The idea of setting price floors was already tested by the China Association of Automobile Manufacturers, in the now-famous joint letter “汽车行业维护公平竞争市场秩序承诺书” co-signed by all major players.
Notably, the clause related to pricing floors was later removed—under pressure. But where did that pressure come from? My take: either the government had its hands tied, or it made a conscious choice to stay out.
2. Local government competition isn’t unique to China. Look at the U.S. or Canada—every time a foreign investor like Northvolt shows interest, provinces or states pull out all the stops to win the deal. And they tolerate failure—often more than they should.
But this margin of tolerance doesn’t necessarily improve the odds of picking a winner.
Conclusion: The real engine behind China’s industrial transformation lies elsewhere. Keep digging.
Thanks for an interesting read. What about mergers? Could consolidation through forced/ encouraged mergers remove some players and capacity?