China appears to be in the process of successfully implementing its long term strategy towards a higher tech, higher margin and more balanced economy (see ‘From China With Love’, Oct. 2017). The NIO ES8, a 7-seater electric vehicle which was displayed at the conference and compares favorably against Tesla’s Model X (same range, half the price), was seen by attendees as a tangible example of what China is capable of. This progress is, in turn, de-risking China Inc.’s leveraged balance sheet.
Ironically, industrial policy finds one of its pioneers in the US, namely Alexander Hamilton. Mr. Hamilton, the first US Secretary of the Treasury, wrote in its ‘Report to Congress on the Subject of Manufactures’ in 1791: ‘To be enabled to contend with success, it is evident, that the interference and aid of [the] government are indispensable’. Elsewhere: ‘To produce the desirable changes, as early as many be expedient, may therefore require the incitement and patronage of government’ in order to overcome ‘the fear of want of success in untried enterprises – the intrinsic difficulties incident to first essays.’
Fast forward to the 80’s. Under President Reagan, Project Socrates was launched to support the design of an industrial policy for the Unites States of America. It was a classified program with a two-fold mission: (1) Utilize all source of intelligence to understand the true causes of the US’ decline in competitiveness (in particular when compared to Japan which was still benefiting from successful policies implemented by the Ministry of Industrial Trade and Industry); (2) utilize this understanding to develop the required solution.
Project Socrates found that the move from technology-based planning which prevailed before WWII (focus on technology and its application to gain competitive advantages) to economic-based planning (focus on capital efficiency) was at the core of the issues when competing against Asia. To reverse the trend of declining competitiveness, the US had to identify ways to leapfrog the tech-based planning of competing nations. The next frontier for mankind and target for the U.S. was identified as ‘the Automated Innovation Revolution’: the process for technological innovation had to move from a haphazard and inefficient one to a standardized and automated one, with a dramatically favorable impact on R&D productivity nationwide (see ‘The Bang For The R&D Buck’, Oct. 2017). The Socrates team went on to build a prototype version of the automated innovation system which, at its core, fostered the coordination of public institutions and private organizations efforts through the establishment of a vast ecosystem. The project was then killed by the Bush administration.
But China read the memo. Its successes will continue to change the dynamics in the Diversified Industrials sector for years to come. As its economy evolves from quantity to quality, some of its faster growing industrial sectors (e.g. wind, nuclear, urban transportation) will increasingly favor domestic players. The addressable market for foreign companies may not grow as fast as that for Chinese players who can then afford to be bolder when seeking to penetrate foreign markets. How to respond?
In the Broadway hit musical about his life, Hamilton sings ‘I am young, scrappy and hungry/And I am not throwing away my shot/It’s time to take a shot’, which represents an image of the US at the end of the 18th century. Isn’t it how all the developed nations and organizations should feel at the dawn of the 4th industrial revolution? A rejuvenating cure and an open mind about industrial policy, if not implemented by governments then by non-profit organizations (check here for a proposal), must be considered to underpin new, visionary plans to successfully compete through innovation – in a way which is fully consistent with the belief in free markets. Socrates, where are you?