** There is a lot of (in my view) somewhat confused analysis of Chinese investment that works off the analogy provided by either foreign investment in China’s auto sector or Japanese investment in the U.S. and Europe in the 1980s. These are relevant examples of course, but asserting that Chinese investment will result in a similar outcome when the underlying economics differ is a big logical jump. Japanese firms had incentives to localize their parts production in the United States from the then-strong yen as well as from the risk of protection. Foreign firms operating in China had to do JVs until recently and had incentives to localize from China’s significant tariff on auto parts and China’s lower cost structure (in part because of a weak RMB). Tesla’s Shanghai incentives and tax deal included strong localization incentives, and there were additional incentives from Tesla’s desire to qualify for the lists the governed access to China’s consumer EV subsidies. That is why something like 90 percent of Tesla parts, including its batteries, are now made in China. Chinese investors in Europe have no similar incentives to localize right now, yet many assume that the results will be the same. That, to me, is naïve. Since the underlying economics differ (Europe’s cost basis is much higher than existing production in China) getting Chinese firms to do more than final assembly in Europe will take stronger policy tools than were required to get foreign firms to localize parts production in China. Europe’s Industrial Accelerator Act would be a step in the right direction, but more is likely needed. Thailand provides a useful cautionary example.
Source: www.cfr.org
