Knowledge Capital Writedown: Wind Turbines

On the front page of the NYT this morning, Keith Bradsher gives a perfect example of a knowledge capital writedown, in his story about wind turbine technology being transferred to China by a Spanish company, Gamesha:

Nearly all the components that Gamesa assembles into million-dollar turbines here, for example, are made by local suppliers — companies Gamesa trained to meet onerous local content requirements. And these same suppliers undermine Gamesa by selling parts to its Chinese competitors — wind turbine makers that barely existed in 2005, when Gamesa controlled more than a third of the Chinese market.

But in the five years since, the upstarts have grabbed more than 85 percent of the wind turbine market, aided by low-interest loans and cheap land from the government, as well as preferential contracts from the state-owned power companies that are the main buyers of the equipment. Gamesa’s market share now is only 3 percent.

With their government-bestowed blessings, Chinese companies have flourished and now control almost half of the $45 billion global market for wind turbines. The biggest of those players are now taking aim at foreign markets, particularly the United States, where General Electric has long been the leader.

The story of Gamesa in China follows an industrial arc traced in other businesses, like desktop computers and solar panels. Chinese companies acquire the latest Western technology by various means and then take advantage of government policies to become the world’s dominant, low-cost suppliers.

It is a pattern that many economists say could be repeated in other fields, like high-speed trains and nuclear reactors, unless China changes the way it plays the technology development game — or is forced to by its global trading partners.

Because of Gamesha’s transfer of knowledge capital to China, GE’s knowledge capital has become less valuable, which eventually will affect wages and employment.   Gamesha’s knowledge capital has been less valuable as well, which affects the Spanish standard of living.

The correct policy prescription is for the U.S. to dramatically up our investment in knowledge capital and physical capital.  Dramatically. That may require less support for consumption now so that our children can be better off in the future.

Having written that sentence, I need to make a caution: The current categories of consumption and investment in the national income accounts are simply wrong, and giving us misleading policy advice. Education spending and public support for R&D are both  counted as consumption, which is wrong.  New homes are counted as investment, which is wrong as well.  And healthcare, which is currently completely counted as consumption, should be partly counted as investment as well in the workforce.

EDIT: I changed the original title on the post.

Comments

  1. Thank you for this, even though the message is maddening.

    I see a great deal of posturing, but ultimately, I fail to see how any company that sends its manufacturing to a foreign nation could be surprised that people of that nation soon know all there is to know about the technology.

  2. I have a general question about how to combat this issue. Chinese companies have been raiding on foreign technology for many years now. Is the solution to this multilateral? By that I mean, do we strengthen the WTO with regards to patents and such? That would be unlikely to happen, because of the consensus nature of the WTO.

    I really do think that out-sourcing has been one of the most short-sighted decisions by the business leaders of our country ever. We are pushing out our technology and know-how that was gained over many decades to countries who did not have to go through that learning curve.

  3. Here’s a link that suggests otherwise, that at least in the most profitable segments, the Chinese derive almost no value and have not been able to catch up in any meaningful way. Frankly, I don’t much care what sectors they acquire, as such govt-assisted companies are ultimately self-defeating, look at the US car companies or Japan since the late 80s. If HTC is able to do a good job at a cheaper price though, I’m glad to buy that value.🙂

  4. “The correct policy prescription is for the U.S. to dramatically up our investment in knowledge capital and physical capital.”

    This isn’t the correct policy at all. So long as Chinese can easily acquire the West’s knowledge capital, we shouldn’t be spending money on it at all. If the article quoted is any indication at all, increased spending on knowledge capital will primarily end up benefiting Chinese workers and especially Chinese oligarchs. It doesn’t make any sense to engage in productive activity if someone else will be the one enjoying the fruits of your labor. That said, Mandel must be making a thousand assumptions that are unstated, because the argument he outlines here doesn’t make any sense. If it is true, as he points out, that in a course of a few years Chinese firms, at a very, very low price, can acquire almost whatever knowledge capital they want, then the reason for the write down in the value of knowledge capital has to do with the fact that knowledge capital is no longer an exclusive good. Now, that doesn’t mean China will be able to generate any new knowledge capital in the future. What it does imply, however, is that anyone in the U.S. or Europe who does produce knowledge capital is unlikely to be compensated for use of that knowledge capital. So how then is investment in knowledge capital in trade-able goods and services supposed to make U.S. citizens wealthier in the future?

    • Mike Mandel says:

      Good point, I did have some unstated assumptions. My assessment is that there ‘s been an innovation shortfall in many areas, outside of communications. The apparent slowdown of innovation has made it easier to offshore production and transfer knowledge capital, because the leading-edge hasn’t been moving that quickly. So the investment in knowledge capital is both to make up for the writedown, and also create the conditions under which the writedown slows.

Trackbacks

  1. […] This post was mentioned on Twitter by Ben Shoemate, Claude Vinet. Claude Vinet said: Knowledge Capital Writedown: Wind Turbines « Mandel on Innovation … http://bit.ly/erv9qn […]

  2. […] This article is cross-posted at Innovation and Growth […]

  3. […] This article is cross-posted at Innovation and Growth […]

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