27 October 2011

Dumb or smart China?

SK, DL and GT all sent this NYT article on China's bid to "dominate" the desalination industry in the near future.

Their strategy follows the tradition of "sell each unit at a loss but make it up on volume," i.e.,
The desalted water costs twice as much to produce as it sells for. Nevertheless, the owner of the complex, a government-run conglomerate called S.D.I.C., is moving to quadruple the plant’s desalinating capacity, making it China’s largest.

“Someone has to lose money,” Guo Qigang, the plant’s general manager, said in a recent interview. “We’re a state-owned corporation, and it’s our social responsibility.”

In some places, this would be economic lunacy. In China, it is economic strategy.
There are two potential problems with this strategy. First, China Inc may bet on the wrong technology or technique for handling water scarcity, wasting resources (the opportunity cost problem). Second, China Inc may not be able to take over the market (the competition problem).

Bottom Line: China's command and control bureaucrats can spend money more easily than they can make money.

2 comments:

Michael Warady said...

David,

I don't know if you've been following the recent trade war between China and the US in the solar industry (not to mention the recent nationalizations of industry leaders) but it may be useful to remember that China doesn't play by the same rules regarding "wrong technology or techniques". The Chinese manufacture and develop technology at a rate structure that is economically not viable in the West. If this SDIC decides to make a push against the West in terms of desalination industry with the full backing of the PRC and I'm assuming the China Development Bank, it is hard to imagine a situation in which they don't come out on top.

David Zetland said...

@Michael -- "on top" means different things. Top market share doesn't always mean top in profits. If the Chinese want to send money to the US (via subsidies), then let them.