The government-in-business debate gets tricky when one brings in national interest.

An ideological issue frequently crops up during the presidential election season in the US: should the government be actively involved in the private sector, or let the market do its thing? The Obama camp, which handed out money to rescue firms and support others in order to stimulate the economy, will support governmental action while the Romney camp will say it is none of the government’s business to be involved in business. But what happens when you throw national interests into the debate?

A current case is that of A123, a lithium-ion battery manufacturer with operations in Michigan and Massachusetts. The Federal Government and both State Governments have invested money in it. The company is now facing the threat of bankruptcy. A Chinese company has offered to invest in the company that would ultimately give the investor 80 per cent control.

Lithium still struggling

Green energy is the industry of the future. So many governments and companies are eyeing this field. When a technology is at a level where it is uncertain, but considered important for the country, it draws in the government.

The technology, which A123 uses, has a lot of potential for use by electric and hybrid vehicles in the auto industry. But conventional automakers are making this kind of battery as well. So how unique is their technology? Is lithium ion at the cutting edge of technology and needs to be assisted, or is it a cost issue that explains the firm’s performance? Experts are divided on whether lithium-ion technology really has all that much potential. Battery-driven vehicles right now are faced with two issues — how long does the battery last, that is, how many miles can the vehicle run with one charge, versus the cost of using it instead of oil. Lithium ion has been around for about 20 years, and it is still struggling to be uniformly acceptable for vehicles.

A123 was running out of cash, and there has not been enough domestic private investor interest. Perhaps, as some have suggested, there is excess capacity in this kind of technology, so it is not attracting investors. So, the argument goes, the Chinese must be interested in investing in order to get hold of the technology.

National interest

Apart from encouraging this kind of technology, should the US Government get involved in protecting it as well? A123 received about $250,000 (Rs 1.4 crore) of federal funds because it was seen as an innovative company working on a technology of the future. It was one of 37 groups (companies as well as divisions of companies) that received federal funding as part of stimulus money. One of the requirements of getting the money was to put up manufacturing plants in the US so that jobs are created.

In a globalised world, national identities and interests become difficult to unravel. Nissan, a Japanese manufacturer is making batteries in the State of Tennessee, and has received government funds, too. The Chinese investor is arguing that A123 will now have access to a growing Chinese market. But nationalist politicians in the US have a reason to be concerned when it comes to the Chinese.

China, in 2009, became the largest car market in the world. Given the problems and costs of procuring oil, the Government has been setting ambitious goals with regard to clean energy and alternative fuels. An important missing piece is that they lack the technology to build the batteries on which electric vehicles can run.

Chinese behaviour

But globalisation is a win-win situation if it operates on a level playing field. The automotive sector in China is skewed to favour domestic firms. Joint ventures with a local partner are required and foreign companies are not allowed more than 50 per cent ownership. The explicit objective of the Government is for the domestic partners to learn the technology so Chinese firms can be globally competitive. (It is not clear if that means the joint venture partner will be disposed of in the future.)

The other problem is how the Chinese Government has behaved in the past when it comes to using its dominance. Take the case of rare earths. China now accounts for about 95 per cent of the global rare-earth mineral output. Repeating the pattern in other industries, rare earth manufacturers in other countries slowly shut down operations as they could not compete with Chinese low prices. Then, since 2010, China began to slowly restrict exports through taxes and quotas, which pushed up prices. The objective is to force foreign electronics and green-energy companies that need the rare earths to set up plants in China and thereby access the materials. In response, companies in Japan and India have now returned to build their own rare-earth mining and processing capacity.

Although the Republicans were initially against the Federal Government handing out money to companies, they are now criticising the potential loss of battery technology to China after the Government had invested in A123. So would they be agreeable to more government investment to keep the company here?

There is one other way the Government can try to keep control of the firm within the country. All foreign investments are scrutinised by an inter-departmental committee of the Federal Government from the perspective of national security. Only recently, the Chinese telecom equipment maker Huawei was said to have given up its plan to buy a share of a US company 3Com due to the latter’s security concerns.

It is not clear what will happen to A123 — if a local white knight will ride in to the rescue or the US government will make it difficult for the Chinese company to gain control. Meanwhile, the case is providing a lot of fuel for the two presidential candidates to debate their views on what should be the role of the government. But don’t hold your breath. This is not a debate that is going to be resolved anytime soon!

(The author is professor of International Business and Strategic Management at Suffolk University, Boston, US. blfeedback@thehindu.co.in)

(This article was published on August 26, 2012)
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