Divergent technological strategies among leading electric vehicle firms in China: Multiplicity of institutional logics and responses of firms

Abstract

This paper aims to explain the divergence in technological strategies among leading electric vehicle (EV) firms in China. EVs, with their prospect of energy efficiency and emission reduction, have attracted widespread attention in recent years. However, EV development still faces technological challenges. While these challenges are similar for all firms, their coping strategies are highly divergent. One of the main reasons is that the policy environment for Chinese EV developers is shaped by a multiplicity of institutional logics which are sometimes incoherent. This allows firms to selectively build on those institutional logics that meet their needs and priorities. This strategic behavior results in divergent technological paths.

1. Introduction

This paper explores the diversity of strategies used by companies when confronted with similar challenges. Scholars have developed a series of conceptual tools with which to interpret the strategic choices of firms, such as the capacity accumulation of firms ( Nelson and Winter 1982 ), path dependence ( David 1985 ) or the influence of sector/regional innovation systems ( Breschi and Malerba 1997 ; Cooke et al. 1997 ). This paper adds a specific institution-centered perspective with an emphasis on the interactions between firms and different institutional logics. It can be seen as a response to Nelson (1991) .

This paper investigates how institutional environments influence the discretionary choices made by firms. By introducing the concept of a multiplicity of institutional logics ( Greenwood et al. 2011 ), it opens the black box of the institutional environment, and helps us to understand the responses of firms to the diversified institutional logics as a critical source of their differing strategies. Institutional logics are overarching sets of principles that prescribe how to interpret organizational reality and provide guidelines on how to behave in social situations ( Greenwood et al. 2011 : 318). Firms respond to the logics of certain institutions that shape their environment in order to gain endorsement from important referent audiences, for example local or national government institutions. However, since the institutional environment always consists of multiple institutions with different logics, firms have to prioritize the logics that they are confronted with. Hence, the autonomous strategic responses of firms are shaped by the institutional logics that they perceive to be the most important.

This paper does not regard the strategy of a firm as an automatic reflection of resource conditions and environmental conditions. Instead, it is the firms that actively perceive and analyze their environments, and determine which dominant logics to follow. Again, the behaviors of firms reshape their environments ( Lok 2010 ). But since their interactions with the external environment are mainly framed by the dominant logics they choose, their reactions to environments are also dissimilar but are characterized by the struggles within their dominant institutional logics.

Using an in-depth investigation into the dissimilar strategies of Chinese EV firms addressing similar challenges, this paper aims to reveal the interaction between the institutional environment and the firms’ reactions, while seeking clarifications for innovation policies.

1.1 The significance of EV development

This paper studies the technological trajectories of leading EV firms in China. The development of the EV industry is an increasingly important issue worldwide ( Altenburg 2014 ; Schamp 2014 ; Chaudhary 2014 ; Altenburg et al. 2016 , pp. 464–75; Chen et al. 2014 ) as EVs are widely considered to be an effective way of promoting energy efficiency and reducing emissions from road traffic ( Weiss et al. 2000 ; Bandivadekar et al. 2008 ). It is particularly important to study EV development in China, since it is the world’s largest developing country and has a large-scale automobile industry. In fact, China has already been the top producer and consumer of automobiles for five years in a row. ¹ It had over 137 million automobiles in 2013, with the number of privately-owned passenger cars growing rapidly, reaching 85.07 million in 2013, with a 13-fold increase over ten years. The automobile industry accounts for 85% of gasoline and 20% of diesel consumption in China, ² contributing to the country’s leading position in world petroleum consumption with an import petroleum dependency rate of 58%. Automobile emissions have become an issue of concern for Chinese society because of the broadly debated pollution of the air with fine particles. However, the increase of automobile consumption in China is unlikely to ease in the near future, since the vehicle penetration rate is still at a comparatively low level, merely about 105.86 sets per thousand population in 2014. ³ Therefore, the development of the EV in China as an alternative to the traditional automobile is not only a national issue but also a global one.

The Chinese government plans to achieve 40–45% reduction in CO ₂ emissions per unit of gross domestic product (GDP) in the period 2005–20. Therefore, the development of the EV industry must play an important part in order for such targets to become a reality. Meanwhile, given the significant linkage effects of the automobile industry, China regards the development of an EV industry as critical in leveraging economic growth. To develop EVs is not only a means to reduce emissions and safeguard energy security, but also a potential short-cut for catching up in the automobile industry. Thus, the Chinese government is mobilizing support for strategic investment in EVs. ⁴

1.2 Compelling challenges of battery technologies

Even though China considers the EV industry to be strategically important for economic, environmental and energy-saving purposes, the disadvantages China faces in traditional automobile technologies would not automatically be turned into an advantage in EV technologies ( Gong et al. 2013 ). Battery performance significantly influences the power and environmental efficiency of vehicles, which makes it the heart, and also the bottleneck, in EV development ( Armand and Tarascon 2008 ). Since the EV industry is still at an early stage of the product life cycle, developers from China, like most competitors around the world, are also confronted with the challenges of developing better battery technologies ( Schamp 2014 ; Altenburg 2014 ; Chaudhary 2014 ; van Noorden 2014 ). The progress in improving battery performance may determine the long-term competitiveness of their respective local industrial ecosystems.

EV developers in developing countries usually lack battery know-how. In this situation they pursue different strategies: funding in-house R&D for developing core battery technologies, working on substitute technological solutions in order to avoid long-term commitment to battery development, relying on external cooperation, or simply outsourcing battery modules. The central difference is whether or not the corresponding firm regards the exploration of core technologies as a critical part of its response to the external challenges. Certainly, at a general level, the Chinese government has implemented a series of policies to encourage indigenous innovations in EV technologies. At any given time, however, different levels of the government such as ministries and regional governments have different goals in mind, and some of the policies developed for pursuing these goals conflict with each other. For example, in the domain of EV development, the Ministry of Science and Technology emphasizes technological criteria and the Ministry of Environmental Protection cares more about emission reduction, while the regional governments usually seek to prioritize expanding the scale of the local economies. The multiplicity of institutional logics allows firms some space to maneuver, and also enables them to reshape the interrelated institutional environments. The relevant firms, governments, suppliers, and customers may align with each other for some developmental goals.

Therefore, in order to generate a clear picture of the divergent technological strategies of leading EV firms, this paper focuses on how these actors, including firms, governments, suppliers and customers, ally with each other, and what kind of institutional logics they follow or enhance.

Data in this paper was mainly collected in two ways: document analysis and personal interviews. For document analysis, the authors have analyzed all the major policy documents issued by the central government of China in the period 1994–2014, and all the annual reports of four firms: Foton, Shifeng, Zotye, and BYD. For personal interviews, authors have interviewed relevant officials from the central government and a series of relevant regional governments including: Shandong Provincial Government, Liaocheng Municipal Government, Gaotang County Government, Shenzhen Municipal Government, and Hangzhou Municipal Government. Interviews regarding firms were carried out during 2011–14, and the interviewees were all officials directly in charge of EV policy in the respective governments. Nine EV producers were involved, there were in-depth open interviews with 21 managers from these firms, and nine managers from four battery companies also participated in the interviews. ⁵ Additionally, we had discussions with researchers from the Development Research Center of the State Council and researchers from China EV100. ⁶ The validity of the qualitative evidence was ensured by the cross-examination of information from different sources.

2. Theoretical review

A major task for firms is to respond to the equivocality of the external environment ( Weick 1979 ). The external environment, especially the institutional environment, usually has a significant impact in terms of enabling or hindering innovations by firms ( Nelson 2008 ; Nelson and Sampat 2001 ). In discussing the relationship between a firm’s innovative activities and its external environment, embeddedness ( Granovetter 1985 ), path dependence ( David 1985 ) or the dominance of the social-technological system ( Perez 1983 ) are often emphasized and adopted as explanatory paradigms. However, the external environment, including policy, market competition and industrial chains, can be more complicated than these concepts suggest. The environment may include multiple dimensions. For each dimension there can be multiple and even conflicting institutional factors, and these complex institutional factors are always undergoing dynamic changes ( Scott 2008 ). Therefore, it is far from sufficient to merely state that firms have to respond to their external environments. In order to gain a better understanding of the relationship between firm and environment, researchers need to disclose which external institutional factors have and have not been responded to by firms, and how.

In fact, Karl Weick and his followers believe that the ‘externalities’ perceived and interpreted by different firms are essentially dissimilar ( Weick 1995 ; Thornton 2004 ). Some institutionalists suggest that different institutional logics always exist in the external environments of firms ( Scott 1991 ; Friedland and Alford 1991 ; Kraatz and Block 2008 ) and in a complicated institutional environment, some institutional logics may be mutually incompatible ( Greenwood et al. 2011 ; Jarzabkowski et al. 2010 ). Therefore, it is not possible for a firm to respond equally to all institutional logics. How firms act depends on what kinds of logics they choose to respond to, how they filter logics, how they prioritize and how they develop their strategies during such a process ( Greenwood et al. 2011 ). That is to say, the differences among firms arise not only from institutional influence, but also from the firms’ initial perception and their choice of institutional logics:

Institutional logics are overarching sets of principles that prescribe “how to interpret organizational reality, what constitutes appropriate behavior, and how to succeed” ( Greenwood et al. 2011 : 318; Thornton, 2004 : 70)

An institutional logic contains a set of ideological goals and means ( Pache and Santos 2010 ). For business firms, an institutional logic is primarily constructed by a set of factors influencing the sustainability of business development (e.g. policy arrangements, financial methods, supplies of technology, and market). It also involves a series of socio-cultural factors, such as customer acceptance, the interrelated trust of the industrial community and social legitimacy:

Organizations comply with logics in order to gain endorsement from important referent audiences, socio-culturally and commercially, and because logics also meanwhile provide a means of understanding the social world and thus for acting confidently within it. ( Greenwood et al. 2011 : 318)

A system featuring dynamic transition is more likely to generate a complex environment of institutions ( Scott 2008 ; Kraatz and Block 2008 ). Such a situation is common in developing countries which are implementing catch-up strategies. In order to support the domestic industries to achieve further strategic targets, countries playing catch-up have to keep adjusting their policy arrangements ( Forbes and Wield 2002 ). New institutional arrangements and new patterns are continually being constructed with new actors being introduced. These institutional actors, serving different goals and experiencing different phases of development, keep interacting with each other and competing for influence ( Nigam and Ocasio 2010 ). The institutional construction of China during its rapid economic growth presents a typical case of this kind. Institutional complexity in China has attracted broad interest from scholars globally. It is argued to contain different logics maintained by the professional ministries of central government and those of regional governments acting as local economic planners ( Shih 2007 ). Meanwhile, even in professional central government ministries, obviously different communities and policy inclinations also exist ( Lieberthal 2004 ). Breznitz and Murphree (2011) developed a concept of ‘structured uncertainty’ to describe the institutional complexity in China: there are informal but well-structured constraints in such a system. However, this concept just touches upon an indifferent picture of the external conditions for the economic players within. In fact, under a complex environment featured by multiple institutional logics, the institutional logics perceived and handled by each firm are different. And within such a dynamic system, since there are conflicts between different constraints, it becomes difficult for firms to cope with all institutional arrangements at all times.

The response of firms to externalities also reshapes the complex institutional environment. The entry and exit of firms, changes in corporate strategy and the evolution of corporate organizations themselves, all contribute to the construction of institutional environments ( Lok 2010 ). Of course, the effects in terms of reshaping the environment may be significantly different according to the responses that firms make. Firms can comply with existing institutional logics: that is to say, they comply with existing technologies, policy setting and current market demand etc. Research by March (1991) on organizational learning, in particular the distinction between ‘exploitation’ and ‘exploration’ is relevant here. Adopting a strategy of exploitation means firms focusing on exploiting current policy arrangements, industrial chains or customer acceptance under comparatively stable institutional logics. So firms place more emphasis on adaptation to the environment ( D’Aunno et al. 1991 ).

In contrast, adopting a strategy of ‘exploration’ means firms, through active strategic adventures, aiming to generate influences on policies, market, industrial chains and social acceptance, and seeking the support of potential allies for further growth and development. In the end, the explorers, with their adventurous efforts, transfer some undistinguished institutional logics into distinguished ones.

Specifically, the heart of a successful exploration strategy is to achieve breakthrough performance in those dimensions that are highly valued by one or more important institutional logics, even though not all relevant logics may view the particular dimension as their highest priority. Breakthrough effects may obtain social legitimacy for their innovators, therefore triggering changes in government policy, industrial chains, and market acceptance. Thus, a successful exploration creates a better, friendlier institutional environment for technology developers. Meanwhile, it also enhances the relevant institutional logics. The efforts by explorers facilitate tangible technological trajectories, schemes, and attractive selling points. So, a successful explorative strategy may enlarge the possible strategic space for firms to cope with institutional complexity. Therefore, in order to implement a successful strategy of exploration, a firm should continue investing in its in-house technological capability.

3. Institutional backgrounds for EV development in China

China is in the process of rapidly developing its automobile industry. The central government of China sees improving technical and industrial competitiveness as its priority policy objective. It eagerly hopes for a breakthrough of indigenous battery technology in order to accelerate the development of the national EV industry.

In China, the institutional actors in relation to EVs create a complex policy environment. Compared with other developing countries, the Chinese government’s policy in the field of EVs is undoubtedly quite radical, and its policy objective is ambitious ( Chen et al. 2014 ). In its Energy-Saving and New Energy Automotive Industry Development Plan (2012–2020) issued in 2012, the Chinese government made the commitment that the cumulative volume of production and sales of pure EVs (PEVs) and plug-in hybrid EVs (PHEVs) would aim to reach 500,000 units by 2015, and the corresponding production capacity would reach two million and cumulative production and sales volume exceed five million by 2020. ⁷

With periodic adjustments, the policies of the Chinese government are continually changing ( Chen et al. 2014 ). In this system, a number of government departments, such as the different central ministries and the regional governments, all have their own policy measures, which further enhances the complexity of policies in these fields ( Lieberthal 2004 ). Because of the dynamic and complex nature of policy, Chinese firms have faced difficulties in responding to all policy issues. On the other hand, because none of the policies issued by different governmental departments can completely override the others, it gives Chinese firms the possibility of being flexible by following some specific policies rather than all of them.

Firstly, with regards to policy motivations, it is undisputed that the development of EVs helps to achieve better energy efficiency and lower emissions. ⁸ But among the numerous policy objectives of the Chinese government for developing EVs, in practice, the goal of improving the competitiveness of the domestic automotive industry is more important, particularly in taking full advantage of technical flexibility in the early life cycle stage of new energy vehicles (NEVs) in order to overtake its global competitors. This is the result of the Chinese tradition of pursuing industrial catch-up.

Secondly, the government’s prioritization of policy objectives changes from time to time. An interesting case is the policy acceptance of traditional hybrid EVs (HEVs). In the period 1999–2012, the HEV, together with the PHEV and fuel-cell powered vehicle (FCV), were considered by the central government as NEVs for their energy-saving advantages. ⁹ Accordingly, EVs’ relevant government subsidies were removed from the incentive package for energy conservation and emission reductions. Therefore, it was the energy-saving nature of EVs that was highlighted by government. However, with the development of the EV industry being increasingly incorporated into the industrial catch-up discussion, HEV was ruled out from the concept of EV in policy language, because the domestic Chinese EV industry turned to concentrate mainly on the PHEVs and less on the HEVs. In the Industry Transformation and Upgrading Plan (2011–2015) issued by the State Council in December 2011, only the HEVs were defined as energy-saving cars, while the others including PEV, PHEV and FCV are additionally defined as NEVs. The conceptual separation allowed the policy-makers to reduce the governmental subsidies for HEVs and they were finally eliminated by the Announcement on the Exemption of Vehicle Purchase Tax on New Energy Vehicles issued jointly by four ministries in 2014. In essence, HEVs, namely those non-plug-in hybrid EVs, even those with good energy-saving performance, are entirely abandoned by the new policy program which centers on industrial catch-up.

Although featuring in policy debates from time to time, the goal of emission reduction was not common in China’s early incentive policies. The situation only changed when the seriousness of the PM2.5 pollution ¹⁰ drew nationwide attention in 2013. The government allocated exemplary incentives for EVs so as to enhance emission reductions. ¹¹ As part of this process, even low-speed city e-cars seem to receive more support, having earlier been branded outdated by a series of central government ministries.

Thirdly, different government departments have diversified preferences. At the central government level, the Ministry of Science and Technology places more emphasis on promoting technological advancement and industrial competitiveness in a global context, while the National Development and Reform Commission and the Ministry of Industry and Information Technology stress the progress of industrialization and the penetration rate of NEVs. In addition to the various central ministries, it should be noted that the regional governments have a more direct impact on EV enterprises. Because regional governments take GDP growth as the focus of their economic policies, they may offer a large number of preferential policies and subsidies for favored firms in order to leverage the growth of the local economy ( Shih 2007 ; Breznitz and Murphree 2011 ). This has led to firms within a region becoming more dependent on the corresponding regional government, and local governments have an obvious tendency towards regional protectionism. Firms usually have to invest to build facilities (e.g. factories, R&D centers etc.) locally if they try to enter a regional market, and they generally attempt to adapt as much as possible to the developmental patterns proposed by the regional government. This regional protectionist tendency is so serious that the State Council has had to state explicitly in the Guiding Opinions on Accelerating the Promotion and Application of New Energy Vehicles in July 2014 that such discrimination in regional EV demonstration projects must cease.

The institutional complexity in China presents Chinese EV developers with an ambiguous environment. It is impossible for each firm to recognize all these institutional settings all the time and respond to them accordingly, even though each firm will try to cater to as many as possible. Thus, by following their perceptions about the possible models for sustainability or prosperity, they have to position themselves within some institutional logics, especially a dominant one.

4. Case study of four leading EV firms

This section presents a comparative case study of four enterprises in China, in order to highlight their different methods of strategy development when faced with similar challenges of battery technology. The paired concepts of ‘exploration’ and ‘exploitation’ taken from research on organizational learning by March (1991) are borrowed as tools to analyze how firms make strategic choices in response to external challenges. According to March, exploration includes things captured by terms such as: search, variation, risk taking, experimentation, play, flexibility, discovery, and innovation. Exploitation includes such things as: refinement, choice, production, efficiency, selection, implementation, and execution. Of course, all firms are simultaneously applying both exploration and exploitation to different degrees. However, their strategies still reveal prominent, stylized characteristics:

• BYD adopts the most positive strategy of exploration. BYD has attained its strong position in the areas of battery safety, economy and energy efficiency, namely the three features of batteries mentioned above, by making direct breakthroughs in core technologies. Its breakthrough has also helped lever policy changes.

• Shifeng and Foton adopt relatively representative strategies of exploitation. They make use of their existing alliances with local government to resist the impact of conflicting policies, and completely avoid making strategic investments in battery technology.

• Zotye adopts a combined strategy. It follows existing technology in most areas and actively responds to the expectations of government or specific market segments, but it also carries out explorations in specific areas and has achieved some breakthroughs, particularly some technologies about architectural designs of product and methods for controlling battery system, which have endowed them with a level of competitiveness.

4.1 Foton: Complying with governmental arrangements and ignoring core technology development

Foton is a subsidiary of the Beijing Automobile Industry Corporation as well as a state enterprise owned by the Beijing Municipal Government. It mainly produces agricultural vehicles and light trucks. Foton has not presented any strategic action on developing core technologies for battery development and EV. The batteries and other core components in its EV products are all outsourced, as well as a series of critical engineering services for vehicle development. It relies heavily on the support of municipal government and benefits from favorable policy treatments for the survival of its EV business.

Taking advantage of support from the regional government, Foton does not focus on breaking through the bottleneck of battery technology, but prefers to outsource the battery and other important modules. It shows a preference for risk aversion in the private market, and has always depended on the public procurement market (e.g. buses and taxis), which are also subsidized by the Beijing Municipal Government.

Foton had a good foundation for NEV development. It is a listed state-owned enterprise (SOE) focusing on commercial vehicles whose sales rank first in the Chinese light truck market. ¹² The government arranged for Foton to participate in the green transportation project for the Beijing Olympic Games in 2008, providing fuel-cell vehicles and pure EVs. For this project, Foton carried out joint development together with a large team from Tsinghua University and the Beijing Institute of Technology as well as some talented overseas returnees. ¹³ After the Olympic Games, the Ministry of Science and Technology and the Beijing Municipal Government jointly awarded Foton the title of ‘NEV design and manufacturing industrial base in Beijing’ and equipped it with preferential policies. This base was the first NEV industrial base in China. Foton quickly launched a pure electric car on the basis of a combustion-engine car model Midi, releasing the Midi EV onto the Beijing suburban taxi market with the support of governmental subsidies in 2010. ¹⁴

The entry of Foton into the EV domain is mainly influenced by the Beijing Municipal Government. The sales data indicates that in most of the last decade, the proportion of trucks and coaches in Foton’s annual output has remained steady at about 98%. ¹⁵ And even after its launch of the Midi EV, Foton has still not demonstrated attempts to achieve rapid expansion of its passenger vehicle business. Therefore, the influence of regional government must be a significant factor for such a firm to start its EV development in the domain of passenger vehicles. Accordingly, Foton mainly relies on government support and the public procurement market.

Procurement in the public market, especially car procurement for the Olympic Games, required security, stability and timeliness of delivery, so Foton was mainly devoted to purchasing components, modules and solutions from well-established firms, and assembling them on its own existing bodyworks for buses or cars. Public market procurement provided Foton with stable, large-scale orders for a while, and also secured it good government relations and good social media exposure. Therefore, in its subsequent development, Foton continued responding to this model. Foton sold 800 hybrid buses to the Beijing Public Transport Company in 2009 and 300 in 2010. By the start of 2013 300 Midi EV had been sold to a taxi company in suburban Beijing. It should, however, be noted that the buyer is a joint-venture company created by the Beijing Municipal Government, the State Grid Corporation and Foton itself.

Even after the Olympic Games, Foton continued with its original pattern. Nominally, its NEV industrial base was installed with four engineering centers: hybrid-powered, pure electric, hydrogen-fueled, and energy efficient engines. It had also carried out trials of new energy modules in mid- and large-sized passenger cars, multi-purpose vehicles and trucks in response to governmental requests for industrial vehicle models. However, in practice, Foton still relied primarily on external technology procurement (for the platform design and the batteries). The only relatively remarkable technological outcome of Foton was its battery control module, featuring well-performing technologies in coordinating different lithium cells.

Foton paid little attention to the private market where the competition is fiercer: consumers are more price-conscious and maintenance services are more complicated. To compete in the private market, a firm would be required to have better control of the key technologies or at least to have better technological integration. However, Foton has not built up its own in-house capability for managing and generating technological change in EV development. Indeed, there is no specialized team within Foton for the technological upgrade of the Midi EV, and also no specialized team for battery R&D. The development of the Midi EV was outsourced and the decision-makers at Foton do not demonstrate any attempts to generate long-term, continual technological advance of its EV products. ¹⁶ For example, the Midi has not been upgraded since 2011 ¹⁷ and has almost zero shares in the private market. In his defense against the public inquiry, the general manager of Foton stated in a media interview in 2010 that he believed EVs would not really be commercially viable for at least 10 years. ¹⁸ Therefore, the current strategy of positioning itself within in the public purchased market with governmental subsidies seems to be a reasonable option for Foton.

As a result, when BYD and other newcomers launched EVs on the private market, Foton’s participation in this field contracted. When the private-use EV market emerged, the Midi EV, which had not been improved since 2011, proved to be disappointing in terms of technical performance compared with the new generation of products launched by its rivals. Midi even failed to be taken into account for Beijing’s NEV Products Catalogue. In its annual report of 2013, the task of developing NEV and other energy-saving technologies has been regarded as a ‘corporate social responsibility’ rather than a strategic scheme of the firm. In short, Foton seldom regards the customer-oriented, product innovation-focused private car market as the base for its EV development.

4.2 Shifeng: Focusing on existing market base and pursuing cheap technologies

Shifeng is a major manufacturer of agricultural vehicles and agricultural machinery in China. Currently, it is also a leader in low-speed city e-cars. ¹⁹ Most of the low-speed city e-cars are powered by lead-acid batteries. Although these city e-cars have not yet been accepted by policy-makers, they currently represent the EV products with the largest domestic sales. For example, in 2011 in Shandong Province, where Shifeng is located, 1,230 new energy buses were produced and 6,500 new energy special vehicles, while 78,000 low-speed e-cars were produced. ²⁰

Shifeng also adopts an exploitive strategy in EV development. Shifeng does not regard the development of battery or other core automobile technologies as its central concern. It produces low-end, low-speed EVs with lead-acid batteries purchased from external actors, and its priority is to respond to the needs of customers from the small towns and rural areas. ²¹

Shifeng is a collective-owned firm ²² but is now operated by professional managers. Starting as a very small factory in Gaotang County in 1993, it is one of the successful survivors among those township enterprises which were encouraged by Chinese governmental policies in the 1990s. Today, Shifeng has grown into a large firm with an annual income of about RMB32.29 billion and an output of 1.34 million vehicles in 2014. ²³ It shall be noted that in 2014 the gross output value of Liaocheng City, which includes Gaotang and seven other counties, was just RMB251.64 billion. ²⁴ The importance of Shifeng to the local economy has won it intensive support from the regional governments at all levels within the Shandong Province.

Shifeng had an output of 50,887 EVs in 2014. However, most of them are driven by lead-acid batteries. In short, Shifeng has adopted an evasive strategy towards the challenge of battery bottlenecks. However, Shifeng’s strategy differs from Foton’s. Shifeng persists in responding to the demands of traditional rural customers, who are highly sensitive to prices in the agricultural vehicle market. Through this process, its strategic alliance with the regional government has helped it to survive despite criticisms from industrial regulators. The industrial regulators, especially the Ministry of Industry and Information Technology, regarded low-speed EVs as technologically backward, outdated, and harmful to the environment. More importantly, many low-speed EVs cannot reach the basic threshold of speed and safety specified by the Ministry of Industry and Information Technology in the domain of traditional automobiles which are powered by internal combustion engines.

Shifeng’s developmental pattern of low-speed e-cars derives from its interpretation of its success in the agricultural vehicle market. Shifeng has been a leader in agricultural vehicles since the 1990s. Consumers in this market were sensitive to pragmatic functions and prices. Therefore, on the basis of their original light trucks and agricultural machinery, Shifeng strengthened passenger performance and provided a range of attractive functions such as robustness for poor road conditions, low maintenance costs, and the ability to overload ²⁵ etc. ( Gao and Xu 2001 ). Thanks to the support of customers that brought about a rapid increase in its sales, Shifeng gained the support of local government, which was undoubtedly consistent with its core GDP-oriented ideology. ²⁶

Shifeng’s development strategy for low-speed e-cars can be seen as a continuation of its original strategy. Dependent on highly price-sensitive consumers from rural and small town areas, Shifeng offered them the option of a car that had previously been unaffordable. The price of most Shifeng vehicles being around RMB20,000–30,000 (about US$3,200–4,800); the running costs of electricity were as low as 5–7 US¢ per kilometer; and it was very convenient to charge the cars with residential electricity.

By relying on its alliance with local government, Shifeng resisted conflicts between its technology strategy and the requirements of central government. In this way, Shifeng did not respond to the appeals of central government ministries to pursue cutting-edge technologies, but continued using low-priced technological solutions, such as the lead-acid battery. Even when some ministries strongly opposed the lead-acid battery powered EVs, Shifeng continued to build a production line with an annual output of 100,000 low-speed e-cars in 2010, which required a considerable investment.

Meanwhile, the Shandong Provincial Government offered Shifeng a series of incentives. These included offering low-speed e-cars a place in the mainstream policy of NEV development. At the request of the provincial government, local traffic administrations essentially loosened their supervision over the purchase and arrival of low-speed e-cars. This constituted a niche policy environment in Shandong.

Local governments do not expressly resist the central government on low-speed e-car issues, but they do make use of the conflicts between different policy logics. Among the variety of policy logics, Shifeng and local government chose to respond to only some of them, in order to ‘win’ space in disputes. Market demand-oriented ideology, energy saving and emissions reduction are the reasons that local governments habitually use as excuses for legitimacy. Shifeng also put in resources to demonstrate its commitment to the relevant indicators. For example, Shifeng widely publicized its energy-saving performance in the media, declaring that its vehicles would save 75% of energy compared with traditional vehicles. Shifeng also partnered with the leading domestic suppliers of lead-acid batteries and propagandized the timetable of lead-acid battery improvement, the realization of waste lead-acid battery recycling etc.

More importantly, the timetable for increasingly larger-scale EV development set by the central government itself provides space for Shifeng and the provincial government. Because the firms which produce NEVs with batteries other than lead-acid have not met the ambitious timetable for growth in the scale of production, the central government hesitates to totally rule out the low-speed e-cars. Sometimes lead-acid battery driven cars are counted as NEVs in order to excuse the central government from admitting the failure of its NEV policy to the public. Even though there are disagreements on this point within the central government, such a situation still provides space for Shifeng and its governmental allies to draw their own conclusions.

From the perspective of innovation, Shifeng is actually quite creative. It has led the development of a new class of products and provides consumers with a service that had not previously been available. However, in continuing to evade the technological challenges of battery development, Shifeng has chosen to be guided by the current needs of its traditional rural consumers, and to rely on its existing alliance with local government to survive ongoing policy debates.

4.3 Zotye: Adopting a mixed strategy and cooperating with local governments

Zotye presents a mixed strategy in terms of EV development. Firstly, Zotye avoids the risks of developing core battery technologies. Rather, significant efforts are made to industrialize and commercialize the battery-exchange model of EVs in which Zotye is considered a first-mover in China. It indicates that Zotye has had to invest strategic assets in architectural design and controlling technologies for the lithium-based batteries it has purchased from external suppliers.

Zotye started in 2003 as a privately-owned company manufacturing automobile components. When the local government and local industry of Zhejiang Province lacked mature ideas for developing EVs, Zotye took the opportunity to manufacture entire automobiles. The company then took the lead in cooperating with the State Grid Corporation and developed a battery-exchange model. This pioneering initiative was of great importance for the local ecosystem of EV development in Zhejiang Province. Meanwhile, Zotye employed a relatively conservative strategy on technological issues. It avoided the possible risks inherent in R&D in the core and frontier technologies. Rather, it outsourced mature battery modules, and developed its own capacity for system integration to meet the market demand and the expectation of local governments.

When entering the EV industry, Zotye also started with a lead-acid battery powered EV, the 2008EV, which was aimed at the price-sensitive low-end market. By doing this, as a pioneer in the Zhejiang Province, Zotye gained commendation from local government. When, with support from the local governments, it developed EVs for urban private users and the taxi market, Zotye upgraded its outsourced core components and began to purchase lithium-based batteries. Like most EV developers, Zotye had to deal with the issues of ‘lightweight car design’ (EVs need to reduce weight to save energy) and ‘mileage anxiety’ (customers do not want to run the risk of running out of electricity during a trip). Through seeking assistance from the regional government, Zotye successfully allied with the Wanxiang Group and the State Grid Corporation to develop EVs with an exchangeable battery system. It launched its M300EV for the taxi market in 2010, which was the first industrialized battery-swapping EV in China. In this cooperation, the State Grid Corporation was responsible for providing the battery pack, charging and electrical exchange facilities, and the operating service, Wanxiang Group provided batteries and battery packs, and Zotye was in charge of vehicle design and the battery management system. This reveals that Zotye avoided the challenges of core battery technologies, particularly those about the density of the battery energy. Certainly, even in this pattern, Zotye still has to build up its in-house technological capability, particularly in system integration. For example, it has independently developed a battery safety monitoring system and battery initiative equalization technology.

Zotye’s strategy was in line with the needs of local governments. Responding to the emerging advocacy for EVs from the central authorities, local governments urgently needed to promote local EV industries. Furthermore, both the Zhejiang Provincial Government and Hangzhou Municipal Government took developing NEVs as a strategic focus to lever the development of the local automobile industry and other relevant manufacturing industries. Therefore, consensus was reached between governments and firms to choose and outsource relatively mature technologies to ensure a rapid rise in local EV output. The introduction of the battery-swapping model helped to solve the ‘mileage anxiety’ problem and shape the above into an effective model of EV development.

With local government support, Zotye became the leading EV producer within Zhejiang Province. It helped Hangzhou, the capital of Zhejiang Province, to successfully achieve its goal of becoming a national showcase for NEVs. Gradually, a series of new operational modes including time-share rental, battery leasing, and EV rental businesses began to be used in Hangzhou. With this progress, Zotye gained larger shares in partial markets.

Prior to 2005, Zotye simply provided automobile components and was not qualified for automobile production. It had no advantage in human capital, technology accumulation or brand influence for developing EVs. Therefore, cooperation with local governments and leading suppliers helped Zotye to achieve a good start in its foray into EV development. The battery-swapping model enabled Zotye to make use of knowledge from different sources. So its efforts in some selected areas of technological development can be sustainable in this industry.

4.4 BYD: Actively exploring new technology, driving changes of policy and market

BYD is a leading explorer in a series of core EV technologies. It does not simply follow government guidelines. For example, BYD did not follow the technological scheme advocated by the central government ministries. ²⁷ It also refused to adopt existing mature technologies which would usually be suggested by regional governments for leveraging economies of scale rapidly. Instead, its breakthrough in battery technology and product development helped it to gradually win the support of policy-makers and customers, thereby driving the corresponding changes of environments.

BYD was founded as a private-owned company by Cuanfu Wang, a former metallurgist. Before entering the automotive industry, BYD was already among the three largest global battery manufacturers in the consumer electronics industry. It obtained a car production license in 2003, and has carried out dozens of projects to develop EVs since then. When MIT announced a breakthrough in basic research into lithium-iron-phosphate materials in 2005, BYD declared its strategy focusing on this field and rapidly became a global leader in the development of batteries based on lithium-iron-phosphate materials. In 2009, BYD’s plant in Huizhou began to massively output lithium-iron-phosphate batteries that established its superiority in this area. In 2014, BYD announced an adjustment by adding manganese to its basic battery materials, which was a frontier attempt to improve the power density while maintaining the security and longevity of the original lithium-iron-phosphate batteries. All these factors have contributed to the global development of the lithium battery.

BYD defined EVs as urban commuter cars rather than low-end products. Based on its technical superiority, BYD focused on publicizing the comfort and power performance of EVs in addition to the characteristics of energy saving and environmental protection. Such a strategy helped to attract new customers, especially young and middle-income customers in the urban market. For example, in 2013 BYD launched a PHEV model, the Qin, and highlighted its outstanding performance, particularly the ability to accelerate from 0 to 100 km/h in 5.9 s. Hence the Qin model became the sales champion in the domestic EV market with a sales level of about 1,000 cars per month. Now its e-SUV model, known as the Tang, even has the ability to accelerate from 0 to 100 km/h within 5 s. As follow-ups in the e-SUV domain, the prototypes of two new models, the Song and Yuan, were launched in 2015 and also demonstrate excellent acceleration. In the field of public service or executive-level vehicles, BYD launched a PEV model, the E6, in 2011, focusing on comfort and long mileage range. ²⁸ BYD is also a leading producer of electric coaches, having a manufacturing center in the USA and sales in European countries. BYD is currently the only EV manufacturer who maintains continual product plans in China, which means that it has EV products or clear EV product schemes in each product segment of passenger vehicles.

Due to the well-recognized technical ability of BYD in batteries, Daimler joined with BYD in 2012 to establish Denza, a joint-venture brand, which launched its first PEV model onto the market in 2014. For this project, Daimler mainly relied on BYD’s knowledge and experience in batteries and electric drive, and took advantage of BYD for the mass production of EVs. ²⁹

For a long period, BYD did not enjoy the support of central government. It was not even included in the central government’s annual research projects on EVs until 2007. However, when BYD gradually revealed its critical breakthroughs in relevant technological fields, government departments adjusted their policies to provide policy support. They listed BYD as the ‘vanguard’ of the domestic development of EVs, and included BYD in various governmental plans for developing strategic emerging industries. The Shenzhen Municipal Government franchised BYD and the public transportation corporation to jointly establish a special electric car taxi company. With the aid of favorable governmental policies, this company operates 800 BYD E6 and plans to purchase 3,000 more in 2015. Now the central government also stresses BYD as an exemplar. When BYD’s Qin model was unable to enjoy equal policy treatment in the Bejing regional market due to local protectionism, the central government appealed to local governments to eliminate discriminatory policies as soon as possible.

BYD’s persistence in technological exploration is consistent with its business philosophy, that is, BYD believes in gaining greater market share, more social support, and even the attention of policy-makers based on technological strength. Much earlier than its official announcement that it was entering the power battery sector, BYD actually began the relevant basic research in 1998. Even when it was only producing lithium batteries for consumer electronics in the 1990s, BYD also invested human and material resources in R&D into fundamental advances in materials and chemistry technologies. Now, in the field of EVs, BYD’s R&D team has developed technologies in material science, thermal management, bi-directional inverters etc., and has even begun to build technological strength, for instance in superconducting materials for future applications. Successful application of this strategy has allowed BYD to play an important role in shaping the technology, market and policy environment related to EVs.

5. Comparative analysis

The firms studied in this paper face similar challenges of battery technologies and market acceptance. However, they have implemented distinctive strategies, which have led to diverging technological solutions.

The main concern of this paper is to understand the trajectories of technological development of firms by studying how they respond to the multiple institutional logics in their environments. The case studies reveal that the theoretical explanation simply focusing on institutional influence, accumulated technological competencies or path dependencies is insufficient to interpret the divergence. Institutions do exert influence, but for firms, the institutional factors and institutional patterns they perceive, value and respond to can be remarkably dissimilar. Accumulated competencies are also important, but are not a sufficient explanation for path-creating strategies. Strategic intent is needed, causing tensions for organizations when compared with their current capabilities ( Hamel and Prahalad 1989 ). From a long-term perspective, path dependence exists in strategy making for all firms: it is simply a matter of scope. However, the influence of previous experience still depends on how the organization perceives and deciphers its own previous success (or failure) and external challenges.

Therefore, if we acknowledge the complexity and dynamics of institutional environments, the dominant institutional logics chosen by firms and their interactions with these dominant logics should be regarded as critical factors in interpreting their diverse trajectories. Certainly, firms choose their dominant logics based on their understanding of their experiences, external challenges and the potential moves of the relevant actors (see Table 1 ).

Foton, located in Beijing and owned by the Beijing Municipal Government, is in the best position to reap the benefits of favorable policy treatment. It is the first Chinese EV producer to be awarded R&D and production subsidies and other favorable policy treatments by the central government. Its superior position, high brand recognition and the governmental support that it receives have attracted first-class human resources. However, Foton sticks to its alliance with the regional government and relies on public purchases. The stable relationship with government and public markets has resulted in Foton’s indifference to the private-use market, allowing Foton to provide products that are merely assembled from a series of outsourced modules.

Shifeng has a good knowledge of the Chinese policy environment. It sidesteps the challenge of battery technologies. Rather, it adopts the lead-acid battery which, the official definition, regards as outdated and unacceptable for EVs. However, Shifeng has broad support from its previous market base. As such, its current position attracts the regional government to ally with Shifeng, as it did during Shifeng’s previous campaign of agricultural vehicles. The local government also protects Shifeng from external criticisms. In fact, such an alliance tends to become even more solidified. In satisfying the EV sales goal set by the central government, the regional government is further incentivized to help Shifeng to win ‘legal status’ for its products. In other words, the leading player of a dominant institutional logic helps the firms under their influence to cope with some conflicting institutional requirements.

BYD regards the continual exploration of new technologies as foundational to its commercial survival. Some scholars may interpret such a phenomenon as an accumulated tradition inherited from its experiences working as an original design manufacturer in electronics and a battery producer. However, even at a very early stage, BYD had begun to invest in fundamental technologies for long-term purposes. Therefore, the advocacy of path dependence or accumulated capability cannot be completely convincing. The active strategic moves of BYD’s decision-makers can be also considered to be critical in continually shaping (and reshaping) the firm’s trajectory. BYD did not deliberately intend to comply with governmental advocacies. On the contrary, it is BYD’s success in generating better technologies and better EVs that has driven changes in policy settings and market acceptance.

Zotye, by comparison, employs a more combined strategy wherein they exploit existing policy incentives but also generate important innovations for a better pattern of EV development. Zotye utilizes existing core technologies, but leads an innovative pattern in the ‘battery-swapping model’. In launching these innovations, its strategy is not to challenge the existing institutional logics, but to reposition itself in a situation of greater competitiveness.

The four case studies have revealed that firms tend to focus on their unique advantages. Foton and Zotye focus on their political resources, namely their alliance with local governments. Shifeng sticks to its acceptance by local customers and BYD bases its success on technological leadership. This paper, however, argues that some of their strengths have been created through the process of responding to the environment. For instance, BYD was a newcomer to both the power-cell and the automobile industry when entering the EV domain, therefore the relevant technological leadership is something that BYD has developed over the past ten years. Similarly, government support for Zotye was won through Zotye’s successful innovation in product architecture and industrial coordination. Nevertheless, the strengths they have (or had) would not be sustainable in the long term. For example, Beijing Municipal Government stopped supporting Foton in the electrical passenger car domain after 2013 because, compared with its rivals, Foton has not generated a satisfying performance in furthering technological advance even for governmental demonstrative programs for EVs. BYD was ever a challenger to the Chinese industrial regulations and the science and technology community which meant that it was not supported by the central government until 2007. However, its strength in technological development finally turned the central government into a firm ally of BYD. As has been mentioned, in order to stop Beijing Municipal Government from discriminating against BYD’s EV products, the central government added a special notice in the Guiding Opinions on Accelerating the Promotion and Application of New Energy Vehicles issue in 2014. ³⁰ In other words, the government has learnt something during such a process, as have the other actors involved in institutional logics.

Therefore, the choice of dominant institutional logics cannot be interpreted by the resource legacy of firms alone. It interprets why we regard the argument of this paper as fundamentally different from the resource-based view (RBV) explanation (even the dynamic RBV explanation provided by Helfat and Peteraf (2003) ). The active and strategic intent of firms works significantly in generating their responses to their external environment. The process of generating and practicing responses, usually framed by the institutional logics they choose, can enhance the strength of firms. Such strengths would also determine whether a firm could be accepted by the main actors in specific institutional logics.

Fig. 1 demonstrates the major responses made by each firm to external challenges. None of these firms could satisfy all the governmental goals, as indicated by the dimension of ‘legitimacy’ in Fig. 1 . However, they built alliances with specific influential governmental players and specific customers, or maintained existing alliances, by providing solutions that satisfy some of the desires of these institutional actors. They have different rationales about appropriate behaviors. Furthermore, the multiplicity of institutional logics also allows space for their maneuvers. By doing so, they successfully mobilized social forces in different ways or different combinations, to shelter their business under the complex environments featured by institutional conflicts. Therefore, the governmental advocacy of technological advance or better environmental effects, as well as the challenges faced by battery technologies, can be admitted or not by firms in their major strategic maneuver, which leads to the diversification of their technological trajectories.

BYD (see Fig. 2 ) is more capable of satisfying the expectations of different governmental players and customers. Its successful exploration in the core battery technologies and the architectural technologies of the power system enables BYD to meet the challenges raised by different players in this complex environment. And its successful responses to complex environments also enhance its inclination to lead indigenous innovation.

6. Conclusions

This paper applies the institutionalism approach to innovation study. Echoing the classical debates about divergence of firms ( Nelson 1991 ), this paper reveals that even in the Chinese economy, with its legacy from the central planning system, and despite governmental intervention, firms are still dramatically different in their strategies. As one of the officially defined ‘emerging industries with strategic importance’ the Chinese EV industry is affected by a series of direct interventions from the government including critical issues related to: entry regulation, finance, R&D subsidies, governmental procurement etc. ³¹ This paper has shown that there are considerable differences in firms’ responses to this complex institutional environment. On the other hand, this paper suggests that the ‘discretionary firm difference’ ( Nelson 1991 : 61) is constrained. Although firms can decide the institutional logics that they follow, their subsequent strategies are framed by the dominant institutional logics they choose and attach themselves to. Certainly, the case of BYD indicates a firm-level capability of breaking through critical bottlenecks and flexibility against attachment to specific institutional logics. Such a topic is interesting for further study using modeling and quantitative measures.

For the domain of innovation study, this paper goes beyond the traditional debate about the institution–firm relationship. Some scholars have already investigated the ‘match’ between institutional settings and behaviors of industrial firms ( Forbes and Wield 2002 ; Hannan and Freeman 1984 ; Van de Ven 1979 ) at different levels. However, this paper reveals that firms do not merely respond passively to the institutional environment, because there is no distinctive set of consistent institutional arrangements for them to respond to. Instead, firms respond selectively to dominant institutional logics. By allying with regional governments they are even active in reshaping relevant institutional logics, which will be discussed further in future papers.

Therefore, this study enriches our understanding of the institutional dimension of science, technology and innovation study, especially for the national innovation system approach. As discussed above, complex institutional environments provided space for firms to maneuver when environments constrain their options. None of the strategies of these firms are directly determined by institutional constraints if we regarded the institutional environment as an integrative factor, and none of the firms have successfully reacted to all the relevant institutional logics. Complexities of institutional environment come not only from the interactions of multiple actors and the contradictive effects of institutional legacies initiated in different phases, but also from the reshaping effects generated through firms’ responses to their environment. In particular, the successful actions of firms may enhance the institutional logics they follow which may, in turn, change the competition between policies.

This paper has obvious policy implications. Its findings suggest that policy-makers should consider the multiplicity of institutional logics, especially when they think of industrial policies. It is obvious that firms following disparate dominant institutional logics would respond differently when they are confronted with the same industrial policies. Thus, relevant consideration must be included in policy debates otherwise industrial policies would not work as expected.

Certainly, it could be difficult for policy-makers to thoroughly consider a greater multiplicity of institutional and social factors. However, it is still important for them to foresee the potential diversified responses of firms. Hence, in order to effectively promote innovations, policy-makers should establish better communication and negotiation channels over a broader scope, and should be more flexible during the dynamic development of an industry. However, a more important issue for policy-makers to reconsider is whether the behaviors themselves are coherent and consistent since they are evidently important contributors to the complexity of institutional environments.

Funding

Financial support from the National Natural Science Foundation of China (project number 71202012) and from the Riksbankens Jubileumsfond of Sweden is gratefully acknowledged. Tilman Altenburg, Hubert Schmitz and two anonymous referees provided valuable comments on earlier drafts. The authors would also like to thank Lan Xue and Ambuj Sagar for their support. Of course, the authors take responsibility for any errors in this paper.

References