Is government R&D subsidy good for BEV supply chain? The challenge from downstream competition

Abstract

The new energy vehicle industry has gained a considerable amount of attention in recent years. However, the high cost of battery R&D reduces the competitiveness of battery electric vehicle (BEV) products. In this context, government might choose to support BEV companies in product innovation. In this paper, we examine the performance of government R&D subsidy by considering supply chain downstream competition. To capture the impacts of downstream competition, we model a two-tier supply chain consisting of a high-end encroachment manufacturer and an incumbent manufacturer who source from a same battery supplier. Result shows that downstream competition might reduce upstream battery R&D. In addition, when the consumer preference for the high-end substitutable BEV is less than a threshold, the BEV market scale will diminish due to competition. Furthermore, downstream competition might hurt the supplier’s profitability. For the impacts of R&D subsidy, result suggests that it performs better under competition on increasing supplier R&D activity. Regarding supply chain stakeholders, R&D subsidy always increases supply chain members’ profits and consumer surplus without competition. While, under downstream competition, it only increases supplier profit, but does not always benefits manufacturers and consumer surplus. Specifically, we identify the Pareto regions in which R&D subsidy increases both profits and consumer surplus. We extend the models by considering supplier non-uniform pricing and monopoly by the high-end BEV manufacturer. The above analyses are robust in the extended models and new findings are derived. Our findings are instructive for both BEV supply chain stakeholders and policy makers.