Sunday, December 6, 2009

Private Chinese Firms Don't Get Bank Loans? Think Again.

Just when you think you have it all figured out.

The Bank of China, one of China's Big Four state-owned banks, has been busy funding auto companies this week.

The Bank announced this week that it has approved a 20 billion yuan ($2.9 billion) line of credit for Beijing Auto Industry Holding Corp (BAIC). Some are speculating that this money may be used by BAIC in its continued pursuit of an overseas purchase, most likely Saab, or at least some of its assets.

BAIC is owned by the local Beijing government, so the fact that Bank of China is providing funds should not come as a big surprise. Bank of China and BAIC are both state-owned.

But BAIC is not the only Chinese auto company to get funding from Bank of China this week.

The Bank also announced that it will be providing a 15 billion yuan ($2.2 billion) line of credit to BYD, a private auto firm based in Shenzhen. (Announcement here in Chinese.) BYD, which is listed on the Hong Kong stock market, was made famous earlier this year because of an strategic investment by one of Warren Buffet's companies.

Though BYD did not confirm this, apparently the lending facility will be used to support BYD's R&D efforts in new energy vehicles and solar power generation.

This bit of news runs contrary to the story we always hear about private Chinese companies having difficulty getting financing. The biggest and strongest banks in China are, by design, state-owned, and therefore, the logic goes, they are only interested in supporting state-owned enterprises.

While China's government wants its state-owned banks to be profitable, and is happy to boast about it when they are, these banks, like any SOEs are tools of the state. They will be used to serve the ultimate interests of the state. In this particular case, I am guessing that it is in the interests of the central government to demonstrate their commitment to research and development in the area of new energy vehicles just prior to the Copenhagen summit.

While BYD has yet to put anything close to a significant number of its hybrid or pure electric vehicles on the road, they are, among all Chinese companies, probably the furthest along in development.

Monday, November 30, 2009

China Continues to Ride the Tiger

Analysts are predicting a significant drop in European auto sales in 2010, possibly by as much as 10.4 percent according to J.D. Power. The drop, however, will not come because Europeans have lost interest in cars, or because the economy is expected to further worsen. It will come because of incentive schemes that pumped up 2009 sales. (Financial Times, "Carmakers Plan for Slow Year as Incentives End".)

While we can debate the merits of incentivizing major consumer purchases as a tool for jumpstarting an economy in recession, many auto analysts feel that such tools only amount to a shell game in the auto industry. An auto analyst with whom I met in Shanghai earlier this year tells me that these kinds of incentives (such as tax cuts and "cash for clunkers" schemes) only pull future planned purchases into the current period. The inevitable result will be a dip in future sales.

While it appears the Europeans are prepared to stop robbing Peter to pay Paul, the Chinese are preparing to double down. According to a report from Reuters, China's Vice Minister of Commerce announced yesterday a continuation of one of the schemes that provided a boost to 2009 sales. These schemes provide a rebate to consumers who trade in old cars and household appliances for new ones.

In addition, the Finance Ministry and National Development and Reform Commission have apparently agreed to extend this year's 50 percent sales tax cut on vehicles with 1.6 liter and smaller engines.

But that's not all! According to this report in Automotive News China (free sub. required), the tax cuts will be extended to ALL passenger cars in 2010.

Rather than take the chance of a significant slowdown, China is apparently counting on the size of its auto market to continue expanding so rapidly as to wash out any potential future drop in sales.

More info on whether analysts find this plausible as I find it...

___________
Edit:

Well, we have an explanation from one of China's top auto industry experts already! Please see Bill Russo's comments below. As I suspected, there seems to be the hope that the rapid pace at which China's auto market is growing will largely make up for the eventual drop in sales that would occur when (if) incentives are removed.

(Thanks for the comments, Bill!)

Wednesday, November 11, 2009

As the World Turns: Geely and Volvo

Plenty of ink has been spilled and pixels lighted covering the potential purchase of Volvo from Ford by Geely. A quick Google search will turn up more than enough material about this merger that simply refuses to be consummated, so I won't even attempt to link them.

Today, however, there was finally a fresh piece of news on this story in the Wall Street Journal's "China Real Time Report". WSJ's China auto journalist, Norihiko Shirouzu reports that a "knowledgeable person" close to Geely is expressing doubts that the merger will ever happen -- at least not in the way it has been presented over the past several months. Apparently there has been a last-minute request from the government to let one of the state-owned auto companies in on the deal.
“Whether the deal can be made or not now depends to some extent on the attitude of the government. Geely fears there may be troubles ahead, especially when it goes through the approval process for the Volvo deal,” says the knowledgeable person.

“The government thinks that the future belongs to state-owned companies,” the person said. “China’s quick recovery from the financial crisis gives them more confidence and justification to favor state-owned companies.”
This is a charge we have begun to see more of in recent months.

As the Economist recently reported, there is a move in Shanxi Province to nationalize many of the hundreds of privately-owned coal mines. The ostensible reason is to curb the massive number of deaths that occur in these mines, but as John Garnaut of the Sydney Morning Herald reports, there also appears to be an undercurrent of a desire to bring these mines permanently under the control of the state -- to the extent that the private owners are being personally bankrupted in the process. (Though I must admit that I shed few tears for the private owners given their deplorable safety records. Let us hope the government will be more concerned with the lives of the miners.)

Is this the beginning of a trend away from private ownership back toward state control? China would not be alone. Such discussions are doubtless being held within governments all over the world as people seek to find a scapegoat for the global financial crisis.

Government takeovers of private industry aside, I see even more reasons to doubt the eventual takeover of Volvo by Geely.

I visited a Ford dealership in Beijing this week where I was told that the new Fiesta and the Focus are flying off the lot. These are Ford's hottest sellers in China. They are both (in my opinion) sporty and attractive cars that have a good reputation for quality.

One thing I noticed immediately upon seeing these cars is the striking similarity of their hood lines with those of recent Volvos. And while I'm not an engineer, I wonder if this demonstrates the difficulty Ford would have separating the Ford and Volvo entities. The reports that Ford has IP (intellectual property) concerns with a potential sale do not appear to be unfounded.

Furthermore, GM has also recently backed away from its previous decision to sell Opel to its "preferred bidder" Magna. And Ford, being in far better financial shape than GM, may also find it easier to just keep Volvo and turn it around than to take a multi-billion dollar loss on the sale.

_______________

Compare the hood lines on these pics of the Volvo S80, the Ford Focus and the new Ford Fiesta:








Thursday, October 29, 2009

Plenty of Lithium Outside China


Following up on yesterday's post about electric cars in China, an astute observer pointed out the possibility that China may have already cornered the market on the rare earth metals necessary for hybrid and battery technology. (See comments below this post.)

I just happened across this short photo essay at ForeignPolicy.com about Bolivia's supplies of lithium which are estimated to be 50 to 70 percent of the world's known reserves (a figure that surprised even me!). Lithium is, of course, a major component of the lithium-ion batteries used in mobile phones, laptops and most of the electric cars currently in development.

So it appears that China will not have anything near the "monopoly" on lithium that is causing the China-haters to wring their hands. Then again, Bolivia's president Morales is close pals with Venezuela's Chavez, so we can be certain they won't be giving their lithium away either.

Also, Bolivia doesn't exactly have the best record of extracting natural resources for the benefit of its citizens. Despite abundant sources of petroleum and natural gas, Bolivia suffers from a "resource curse" which is partly responsible for making Bolivia the poorest country in South America.

So, while it does appear that China's sources of rare earth metals will give it somewhat of an advantage, it doesn't have a monopoly on them. And, of course, even a monopoly on these metals is still no guarantee that the most successful EV technology will ultimately come out of China.

Wednesday, October 28, 2009

What is a "Preferred Bidder"?

News outlets are reporting today that Geely, a HK-listed, "private" Chinese automaker, is the "preferred bidder" for Ford's Volvo unit. (Stories at Bloomberg and WSJ.)

I'm a little confused by this announcement. What exactly is a preferred bidder? What is it about the bidder that would lead Ford to approve Geely over another?

Correct me if I'm wrong, but when you're trying to unload a money-losing asset while taking as small a loss as possible, wouldn't you be more focused on the bid than the bidder?

If I were a Ford shareholder (and I probably am through mutual funds), that's where my concern would lie.

Electric Vehicles: China can do no Wrong. Right?

Think Again.

This past week, columnists Anil Gupta and Haiyan Wang published an opinion piece in Business Week that dares to go against the flow. While the rest of the world seems ready to declare China the winner in electric vehicle technology, Gupta and Wang explain why China has no real advantage -- a position with which I agree. They make two important points that are worth highlighting:
  1. Despite the apparent importance of battery technology for cars in the future, batteries are merely one component among many others. The apparent early success of China's BYD in battery technology (which is also questionable) does not mean that BYD is certain to enjoy success in other important factors such as "performance, safety, reliability, comfort, styling, dealership network, service quality, and price". In an article in the Wall Street Journal this week, Norihiko Shirouzu quotes the tech chief of a global automaker who had test-driven BYD's E6 as calling it "half-baked".
  2. First mover advantage ain't what it used to be. Gupta and Wang give plenty of examples in which non-first movers eventually came to dominate an emerging technology, leaving first-movers in the dust.
Gupta and Wang don't dismiss the importance of battery technology, and indeed, BYD seems to have somewhat of an advantage because, after all, they've been a battery company since the early '90s. But when you put the whole package together -- battery, auto body, electric motor, etc. -- BYD's success has been less than stellar. Through the first eight months of 2009, they only managed to sell 100 of their F3DM plug-in hybrids.

They also seem to speculate, as have I before, that Buffet's consolation prize with BYD may very well be the battery technology itself. Even if they cannot manage successfully to assemble the entire package for a mass market, BYD's battery technology -- if it is advanced as they claim -- could be licensed to dozens of global auto manufacturers. Indeed, Volkswagen has already partnered with BYD on battery technology.

I would add to this argument the fact that, among all of the auto specialists and insiders I have interviewed in China this year, I have yet to find anyone who believes that BYD -- let alone any other Chinese automaker -- has a lock on EV technology. They all see it as very experimental, and while they believe China is finally on a level playing field with developed countries in this emerging technology, they all acknowledge that the solution is just as likely to come out of Japan, Europe or North America. (I have yet to interview anyone at BYD, so perhaps this will change once I make it to southern China.)

I don't want this post to be interpreted as attempt to knock BYD. In fact, I admire BYD's CEO, Wang Chuanfu, for his courage and optimism and I wish the company every success. However, I think the rest of the world (i.e., all three people who still read my blog) deserve to read views contrasted with those of non-Chinese speaking foreign correspondents who fly first class, ride in limousines, stay in 5-star hotels, then return home to tell everyone China is the new land of milk and honey and BYD will own the future of electric vehicles.

Tuesday, October 13, 2009

Mr. Hu, tear down this wall!

On a day in which China has taken further steps to block social networking applications, I think it appropriate to explain why I use Twitter, and why China is doing itself a disservice by blocking these applications.

Twitter is one of those applications that people either love or simply don't understand. I've found few people who remain on the fence about Twitter for long. When I first tried it, I did so because Business Week was raving about it, and I wanted to see what all the fuss was about. After playing with it for a few minutes, I failed to get the point and didn't touch it again for about eight months.

Fast forward to now, and though I'm certainly not the most active of Twitter users, I follow nearly 300 people, most of whom are interested in topics about which I am most passionate: China, the automotive industry, finance and alternative energy.

Some Twitter users like to follow as many people as they possibly can, and I think that's great if that is how they get the most out of Twitter. I prefer to follow a smaller group, all of whom I feel, in some way, make me a smarter person. I may not necessarily agree with all of them all of the time -- in fact, I often disagree -- but they make me think harder about what I believe, and that, to me, is what any friend should do.

Many people like to make fun of the fact that people on Twitter often tweet about the most mundane details of their lives. And I will admit that I also occasionally tweet about what I had for lunch, or a particularly bad customer service experience. In this respect Twitter is actually a mirror of our real-life, every day conversations, but the beauty of Twitter, is that it is a 24-hour-a-day, nonstop conversation among people scattered all over the world. When you have time, you jump in the stream.

We all have friends whom we admire because we find them to be smart or clever or funny, but when you think about it most of your conversations with them do in fact consist of the mundane. The reason we keep hanging around them is for their gems of wit and wisdom. We listen to the mundane, not because it's necessarily interesting, but because it gives us a sense of who that person is -- the real person behind the wit and wisdom. This is why I follow people on Twitter.

Twitter is like a virtual water cooler conversation, except that, unlike at work, you get to pick those with whom you stand around the water cooler. And I can say without a doubt that, having been an avid user of Twitter for nearly a year, I have a broader perspective than before. I have considered ideas I would have never considered before. I have met more than 20 of my Twitter acquaintances in real life, and quite a few of my virtual Twitter relationships have led me to many valuable resources for my dissertation research.

Twitter is like a big university campus for me. While it's hard to point to a particular class you attended, or a particular interpersonal interaction you had that contributed to your betterment, after four (or five, or six...) years on campus, you know that you're better for it. And indeed you are.

And this is where China is missing out. China's leaders are so paranoid about their lack of legitimacy that they are depriving their people of a fantastic tool for innovation. Rather than taking steps to legitimize their leadership they instead try to prevent their people from being able to discuss it.

Yes, China does have a few Twitter-like clones, and I think a few of them may actually still be in operation, but what these clones don't have that Twitter does have is a world-wide following. I am very thankful that at least a handful of Chinese go to the trouble of circumventing the "great firewall" in order to join in the global conversation. And when they aren't tweeting about the inconvenience of getting around the blocks, their perspectives are very valuable for me as a non-Chinese who wants very much to improve his understanding of China.

If China's leaders insist upon keeping themselves walled off from the rest of the world, they will always find themselves playing catch-up in terms of innovation.

As for me, I will pay whatever I have to in order to keep the information flow turned on. This world needs people who aren't afraid to have their beliefs challenged, people who aren't afraid of the truth. I hope my friends, and my followers on Twitter, will think of me as that kind of person.

Thursday, October 8, 2009

Reciprocity or Market Principles?

A story appeared in Bloomberg today that China Minsheng Bank, the largest "private" bank in China, intends to raise its stake in a US-based bank to as much as 50 percent. The company, UCBH Holdings runs the United Commercial Bank of San Francisco which has about $13 billion in assets.

Minsheng made its initial purchase of 4.9 percent of UCBH in 2007 and then increased its holding to 9.9 percent in 2008.

Assuming Minsheng meets the Fed's requirements in terms of its management capability and the health of its balance sheet, the purchase will probably be approved. It seems only fair that a Chinese bank should be allowed to purchase a share of an American bank. After all, American banks own shares of Chinese banks, right?

Well, yes, but there's a catch. Foreign banks are not allowed to own more than 20 percent of a Chinese bank. These terms were agreed upon when China joined the World Trade Organization in 2001, but I wonder whether US negotiators gave even a moment's thought to whether China would someday want to buy shares in foreign banks as well.

Here's the question: When reviewing the proposed purchase of UCBH, should the US demand reciprocity -- that if Chinese banks can buy a controlling interest in a US bank, US banks should have the same privilege in China -- or should the US just stick to "market principles" and allow Minsheng to go through with its purchase?

All governments intervene. It's only a question of how.

Yesterday, the Wall Street Journal's "China Journal" published a short interview with Justin Yifu Lin, the World Bank's Chief Economist. The interview itself is interesting, and you should read the whole thing, but here is what I believe to be the key revelation.

Lin says: "Common people put their money into the financial system and their earnings from it are relatively low. So they are subsidizing big corporations. That’s the reason why big corporations have such high profit. They are subsidized through lower wages and lower capital costs."

In very simple terms, Lin explains why China's big corporations have not been hit as hard as those of the West during this economic downturn. Due to a lot of the uncertainties of life in China, Chinese save a lot. These savings are kept in banks where they earn an abysmally low rate of interest. Because interest rates on savings are so low, banks can afford to funnel cheap loans to state-owned corporations at a below-market cost of capital.

Granted, there are some problems with this scenario too. It would be nice if a lot of the uncertainties of life in China were better addressed by the government (through social safety nets) so that people would feel comfortable spending more of their incomes. And it would be nice if the government would allow the banks to make market-driven, rather than politically-driven, lending decisions so that capital could find its way to the most efficient uses.

On the other hand, unlike the United States, China seems to get the fact that big corporations are huge drivers of economic activity. While the United States, particularly Congressional Democrats, seem, bent on punishing corporations for their very existence with even higher taxes, China seems to understand the necessary role corporations play in generating employment. While the United States, along with its labor unions, seems determined to fight a losing battle of keeping wages high while manufacturing flees to lower cost regions, China keeps wages depressed, further subsidizing the corporations and attracting foreign investment.

Though this may seem overly-critical of the United States, my point is that, in the cases of both China and the US, our economic systems are determined by government intervention. People in the US who accuse China of excessive government intervention need to take a look in the mirror.

Both of our systems are what they are due to decisions made by political leaders. The question isn't whether governments intervene. Rather, it's how they intervene.

Which one seems to have performed better in recent years?

Tuesday, October 6, 2009

Now, It's Personal

Last May, China's regulators decided to block all blogs being hosted on the blogger.com/blogspot domain. Because that's where this blog is hosted, it has been inaccessible in China, except to those who use a proxy or a VPN.

That's a shame because, up until the block, the second largest number of visitors to this blog came from China. At the time, visitors from China were about 3/4 the number from the US. Though my general topic, business-government relations in China, is aimed primarily at informing an English speaking audience, I was happy that there were at least a few readers in China, and presumably, some of them were not expats. My original hope had been to draw in both English speaking Chinese and non-Chinese who were interested in this very important topic, and to help Westerners have a little better understanding of how things work in China.

While the block bothered me, it wasn't of major concern. It's not my innocent little blog they have a problem with, I figured: there are probably a few dissident blogs on blogspot that directly challenge CCP rule, so they're blocking them all just to be safe.

And you really can't blame them. After all, former leaders of dictatorships have historically not fared too well under new democracies. (The name "Ceaucescu" probably still keeps dictators up at night.)

To counter the block, I even went to the trouble to buy the domain www.chinabizgov.com so that I could eventually migrate my blog away from blogspot.

Today, I read a piece in The Guardian by Jeremy Goldkorn, keeper of the excellent Danwei.org blog which has been blocked in China since July 3. In the article he draws a connection between China's paranoia of censorship and its lack of innovation.

Goldkorn's article reminded me that I needed to start the process of migrating my own blog away from blogspot to chinabizgov.com, but when I tried to access my domain without the aid of a VPN, I was shocked to find that it has also been blocked. While there's nothing there but a link to my blog on the blogspot domain, apparently I didn't just get caught up in the massive blocking of blogspot, but someone somewhere took exception to something in my blog. Someone, or something decided that anything with the name "chinabizgov" in it needed to be blocked.

As Goldkorn lamented in his article, I too have no idea what in my blog caught the censors' eyes, nor even whether the block was put deliberately in place by a person, or merely by a piece of software designed to block objectionable material. And if there is indeed objectionable material, I have no idea what it was, nor do I know whom I could ask in order to find out.

Before, I was willing to believe I was an innocent victim of the Party's paranoia. Now, it's personal.

And it's also very lame. If they're afraid of a little guy like me, maybe their grip on power is even more tenuous than I had previously thought.

Saturday, September 26, 2009

SASAC's Budget End-Run

According to a story in today's Economic Observer Online, China's SASAC (国资委) is trying to shake things up a little.

Currently, only the Finance Ministry (财政部)has the authority to compile public budgets in China. SASAC's only role when it comes to money is to collect dividends from the SOEs that it controls and hand them off to the Finance Ministry.

A few years ago, when SASAC's role of "dividend handoff" was established, it followed a bitter battle between SASAC and the Finance Ministry for control of these monies. SASAC's reasoning was that, as controlling shareholder of these SOEs, it should naturally control the dispensation of dividends to which it is entitled. In the end, the Finance Ministry was simply too powerful, and managed to relegate SASAC to its handoff role. Though it controls the shares of China's largest and most important SOEs, SASAC has no source of revenue and must depend on the Finance Ministry for its own budget.

Now SASAC is at it again. They have apparently been circulating a draft resolution among local government SASACs that would give SASAC the authority to independently draw up the budget for central state-owned enterprises (独立编制央企预算). This is not an inconsequential sum. In 2008, central SOEs submitted over 500 billion yuan ($73.5 billion) in dividends to the central government.

A Finance Ministry official who was asked for comment expressed his surprise that such an action was being considered. Apparently SASAC circulated a draft in the Finance Ministry last week, but the draft "on the whole, had no major problems" -- the implication being that it contained no such provision for SASAC to take over budget preparation for the SOEs.

Central SASAC is not just pulling this idea out of the air. Apparently some local SASACs have been doing this already. Shenzhen's SASAC has, since 1995, controlled the budgets of local SOEs, and only recently has the local finance department even been invited to take part in the budgeting process for SOEs.

This story illustrates a couple of interesting aspects about governance in China. One is the constant battle over resources that takes place at the ministerial level. Money is power, and China is no different from any other country whose various departments fight over resources. The other is the variety of policies being implemented by local governments. Foreign observers so often talk of China as if it is a monolith, but this story illustrates that, when you open the box, there are a lot of moving parts, some of which don't rub each other very well.

Only time will tell whether SASAC is successful in its attempt to increase its span of control. One thing we can be sure of is that the Finance Ministry will not let this happen without a fight -- a fight they will probably win.

If you build it, will they come?

A group of Chinese investors is planning to build a hybrid car plant in Alabama. HK Motors ("Hybrid Kinetic", not "Hong Kong") would begin operations in 2013 and create 5000 jobs.

The venture is headed by Yang Rong, former head of China Brilliance, an auto company headquartered in Shenyang, Liaoning Province. Brilliance continues to operate in Shenyang, primarily through a JV with BMW, but it also produces some of its own-branded vehicles. Yang apparently had to leave Brilliance a few years ago after a falling out with the local government, which then took ownership of Brilliance and made it into an SOE. (More on Yang's story here at Automotive News, sub reqd.)

But all of that is beside the point. What I don't understand is how any venture can expect to sell vehicles when they have no brand. And in an industry suffering from significant over-capacity, what will differentiate HK's cars from all of the other established names?

A factory that would provide 5000 jobs will be able to turn out a substantial number of cars. What gives Yang Rong the confidence that anyone will buy them?

Thursday, September 24, 2009

China: Leading the Transition to Electric Cars?

My friend Bill Russo has posted a very interesting powerpoint slideshow from his recent presentation to the European Chamber of Commerce in Shanghai. The topic of his presentation was China's Next Revolution: Leading the Transition to Electric Cars.

If you are interested in this topic, you will find his presentation to be filled with interesting data that leads to his conclusion that China enjoys favorable conditions for widespread adoption of electric cars. Among those conditions is the fact that China is not saddled with as much legacy infrastructure as the developed world, and therefore, it will be easier for Chinese consumers to make the leap to new energy vehicles.

While I tend to agree, I think this is not as much of an advantage as some think it is. The obvious comparison is telecommunication technology. According to the story, China had an advantage in making the leap to mobile telecoms because it wasn't saddled with a massive wired infrastructure.

In the early to mid-'00s, I found this to be generally true as I envied the mobile phones carried by Chinese whenever I visited China. The US was late to the mobile telecoms game because we all had easy access to wired telephones, and therefore had no real urgency around getting our hands on mobile technology.

Of course, by now that has all changed. The United States has launched 3G networks faster than China, and the US-designed iPhone is the envy of many Chinese who wanted it so badly they have paid upwards of $700 for a smuggled iPhone.

While I don't want to claim that EV technology will follow exactly the same path as that of mobile telecoms, my point is that new technology, regardless of its origin, moves into new markets at an accelerating pace. Whether the next big battery breakthrough originates in China, the US or Iceland doesn't really matter. These technologies will be of interest to everyone.

I think the most important point that Bill makes in his presentation is on the final page:
It takes a combination of business and government working together to make this revolutionary change possible and nowhere in the world is there a closer link between business and government than in China.
The switch from gasoline powered to battery powered cars is so revolutionary that it is hard to imagine any large country pulling this off without partnerships between business and government. Tesla may have built the coolest electric vehicle available, but Tesla isn't going to build charging stations all over the country. And until those charging stations are available, the Tesla will remain an overpriced golfcart for people with too much money on their hands. Someone has to step in and build the infrastructure.

In the US, Nissan is already working with local governments and public utilities to prove their concept that electric vehicles are a viable replacement for gasoline powered cars for the everyday commute. I would be surprised if there aren't already several other manufacturers following a similar path.

While this may seem rather novel for the US, in China, it is simply the way things are done. Among the top 15 Chinese automakers, all but three are SOEs. In other words, they are the government. The question is whether the Chinese system is flexible enough to allow the market to dictate which alternatives to the internal combustion engine are the most commercially viable.

Monday, September 21, 2009

How Many Hybrids has BYD Sold?

Last December, Shenzhen-headquartered BYD Corp. announced the launch of the F3DM plug-in hybrid sedan. BYD's gasoline version F3 is basically a Toyota Corolla lookalike that was the highest selling sedan in all of China during the first eight months of 2009. The F3DM is a plug-in hybrid of the same model. ("DM" stands for "dual mode", meaning that the car has two ways of charging its battery: through the on-board gasoline engine -- like a Prius -- or by simply plugging into an electrical outlet.)



Those who haven't been hiding in a cave (or watching America rearrange the deck chairs on its Titanic health care system 24/7), will also be aware that BYD's li-ion battery technology has attracted the attention -- and the money -- of Warren Buffet. Mid-America Energy, a subsidiary of Buffet's Berkshire Hathaway empire has invested about $230 million to buy 9.9 percent of BYD's Hong Kong traded shares.

Given the fact that BYD is the first company in the world to launch a production plug-in hybrid last December, how many F3DMs might BYD have sold by now? 1,000? 10,000? Nope. Apparently they only managed to sell 100 during the first eight months of 2009.

The initial idea was that BYD was going to sell thousands of F3DMs to government and corporate fleets before opening up sales to individuals in July of 2009. Apparently not even the fleet sales attracted much interest.

Having previously expressed my skepticism about the readiness of both the technology and of China's consumers to pay extra for fuel efficiency, I am not surprised by the poor sales -- though I would have expected at least a few thousand to have been sold by now. I think BYD had higher expectations as well.

None of this means that BYD's technology is not ready for prime time (though I still have yet to see public evidence that anyone has road tested the F3DM with the air conditioner running). What it does mean is that Chinese drivers are just like American drivers: they expect value for their money, and none of the alternative methods of propulsion offers a good value proposition yet.

Tuesday, September 15, 2009

GM is Exporting China-made Vehicles to the US (sort of)

Automotive News China (free sub reqd) reports that an electric truck made by Wuling is being distributed in the US by ZAP of Santa Rosa California.



These odd-looking trucks are categorized as low-speed vehicles or LSVs, and are only licensed to travel at speeds of 25 mph (40 kph) or less on US roads. Being classified as "low-speed" and weighing less than 3000 pounds, they are also not subject to US crash-testing requirements.

The body, chassis, brakes, steering, etc., are manufactured by Shanghai-GM-Wuling and outfitted with German EV technology. They are designed to be used primarily on the premises of large businesses such as military bases and airports.

The first batch of 100 were exported to the US earlier this year, so, in a sense, there are already vehicles made by GM in China driving the roads somewhere in the US.

From Concept to Showroom - Ford C-Max

When I visited the Shanghai Auto Show this past April, I was quite taken with the Ford Iosis Max concept car. This past week, Ford, America's only non-state-owned domestic automaker, released pictures of its new C-Max, to be shown at the upcoming Frankfurt Auto Show, and to be sold in Europe next year and in the US in 2011. (Why so long coming to the US?)

While the "concept" Iosis Max was promoted as either hybrid or fully electric, the C-Max will be sold with a traditional internal combustion engine. The C-Max has also been toned down a bit, but you can see that not a lot was changed, down to the cool greenish-yellow paint scheme.

The Iosis at the Shanghai Auto Show (photo by yours truly).




The New Ford C-Max (from New York Times auto blog)




Re-nationalization?

Today ChinaStakes posted an article warning of difficulties to come related to China's mis-spent stimulus funds.
During the economic crisis, the government has issued stimulus policies to avoid in the short term business closures and layoffs, but the side effects of this "medicine" are becoming apparent as market mechanisms have not been allowed to play a role and resources have flowed into inefficient sectors.

Both the government's 4 trillion yuan stimulus package and the banks' first half 7.4 trillion yuan lending splurge have been feasts for SOEs in the economic winter.
...

Flush SOEs are turning their attention to high profit areas where the private economy is relatively active, such as real estate and mining and steel, and getting involved. Central firms bid for "Land Kings," private coal mines in Shanxi Province are being snatched up by SOEs, reconstruction in the private steel sector has stopped while loss-making, laggard, and inefficient state-owned steel firms are helping themselves to private iron and steel companies with government assistance.
Unable to expand capacity in their own industries, many SOEs took government stimulus funds anyway, apparently hoping to think of how to spend them later. And now it looks as if the SOEs have discovered what economists have been saying for years, that the private sector is better suited to creating value than the public sector.

And since stimulus funds have basically been off-limits to private firms, they may find offers of cash from big SOEs to be irresistible, choosing to accept the embrace of the state over inevitable bankruptcy. (While it would be interesting to see some statistics on how many private sector firms have been swallowed up, it may be awhile before they are available.)

The SOEs, on the other hand, may be hoping to cash in on private sector innovation and efficiency. While the learning opportunity certainly exists, once the SOEs control these private firms, who will be learning from whom?

Monday, September 14, 2009

On PhD Degrees and Honesty in Business

I found in my emails this morning, an occasional email from David Webb, self-appointed guardian of corporate governance in Hong Kong. As some may know, Mr. Webb, formerly a member of the board of the HK Stock Exchange runs his eponymous webb-site.com which exists to point out shortcomings in HK corporate governance.

His email this morning announced that the newly-appointed CEO of HK-listed Neo-Neon Holdings Ltd, Mr. Tseng Jinsui, had, at best, misrepresented his educational qualifications. Mr. Tseng claims to have earned a doctorate at Edendale University in the UK. The only problem is that no one, not even the South China Morning Post, seems able to find proof that Edendale University exists, or if it does, that it offers an accredited degree.

Based my own very unscientific survey, I have learned that in China there are doctorates, and then there are Doctorates. Some are real, and some are not, and this fact is pretty much an open secret.

Many high level political and business officials in China claim to have doctorates, and indeed, some of them do. But many others somehow managed to obtain doctorates with only a six-month gap on their CVs during which the doctorate was supposedly earned. They must either be super-brilliant, or their education was somehow lacking.

As a real PhD candidate from a Chinese university put it to me: "Some of these doctorates held by senior officials are earned by attending a few seminars and writing a paper. Everyone knows they aren't real. But there is pressure for leaders to have an advanced degree, so those who hope for promotion have to attend one of these programs."

None of this is to say that Mr. Tseng of Neo-Neon is an incapable leader. He appears to have been promoted from within the organization, so one could reasonably assume that he knows the business well.

Why the fake degree then?

This is something that baffles me. Why, in an age in which pretty much any "fact" can be quickly researched on anyone's mobile phone, would people risk damaging their credibility by making false claims, or paying for degrees without having to do any actual learning?

On the mainland, there seems to be a pretty good explanation.

One of my interviewees in Shanghai, talking about a completely different subject, explained this phenomenon. "Many of you foreigners think of China as the model Confucian society full of humble, hard-working people. What you don't know is that the Mao years instilled in many Chinese this need to brag and exaggerate -- to convince people they have achieved something that they have not really achieved. This tendency is hard for people to change, and we still see it often among the auto companies (when talking of their achievements in electric vehicle technology)".

Though the context was electric vehicles, I wonder if this explains the tendency of some to put degrees on their CVs that were either never earned, or earned over only a few months.

As to why this happens so frequently in Hong Kong, I am still at a loss.

Having a PhD does not make one smart. All it means is that you have the tenacity to stick out a long program of learning and research that offers little hope of a financial payoff. Surely a long history of successes in industry are worth more than that when it comes to demonstrating one's ability to run a company.

Monday, September 7, 2009

Nissan's Global EV Infrastructure Partnerships (and a cool website!)

In my quest to understand the nature of business-government relationships in China's auto industry, I talk to a lot of people, rack up a fair amount of frequent flyer miles, and visit a lot of websites. Today I had the occasion to visit Nissan's zero-emission website to learn more about their new "Leaf" electric vehicle.




Nissan has an important joint venture with Dongfeng, one of China's larger manufacturers of passenger cars, and I wanted to know what Nissan is doing to bring their zero-emission technology to China.

Because I visit dozens, perhaps hundreds, of websites weekly, I've suffered through a lot of poorly designed sites and very unnecessary eye-candy in an effort to find the information I seek. This Nissan-global zero-emission website, however, is not only impressive for its sleek and intuitive design, but its content as well. (And, no, Nissan is not paying me to plug their site; I am honestly that impressed with what I have seen.)

First, on the content side, I am interested by the fact that Nissan is touting its partnerships with governments, not other companies as I had expected. While I know they have some corporate partners as well, this interactive map shows the governments that Nissan is working with to roll out technology infrastructure to support zero-emission vehicles.

Also of interest is the fact that Nissan is working with different levels of governments. In some countries such as Portugal and Ireland, their partnership is with a central government, and covers an entire country. In other countries, such as the United States, their partnerships are with various state and local governments: the State of Oregon, Sonoma County, CA, San Diego, Phoenix-Tucson, the State of Tennessee, etc.

In China, they have both a central government partner, the Ministry of Industry and Information Technology, and a local government partner, the City of Wuhan (which also happens to be the headquarters city of Nissan's JV partner, Dongfeng).

I know that some commentators have been critical of Renalt-Nissan's leader Carlos Ghosn for leapfrogging the hybrid stage and aiming straight for zero-emission vehicles, but I am impressed with the way in which Nissan has been charging forward on this. Rather than taking an interim, incremental step with hybrids, Nissan is partnering with governments to confront directly the chicken-and-egg issue of electric cars and charging infrastructure.

I cannot opine as to whether this makes business sense, but, as someone who would like to breathe cleaner air now, not 20 years from now, I wish Nissan well. As a political scientist, I agree with Nissan that governments are really the only likely partners for building out infrastructure. Bound as they are not to achieve a short-term return on their investments, governments lack the disincentives that would prevent most private sector businesses from taking such a bold move.

Why is Nissan taking this risk? My guess is that it has something to do with the guy at the top. Carlos Ghosn is no shrinking violet, and my sense is that, having fallen a little behind on hybrid development, Mr. Ghosn sees the only wise move as making a giant leap forward rather than running to catch up with pretty much everyone else on the hybrid bandwagon.

As for Nissan's zero-emission website, all I can say is that it's pretty cool. In about five minutes, I was able to get a pretty good idea of the projects Nissan has cooking. I also learned enough about the new Leaf electric vehicle to know that I want one. (Okay, to be honest, I'd rather have a Tesla, but the Leaf would probably be a more practical option for my bank account.) Check out the Leaf's gallery.

Sunday, September 6, 2009

Shopping bags: China's sticks or Ralph's carrots?

During the several months I recently spent in China, I occasionally found myself feeling a little miffed that I was charged for the privilege of carrying away food items I had purchased in plastic bags. In Shanghai, I was charged five mao per bag (roughly 7 US cents). The longer I was there, the more I found myself making a conscious decision to take used plastic bags with me to the store.

Over the past five years that I have lived in LA, I have noticed that supermarkets have begun their own attempts to discourage the use of plastic bags -- or rather, to encourage their non-use. The Ralph's in Westwood, where I have been shopping lately, gives you back five cents for any reusable bag you bring in.

So where am I going with this? I think there are a few lessons here about both political systems and human motivation. (Think of this as a hodge-podge post if you want.)

In China's case, it was the central government in Beijing, not local governments, that made the decision to charge for plastic bags. Regardless of how business owners feel about this issue, they have no choice but to charge for bags. (I will make no assumptions about where all of this money ends up.)

Due to the federal system in the United States, issues like this typically fall to state and local governments, and sometimes, directly to the voters. Unfortunately (from the point-of-view of someone who wants to see less usage of plastic bags) the closer such decisions get to voters, the greater the likelihood that taxes of this nature will not be passed -- unless, of course, one lives in San Francisco, whose relatively wealthy voters often happily tax themselves for green causes. Seattle's voters, given an opportunity to vote for a bag tax a couple of years ago, chose to vote it down. When Seattle later passed an ordinance, the plastic bag business lobby (who knew there was such a lobby?) successfully batted it down.

In New York City, bag taxes or bans have been discussed in the past, and, as far as I know, have still not been passed. In Los Angeles, the City Council has passed an outright ban on plastic bags to go into effect in July 2010 unless the State of California passes a statewide bag tax in the interim. The latest information I have been able to find is that California's legislature has still not been able to pass a bag tax. The plastic bag business lobby in California has also successfully sued cities that have banned plastic bags.

In doing a little Googling for this post, I have discovered that there is a lot of activity in the US surrounding plastic bags, but apparently none of the action is happening at the federal level. And, aside from Washington D.C. and North Carolina's Outer Banks, no local community has been able to pass bag taxes and make them stick. (If my facts on your particular community are out-of-date, please feel free to set me straight via the comments section below.)

My point here is that, aside from the exceptions mentioned above, the only policies in the US on plastic bags that appear to be approaching success are those taken all the way down at the store level. Our central government is (thus far) taking a hands-off approach, and our local governments are not powerful enough to fight a nationwide plastic bag business lobby.

Yet, while China's central government has approached this issue with a stick, local stores in Los Angeles are voluntarily offering carrots.

Which method is more successful? While I am sure China's Statistics Bureau has come up with some numbers on this, our intuition should tell us that China's policy has been more successful -- if for no other reason than that it is a nationwide policy. However, even if you could compare the cities of Shanghai and Los Angeles, I am certain we would see that Shanghai's bag use has fallen further than has LA's.

My intuition tells me that people will respond more to a stick than a carrot on an issue such as this, even if the values of the sticks and carrots are negligible. People don't want to lose something they already have, even if it's small, but they will also not go out of their way just to get a few cents back -- especially if they feel stupid doing it, or if it creates a little inconvenience.

While my wife is keen to make use of reusable bags, and I go along with it when I'm with her, I will admit that I sometimes bring home plastic bags when I'm shopping by myself. China's sticks did more to change my behavior than have Ralph's carrots.
  • Can you think of similar comparisons between how China and the US attempt to legislate human behavior?
  • Do you agree that sticks can be more effective than carrots on issues of conservation, or can you think of examples in which carrots have been more effective than sticks?
  • Does the federal nature of the US government place the US at a long-term disadvantage when it comes to changing destructive human behavior? Or is there a price to be paid for the heavy-hand of China's unitary system?
  • What are the tradeoffs between these two styles of governing?
(Apologies to my readers who haven't been in school for awhile and find such academic questions to be a bit of a shock. ;-)

Friday, August 28, 2009

China Stakes on SOE Corporate Governance

ChinaStakes, a fantastic Shanghai-based political economy site that I follow daily, has posted a commentary on a recent People's Daily article that asserts the importance of Communist Party leadership in state-owned enterprises.

I somehow managed to miss this People's Daily commentary, so I am happy that ChinaStakes has highlighted it for us. If there has been any doubt as to the role of the Party in China's SOE, People's Daily makes it crystal clear: SOEs exist to serve the political aims of the party. Any economic goals are only secondary.

You can read the entire ChinaStakes post here.

Thursday, August 27, 2009

China Gives the US a Way to Save Face

We often hear scholars and policy wonks ask the question of what kind of power China will be in terms of international relations. We attempt to put them into our Western-derived boxes such as realist, liberal, status quo, etc.

I think China is increasingly showing us that it will not fit into our traditional boxes. While it may at times exhibit realist or liberal behaviors, at its roots, China is what it has always been: a Chinese power.

Such Chineseness was on display today as China's Ministry of Defense summed up two days of maritime safety meetings with the US military:
The way to resolve China-US maritime incidents is for the US to change its surveillance and survey operations policies against China, decrease and eventually stop such operations. (See Financial Times story here.)
Notice what they did not say. They did not make demands for what we can be certain they really want, which is an immediate end to US surveillance. Rather, China is offering the US a face-saving way out of this. As China suggests, the US can begin to decrease such operations, then eventually end them.

This assumes, of course, that, at some point in the future, China will be in a position to force the US to stop such surveillance in its own backyard. China itself seems quite certain that, at some point, the US won't be there anymore. The only question, from their point of view, is whether the US gradually and voluntarily ends such surveillance in the near future, or China ends it in the longer term.


Sunday, August 23, 2009

Public vs Private: Does this distinction "defy logic"?

I was honored to have one of my recent posts, "How do Australia's Foreign Investment Rules Apply to China?", cross-posted by the East Asia Forum where it received the following question/observation from Lincoln Fung:
What does the ownership in terms of public versus private make to owning some shares of a firm in an another country? All firms in a country are subject to the regulations of that country, whether they are owned domestically or by foreign investors. A country can always regulate the behaviour of the firms operate in its land. So what are the concerns or fears of a firm is owned by a public firm of another country? It defies logic to understand the reasons behind.
Mr. Fung's questions are very important. Indeed, this distinguishing between "public" and "private" drives much of my own research. And, in fact, I used Mr. Fung's very line of reasoning in an interview about the Rio Tinto case with a journalist from the Sydney Morning Herald earlier this year. As for defying logic, I understand that such a distinction may defy some people's logic; however, from other people's perspectives, such a distinction may seem perfectly logical.

For example, there is the populist logic that a "communist", authoritarian state lacking in transparency and rule of law is not to be trusted. While one may disagree with that premise, it is not difficult to understand why someone holding that premise would logically be wary of China's intentions.

There is also the logic of neoclassical economic theory which tells us that a government, conflicted as it is with various political objectives, cannot run a business as efficiently or effectively as the private sector. Again, someone from China who is accustomed to the government having a major role in just about everything may not understand this "logic".

Many people in the West have been influenced by the two "logics" I have mentioned above. These have become so ingrained in Western culture that few people even bother to question them. However, the recent economic upheavals have led many in the West outside of academia (economists and political scientists have been pondering such questions for quite awhile) to ask whether government can indeed have a positive role.

This is not to say that governments will most certainly have an increased economic role going forward. They may, but then again, there are plenty of reasons to question the sustainability of China's state-centric economy.

Monday, August 17, 2009

Increased Worker Activism: Symptom of a Central-Local Issue?

For the second time in a month, local Chinese officials have been forced by workers to call off privatization of steel mills.

The first incident occurred in Jilin Province on July 27 during which thousands of workers protested the proposed privatization of Tonghua Iron and Steel. The manager of the mill was beaten to death by disgruntled workers who felt their needs were being ignored.

The latest incident occurred on Sunday as Henan Provincial officials, again, pushed by protesting workers, called off the proposed privatization of Linzhou Iron and Steel.

In both cases, the SOEs being privatized are owned by local governments, not the central government. The workers, on the other hand, are officially represented by the All China Federation of Trade Unions (ACFTU), which is a centrally-managed organization affiliated with the Communist Party.

While no evidence suggesting any corruption has been presented as of yet, local government officials have profited quite handsomely in the past from privatizations of local SOEs.

The focus of the Hu-Wen government -- in stark contrast with that of the Jiang-Zhu government which pushed for increased privatization -- has ostensibly been less on privatization, less on growth at any cost, and more on ensuring that China's common people get a chance to benefit from economic reforms.

There are a couple of apparent conflicts between central and local governments that we may see playing out in the steel industry (among others) right now. First, the ACFTU, according to the Wall Street Journal, "has been taking a more active role in trying to represent workers' rights", and as a result, their organization may have taken a role in encouraging workers, if not to protest, at least to demand their voices be heard. This is in direct opposition to the incentives to local officials who are highly motivated to privatize locally-owned assets.

Second, the central government has been adamant that China's steel industry, in its present state, is far too fragmented for any one company to become a major global player, not only as a steel producer, but as a negotiator with iron ore suppliers. While the central government's power to force locally-owned SOEs into mergers is questionable, further privatization of these assets would even further dilute the central government's power over this pillar industry.

As an aside, I also find it interesting that, the richer China's people become, the more rights they seem to demand. This connection between wealth and demands for rights has been pretty much debunked by economists and political scientists over the past decade or so, mostly because no one has been able to identify the causal mechanism connecting wealth and democratization -- this despite abundant empirical evidence pointing to a relationship* -- with (until recently?) one glaring exception: China.

*Robert J. Barro has called this relationship "an empirical regularity".

This is not to say that China's workers suddenly have rights simply because they've demanded it, but, while the ACFTU (with its access to the resources of the central government) is clearly in a position to help stop worker unrest, one wonders whether they may have been encouraging their organization.

At a minimum, we can identify clear conflicts between central and local governments here, and the workers seem to be caught in the middle.

Saturday, August 15, 2009

Why is Chery Losing Talent?

A few days ago, the Wall Street Journal's ace auto journalist in China, Nori Shirouzu, reported that Beijing Auto has recruited away Chery's current Chief of R&D.

While this news, in and of itself, is certainly no cause for alarm, it seems to be part of a larger trend that may portend difficulties for Chery. According to several well-placed insiders with whom I have recently spoken in China, Chery may be having a bit of a problem hanging on to its talent.

The R&D Chief who has recently left, Gu Lei, brought with him to Chery 11 years of experience at Ford Motor Co. Mr. Gu's predecessor was also highly sought after to run Chery's R&D, but he departed for academia after only three years -- and several very successful model launches, I might add.

Some of the discontent -- and this is only speculation -- may be arising from Chery's ambitious launch schedule. The company has announced that it would launch an astounding 15 new models this year -- a schedule that, at this point, no longer looks possible, but which nevertheless may work Chery's people to death as they attempt to achieve it.

One Chery insider, who also recently came from a foreign producer, confessed to me that he no longer has weekends off since he joined the company. While he's excited to be working for a domestic automaker, he wasn't certain how long he could keep up the pace.

Tuesday, August 4, 2009

How do Australia's Foreign Investment Rules Apply to China?

Australia's government announced yesterday an easing of foreign investment rules. The rules have apparently come under criticism recently for causing delays that may be overly burdensome to foreign investors.

One recent deal, the proposed purchase of a controlling interest in Aussie miner Rio Tinto by Chinese metals company Chinalco, was canceled during Australia's review process. According to Reuters, some critics have complained that the delay caused by Australia's review process injected doubt and uncertainty, possibly causing Rio to cancel the deal before a decision was rendered. There is, of course, no evidence to support this speculation.

The Reuters story also points out that the changes to Australia's rules only affect private investment. Sovereign investment, that is, investment by foreign governments, is still subject to the same rigorous review process. So in fact, this change in rules would have had no effect at all on the Rio Tinto purchase. Chinalco is owned by China's central government, and its proposed controlling purchase of Rio was only a small part of the $12 billion in Chinese state investment into Australia proposed during the first five months of 2009.

One question not addressed is how exactly Australia will distinguish between "public" and "private". Among most countries with market economies, the question is not so difficult to answer.

For example, if Ford Motor Co. from the US wanted to buy an Australian parts company, this would be considered "private" investment. But if General Motors wanted to buy the same parts company (and assuming it were able, which I know is a bit of a stretch) this would be considered "public" since GM's majority shareholder is the US government.

But how would these rules apply to Chinese companies?

For example, Lenovo, maker of the Thinkpad on which I write this post, is a publicly traded company. If it wanted to buy an Australian software firm, surely it would be considered private, right? Not exactly. When you follow the trail, you find that Lenovo's controlling (though not majority) shareholder is the Chinese Academy of Sciences, a government-controlled thinktank.

What about Geely Motors? Geely is traded in Hong Kong, and its controlling shareholder is the company's Chairman, Li Shufu, a private Chinese citizen. I think this case would be more clear cut, and indeed, apparently Australia thought so when they allowed Geely to buy DSI, an Australian maker of drivetrains.

However, as I pointed out in a recent post about Geely, the line between "public" and "private" in China can be blurry. Despite the private ownership of Geely, China's State Council apparently maintains the right to sign off on Geely's strategy for expansion.

Saturday, August 1, 2009

China's Auto Policy: Under-Promise, Over-Deliver?

People's Daily reports some surprisingly strong numbers in terms of the domestic market share of China-branded passenger cars:
In the first half of 2009, Chinese-brand car sales reached 955,300, an increase of 4.21 percentage points year-on-year and accounting for 45.32 percent of the total passenger vehicle sales and 29.45 percent of the total sedan sales respectively.
Compare these numbers with the three-year goals stated in China's recent "
Automobile Industry Adjustment and Stimulus Plan" (which I previously wrote about here). This policy was released only in March of 2009:

自主品牌乘用车国内市场份额超过40%,其中轿车超过30%。

Chinese brands will surpass 40 percent of the passenger car market, among which sedans will surpass 30 percent.

If I read this correctly (and if People's Daily's statistics are to be believed), the State Council's three-year market share goals were achieved about two-and-a-half years ahead of schedule!


Friday, July 31, 2009

BYD Doesn't Really Need Buffet's Money

Buffet's Midas Touch is Enough

A story appearing on Bloomberg's website yesterday reported that Warren Buffet's Berkshire Hathaway had already earned a US$1 billion paper profit on shares in Hong Kong listed, Chinese automaker BYD.

What makes this interesting is that, as of yesterday, Berkshire Hathaway (or more precisely, Berkshire's subsidiary Mid-American Energy) had yet to actually purchase any of BYD's shares. Only on July 30 did BYD receive approval from the China Securities Regulatory Commission (CSRC) to sell the shares to Buffet's company.

Since the joint announcement by Buffet and BYD last September 27, the value of BYD's shares have increased nearly fivefold -- before Buffet had invested a single dime in BYD stock. Apparently BYD only needed for the world to see that Warren Buffet approved in the direction the company is going to benefit from his Midas touch.

Of course, there is more credit to be handed out. BYD's sales of 176,814 vehicles in the first half of 2009 more than doubled their sales in the same period last year. Credit can also be given to China's State Council whose 50% tax break on small engine passenger cars have boosted sales of China's domestic automakers. BYD's F3 (the gasoline model) is China's fourth most popular passenger car.

A New Shanghai Bubble?

Unfortunately, there may have also been some irrational exuberance at work. China's stock market has been one of the best performing in the world so far this year, and this has also provided some lift to the Hong Kong market. Analysts are concerned that the sudden resumption of IPOs may have unleashed pent-up demand and begun to inflate a stock market bubble.

And speaking of IPOs, BYD is also considering one of its own on the Shanghai market. This will be a key for the growth of the company as Chinese auto companies may only draw 50 percent of their capital from overseas sources. And despite the fact that Hong Kong now belongs to China, capital raised on its stock market is still considered to be "overseas".

While the run up in BYD's Hong Kong stock price is certainly welcomed by the company, this will increase pressure on them to raise more funds on the mainland. Now that the CSRC has turned on the tap again, there is apparently a lot of money waiting on the sidelines, eager for more IPOs. Two other Chinese auto companies, Chery and Lifan, are also considering IPOs.

But what will happen when the CSRC turns off the tap again? I'm afraid the CSRC will soon discover they are riding a tiger.

Tuesday, July 28, 2009

Malcolm Bricklin and Chery, The Movie

I stumbled upon this fascinating documentary today, and dropped what I was doing to watch the entire film in the middle of the day. The Entrepreneur documents the efforts of Malcolm Bricklin to introduce cars made by Chery of China into the United States. Bricklin previously had success with introducing Subaru to the US, and later, initial success by introducing the Yugo (which later turned out to be a fiasco).

The film was made by Bricklin's son, Johnathan, who was apparently given uncensored access, not only to Bricklin's board meetings, but also to negotiations with senior Chery management in China.

What I found most fascinating is the way Bricklin basically browbeats his Chinese hosts into signing an agreement with him. This goes against everything that China "experts" tell us about negotiating with the Chinese -- that typical Western emotional reactions have no effect on Chinese negotiators.

I don't think I am giving anything away by revealing the fact that Bricklin's venture was ultimately unsuccessful. If it had been, we would see Cherys on US roads today. However, I must admit surprise at how it all ended. My original assumption had been that the failure lay completely at Bricklin's feet. Indeed, the entire documentary, except for the last five or so minutes, gives one the impression that this excitable, hot-tempered entrepreneur could not possibly succeed in holding up his end of the contract.

So why did it all fall apart? Well, I'll leave that for you to judge -- that is, if you have about an hour and a half to watch a fascinating story.

You can find the entire documentary online at Hulu.com. Once you've watched it, feel free to return here and post your thoughts.

How does Bricklin get away with breaking all the "rules" of negotiating in China?

Did he ever really have an agreement with Chery?

Whose fault was it that this venture never got off the ground?

Friday, July 24, 2009

In Lieu of an Actual Blog Post...

A decision to spend the rest of the summer in LA, followed by a decision to move to a different apartment, have interrupted my original research plans. Once my move is out of the way, I expect to spend the rest of the summer absorbing the content of the 30+ interviews I have conducted in China thus far and planning my return to China later in the year, as well as hopefully resuming a more regular blog posting schedule.

Meanwhile, I was recently interviewed about my research by the intrepid Aimee Barnes, a New Yorker and China specialist who interviews other China specialists with diverse backgrounds. I am honored to have been added to the mix.

You can find a transcript of the interview on Aimee's blog, here.


Monday, June 29, 2009

The Blurry Line Between Public and Private

According to my original plans, I should be touring a factory right now. Unfortunately, I'm a bit under the weather, so I have a few moments to post an interesting story about someone else's factory visit. (No, I don't have H1N1 "swine" flu.)

A few weeks ago, Chinese Premier, Wen Jiabao paid a visit to Geely's automotive factory in Hunan Province. Despite the fact that Geely is not a state-owned enterprise, this visit is not all that surprising. State leaders all over the world pay visits to privately owned businesses from time to time.

Standing behind Wen's right shoulder is Li Shufu, founder, Chairman and controlling shareholder of Geely.


What makes Wen's visit interesting, however, is the fact that Wen's government itself directly and indirectly owns or controls several competing auto manufacturers. Wen also had some interesting things to say while there:
我今天的讲话就是为吉利今后的发展指明了方向,并请吉利半年后再向国务院提交专题报告,我将再次批示继续支持吉利汽车工业发展。

Today I am speaking about the future direction of Geely's development. I am also asking Geely to submit a special report to the State Council again after six months. I will once again give instructions to continue to support Geely's industrial development.* (emphasis added)
So apparently, at some point in the past, Geely has submitted a "special report" to the State Council (China's "cabinet"), and from the sound of this story, Wen is offering Geely a chance to re-submit this report for consideration. I hesitate to read too much into this, but it does sound to me as if Geely's first report may not have been acceptable.

An automobile analyst with whom I have met here in Shanghai tells me that this "report" is a development plan that charts the strategic direction of the company. The fact that China's government has identified the auto industry as a "pillar" industry over which it intends to continue to exercise heavy influence, plus the fact that Geely is solidly among China's top ten auto manufacturers are reason enough for the government's concern. Despite the fact that Geely is nominally "private", its strategic plans will have to be approved in Beijing.

The surprise for me here is that Beijing is taking a visible lead in the plans of a private firm. I would not have been surprised to learn that the local government of Zhejiang Province, where Geely's headquarters are located, exercises this level of influence, but I am surprised that Beijing is taking such an interest.

In fact, this challenges what I thought I knew about the level of government influence in this industry. My previous impression had been that the central government was only involved at a strategic level with the handful of firms that it directly owns (FAW and Dongfeng), and that all other auto firms were more heavily influenced by local government.

In addition to its apparent role in Geely's strategic direction, the central government also has perks to offer. In the story referenced above, the final sentence says "
年初,中央各大新闻媒体也纷纷对吉利的成功经验作了报道。" ("At the beginning of the year, all of the major central news media outlets made reports on Geely's successful experience.")

This confirms what an executive of one of China's major auto firms personally told me a few weeks ago. "The Central Government offers a kind of support that no local government in China can offer. The Central Government is the only government that controls national level media -- local government only control local media -- and many favorable news stories about a car company can have a big influence on consumer perceptions."

Of course, this brings up questions for which I have no answer. For example, how does the central government choose which auto companies it wants to support? Is there a quality about the company (not necessarily related to the quality of its products) that draws government support? Or do auto companies have to proactively seek this kind of government support? And if so, what does it take to win them over?

_________________
* I'm a little unsure as to my translation of 批示 in this context, so please feel free to offer an alternative translation in the comments.

Saturday, June 20, 2009

How far should governments go to protect us?

A big difference between doing research back home in Los Angeles and here in China is that I feel like I'm on the clock 24 hours a day. Not that I have had much fun over the past five years that I've been attending UCLA, but when I'm away from home, there's this constant feeling that, for every moment of fun or relaxation I may have here, that's one moment longer that I will be away from home.

I guess all of this is to say that, I've been neglecting my blog, and I feel a little guilty about it -- but not so guilty that I'm going to start posting frequently again. Which is a shame because there have been so many interesting events for which I have started outlining blog posts in my head only to decide later that my time would be better spent reading an article, reviewing my field notes or preparing for my next interview.

One recent topic of interest for which I would love to write a much longer analytical article has been the reaction by various governments to the H1N1 swine flu. The contrast between the responses of the US and Chinese governments (including Hong Kong) could not be more stark.

Whereas China and Hong Kong are checking temperatures on planes before allowing people to disembark, and forcing anyone with an elevated temperature (as well as anyone who has been in close proximity to them) into quarantine, the US government has done very little.

While I have an uneducated opinion about the efficacy and necessity of various preventative measures being taken in China and Hong Kong, the purpose of my writing about this topic is not to criticize, but to point out the huge disparity in reactions.

Back in 2003, China's reaction to SARS was widely criticized, but the criticism was not about what China did to prevent SARS. Rather, it was about what local Chinese officials did to cover up the presence of the disease. China's actions now to prevent the spread of H1N1, a disease only slightly more fatal than common seasonal flu, appear to be intended, if nothing else, to demonstrate to the Chinese people that their government can indeed protect them from disease. And the complaints about quarantine that I have been reading online are coming primarily from foreigners (i.e. citizens of countries other than China) who have been forced to waste time and money confined in Chinese hotels. Commentators in China and Hong Kong seem (from my perspective) fairly supportive of their governments' respective actions to protect them.

The US government, on the other hand, is behaving pretty much the same as during the SARS outbreak of 2003. Though SARS was a far more deadly disease, in both cases, the US government basically assessed the risks and allowed American citizens to make their own decisions as to whether they should travel.
Only today did the US government issue a travel warning, and ironically, the warning was not about the dangers of contracting swine flu, but of the risks of being quarantined by the Chinese government which does not reimburse lost travel expenses.

While I know there are certainly exceptions, my guess is that most Chinese and American citizens reading this post are thinking "well, of course, our government is doing exactly what we expect of them!". Chinese aren't complaining about quarantine, and Americans aren't begging for more protection. In the end, whether democratic or not (and depending on whether it threatens their hold on power), governments tend to run day-to-day operations in ways that they think will best serve the interests and wishes of their citizens.

In a few weeks, I will be meeting my wife, whom I haven't seen in over two months, in Hong Kong. If you happen to see a mushroom cloud over HK during that time, that will be my head exploding due to one or both of us being quarantined by the nanny state. :-)