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.This is a charge we have begun to see more of in recent months.
“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.”
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.
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Compare the hood lines on these pics of the Volvo S80, the Ford Focus and the new Ford Fiesta:
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I know one of the problems is separating "privately owned" businesses from state ones. Many of the entrepreneurs came out of state sector after all (although perhaps less so in the last ten years).
ReplyDeleteBut I read somewhere that SMEs generate a disproportionate share of urban jobs, and are far more productive in terms of GDP output per unit of input.
So squeezing the lifeblood out of private sector will hinder all the talk of the Chinese economy to improve qualitatively.
I think it comes down to a different interpretation of how you build a competitive economy.
Western market liberalism says a level playing field, the survival of the fittest ethos etc will see the victors emerge through a spirit of innovation, discipline and creativity etc.
China's current model seems to be going for pre-ordained scale - the tyranny of numbers, again. Choose a few of the biggest players, shower them with state credit and then wheel them out onto the global stage.
This might work in some sectors and help Chinese giants burst into foreign markets.
But invisible hands are better than guiding, government ones - at least in my book.
Thanks for your insightful comments, Will.
ReplyDeleteYou have touched on the exact question that motivates my research. While my intuition agrees with your final sentence, the scientist in me wants to find a definitive answer to this question. (And I cannot claim to be anywhere close to an answer at this point.)
Whereas we Westerners (or at least Americans) tend to err in the direction of less government involvement, the Chinese tend to err in the other direction. The extent to which China's economic planners -- despite the prosperity brought by market reforms -- continue to believe they know what is best for the economy still strikes me as remarkably arrogant.
Then again, the previous "ideal" (i.e. the US) has not only fallen on hard times, but has also plunged into the abyss of increased state control of certain elements of the economy. The government's position, of course, is that this is all a necessary, temporary measure, and that the government does not want to be in the auto, insurance and banking businesses long-term. We shall see in a few years if this was indeed the case.
In the meantime, I am still searching for a mechanism -- if it exists -- by which the Chinese state (in its various forms) can somehow defy gravity by owning important parts of the economy while restricting its ability to meddle politically. Frankly, that's tough for even me to swallow.
It is an interesting area to specialise in.
ReplyDeleteBut doesn't the answer to the question depend on the context? Early stage economic development might benefit more from government intervention - to protect fledgling industries, to nurture scarce resources, to set priorities etc.
But later on, to maintain a similar pace of growth, productivity must go up and I believe that is much more down to individual energies and incentives.
There is no way a single coordinating agency (or even a group of them) can foster this beyond a certain point.
So it depends where China is on the spectrum of development, and that varies by industry, region etc...
For me, it also leads to political choices. You ask for economic lift-off from a nation of entrepreneurs and far-thinking businessmen, and eventually they will rub up against the political ceiling.
So I find the celebration of the China model a little premature. But I suppose Francis Fukayama was equally self-congratulatory fifteen or so years ago on the triumph of capitalism (and before that we were back down in the dumps worrying about Japanese dominance).
It seems to suggest that all this stuff happens in cycles, so there may be a time for government to step in, and a time to step away.
But that requires a political (and ideological) self-confidence that China lacks?
Thanks, Will. (Sorry it has taken me so long to respond.)
ReplyDeleteI think you have articulated my research problem better than I could have!
There are a couple of your statements, however, that, while I accept them as a matter of faith, I hope to address them in a more systematic, scientific manner. (And I think my dissertation committee will expect this of me as well.)
"There is no way a single coordinating agency (or even a group of them) can foster this beyond a certain point."
My gut, along with the Soviet experience, tells me this is true. But what if China is doing something different that requires explanation? Not saying they definitely are, but I also need to investigate it closely enough to make a claim one way or the other.
"You ask for economic lift-off from a nation of entrepreneurs and far-thinking businessmen, and eventually they will rub up against the political ceiling."
Again, this makes intuitive sense to me, plus many economists and political scientists have theorized as to why this is true.
Then again, so far we haven't seen the kind of political engagement in China we would have expected. Many entrepreneurs seem to be satisfied to simply get rich as long as they avoid politically sensitive areas.
Thank you for your willingness to engage on this topic. It pushes me to think harder.
I'm not sure where you are, but if you happen to be in Beijing now, I would love to chat more.
I live in Hong Kong, but I do some work in relation to China and trying to understand it better. I try to follow a few blogs, including your one.
ReplyDeleteI'd be interested in other ones that you might recommend (business/economic/policy angle).
But I do get up to Beijing sometimes. It would be good to meet up as I think you sound much closer to the coal face in terms of your China research and relationships.
I take all of your points above.
Two of them interest me most.
Firstly, how to 'measure' one system of economic development in comparison to another? Choosing parameters must be key, as well as the period that you elect to study.
Your topic is so huge, I am not sure how you get your arms around it. Amid the welter of views, news and statistics how do you create a scientific or systematic framework solid enough to support sturdy conclusions? I know you focus on a particular sector, which must help.
Second, your point on China perhaps doing things differently.
Instinctively I struggle with that - or at least, I struggle to accept that they will create a model that is distinctly Chinese for a sustained period.
That is my bias again, as I think Smith's invisible hand has a human universality to it that subverts exceptionalism (over anything but the shortest term).
And what is it about the Chinese that supports the idea that they have discovered a new economic model?
Demographics, maybe - although India's population will exceed China's within a few decades, so that blurs the argument. Huge populations can be a millstone too.
Some kind of Chinese genius? Law of large numbers and all that, as well as an incredible heritage in invention and sophistication. But no real evidence has been presented on exceptional abilities here, either.
In fact, it surprises me how quickly so many western liberals have lost confidence in their own convictions about how value (economic and intellectual) is best created.
It is as if we are preparing a new Needham Question, this time focused on how the western economies will disappear from view for a few centuries.
My other suspicion is that there is no agreed or codified "Chinese way" being applied by the planners themselves (has an official ever been able to outline it to you in detail?).
So we'd be looking for something that is articulated only as cover for a more self-interested agenda.
There are clear focal points - survival of the Party and the associated goals in economic growth. But other than that it is a tooth-and-claw struggle for resources and power amid a chaotic and fast-developing political economy.
So in some ways not so unlike the period of history that Smith was writing about too.
Will, thanks again for your excellent thoughts on this.
ReplyDeleteAs you have pointed out, this is indeed a huge question. In order not to drown in the magnitude of it, I have to separate my research into two components: 1) the big questions that will motivate a lifetime of study and 2) the more manageable questions that will help me to graduate in 2010.
My research on China's auto industry forms the latter. However, it is my hope that, by understanding how a single industry works, I will get a little more clarity into the intersection of Chinese politics and economics in general.
I do agree with you that, to call China's method a "model" is a bit of a stretch. At least from where I stand at the moment, it looks more like a series of experiments than a deliberate course of action.
However, to the extent that everything in China is done in this manner, we may begin to see a "model" of sorts emerge. This leads to questions like: How does China manage its process of experimentation? Who leads and how do they do it?
Then again, there may be no pattern at all. If that is the case (and I think China's leadership, more than anyone would know this), they may be only one big misstep from a disastrous outcome.