The basic premise behind my current research program is that some governments are more heavily involved than others in their respective economies. And a further assumption, supported by economic theory, is that greater state involvement equals lower efficiency, profitability and competitiveness. For me, two of the most obvious reference points are the United States and China.
As I have looked closely at how China’s government has guided and supported its auto industry, I have also begun to ask some important questions: Why does government’s involvement in economic development necessarily have to be negative? And why is China’s government able to manage the growth of national champions while the U.S. government still seems content to let the market do its job and let the chips fall where they may?
Last week I received a somewhat last-minute invitation by a company named Ener1 to attend a U.S.-China Advanced Technology Vehicle Summit in Indianapolis, Indiana. The chief attraction for me was the fact that dozens of Chinese automobile company executives and government officials would be in attendance, so my expectation was that I might get to chat with a few of them on the sidelines.
While my expectations were indeed met – I had a chance to talk with people from Geely, Dongfeng and BYD – they were ultimately exceeded. My unexpected find was a number of American auto supplier executives who were excited about state and local governments in Indiana, the environment for electric vehicle innovation there, and their opportunities in China.
The day I arrived at the summit the folks at Ener1 were excited about the announcement of a joint venture between their EnerDel subsidiary and Wanxiang of Hangzhou, Zhejiang Province. Wanxiang is the largest tier-1 auto parts supplier in China. During 2010 the joint venture formed by the two companies will begin producing lithium-ion battery systems for Wanxiang’s existing customer base in China.
I had a chance to chat with Ener1 Chairman and CEO, Charles Gassenheimer who explained to me that EnerDel’s advantage in China is its manganese-oxide based battery technology which has greater energy density than the iron-phosphate technology used by companies such as BYD. As there is a big need in China for battery packs that can drive heavier vehicles such as buses, energy density will be increasingly important, and EnerDel’s technology gives Wanxiang a stronger offering for its domestic customers.
EnerDel’s batteries are already being deployed in the TH!NK City and the Volvo C30 electric passenger vehicles.
Governor as Matchmaker
Because China is a new frontier for EnerDel, I asked Mr. Gassenheimer how he connected with Wanxiang. Of all the companies in China, why this one? “It was a marriage made by the Governor of Indiana,” he replied. Governor Mitch Daniels, who addressed the opening dinner of the Summit, makes trips to Asia to promote his state, annually to Japan, and this year, for the first time, to China. Governor Daniels later reached out to EnerDel, whose facilities are located in Indianapolis, to encourage them to talk with Wanxiang whose Chairman he had met during his trip to Zhejiang Province, a sister province to the State of Indiana.
So it would appear that Indiana has a savvy governor who understands the value of creating business connections for his state. But when Governor Daniels travels to China and elsewhere, what exactly is he selling? Why would the Chinese be interested in Indiana when Detroit is right across Indiana’s northern border?
As I spoke with Mr. Gassenheimer, we were also joined by Thomas J. Snyder, President of Ivy Tech Community College and also a board member of Ener1. Mr Snyder pointed out that the 100-strong delegation of Chinese visitors who were currently attending the Summit were spending only a brief time on their other stops in the U.S. (they were also to visit Chicago and Detroit), but they were spending nearly two full days in Indiana.
Part of Indiana’s attraction, according to Mr. Snyder is a strong educational system. He runs the country’s largest Community College system with over 100,000 students and 23 campuses in Indiana. This system feeds into a system of four-year universities among which are such engineering giants as Purdue University.
At the opening dinner, I spoke with an executive from an Italian parts supplier who attended the Summit. His company has factories in both China and the State of Indiana. “Why Indiana?” I asked. “Because, not only are wages competitive for a region so close to Detroit, but local engineering talent is readily available. People in Indiana can make anything you want.”
Not only does Mr. Snyder, a former General Motors man, serve on the board of directors of Ener1, but he and Dr. France Cordova, President of Purdue, both serve on the board of Indiana’s Energy Systems Network (ESN). ESN is a partnership among business and academia formed to develop Indiana’s energy technology and cleantech sectors. They “provide project development and coordination for joint ventures and cooperative partnerships”. And they were also the organizer and chief sponsor of the Auto Summit I was attending.
So Indiana has a governor who likes to hustle, a strong educational system, and a business-academia partnership. California has Schwarzenegger, Stanford, Cal-Tech, USC, UCLA. Why wouldn’t the Chinese choose to base themselves in California?
A Nexus for New Vehicle Technologies
Unlike California, “Indiana has a balanced budget. We’re in the black. We have a conservative government, low taxes, low wages... But most importantly, we have a nexus of new vehicle technologies,” explained Mr. Snyder.
Right there in the area are either headquarters or major operations for companies such as Cummins, Delphi, Remy, Allison Transmission, and EnerDel. The last four of which were previously spun off from General Motors. In fact, much of the team that now comprises EnerDel were the team that designed the ill-fated EV1 electric car that General Motors introduced and later unceremoniously killed during the 1990s.
Some of these businesses were dying on the vine at General Motors and have since found new lives of their own as stand alone businesses. Out from under the bureaucracy of GM, they were freed to innovate and seek out new markets, which, for these businesses, are now focused on two areas: big and new – “big” being China, the world’s largest auto market, and “new” being new technologies for transportation such as batteries and motors for electric and hybrid vehicles.
The China-Indiana Connection
While Ener1 and EnerDel ready their joint venture with Wanxiang, some Indiana companies are already on the ground in China. Remy, Inc. (formerly Delco-Remy, and formerly part of GM) is already building starters and alternators in China through both a wholly-owned foreign enterprise (WOFE) and a joint venture with a unit of ASIMCO. They also had their starter/alternator combinations in the hybrid Chery taxis that have run in Beijing since about a year prior to the start of the Olympics.
Remy have recently closed their WOFE factory in Shenzhen and moved it to Zhengzhou where labor is in greater supply and, therefore, cheaper. This also places the WOFE in close proximity to their joint venture which solves a few logistical issues as well. As Jay Pittas, Sr. VP for Remy explained, “we save a lot of money on wages by getting away from Shenzhen, but then you have more challenges with transportation, so it’s a bit of a tradeoff.”
I asked Mr. Pittas whether the Chinese were truly serious about electric vehicles and whether they would have a market in China, to which he replied, “the Chinese are viewing the electric vehicle as a very important strategic spot for them because they realize they will never be the technological leaders in gasoline and diesel engines. They clearly see a more level playing field with EVs because we’re all at the same starting point. So they are willing to throw a lot of resources behind this.”
“We saw a dichotomy of forecasts this morning with one guy (an American auto analyst) projecting a 4 to 10 percent increase in share of electric and hybrid vehicles in the China market by 2015, (while) the (Chinese analyst) projected a 30 percent share by 2015. I happen to believe the Chinese will try to drive it to a 30 percent number, regardless of what the economics look like because they want that technological leadership.”
When asked how he would compare U.S. and China’s state support for new vehicle R&D, Pittas said, “we (Americans) think it’s a big deal when the President talks about investing $100 million in alternative vehicles. The Chinese talk about a billion.” From this perspective, the U.S. Federal Government doesn’t exhibit nearly the level of seriousness as do the Chinese. Is it any wonder then that American automakers and parts suppliers are all beating a path to China now?
The Downside to China
I asked Mr. Pittas and the CEO of Remy International, John Weber about the downsides to working in China. Almost in unison, they both said, “IP” (intellectual property). Explains Weber, “IP is probably the biggest (downside) by far. No matter what (your partner) says, your technology bleeds when you take it over there. You’re copied everywhere.”
“So how do you get ahead of that?” I asked. “You can’t. You learn to manage the bleed. You don’t give them your latest technology, and when you do, you put it in a wholly-owned, not a JV.”
“Still” offers Pittas, “I like operating better there than in Japan. It’s the most entrepreneurial environment in the world – including the U.S.”
“Also”, adds Weber, “while, in general, you can’t beat the cost of a Chinese product, their quality is just not what you’d expect, and this is where our opportunity lies.”
Some executives of Allison Transmission, whose heavy-duty automatic transmissions are in all of Beijing’s buses, expressed similar sentiments. Foreign parts manufacturers still have a tremendous technological edge over the Chinese manufacturers, but more importantly, some Chinese assemblers are starting to raise the bar in terms of requirements.
Explains Michael Headly, Allison’s VP of International Marketing, “what our technology offers is improved safety, productivity and cost-effectiveness. While not all of the Chinese manufacturers are making these kinds of demands yet, many are beginning to ask about it, and we take this as a positive sign for the future.”
Interestingly, most of these companies have also received federal grants and loans to help them get their new technologies off the ground. Ener1 has received a $118 million grant from the Department of Energy under the American Recovery and Reinvestment Act (ARRA) and is also in line for a sizable loan. Remy has received $60 million under the same program, and Allison International has received $63 million. Kokomo, Indiana based Delphi has also received a grant of $89 million. All of these projects are related to development of new vehicle technologies and were part of President Obama’s $787 billion stimulus package.
So while the U.S. government does not get as heavily involved in industrial planning as does China’s government, it isn’t exactly fair to say the U.S. government is uninvolved. Nor can the same be said for many state governments. In addition to benefiting from Governor Daniels’ matchmaking skills, Ener1 has also received $70 million in funding from the State of Indiana.
While some great things are happening in Indiana, there may still be lessons U.S. governments could learn from their Chinese counterparts. For example, construction projects tend to progress from the planning stage to usage in times that are unthinkable in the U.S. During his first visit to Wanxiang, Ener1’s Charles Gassenheimer was “blown away” by the fact that Wanxiang had just broken ground on a new facility twice the size of their current facility. The people at Wanxiang told him it would be ready for use in three months.
Disclosure: The author's travel to Indianapolis was paid for by Ener1, Inc.