Tuesday, July 20, 2010

BYD Between a Rock and a Hard Place

The multinationals think they have it hard? It seems that one of China's rising stars of the auto world, BYD, has run afoul of the authorities in Beijing.

BYD, a Hong Kong listed automaker based across the border in Shenzhen, has aims of becoming bigger than Toyota someday, but in the short term at least, they may have to scale back their expectations. At the beginning of this month BYD broke ground on its second factory in the city of Xi'an. This new 5 billion yuan factory, due to open in 2011, has a projected capacity of 400,000 cars a year.

Yesterday, BYD was ordered by the central Ministry of Land and Resources to halt construction of its new factory because of a "land use violation".
The Ministry's announcement gave no further specifics as to the nature of the violation. In its defense, BYD said that it had conducted due diligence and obtained the necessary approvals from local government. So it would appear that the violation has been committed not by BYD, but by the local government.

Perhaps the violation comes as Beijing has stepped up its enforcement of land use policies. There was much talk during this year's National People's Congress of the need to prevent local governments from appropriating farmland to sell to developers, a situation that has led to much social unrest in recent years. Regardless, BYD has become yet another victim of the vagaries of doing business in China.

Until now, the conventional (yet somehow simultaneously unorthodox) wisdom has been for foreign companies to worry more about local governments when setting up their businesses in China. Just because you got approval from someone in Beijing didn't mean that all problems were solved. Local governments are the ones with the real power to make or break your business, and "as everyone in China knows" the central government devolved a lot of their powers to the local governments back in the 1980s.

So which governments should you be worried about? Perhaps the received wisdom (conventional or unorthodox, or whatever you want to call it) needs to be revisited. The real answer is, you need to worry about both.


  1. Regarding the current Xi'an situation, I'm sure that sometime in the next month or two some sort of deal will be worked out with the proper authorities in Beijing to allow production to go forward. BYD, while not state-owned outright, is certainly not beyond the distinction of being state-influenced (a true hallmark of a state-designated champion). Beijing wants BYD to be bigger and more influential than Toyota, and it that's going to happen this factory will need to go through.

    However, these provisional-national splits can certainly be interesting for close watchers of Chinese politics. Thanks for the post.

  2. Thanks, Paul.

    I think you're right. It seems that BYD is caught in the middle of a power contest between central and local people that probably has nothing to do with BYD. Since Bank of China has already favored BYD with big loans, it's fairly certain that people high up in Beijing want to see this company succeed.

  3. but ppl high-up are looking at the same pile of cash, figuratively or literally. I mean some ministries might got some benefits--money or political capital--, but ministry of land must have been left out (mistakenly snubbed?) by BYD. just my two cents.

  4. Thanks, Steven.

    I agree. The central government is not a monolith, and the Ministry of Land and Resources ranks well below NDRC, MIIT and others in terms of power. (I had to look up the name of their Minister. He's not even a Politburo member.)

    Of course we can only speculate as to what goes on in Beijing. The lack of transparency combined with a state-controlled press means everyone, even Chinese citizens, can only guess about what the government is doing.

    Still, it's fun to guess. :)


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