Monday, August 22, 2011

Outside world belatedly catches up to China reality

There's a big difference between reporting on reality in China and merely analyzing the news or talking to the government.

From the fall of 2008, when Warren Buffett first took his 10 percent stake in BYD, until very recently, practically every foreign news report or commentary about alternative energy vehicles had already declared China the ultimate winner. I long ago stopped trying to save every article I could find about China's “new energy vehicle” (NEV) industry because they began to appear formulaic.

Here's how it went. A foreign reporter, commentator or business leader would visit China, stopping first in Beijing to meet with government officials, then hop a plane to Shenzhen to test drive one of BYD's hybrids or EVs. Then he or she would return and write an article, based on no more than official government projections and a 10-minute test drive, proclaiming that the rest of the world was already far behind.

Of course, anyone who regularly follows news about China knows that those early stories – which persisted throughout 2009 and 2010, and even into 2011 – were way too optimistic. (A couple of stories on this very topic that came up today are here and here.) The once-vaunted BYD, having suffered a growth rate only half that of China's auto industry as a whole in 2010, and having seen its profits drop a further 89 percent in the first half of this year, is no longer the darling of innovation it once appeared to be. (Recall that BusinessWeek ranked BYD the 8th most innovative company IN THE WORLD in 2010!)

So how did those early visitors to China get their assessments so wrong? They didn't talk to the right people. So many foreign business leaders head off to China, meet with government leaders and return assuming they know everything they need to know. After all, China's government is in charge. They get what they want, right?

Well, anyone willing to swallow Chinese government policy back in 2009 would still be expecting to see 500,000 NEVs plying China's roads by the end of this year. While I don't have a final count of the number sold so far, I do know that in 2010, only about 1,000 of these cars were put into service in all of China. And the news I've seen so far this year, though not comprehensive, seems to suggest that maybe even fewer of these NEVs have been sold in 2011.

Of course, I cannot really point my finger at anyone else because, early on, I was just as guilty. My early blog posts about BYD should have been more skeptical, less optimistic. I won't be too hard on myself though, because, by the spring of 2009, I had turned somewhat pessimistic, asking "Will China Lead the World in New Energy Vehicles?" (May 2009). Or maybe “realistic” is a better word.

What led to my newfound skepticism? I went to China. But I didn't talk to central government officials (though I tried); I talked to analysts, auto company insiders, scholars, and business people.

My point here is not to say that I “get China” and no one else does. What I am trying to say is that, at one time I did get at least one aspect of China, and only because I went there and managed to talk to some of the right people. In all fairness there were also a few foreign journalists in China who also got it at the time, though their voices were in the minority.

The difference for anyone who truly reaches a level of understanding about any aspect of China is not only about being on the ground there, but also about talking to the right people. The May 2009 post I linked to above was written from my hotel room in Shanghai after I had only been in-country for about three weeks. But what a difference those three weeks made in how I viewed China's NEV prospects.

As I now sit here at my desk in Los Angeles, I feel, unfortunately, about as disconnected from China as I have been in quite awhile. Not having been there to talk to people (I've been busy with a little writing project for the past year-plus), all I can do is read the news coming out of China, try to distill fact from fiction, and apply theories I have developed based on previous experience.

That said, one can learn much about China in general by watching and reading from a distance. In this way we can hone theories that help us to understand what we see. Then we can test those theories with later events or situations to determine whether those theories were correct.

Unfortunately for investors, economists and business people, the operative theory regarding China's NEV industry in 2008-2010 seems to have been twofold: First,
China's government always gets what it wants. And second, if Warren Buffett is investing there, it must be a sure thing.

In this case, I think we can safely toss that theory aside – or at least be careful in how we apply it in the future. Theories are nice, and they will do in a pinch, but there's really no substitute for doing the footwork to truly understand what is going on in the world.

We China-watchers need to return periodically and fill our buckets with new data points to chew on.

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