ChinaBizGov

Chinese-branded cars lost market share in 2011

2012-01-30T16:50:00.000-08:00

In early 2009 China's government released a fairly comprehensive policy for the auto industry called the "Automobile Industry Adjustment and Stimulus Plan (汽车产业调整和振兴规划)."

Among the major targets included in this plan was for an increase in market share of China's home-grown auto brands (also known as 自主品牌). One of the targets was for Chinese-branded passenger cars (轿车, aka, sedans) to increase domestic market share to 30 percent in three years' time (by the end of 2011). (Up from about 26 percent at the end of 2008.)

China's auto industry enjoyed robust sales growth of 48 percent in that very year, giving the Chinese brands a 29.7 percent market share by the end of 2009. And just in case the leaders weren't satisfied with rounding up to 30, Chinese brands achieved a 30.9 percent market share by the end of 2010.

Unfortunately, the tide turned against manufacturers of Chinese-branded cars in 2011, causing them to lose market share for the first time. Though the absolute number of Chinese-branded cars sold increased, foreign-branded car sales grew at a faster rate, dropping the domestic brands to a 29.1 percent market share -- just in time to miss the target that had been set out for them three years earlier.

And this came in a year during which luxury automakers enjoyed enviable sales growth in China: Audi-37%, BMW-37%, JaguarLandRover 61%, Cadillac-73%.

Why did Chinese cars suddenly lose market share to the foreign brands?

Did quality decline? Not at all! In fact, Chinese brands have been closing the quality perception gap with the foreign automakers.

What happened was that another provision in the "Adjustment and Stimulus Plan" of 2009 distorted sales growth in 2009 and 2010. The plan included a 50 percent cut in auto sales taxes for vehicles with engine sizes of 1.6 liters or less -- in other words, small cars.

The stimulus really worked! In 2009 sales of cars in the 1.6 liter and below segment grew 71 percent while sales in all other passenger car segments grew by "only" 23 percent. And the beauty of this stimulus plan was that, at the time of its introduction, fully 85 percent of the market for 1.6 liter and under cars was occupied by Chinese brands. This was none other than a plan to stimulate sales of Chinese brands.

The stimulus also worked in 2010, but it was later halved to only a 25 percent sales tax cut, and then, by the end of 2010, the stimulus was lifted completely -- resulting in disappointing performance in 2011.

Of course, we can't blame it all on lifting of the stimulus because, once the stimulus was enacted in 2009, foreign automakers scrambled to enter the 1.6 liter and below segment as quickly as possible.

Still, this does illustrate well the distorting effects of government schemes on markets. And it is somewhat ironic that the same plan that brought such growth in 2009, took it away once the stimulus provision was allowed to expire.

GM Wants its 1% back. Good luck.

2012-01-11T12:48:00.000-08:00

GM announced yesterday (again) that it wants to repurchase a one percent stake in its joint venture with Shanghai Auto (SAIC) that it sold for a handful of magic beans a few years ago.

Back in December of 2009, GM and SAIC announced a major change to their partnership which involved GM selling one percent of the SAIC-GM joint venture (JV) to SAIC for $85 million. This announcement also included details on a new Hong Kong-registered joint venture through which GM and SAIC would partner to conduct business in other countries, primarily India.

The net result was that GM and SAIC were no longer 50:50 owners in the main China JV. With the one percent transfer, SAIC became the majority owner with a 51 percent stake. On paper at least, GM had been reduced to the role of junior partner.

At the time, GM management explained that the purpose of the one percent transfer was in consideration of some future help from SAIC. And though it wasn't explicitly stated, GM statements sort of hinted that SAIC's help may come in the form of help with future funding.

Early speculation was that GM needed the money. And since GM had emerged from bankruptcy only a few months earlier, that seemed to make sense, except that, in the whole scheme of things, $85 million didn't really seem like a lot of money. At year-end 2009, the company had over $14 billion in cash on its balance sheet, so it wasn't cash poor. And with a current ratio (current assets/current liabilities) of 1.13, it wasn't facing an impending liquidity crisis.

Since I happened to be in Shanghai only a few weeks after this announcement was made, and since I was fortunate enough to land an interview with a senior SAIC executive who was integral to the negotiations with GM, I asked the SAIC executive to explain why GM would give up any leverage it had over the JV for a measly $85 million. His explanation made a little more sense.

In short, SAIC wanted to be able to consolidate the top-line revenues of the JV into its parent company income statement, and under accounting rules, it could only do this if it owned more than 50 percent of the company. Chinese companies were (and are) under a great deal of pressure from Beijing to move up in the rankings of the Global Fortune 500, and since the Fortune list looks at sales, not profits, SAIC needed to make its sales number bigger.

Does this sound ridiculous? It did to me too. But it's also the truth, as this particular executive, on two different occasions, emphasized to me the importance of moving up the list of the Fortune 500.

So what did GM get for handing over control? According to the SAIC executive, GM wanted desperately to continue expanding its global footprint, but was facing two hurdles. First, as GM had recently exited bankruptcy, the terms it could receive on bank lending were highly unfavorable. Second, still being majority owned by the taxpayers of the US, GM was restricted in its ability to fund any activity that didn't somehow create American jobs or shore up the US-side of its business.

And this is where SAIC came in. Through this partnership, SAIC, with its stellar credit rating, not to mention being a major state-owned corporation with access to favorable loan terms from both state-owned mainland banks as well as Hong Kong banks, would be able to help GM out with its funding needs overseas.

The SAIC executive did suggest that GM and SAIC could have entered into an agreement whereby the two companies would create an entirely separate sales JV to which all vehicles manufactured would be sold. Then SAIC would own 51 percent of the sales JV, also allowing it to consolidate revenue into the parent company's income statement. (SAIC and its other major partner, Volkswagen have a similar arrangement.)

However, this particular arrangement didn't work for GM either as, once again, GM's government minders in Washington were not interested in entering into any arrangements that didn't serve the interests of the US.

Fast-forward a couple of years, and now GM wants its one percent back. The only way I can see this happening is if GM were to agree to set up the sales organization that SAIC had first proposed, which may be possible now that the US government is no longer a majority owner in GM (though still technically the controlling owner).

Of course, since the time of that transaction, GM has been very vocal about the importance of the China market to the company's future. In fact, GM now sells more vehicles in China than in the US (2.6 million vehicles in China vs 2.5 million in US in 2011.)

One wonders how eager SAIC will be to give up the majority control it has enjoyed for more than two years. Furthermore, given the importance of its China JV, GM can probably expect to pay considerably more than $85 million for the return of its one percent.

End of the Road for Foreign Automakers in China?

2012-01-04T14:38:00.000-08:00

Last week a story emerged that China's industrial planner, the National Development and Reform Commission (NDRC), has announced that it will stop supporting foreign investment in its auto industry. (News stories may be found here, here and here.)

This bit from a China Daily article explains a little about why these restrictions were being put in place:

China...has removed industries from the list of those it encourages foreign companies to invest in. No longer part of that group are automakers, large coal-to-chemical operations and manufacturers of polycrystalline silicon.

"The restrictions generally apply to industries that have excessively large capacities and that pollute the environment," said Zhang Xiaoji, senior researcher at State Council's development research center. (emphasis added)

My take on this story is that the NDRC actually has no real intention of restricting foreign investment in its auto industry. To understand why this is so, one needs only a limited understanding of the history of foreign involvement in China's auto sector, which I lay out in an op-ed in today's Asian Wall Street Journal.

In short, I make the claim that:

... the NDRC's announcement is more about improving Chinese leverage in negotiations with foreign automakers so Chinese automakers can more quickly overcome their innovation deficit.

For the rest of the op-ed at the WSJ site, click here.

And for all of the stories behind the main story of business-government relations in China's auto sector, my book, Designated Drivers: How China Plans to Dominate the Global Auto Industry, will be published by Wiley and Sons this year.

Coming to a bookstore, mailbox or e-reader near you in Spring 2012. Stay tuned!

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EDIT:
I was just notified that my article was also picked up by WSJ's US op-ed page. It will run in Thursday's edition. (January 5)

Will India Challenge China? Not yet.

2011-12-31T12:18:00.000-08:00

Last month my wife and I took our first ever trip to India. Since that time I have struggled to put into words what I learned on our trip – not only about India, but also about China. Since today is the last day of 2011, I have determined that my latest thinking on this topic, however crudely formed at this point, is going up on the blog today.

India Gate, Delhi

So what does China have to do with India? More importantly, you may be asking, how could one hope to learn anything about China by visiting a completely different country?

Why India?

Aside from the fact that I thought India would be an interesting place to visit, I had begun to notice over the past year news stories, blog posts and twitter discussions about whether India would ever challenge China economically, militarily and/or diplomatically.

One book I read earlier in 2011 was Robert Kaplan's Monsoon, a fascinating historical approach to explaining why the Indian Ocean will become the world's most contested region, and how China and India are already competing for influence. (Kaplan also leads the reader to wonder a.) whether the US understands the importance of this region and b.) even if the US gets it, whether the US will have either the will or the ability to maintain its influence.)

The question of whether China's influence in the region will increase is no longer contested, but many people – including some long-time China watchers such as me – see India as a potentially credible rival to China. India has a large land mass, the world's second largest population and an economy that has consistently turned in upper-single digit economic growth for most of the past two decades. India and China also share a long and contested border, with both countries occupying lands claimed by the other, and as a result, the level of trust between the two has always been fairly low.

Regardless of whether India could become a credible rival, it is easy to see that many of the necessary ingredients for a rivalry are there. And given what I know about China – that it fully intends to return to its historical role as regional (if not global) hegemon – I wanted to see for myself whether India might truly be on the cusp of challenging China's ambitions.

So why might I have expected to learn anything about China while in India? Perhaps it is because China is the first country in which I ever spent significant time abroad. Ever since the mid-'90s, every other country I have visited has further illuminated my view of China.

Since 2000, when my employer sent me to Japan for a couple of years, I have viewed China slightly differently. To give but one small example, having been a waiter in college, I had always thought that service in China was poor because no one tipped in restaurants. After my first dinner in Japan, not only was I amazed by the friendly and efficient service, but also by the fact that the Japanese don't tip in restaurants either. There was clearly a much deeper cultural or sociological explanation for the disparity in service levels between China and Japan.

Will India challenge China?

So, back to the first burning question that drove me to India, the question of whether India will be a credible rival to China. The short answer to this question, I am disappointed to admit, is no – certainly not in the near future, and not without China self-destructing from the inside.

As thrilled as we were to have arrived at the clean new terminal of Delhi Airport, my wife and I were simply dumbstruck by the the poverty, filth and chaos we witnessed during the hour-long ride to our hotel. Delhi makes Beijing look clean and orderly by comparison (a fact that cannot have been lost on any Chinese leaders who have visited India). And while I reserved judgment on that first day, the remainder of the two weeks we spent in India further confirmed that India is not quite ready for prime time.

Chandni Chowk Bazaar

This is not to say that India has no hope at all, but a lot of what I saw on the ground, combined with what one may easily learn about politics in India by reading the news, leaves me to believe that India has much further to go if it ever hopes to catch up with China. I simply never imagined India's overall development gap with China would be so wide.

I also came away from India with a new level of appreciation and respect for the accomplishments of China. While I don't believe China's accomplishments excuse the lack of personal freedoms and rampant abuses of human rights, one cannot help but admire the speed with which China has pulled itself out of a deep hole of poverty.

Traveling in India and China

Traveling in China, while having improved quite a bit over the past two decades is still a bit of a grind, and in some areas it has become worse. When there were fewer people traveling by air back in the '90s, there were also far fewer unexplained flight delays than there are now.

That said, we found traveling in India to be even more difficult. Travel agencies and airline ticket offices tend to close on Sundays so if an emergency arises (say, for example, one gets food poisoning – don't ask me how I know about this) and you need to change your travel plans, just be sure it doesn't happen on a Sunday. (Apparently the planes do still fly on Sunday.)

Also, trains in India are apparently affected by fog. The day we left Delhi for Agra, our train was two hours late, which actually wasn't bad considering many trains were as much as six or seven hours late that day.

New Delhi Train Station

This connection between train travel and weather would not have occurred to me, but apparently train engineers in India need to have a certain distance of visibility before a train can travel. Having traveled on trains in China in all kinds of weather, I don't think this is the case there, though I could be wrong. I mean, if all trains follow their appointed schedules, and all trains are connected via radio to each other and to a central dispatch, avoiding collisions shouldn't be rocket science.

Of course, one can easily avoid the hassles of air and train travel by hiring a car and driver, but it can be quite expensive, particularly if it is arranged by your hotel, which (as we later realized) has no problem doubling the price of the car for their own profit.

Corruption

And in terms of scams and general corruption, I used to think the Chinese were masters at cheating foreigners, but they have nothing on the Indians I encountered on the tourist track. By comparison, the Chinese are rank amateurs. At every turn – particularly in north India, but less so in the south – we encountered people who, on the pretense of being friendly and inquisitive, wanted nothing more than to separate us from our money while providing nothing of value in return.

A market in central New Delhi. Where were all the women?

In all fairness, I must emphasize that these people were gathered in massive numbers around the areas frequented by tourists. Because we did not really experience the everyday lives of average Indian citizens, I cannot comment on whether such corruption affects their lives to a similar degree. However, if the many Bollywood movies I have watched are any indication, perhaps the corruption for the average Indian is just as bad though taking on different forms.

But you should go to India anyway...

While my post thus far has focused on some of our negative experiences in India, the truth is that my wife and I loved India. The amazing sights we saw, the outstanding food we ate, and the smart and honest people whom we encountered along the way combined to make the whole experience worthwhile.

If you have ever considered traveling to India just to see the sights, we can attest that it is absolutely worth the effort. (And this comes from a couple who have seen many of the amazing sights that China, Vietnam, Japan and California have to offer.) Though we were disappointed to find our view of the Taj Mahal completely obscured by pea-soup fog, this in no way diminished our experiences in seeing the Qutb Minar, Humayun's Tomb, the Red Fort, Agra Fort and the Amber Fort near Jaipur, among others.

The Taj Mahal (It's back there somewhere.)

We also experienced fantastic service aboard a kettuvallam boat on the backwaters of Kerala while dining on outstanding Kerala cuisine and learning about the lives of the people who farm and fish in the area. And probably our best experience was at a farm homestay near Kochi where we enjoyed the warm hospitality of a world-wise Syrian Christian family and engaging conversation around the family dinner table.

The crew on our kettuvallam cruise, Lake Vembanad, Kerala

All of this should come as no surprise to anyone who has traveled to more than a handful of foreign countries. The world is a big place, and every country has both its pluses and minuses. While I still have yet to visit most of the world's countries, in every country I have visited, I have discovered uniquenesses that make my travels worthwhile. And though India did not live up to my (unreasonable) expectations, I have no regrets for having visited, and I will most certainly return. (While I was able to touch the Taj Mahal, I still have yet to see it!)

Evolving views on India vs China

This has been a difficult blog post for me to write, if for no other reason than that I really, really wanted India to be the credible rival that China needs to have in Asia. Also, since returning from India, my wife and I both have found that our views are evolving as we continue to ruminate over our experiences there and compare them to our experiences elsewhere.

And I must also emphasize that this does not arise from a desire to “keep China down” as China's media often likes to claim whenever foreigners disagree with China's government. As I stated before, I have an even greater appreciation for China's accomplishments to date. Yet at the same time, it is somewhat unnerving to the free world that a big, powerful country such as China may have figured out a way to build prosperity without personal freedoms (note the emphasis on “may”). It makes many people uncomfortable that this kind of government aspires to regional hegemony and world leadership.

I would argue that no one really has a desire to “keep China down,” but that many do have a desire to keep authoritarianism down. If China were to demonstrate its concern for human rights, few would have a problem with its asserting influence around the world. (Though one might argue the same for the United States.)

And this is precisely why my hopes for India were so high. I very much wanted to see for myself that a democratically-led government could provide for its citizens both freedom and economic prosperity, and act as a counterweight to the other big country in the region that only wants to provide the latter. But what I saw is that, similar to America, India's prosperity is limited to a small sliver at the very top of society. The middle class experience stagnation while the poor are just trying to keep their heads above water.

It would be easy to blame democracy for the disparity between China and India, but I believe that is too simplistic of an answer. (Naturally, this is the lesson that China's leaders will choose to take from their own comparisons with India.) There are many other differences between China and India that cannot be ruled out as factors affecting the countries' trajectories of development.

The most obvious difference is demographic. Whereas China is quite homogeneous, India is a patchwork of ethnicities, religions and languages. Without going into too much detail, I can only say that it is a surprise to me that India has remained a cohesive unit since 1947. The fact that it didn't break into dozens of rival states is a testament of the determination of independent India's first leader Jawaharlal Nehru. Love him or hate him, one cannot deny that he laid the foundation for modern India – both good and bad.

Since this blog post is already far longer than most people will bother to read, I will end it here and simply note that my thinking on this topic is far from complete. Scholars far more brilliant than I have tackled this topic of comparative modernization, and have yet to produce anything more than hypotheses (some more plausible than others).

The one thing I know, however, is that I will most certainly spend time in both India and China again in the future. I see great value in understanding both countries and how their political systems affect the lives of real people.

Happy 2012, everyone!

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EDIT (4 Jan 2012)
Dan Harris at ChinaLawBlog, one of my favorite China blogs, linked to my India-China post and had some interesting comments of his own -- some of them way too kind, but also some valid criticism. Since his site generates a lot more traffic than mine, his post generated a lot more comments than mine (although I believe this post sets the all-time record for comments at ChinaBizGov.)

Check out Dan's post and also the comments that follow. Some people are critical of the fact that we would even compare China and India, but I think the fact that so many people took issue with this post tells me that there really is no consensus answer on this topic. There are a lot of great ideas and food for thought in the comments (along with the usual anonymous sniping from the sidelines).

If you're really interested, here's another related post on this topic that I came across today. It's written by someone with a great deal more experience in both China and India than me, and he includes a lot of facts and figures to back up his assertions.

Hold on to your lugnuts! It's time for a Trade War!

2011-12-14T10:11:00.000-08:00

The Wall Street Journal is reporting today that China is preparing to levy duties on certain autos imported from the US. This would be on top of the 25 percent duties that China is still allowed to levy under its WTO commitments.

China's Ministry of Commerce said in a statement late Wednesday that it will levy antidumping and antisubsidy duties on imports from the U.S. of some vehicles with engine capacities above 2.5 liters beginning on Thursday and lasting through the next two years. ...

The ministry said several U.S. companies, including General Motors Co., Chrysler Group LLC and the U.S. arm of Honda Motor Co., engage in dumping and subsidizing. The statement said the move would also affect cars made by the U.S. arms of Mercedes-Benz and BMW AG, though it said their level of dumping was smaller.

Note that China's Commerce Ministry singled out not only the traditional US automakers GM and Chrysler, but also the US arms of Honda, Mercedes and BMW.

While China could have plausibly argued that GM and Chrysler benefit from government subsidies due to the bailouts these two companies received, they instead chose to make this about all cars with engines larger than 2.5 liters made in the US (but not in Japan or Germany!).

Does anyone think the US Congress will choose to view this as any less than an attack on the livelihoods of American workers -- and in an election year no less? Of course, Congress cannot portray themselves as innocents in all of this as Congress has already singled out China's solar panel industry for US-imposed tariffs. Then again, Congress can point to China's currency...

And on and on it goes. One thing I learned in grad school about wars (the kind in which people shoot at each other) is that it is nearly impossible to identify who started it. No matter which incident one side points to, the other side can go further back in history to identify another.

If we look at this incident only with regard to China's auto industry, it is also easy to see a kind of pattern here. Back in 2009, when China launched the stimulus heard round the world, they chose to subsidize consumer purchases of vehicles with engines smaller than 1.6 liters.

Why 1.6 liters? Because the foreign automakers that were dominating China's auto market had very little to offer in the small car segment. That subsidy was intended to boost sales of Chinese-branded cars.

Of course, the foreign automakers didn't stand still. Many of them already had small cars in the pipeline, so they got them to market faster -- just in time for China to cancel the subsidy toward the end of 2010.

Why are the import duties now focused on 2.5 liters? Because this is an area in which the foreign automakers pretty much own the market. This effort to make these imports more expensive may ideally (from China's point-of-view) accomplish two things: 1) make Chinese consumers more likely to consider a less expensive Chinese-branded car, and 2) make foreign automakers consider moving more assembly of their larger models to China.

In reality China's new tariff may not accomplish either purpose. For one, the Chinese consumers who are more interested in these larger cars (as the WSJ article points out) are less price sensitive anyway. They are already interested in these large foreign brands because they perceive them to have higher quality. In addition, because the volume of these larger cars in China is still comparatively small, it is highly doubtful that much, if any, of their production would be moved to China. (Perhaps that second one is a straw man argument.)

So what does China really stand to gain? Not much, really. In the end, China will get the trade war that it has been warning us about for years, and its home-grown automakers will still face a quality gap with their foreign partners/competitors.

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In case you're wondering where the picture at the top came from:

China, without all the paranoia

2011-11-05T19:00:00.000-07:00

I recently returned from a trip to Taiwan as part of an American Young Scholars' Delegation. Pretending that I could still qualify as “young,” I joined ten other American scholars as a guest of Taiwan's Ministry of Foreign Affairs (MOFA) for a week of meetings and sightseeing.

The purpose of this trip was for Taiwan to introduce itself to a handful of foreign scholars who previously had little contact with Taiwan, but who were interested to see the country up close. About half of our delegation were China scholars, with the rest having interest in aspects of Taiwan's culture, politics or society related to their own research.

As is my custom, on the first morning after the trans-Pacific flight, I hit the streets for a quick run and my first look at Taipei as the sun was rising. The area around our hotel in Taipei felt much like parts of Hong Kong or Shenzhen: green and well-swept.

Whenever I run in China, I am accustomed to being either stared at or ignored, but I was surprised when two different people greeted me during my first run in Taipei. One security guard enjoying a cigarette gave me a big wave and a deep-voiced “ni hao.” Another middle-aged Chinese man greeted me with broad smile, a nod and an enthusiastic “good morning!”.

In hindsight, I guess I shouldn't have been so surprised by the openness and friendliness of strangers on the streets in Taiwan. Our entire itinerary was intended to impart that impression. Everywhere we went, we were greeted with openness and a willingness to answer all but the most sensitive of questions. (I'll forgive the Deputy Minister of Defense for not fully answering Katherine's question about Taiwan's strategy for defending the Taiwan-held Jinmen [Kinmen] island against an attack by the mainland.)

And while no one chose to dwell on the negative aspects of Taiwan's politics, no one shied away from the facts that fistfights have occurred on the floor of the legislature in the past or that Taiwan's former president now serves a prison sentence for corruption. Indeed, on the day we visited the Legislative Yuan, there was a protest taking place on the street out front. No problem for us though: we just went around back. We learned that Taiwan has been continuously developing its own democratic system for the past two-plus decades, and that, despite the occasional chaos, despite the international isolation, and despite the ever-present threat of big, bad China next door, Taiwan's people have a say in how their lives are run.

Contrast this trip with, well, every trip I have ever taken to China. While the average Chinese citizen can be as open and friendly in private as the average citizen of Taiwan is on the street, there is a stark difference in the general atmosphere. (And I'm not just talking about China's awful pollution.)

Though it is hard to describe in concrete terms, there is a heaviness in China that one feels as soon as one steps off the plane – a sense that one must be careful about what he does, what he says and where he goes. (And any Chinese government official reading this is saying to himself, “well, of course! That's how it's supposed to work!”)

Despite months and months of trying desperately to get even the lowliest bureaucrat on the mainland to discuss China's auto industry with me during my field research a few years ago, out of over 100 interviews, I only managed to interview a single government official. (Though I did talk to several people who work in government-controlled “NGOs”.) And among those whom I did manage to interview, only a few were willing to delve very deeply into the political forces that have shaped China's industrial planning. Even some expatriates with whom I met were scared to talk openly with me. (One expat even demanded that I return his name card after the interview!)

Another surprise during our trip came in our visit to the American Institute in Taiwan (AIT), the de facto embassy of the United States in Taiwan. Having visited a few US consulates on the mainland, I thought I had an idea of what to expect, and indeed AIT had that familiar smell of an old church with a pot of coffee brewing somewhere. But our meeting with AIT officials (our Taiwan MOFA minder remained outside) revealed a surprising level of enthusiasm. In contrast with the bunker mentality I have encountered among bureaucrats at US consulates on the mainland, these folks made no attempt to conceal their enthusiasm, indeed, their advocacy, for Taiwan and all it stands for.

This is not to say that our entire trip was propaganda-free. After all, Taiwan, just like the mainland, also has an agenda. But unlike the mainland, that agenda doesn't include the continued rule of an unelected government, the stifling of free speech, the occupation of, or claim to, territories that do not wish to be a part of the larger whole.

What Taiwan wants is quite simple. They want the rest of the world to know how open and transparent their system is, how much freedom their people enjoy, and how much like the rest of the developed world Taiwan is. In short, the whole purpose of Taiwan's Ministry of Foreign Affairs is to run out the clock. To use a basketball analogy, the task of MOFA is to keep the ball in play, and to keep the other side from getting their hands on the ball. I think the best hope is that China will eventually change into something Taiwan wants to be a part of.

Taiwan has been effectively isolated in the world by China, but Taiwan's diplomats are doing the best they can to let the rest of the world know they exist and that they have a society worth preserving in its present state. And judging by some of the results, Taiwan's efforts are paying off. To cite but one example, the citizens of Taiwan now enjoy visa-free travel to 124 countries around the world compared to only 34 for citizens of the PRC. (I don't know how many countries US citizens can travel to visa-free, but I'm certain it's fewer than Taiwan's citizens enjoy.)

There are, of course, downsides to Taiwan's position. The question of whether Taiwan should declare de jure independence from China or adhere to the status quo dominates Taiwan's politics – to the extent that important domestic issues often fail to get the attention they deserve. National elections tend to be primarily about a candidate's position on cross-strait relations.

Also, there appears to be some confusion around identity in Taiwan, and this confusion revealed itself in some of the language used. What are the people who live on Taiwan supposed to call themselves? Are they Chinese? Are they Taiwanese? The former may be confused with citizens of the PRC. The latter may be confused with aboriginal people who lived on Taiwan for thousands of years before the mainlanders arrived with Chiang Kai-shek in 1949. One of our tour guides kept using the awkward-sounding term, “Taiwan people.”

When we visited the National Library, I noticed that their “Center for Chinese Studies” called itself “漢學研究中心”which could literally be translated, “center for the study of the Han people.” But again, this excludes the aboriginal people who have lived on Taiwan for millennia. And the Palace Museum (which is a must-see for anyone visiting Taiwan) contained mostly relics that had been transported from the mainland, and a history timeline of dynasties presented as if it were Taiwan's own.

I have no suggestions for how Taiwan should address these issues, and in fact, I'm not certain that these issues are really all that important compared to the existential issue Taiwan faces with the ever-present threat of an angry mainland. And the mainland, whose Communist Party has painted itself into a corner with its irredentist claims to Taiwan, really has no way out but to persist with those claims.

Nor do I have any suggestions for the US in its Taiwan policy, other than to stay the course, maintain ambiguity and occasionally ensure that the security balance doesn't tip too far in the direction of the mainland. Taiwan doesn't want to give up its freedoms; China doesn't want to give up Taiwan; and the US doesn't want to see any of its aircraft carriers sent to the bottom of the Taiwan Strait.

The Chinese may often wonder why this tiny island of 23 million people is so important to the United States. After all, Taiwan hasn't really been a democracy for all that long, and the US has much greater problems to deal with in trying to extract itself from Afghanistan and in restoring growth to its own economy.

But having now been to Taiwan and seen with my own eyes what it is all about, I have a better understanding. In the end, America cannot help but admire and support a budding democracy trying its best to resist a bullying, autocratic overlord. A little over 200 years ago, that was us.

A legitimate beef with China

2011-10-13T15:54:00.000-07:00

A leader in this week's Economist, concerning the US Senate's passage of a bill intended to punish China for currency manipulation, warns that, however right the Senate may be about currency manipulation, passage of the bill would risk an unnecessary trade war.

The Economist goes on to say that America does have "legitimate beefs with China, but this bill is the wrong way to address them. It is legally flawed, economically dangerous and unnecessary." If passed, China would surely have a legitimate claim against the US through the WTO, and would almost certainly retaliate with its own trade-limiting measures.

While I understand the value of this measure as a political tactic for Senators who are part of the most hated US Congress in history, the fact is that there are better ways for America to get what it wants (not that Congress even cares).

While the WTO mechanisms designed to facilitate open trade are slow to work, China recognizes them as legitimate and has generally adhered to their judgments in the past. Although, as The Economist admits, currency manipulation is not addressed in WTO rules, America indeed has "legitimate beefs" with China that could be addressed under the WTO. Yet, for some reason, the US Congress chooses to focus on currency, and the Obama administration apparently chooses to look the other way when it comes to some of China's real WTO violations.

While I haven't cataloged all of China's violations, I know that there are several going on in the auto industry that no one seems to think are worth calling China on. For example, a couple of key measures in China's WTO accession agreement forbid China from conditioning investment in China on technology transfer and local content requirement. (This agreement dates back to 2001, by the way, so it's nothing new.)

As for the tech transfer part of the rules, China's ability to apply pressure to foreign automakers to transfer technology in exchange for permission to expand in the country has been well-documented. (A couple of example articles are here and here.)

The latest attempt by the Chinese to adhere to the letter of the law while blatantly violating its spirit includes holding off on investment approval until the foreign company "voluntarily" offers to contribute technology toward establishing a Chinese brand with its (state-owned) Chinese partner. Peugeot's CEO was quoted by the Financial Times as saying that, cooperating on building a Chinese brand is now "part of the deal."

And the automakers involved in this attempted extortion have no incentive to complain about it for fear of losing their access, all the while knowing that their competitors are all doing the same thing.

Okay, you may say, perhaps China's violations in this case would be too difficult to prove under the WTO's mechanisms. After all, the foreign automakers all appear to be "voluntarily" contributing technology in these cases, and anyway, none of them is complaining. Perhaps.

Then how about a more obvious violation of the rules? In this case, it involves the imposition of illegal local content requirements.

This actually surfaced a few weeks ago, and I commented about it on twitter, but only my friend @alexwoods5 seemed to think it was an issue worth being concerned about. The issue in question arose from a recent Wikileaks cable in which an employee of Ford in China revealed to US diplomatic personnel that Ford's operation in China is subject to a 40 percent local content requirement. This is the relevant section:

¶9. (SBU) All of Ford's parts suppliers must meet the Chinese Government's rules of minimum 40 percent local content by value, Chuang explained.

Does that not sound like a local content requirement? Could this have been a condition for Ford's recent investment in new factories in China?

I even emailed an acquaintance of mine at Ford, twice, seeking some sort of explanation or confirmation. The fact that he has yet even to respond with a "no comment" tells me that this may be worth investigating.

But is the Obama administration investigating it? If not, why not?

I know that the administration, or at least certain individuals in it, understand that the currency bill passed by the Senate would do great harm to both global trade and to America's relationship with China. But if they want to avoid such unpleasantness, why not at least make an effort to make China follow the agreements it has signed?

Who cares about IPR, what about innovation in China?

2011-09-15T13:47:00.000-07:00

The Wall Street Journal reports on a brief debate that took place yesterday between US Ambassador to China, Gary Locke and an advisor to the People's Bank of China, Li Daokui. The exchange took place during a panel discussion at the World Economic Forum meeting currently taking place in Dalian, China.

The apparently civil discussion surrounded a disagreement as to the repercussions of China's difficulties in enforcing intellectual property rights (IPR) protections. In short, Locke expressed his view that lack of IPR enforcement would stifle Chinese innovation. Li, on the other hand, merely expressed his disagreement and noted that China's policy focus instead needed to be on supporting entrepreneurs and removing barriers to their success. (Notice how Li cleverly took Locke's cue and changed the topic from IPR to innovation?)

So who is right about innovation? Where should China focus its policy in order to better support innovation? Should it beef up IPR enforcement, or should it focus on removing barriers to the private sector? Which would give it the biggest bang for its policy buck? (Not that this is necessarily an either/or proposition -- China is big and rich enough now to do both -- but humor me on this.)

Some of my readers may be surprised to learn that I think Li Daokui was right. While Locke was certainly carrying out his duty as Ambassador by saying that China needs to improve IPR protection, the truth is that IPR protection has very little to do with innovation in a developing country like China. In fact, history tells us that, since the dawn of the Industrial Revolution, every subsequent country to jump on the development bandwagon has copied those who came before.

...every country that became economically great began by copying: the Germans copied the British; the Americans copied the British and the Germans, and the Japanese copied everybody.*

This is not to excuse the Chinese companies that blatantly copy foreign products and the government that often chooses to look the other way, but since Locke chose to introduce innovation into the discussion, the issue deserves a closer look.

My research on China's auto industry reveals that the most innovative among China's automakers are the private and independent automakers, not the massive state-owned enterprises (SOEs) with their foreign joint venture partners. While private players have yet to introduce any real breakthrough innovation, their progress in developing new energy vehicles and unique Chinese brands is ahead of the SOEs. The reason for this (and you'll have to take my word for it until my book comes out) is twofold.

First, leadership positions in SOEs are essentially political positions. The men who run these companies have their eyes on their next job, which will be a political appointment to run an association or a local government, or even to become a Vice Minister or Minister in the central government. In order to better assure themselves of a good position, they tend to be risk-averse in their decision making.

Second, because these guys have short-term investment horizons, "wasting" money on R&D is not high on their agendas. R&D spending only helps the next guy. It is much easier to rake in profits building and selling foreign branded cars. They simply lack the career incentives to take the kind of risks that result in significant innovation.

(Here is another story today about how "JV brands" have not resulted in the innovation that the central government had been hoping for. Why? Again, forcing foreign partners to hand over technology does not translate into innovation, especially when leadership incentives are not changed. I previously wrote about this "JV brands" or "sub brands" issue several months back.)

So while Li Daokui seemed to be changing the subject above, he was actually addressing Locke's point about innovation. And if China's auto industry is any kind of indication for China as a whole, the central government would do well to follow Li's advice and remove the barriers that continue to marginalize private business in China.

Of course, as an American, I would like to see the home team do well, so if China continues to insist on a preponderance of state control over all of its major industries, I believe that will ultimately be to the advantage of China's competitors. And they need every advantage they can get.

_______________
* William Kingston, “An Agenda for Radical Intellectual Property Reform,” in International Public Goods and Transfer of Technology Under a Globalized Intellectual Property Regime, ed. Keith E. Maskus and Jerome H. Reichman (New York: Cambridge University Press, 2005), 658.

Outside world belatedly catches up to China reality

2011-08-22T14:25:00.000-07:00

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.

American Wheels, Chinese Roads: a review

2011-08-12T16:35:00.000-07:00

For several months I have been eagerly awaiting the arrival of Michael J. Dunne's new book, American Wheels, Chinese Roads: The Story of General Motors in China (Singapore: John Wiley & Sons Asia, 2011).

If you have read any news stories covering China's auto industry over the past decade, you have almost certainly read quotes from Mike Dunne. Until recently he was in charge of J.D. Power's China unit, and now he runs his own consulting company.

There are few people more qualified than Mike Dunne to write about China's auto industry. He grew up in Detroit, worked at GM, and earned his MBA from the University of Michigan. He has also spent over two decades of his life living and working in China.

American Wheels, Chinese Roads is a more-or-less chronological telling of the experience of General Motors in China, but at appropriate points, Dunne interjects relevant stories about other auto companies and their experiences in China. And it is a pretty quick read because the story is so entertainingly told.

The stories are all fascinating because many reveal lessons that GM learned along the way and often contain fly-on-the-wall details about negotiations between Chinese and foreign automakers. Dunne makes these stories even more interesting (and demonstrates his China credentials) by weaving in little Chinese language lessons and references to Chinese philosophers and historical figures. He doesn't just lay the lessons on us; he often delves deeper into why things are the way they are in China.

At a few points, GM is portrayed almost as a naive victim, caught off guard by the machinations of the government or GM's competitors. For example, when GM inked its deal with Shanghai Auto (SAIC), it was promised a monopoly in the luxury vehicle segment only to be surprised a few months later that Shanghai Auto's other partner, Volkswagen was being allowed to introduce a competing vehicle.

Dunne also retells the story about how Chery Auto managed to beat GM to market with the QQ, a copy of the Chevrolet Spark, adding new details that I had not seen elsewhere.

GM's curious sale of one percent of its joint venture to Shanghai Auto in 2009 is also covered here, though little is said about the possible motivation of SAIC. (But you will be able to find SAIC's side of the story in my forthcoming book on China's auto industry.)

In the penultimate chapter, Dunne sums up the experiences, not only of GM, but most foreign companies attempting to succeed in China:

While placing their bets, companies must never forget that to be dealt a hand in the game of electric cars -- or almost any business in China -- you will need to get approval for a license.

And get a partner.

Once those are secured, you will begin to compete with both the house and the player. The ones making the rules are also playing the game -- and they're determined to triumph.

This nicely sums up much of my own research on China's auto industry. Getting into China is hard, and once there, you will only be there as long as the Chinese find you useful.

In terms of the details, I was very pleased to find that Dunne's take on China's auto industry largely agrees with my own -- not that it has to, but having spent several years researching this industry in which Dunne is an expert, I am happy to note that my own research was not off-base. This is not always the case when two writers tackle the same topic in relation to China: it often depends on which part of the elephant one is touching.

As enjoyable as this book was to read (it is truly a page-turner!), as a researcher, I often wished to see footnotes to support certain quotes, figures or other claims. For some reason, the non-academic world has an aversion to footnotes. From the point-of-view of a researcher, footnotes make a particular work more attractive as a documentary source, and ensures that the book is cited more frequently. More citations will very likely translate into more sales. (And if you're the kind of reader who hates footnotes, you may also be happy that the book comes in a Kindle edition.)

My sense in this case is that many of the quotes come from Dunne's first-hand experience, although I would not have minded his saying so in the text. There seems to be a trend toward increasing acceptable use of the first person in non-fiction nowadays, a trend that I fully support: if you did the work, conducted the interview, etc., I think you should feel free to say so.

But this minimal criticism only reflects my personal preference, and in no way does it detract from this book as both an entertaining work of non-fiction and a source of wise advice on the pleasures and pitfalls of doing business in China.

In the conclusion, Dunne leaves no doubt as to where he stands in his own assessment of the business environment for foreigners in China. His parting shot takes the form of a fictitious memo from a foreign auto executive in China to the US Auto Task Force. His final recommendations aren't delivered in anger; they are a matter-of-fact assessment of a playing field on which foreign businesses have been forced to face down the entire Chinese government all on their own for far too long.

US budget issues predicted in the 1970s

2011-07-28T13:01:00.001-07:00

This post contains no business advice and is only tangentially related to China. You have been warned. :-)

Having recently read Daniel Bell's The Cultural Contradictions of Capitalism, I am reminded of how, back in the 1970s, Bell predicted the budget issues we are now enduring in the United States.

The fundamental political fact in the second half of the twentieth century has been the extension of state-directed economies. These developed first because of the need to rescue the system from depression, later because of the demands of a war economy and the enlargement of military commitments, and finally because of the strategic role of fiscal policy in affecting levels of spending and patterns of investment...

The new “class struggles” of the post-industrial society are less a matter of conflict between management and worker in the economic enterprise than the pull and tug of various organized segments to influence the state budget. Where state expenditure approximates 40 percent of Gross National Product, as it almost does in the United States … the chief political issues become the allocation of monies and the incidence of taxation.

… it is also likely that in the United States a state-directed economy and a state-managed society will please no one... Radicals are becoming increasingly suspicious of government … even though their first reaction to any issue is to call for more “government,” … And the state management that will emerge will be a cumbersome, bureaucratic monstrosity, wrenched in all directions by the clamor for subsidies and entitlements by various corporate and communal groups, yet gorging itself on increased governmental appropriations to become a Leviathan in its own right.

Oh, and did I mention that Bell was an admitted "socialist"? (If you watch Fox News, please don't let that word put you off just yet.)

By way of background, the most significant "contradiction of capitalism" that Bell identified was one between asceticism and acquisitiveness. The Protestant work ethic that Max Weber credited for turning work into a “calling” for Americans and implanting within us the idea that the work itself and the associated accumulation of capital were honorable pursuits, became (sometime during the 20th century) conflicted with the rise of consumer culture encouraged by the introduction of installment credit.

The resulting conflict has shifted the focus of American society 180 degrees from a focus on production to a focus on consumption. Whereas, according to Weber, Americans were all previously motivated by hard work and savings as the ultimate service to God and country, according to Bell, not only have God and country been supplanted by the individual, but we now all measure ourselves by how much we are able to consume.

In other words, employers demand of their workers a traditionally puritan level of commitment to work while urging their customers toward a hedonistic, anything goes, make-yourself-happy-and-screw-everyone-else lifestyle. The obvious problem here is that the workers and the consumers are the same group of people.

But I digress...

Back to Bell's quote above, if Bell was right, then we haven't even begun to see the worst of impending budget fights. Even if the two sides in Washington are able to reach a last minute deal this time, nothing will be done to solve the fundamental issues that have placed the budget front and center of American politics.

Think about it. Seemingly all discussions in Washington now revolve around spending and taxation. Rarely does the debate have anything to do with what sort of society we want to be.

I said above that this post would have little to do with China, but having written this far, I cannot help but wonder whether China's form of state capitalism might not also lead to similar contradictions.

Again quoting Bell:

In a modern [i.e. capitalist] society, the engine of appetite is the increased standard of living and the diversity of products that make up so much of the splendid color of life. But it is also, in its emphasis on display, a reckless squandering of resources... [If you're a China watcher, and this doesn't sound familiar, perhaps you haven't been to China in awhile.]

Where resources are prodigal, or individuals accept a high degree of inequality as normal or just, this consumption can be accommodated. But when everyone in society joins in the demand for more, expecting this as a matter of right, and resources are limited, ... then one begins to see the basis for the tension between the demands in the polity and the limitations set by the economy.

Bell says this results in five elements that are "structurally transforming the old market system":

institutionalized expectations of economic growth and a rising standard of living.
the incompatibility of various wants and diverse values
enormous spillover effects from economic growth (e.g. environmental effects)
a worldwide inflation -- "the largely inescapable consequence of a commitment to economic growth and full employment"
crucial decisions about the economy are no longer left to the market, but become political questions.

When Bell wrote all of this in the mid-1970s, he wasn't really thinking of China (how could anyone have predicted what China would become?), but his descriptions of problems that would soon afflict the US now also seem to apply to China.

While conventional wisdom tells us that China's leaders are probably patting themselves on the back for rejecting democracy and its besetting partisan difficulties, does Bell's warning indicate that China may also be running headlong into a similar set of problems?

Business Insider Quietly Changes its Headline

2011-06-28T18:11:00.000-07:00

In yesterday's post I noted that a story on the increasingly popular Business Insider website misread its source, resulting in a headline and content that were patently false. Several commenters to the original BI story also pointed out that the author had made false claims.

I followed the link in yesterday's post to see if there had been any changes to the story to find that the headline has been changed.

Yesterday's headline: These Fake Chinese Microchips Were Made To Disarm U.S. Missiles

Today's headline: The Navy Bought Fake Chinese Microchips That Could Have Disarmed U.S. Missiles

While the new headline is somewhat less inflammatory, it still doesn't address the false allegation here, which is that a Chinese entity sold chips to the US that had the capability of being used to disarm US missiles.

Having read both the Wired story and the Washington Post story, I can still find no suggestion that this was the case. By all indications, these were merely "fake" chips -- fake in the sense that they looked like real chips and performed like real chips -- in the same way that a fake Gucci bag both looks and performs like a real one.

In no way do I want to minimize the potential for serious damage that a fake chip could cause to an airplane. I get the fact the potential for damage is much greater than that of a fake handbag.

But there is a HUGE difference in the political implications between a fake chip and a chip that has been deliberately designed to cause damage. HUGE. And if Business Insider doesn't get that, then they are in the wrong business.

Of course the chips "could have" been designed with a back-door, but as long as all possibilities are on the table, let's go ahead and acknowledge that China "could have" nuked Los Angeles yesterday. I mean, they do possess that capability, right?

I looked for some sort of mea culpa, but didn't find one. As a commenter to my post from yesterday seems to imply, Business Insider's inflammatory headline has probably already generated enough page views anyway.

If, for some reason, Business Insider should start to lose viewers in the West, I'm sure Xinhua would welcome some of their editorial expertise. ;-)

"Hostile Foreign Forces" Making Up Stuff About China

2011-06-27T08:42:00.000-07:00

Whenever China encounters difficulties or problems, its state-owned media and foreign ministry are often quick to blame "hostile foreign forces" which include foreign (i.e. non-Chinese) media organizations. These accusations are often preposterous, but unfortunately, they are sometimes based in fact.

An article posted today on Business Insider serves as an unfortunate illustration. The article, "These Fake Chinese Microchips Were Made To Disarm U.S. Missiles," by Robert Johnson levels some startling charges:

Last year, the U.S. Navy bought 59,000 microchips for use in everything from missiles to transponders that turned out to be counterfeits from China.

Wired reports the chips weren't only low-quality fakes, they had been made with a "back-door" and could have been remotely shut down at any time.

What??!! This is a major international incident! Why is it not all over the news?

Following the link to the Wired report, we find out why: it simply isn't true.

The chips turned out to be counterfeits from China, but it could have been even worse. Instead of crappy Chinese fakes being put into Navy weapons systems, the chips could have been hacked, able to shut off a missile in the event of war...

...but they weren't, and a further link in the Wired report to a Washington Post story fills us in on the actual facts as reported by an actual journalist (not that all actual journalists are above fabrication).

My point is that we need to be better than this. If a Chinese company somehow conspired to get fake chips with backdoors into US hardware, then, by all means, let's nail them to the wall. But Business Insider's Robert Johnson has either read the Wired article so quickly that he failed to fully understand it, or he has maliciously fabricated a false story -- and neither reflects very well on Business Insider.

And it just adds to the pile of evidence that the "hostile foreign forces" really do exist.

China's corrupt, opaque system will continue to produce enough negative stories on its own. It isn't necessary to make up stuff like this.

_______________
EDIT: Note that since I posted the above, Business Insider has since changed its headline slightly, which prompted me to write this subsequent post.

photos

2011-05-16T16:11:00.000-07:00

Toyota logo (right), Geely Merrie logo (left)

Roewe 750 and MG7

Mercedes C-Class (top), Geely Merrie (Meiri) (bottom)

Jeep Cherokee (ca. 1997 top), Beijing Auto "Qishi" (bottom)

Jinbei "Mianbao che"

Toyota Corolla (top), BYD F3 (bottom)

Great Wall Test Track, Baoding, China

Saab-Hawtai

2011-05-14T10:57:00.000-07:00

Saab-Hawtai

Interesting things happening with the failed purchase of Saab by Hawtai. I wish I had more time to comment on this, but I am in the homestretch to finish my dissertation and get it filed -- possibly as early as next week. I will say, however, that I find it interesting that the two sides are starting to change their stories.

My guess, based on what little reading I've had time for, is that Beijing wants Saab to go to one of the larger Chinese automakers. The last thing it wants to do is strengthen a tiny, private automaker like Hawtai which only produced about 80,000 vehicles last year. And the reason China's other automakers haven't stepped up to bail out Saab yet is that they are counting on Saab's assets being cheaper after Saab has declared bankruptcy. Smart move.

The Chinese media are all suddenly beginning to say (almost as if directed by someone) that Chinese automakers no longer need foreign help. Which, I'm sorry, is total BS. If Chinese automakers had the necessary engineering skills to build great cars, they would be flooding the American market with them as we speak.

Finally, some good news for BYD

2011-04-11T11:38:00.000-07:00

Last October I wrote about a situation in which BYD, the private automaker from Shenzhen, was punished for attempting to build a factory on farmland near Xi'an.

In short, BYD was fined about $435K and had seven buildings, on which it had already begun construction, confiscated and ordered destroyed. In addition 14 local officials in Shaanxi province were also punished for violating rules forbidding the use of arable land for non-farming purposes. Ouch. And this came in a tough year for BYD whose sales only grew 16 percent in 2010 (compared to China's auto industry as a whole which enjoyed 32 percent growth).

The story surfaced a few days ago that BYD was preparing to restart construction in Xi'an. According to an earlier story in the Economic Observer, the land has been "legalized" (合法化) and rezoned as industrial land. BYD was allowed to bid for the land in a public auction, and -- surprise! -- BYD won the auction. (There was no word on whether anyone else bid for the land.)

Even though BYD didn't get all of the land it had secured before, it still got most of the land, and, most conveniently, it got the part of the land on which its unfinished construction already stood. Back in October, the announcement from the Ministry of Land and Resources said BYD's buildings would have to be destroyed, but, fortunately for BYD, no one had got around to destroying them yet.

This strikes me as quite a miraculous turnabout for BYD. The problem that led to BYD's punishment was (and is) that China, despite being a huge country, has precious little of the arable land it needs to feed 1.3 billion people. The central government has recently become quite serious about preserving arable land.

But not that serious apparently.

In the months following BYD's punishment last October, Local officials in Xi'an had begun to complain that they had been deprived of a major source of local income -- sales of land use rights. The Economic Observer quoted a local official as saying that Shaanxi's annual demand for industrial land is running at about 400,000 mu (67,000 acres) per year, but they are only able to supply about 150,000 mu.

I was initially happy to see the central government finally taking a stand last fall by supporting their own laws forbidding illegal use of arable land. For once, it wasn't just about the money. At the time, I took this as a positive sign that rule-of-law was actually starting to mean something in China.

It's amazing to me how a scarce resource such as arable land could have been so quickly and easily "rezoned" as industrial. Apparently it really was about the money.

Creating 'Chinese' brands now 'part of the deal' for foreign automakers

2011-03-21T09:48:00.000-07:00

Last December I wrote about a trend among Chinese-foreign automotive joint ventures in which the foreign partner gives technology to the JV to sell under a Chinese brand. Some of the English language China auto blogs refer to these as "sub-brands."

For example, Honda contributed the design of an outdated City vehicle it no longer makes to its JV with Guangzhou Auto. The JV now sells it under the Chinese brand Linian.

At the time I noticed this trend among several automakers (Guangzhou Honda, Dongfeng Nissan, Shanghai-GM), my assumption was that this was an attempt on the part of the Chinese automakers to wean Chinese consumers away from foreign brands. Chinese consumers still overwhelmingly prefer foreign brands (if they can afford them), because they perceive them to have higher quality.

Now several other foreign automakers including Volkswagen and PSA Peugeot-Citroen are discussing similar arrangements with their Chinese partners. PSA Peugeot-Citroen's CEO told the Financial Times that helping their partner to develop a local brand is now "part of the deal".

Last December I speculated that this may have been under central government coordination, but I had no evidence of that. Today, evidence seems to have surfaced in this report from the Financial Times.

The story quotes Mike Dunne, formerly of JD Power in China, who now has his own consulting company:

Nothing is written down, but when automakers go to apply for capacity expansion, in their application it’s clear that they should have a plan for an indigenous brand with jointly owned product rights and some provision for new energy vehicles. Foreigners want more capacity; China is saying: ‘We want more own brands’.

Back in 2001, when China joined the WTO, they gave up the right to demand technology transfer as a condition for approval of foreign investment. Of course, this new rule did nothing to change China's appetite for foreign technology.

The new demand, rather than for "technology transfer", appears to be: if you want to expand capacity, then X% needs to be devoted to Chinese-branded cars.

The foreign automakers now have a choice. They can pour precious R&D money into joint development of cars that compete directly with their own, or they can just hand over technology they already have.

The technology the foreigners are now handing over may be slightly outdated, so the foreigners aren't being forced to hand over their latest and greatest innovations. But again, it seems to me that these foreign-designed, Chinese-branded cars that the central government is now forcing the JVs to sell will fill the perceived quality gap between Chinese- and foreign-branded cars.

China's central government fully intends that its largest state-owned automakers will be global contenders, and they are patiently finding ways to make that happen. The WTO will not stand in the way. Wherever there's a rule, there's a way around it.

How fragmented is China's auto industry?

2011-03-12T09:00:00.000-08:00

For anyone wondering where I've been for the past several months, I've been right here at my desk. But instead of posting to this blog, I've been in a push to complete a full first draft of my dissertation by the end of March -- which is beginning to look like a real possibility.

For now, here's a quick post of some numbers I've been looking at for the past few days on market shares in China's auto industry.

Probably the most consistent component of China's auto policy since the mid-80s has been the insistence of the central government on consolidation in the industry. Just looking at the raw numbers, I think most people would agree that this demand has been completely justified.

In 1978, the year that Deng Xiaoping launched the first experimental market reforms in China, there were 55 auto assemblers. The number peaked at 124 in the mid-90s, and by 2008 (the latest numbers available) there were still 117 -- clearly, way too many.

But just how fragmented is China's auto industry? Here is a quick comparison with the US.

This chart compares cumulative 2010 market shares for the top five auto companies in the US and China.

If China were to take the US as its example, then it would seem to have already achieved a fair amount of consolidation. China’s largest auto group has a slightly larger share of its market than does the largest automaker in the U.S., and the top five in both markets are practically even.

Of course, we already know that the US market is somewhat less concentrated than it used to be. In 1980, for example, the Detroit Three held 76 percent of the US market. But I think few people would argue that less concentration in the US market has not been good for consumers.

So while it would appear that China is starting to see some solid growth out of the players at the top of its auto industry, the problem lies with all of those tiny companies at the bottom that, for some reason, refuse to go away.

Who are these small players? Quite a few are small, locally-owned automakers that lack any kind of scale to be profitable. In any given year, they probably break even on a cash flow basis, which means that the local government is absorbing their cost of capital. If exposed to true market competition, these small firms would quickly disappear.

So why haven't they? Local governments don't want them to. They employ anywhere from a few dozen to maybe even a few hundred local people, and local governments are not inclined to create any more of an unemployment problem than they have to.

Of course, the central government, through the NDRC or MIIT, could force these local enterprises to close, but why would they? The central government is no more interested in putting people out of work than are the local governments.

So if we simply accept that some of these small players are part of a welfare system that keeps people gainfully employed, then China's leaders should at least be satisfied that, at the top of its auto industry, it appears to have the makings of an increasingly strong and competitive industry. Right?

I don't think so, and this next chart reveals why.

Here we have the top five companies in both the US and China along with their respective market shares.

What I notice about this chart is that each of the companies on the US side also corresponds with a brand, but each of the companies on the Chinese side is just a big old state-owned enterprise that assembles cars for foreign companies.

SAIC makes most of its money selling VW and GM cars. Dongfeng sells Nissan and Citroen. FAW sells Toyota and VW. Chang'an sells Ford, Mazda and Suzuki. BAIC sells Hyundai and Mercedes.

Yes, each of these companies also sells some cars under its own brand, but the numbers are comparatively small. Overall, only 30.9 percent of sedans sold in China in 2010 were of local brands -- up only slightly from 30 percent in 2009.

And therein lies the problem. China's central government wants its biggest SOEs to get bigger so that they can compete with the foreign multinationals. For now, they would just like to dominate in their own market, but eventually, they want to compete in overseas markets as well.

The problem is that, while these SOEs are indeed developing their own brands, it's just so easy to sit back and rake in profits while the foreigners contribute all of the intellectual property.

Designing your own stuff is hard.

A little more clarity on Geely (a little less on Volvo?)

2011-02-03T10:11:00.000-08:00

More arcane corporate governance stuff...

In my previous post, I noted that Geely's 2008 and 2009 annual reports mentioned an unnamed "associate" of Li Shufu as co-owners of the entity that has ultimate control over the sprawling Geely empire.

In the interest of ensuring my readers (all three of you) have the most up-to-date information that I have, and in the interest of the pursuit of truth and transparency, I think a new post is in order.

Fortunately for the English speaking world, Geely is listed in Hong Kong, which means that, not only is the company required to report significant events to its shareholders, but it is also required to do so in English. (Call me lazy, but plowing through a 150-page annual report in Chinese is not my idea of fun--not to mention the fact that mainland reporting standards still don't measure up to those in HK.)

Here is what I have learned today. I can now say for certain that Li Shufu has complete (legal) control over the Geely listed company. This document (pdf) that I found on the HKSE website just happens to mention that Li Shufu owns 90 percent of Zhejiang Geely Holding Group, Ltd. (ZGHGL), which means the "associate" (in the yellow box) can own no more than 10 percent. (See abbreviated corporate structure below.)

What the document also spells out is exactly which entity now owns Volvo. As you can see in the structure below, I have added a couple of boxes at the bottom left side. The green box is "controlled" by ZGHGL (which we now know is 90% owned by Li Shufu). The orange box is Volvo, which is clearly owned and controlled, not by the listed Geely Auto Holdings (the purple box), but by Li Shufu's unlisted ZGHGL.

That explains why Li Shufu has been quoted as saying, "Volvo is Volvo, and Geely is Geely", meaning that these two companies are entirely separate entities. The only thing they have in common is control by Li Shufu.

This means a couple of things.

First, Li Shufu almost certainly had to rely on bank loans in order to pull off the Volvo purchase. Since the cash on the HK-listed Geely Auto Holdings' balance sheet belongs, not only to Li Shufu, but also to the company's public shareholders, Li Shufu could not have used Geely's cash to fund even part the Volvo purchase. Whatever cash was put into the deal would have had to come from any of the entities on the Li Shufu side of the chart. (Yes, it's possible Li could have borrowed money from Geely for the Volvo purchase.)

And while it's possible those entities have other business operations of which we aren't aware, the likelihood that these apparent shell companies were sitting on the necessary cash to fund the deal is pretty slim. Of $1.3billion in cash given to Ford in the Volvo purchase (Ford also got a note for $200 million), about $588 million came from Daqing and Jiading local governments, the remaining $712 million would have had to come from Li Shufu-related entities. At least part of that must have come from loans. (Early indications were that several major state-owned banks were lining up to help with the Volvo purchase, but this has not been verified since the purchase took place last August.)

Second, because Volvo is now 100 percent owned by an unlisted entity, we will no longer have full transparency into the company's operations.

UPDATED - Who is Li Shufu's "Associate"?

2011-01-23T07:54:00.000-08:00

UPDATE below...
_______________________

From the corporate governance files...

Geely is probably best known as the Chinese auto company that bought Volvo from Ford last year. It is also known as China's largest "private" automaker. I put the term "private" in quotation marks because, in China, the meaning of the word is not quite the same as in most developed countries.

As is generally well-known among China watchers, the government -- particularly local governments -- have influence on private businesses that goes beyond mere regulation. And the larger the "private" business, the greater the government's influence.

At a minimum, the local state is everyone's landlord. At the extreme, a local government can force private businesses to sell out to state owned businesses, as has been done with alarming frequency in the coal industry, or local officials can demand an ownership share.

On the positive side, not all governments necessarily seek to own or control private businesses, and many even provide help to private businesses in startup mode such as tax breaks, free or cheap land and utilities, access to bank loans, etc.

But the question that this kind of help often raises is, what does the government expect in return? Is it enough to be a successful business that employs people and pays its taxes on time, or do local officials expect more?

Because we always hear that Geely is a "private" business, I decided to try to find out exactly how "private" Geely is -- at least in terms of legal ownership. Geely is listed on the Hong Kong Stock Exchange, so its audited financial statements and accompanying notes are made available on the HKSE website. Geely's latest annual report (2009) is available here (pdf).

In an effort to determine who exactly owns Geely, I constructed the following partial org chart from information available in the annual report. The listed company is in the purple box. About 48 percent of the Geely Auto Holdings is held by public shareholders, and the remaining majority of shares are owned by a company named Proper Glory Holdings which is incorporated in the British Virgin Islands.

According to the annual report, Proper Glory is ultimately controlled by Geely's Chairman "Mr. Li Shufu and his associate," but for some reason it does not say who this "associate" is. (Here I am referring to the yellow box at the top of the diagram.)

Looking back over the years, this "associate" did not begin to be mentioned as an owner until 2008, but he, she or it seems to be pretty important. If you do the math, this anonymous "associate" could potentially control up to 35 percent of the listed company. And if "associate" owns as little as 75 percent of Zhejiang Geely Holding Group Ltd, he, she or it would be the listed company's largest single shareholder with a 26 percent interest.

Furthermore, as you can see at the bottom of the org chart, Li Shufu and this mysterious "associate" also own 9% of the auto plants.

I contacted several friends who are even more knowledgeable than I about China's auto industry, and their assumption, like mine, is that Li Shufu controls the company. One suggested, however, that the "associate" may be Li's son or brother. Another speculated that it could even be a Communist Party member to whom Li is beholden for something.

I am not suggesting that there is anything illegal going on here, but it seems to me that Geely's auditor, the Hong Kong office of Grant Thornton (which has recently lost most of its employees to BDO) is not doing a thorough enough job of reporting by allowing a shareholder with the potential to control the company to remain completely anonymous.

If there is nothing to hide, why not reveal the name of the "associate"? At a minimum, why not reveal the respective ownership shares that Li Shufu and "associate" have in Zhejiang Geely Holding Group Ltd?

______________
UPDATE, January 28, 2011:

Thanks to one of my readers for bringing this to my attention.

Above I said that Li Shufu's unnamed "associate" could control the listed Geely company with 75% ownership of Zhejiang Geely Holding Group Ltd. (ZGHGL). That's not entirely accurate. I was thinking more like an accountant than a lawyer. (And I am neither, though my work previously involved a lot of accounting).

I should have more accurately said that the "associate" could control Geely with only a majority ownership of ZGHGL. If the associate held 50% plus one share of ZGHGL, then he would effectively control Proper Glory, which, because it owns 51.3%, also controls the listed Geely Company.

Again, while my assumption is that Li Shufu is the controlling owner of Geely, until someone reveals how much of ZGHGL the associate owns, we cannot be entirely sure of that.

Subsequent to the above post, I have also received information from someone who knows the identity of the associate. This "associate" is apparently an influential Party member who helped Geely to get central government approval for the Volvo purchase. Unfortunately, I cannot reveal the source, but it is someone whom I trust, and who is in a position to know.

If that is indeed true, then, if I were a Geely shareholder, I would be even more interested to know how much influence and/or control the "associate" actually has.

First Auto became "Third Auto" in 2010

2011-01-18T11:44:00.000-08:00

Ever since the Chinese Association of Automobile Manufacturers (CAAM) realized people who really need data would be willing to pay for it (graduate students excepted), getting one's hands on sales data has become a bit of a challenge. Whereas in years past one could wait until a few days after the close of the year to get a complete list of China's vehicle sales by manufacturer, now we have to troll Chinese language news releases that dribble out during January.

An interesting phenomenon I have begun to notice is that, the longer it takes an automaker to release publicly its sales numbers, the greater the likelihood that those numbers aren't very good. A case in point is First Auto Works (FAW), a central state-owned enterprise with a long and storied history as the PRC's first automobile factory, and maker of the iconic Red Flag Limousine used to ferry Party Leaders shouting "同志们好!" (hello, comrades!) in parades.

Even though two of China's largest automakers, Shanghai Auto (SAIC) and Dongfeng, released their 2010 numbers in the first week of January, FAW's numbers did not come out until today, January 18. And while FAW's numbers, by themselves would be the envy of any automaker, they weren't as good as Dongfeng's.

For the longest time, FAW could hold its head high as, not only the first automaker, but also the largest. In the chart below, FAW still held the number one position as recently as 2005, but dropped to second behind Shanghai Auto in 2006. In 2010, FAW dropped to third behind Dongfeng, which, until about 20 years ago, was appropriately named Second Auto Works (SAW).

Vehicle Sales 2005-2010 (thousands of vehicles)

I look forward to conducting more analysis on these numbers as the laggards finally begin to report in. (I'm looking at you, Guangzhou Auto and Brilliance.)

The missing link in China's auto development?

2010-12-23T11:03:00.000-08:00

An interesting article in today’s WSJ by ace China auto reporter Nori Shirouzu summarizes an interesting trend in China’s auto development. China’s state-owned automakers, along with their foreign joint-venture partners, are beginning to develop China-only brands.

Battleground in the small car segment

At least part of the impetus behind this trend, I believe, is the popularity of small economy cars in China. Beginning in early 2009, when China halved the sales tax on cars with engines 1.6 liters or smaller, sales of these small cars have really blossomed. (The number of cars sold in the less than 1.6 liter category rose by 71 percent over 2008 while sales of larger cars rose by only 23 percent.) The tax on smaller cars was increased slightly at the beginning of 2010, but small cars have nevertheless remained hot sellers in China.

The good news for makers of Chinese-branded autos was that the foreigners had almost nothing to offer in the less than 1.6 liter space, so Chinese brands dominated. The bad news for Beijing, however, was that the SOEs also had very little to offer in this space. It was the private automakers (along with independent SOEs such as Chery) that benefited most.

New Strategy: Joint development

Enter this new strategy of jointly-developed, Chinese-branded cars that, nearly as I can tell, is a win-win for the big SOEs and their foreign partners – at least in the short-run.

This strategy appears to have two variations. One is for the Chinese and foreign partner to develop a car together, combining the intellectual property of both sides. SAIC-GM-Wuling have taken this route with the Baojun (pictured below). According to the authoritative China Car Times, “The platform was designed in Korea, whilst the body design was done in China with GM’s help, the brand was developed in China and also the engine was developed by [Shanghai Auto] in the UK technical center.”

The SAIC-GM-Wuling Baojun

Shirouzu’s article today reveals that Volkswagen and PSA Peugeot Citroen are considering a similar strategy.

The other variation is simply to re-badge an older model from the foreign partner. Honda and Nissan are doing this with their respective partners in China, Guangzhou Auto and Dongfeng Auto. Guangzhou-Honda is a new Linian model which is a re-badged Honda City from a few years back, and Dongfeng Nissan are building the Qichen from old Nissan technology.

What's driving this trend?

There are a couple of factors at work behind this trend. First, although China’s central government has been pushing hard for development of Chinese brands since China joined the WTO, only China’s independent automakers (both private and local SOEs without JV partners) have made significant headway in introducing Chinese brands. Yes, the big SOEs have also introduced their own brands, but they have been “developed” mostly through purchased technology. That is, the big SOEs have yet to demonstrate any real engineering prowess.

Second, there is a big gap between the foreign-branded, mid-sized cars sold in China and the small, Chinese-branded cars. It’s a gap in terms of both price and quality, and Chinese consumers understand this very well. This is why, despite the growth of Chinese brands (they now make up over 30 percent of passenger cars sold in China), Chinese consumers would still prefer a foreign brand if they can afford it.

The Missing Link

These new, jointly-developed, Chinese-branded cars are, I believe, the missing link between foreign- and Chinese-branded cars. And the fact that this kind of development is happening in almost all of China’s big SOEs at the same time tells me there is some kind of central coordination going on – either that, or it’s just a big coincidence. Regardless, I think the strategy here is to provide Chinese consumers with a new product intended to wean them away from foreign cars and make them more accepting of Chinese brands.

And, if I am right, this should call into question the future role of foreign automakers in China’s market.

Another interesting wrinkle to this story is of whether Chinese automakers are learning any better how to design their own cars.

What some of these SOEs are doing is simply buying (or being given) old designs by their foreign partners, and then slapping on a Chinese badge. On the other hand, China’s private automakers have essentially been doing that for years ... only, they don’t have foreign partners ... and, um, they don’t pay for the stuff they copy. But in the process, the private automakers have probably gotten better at auto design. Even the process of copying must have imparted to the private firms some useful engineering skills that the SOEs have yet really to develop.

Perhaps this new method of (legally) copying what their foreign partners have already done will impart to SOE engineers some of those same skills.

Umm...What's my motivation here?

2010-12-11T15:10:00.000-08:00

Some people were "stunned" this week when the results of the latest OECD-administered exam comparing the performances of students across countries showed Shanghai's students to be the smartest in the world. This isn't something I would normally cover in this blog, but I would like to offer a slightly different perspective on these exam results.

First, I was not at all stunned that the Chinese came out on top. This is a country that teaches math as if their children's lives depend upon it. As I've stated before on this blog "the average Chinese middle schooler can plot the trajectory of a non-guided missile." The only Americans who can do that are the handful who, for reasons that their friends can hardly fathom, opt to take a physics elective in 12th grade.

Fortunately, a few people did rush to put these results in perspective. Some Chinese experts acknowledged that, while their children are indeed pretty good at math and at taking exams, where they fall far short of their American counterparts is in creativity. (See articles here in ChinaDaily, and an editorial in WSJ by the Deputy Principal of Beijing University High School.) And James Fallows, in the Atlantic, quotes an educator who questions the representative nature of the exam given.

While I saw a lot of chatter about this news item on twitter this week, and read a few blog posts, I have yet to see anyone bring up the thought that originally came to my mind when these results were released. (Perhaps I missed it since I've been doing a lot more writing than reading recently.)

The point I would like to add is that I think various groups of students taking this exam most certainly had different levels of motivation.

Do any Americans remember the PSAT that we had to take in our 10th or 11th grade years? I would be surprised if many did. Does anyone remember the SAT or the ACT? Whether you got into college or not, you almost certainly do.

The only difference between these two exams was that one (the SAT or ACT) mattered, but the PSAT did not. I remember thinking about the PSAT: this has absolutely no bearing on my future, so I'm not going to sweat it. I may have even started to make patterns on the answer sheet as I colored in the dots.

My guess is that the American students who took this OECD exam approached it in pretty much the same way. Unless they could see how it would benefit them personally, they had no stake in the outcome.

As for the Chinese students who took the OECD exam, I have no way to prove this, but I am fairly certain that it was presented to them as something they must do for the honor of the Motherland.

This kind of pressure, combined with the fact that the Chinese system is already geared toward producing outstanding performance on standardized tests, was far more likely ensure a higher proportion of the students were motivated to perform well -- that, and the fact that the average Chinese student can do circles around the average American student in math.

Let's have more competition!...Just kidding!

2010-11-12T10:12:00.000-08:00

An interesting bit of news came across the teletype today. The annual China-Europe Auto Manufacturers' Forum took place toward the end of last month (October 2010). Sometime during the discussion, the Assistant Director of the State Council's think tank, the Development Research Council, made a provocative statement that apparently freaked out a lot of people.

Let the foreigners have more than 50 percent?

The Assistant Director, Professor Liu Shijin, someone whose views on the auto industry are highly respected and influential, suggested that it was about time for China to end its 50 percent ownership restriction on foreign auto companies that invest in China. Currently, China's policy limits foreign auto assembly joint-venture (JV) partners to an ownership stake of 50 percent or less. (This only applies to whole vehicle assembly operations; parts companies may be wholly foreign-owned.)

(A Chinese source for Liu's statement and the controversy that followed may be found here.)

According to a writer for China's "First Finance" website, "the audience members with blonde hair and blue eyes applauded and nodded in agreement, while those with dark hair and dark eyes shook their heads [in disagreement]." I think what the writer intended to convey was that the foreigners in the audience agreed with Liu and the Chinese did not.

No! We're still not ready!

The Chinese arguments against Liu echoed those made prior to China’s joining the WTO: the Chinese auto industry is not yet mature enough to take on the foreigners head-on. If restrictions were lifted, foreigners would completely occupy China’s market to the exclusion of the Chinese manufacturers.

However, there was at least one Chinese auto executive who fully agreed with Liu: Li Shufu, Chairman of Geely. Li was later quoted:

Only complete lifting of the restrictions [on foreign investment] will help the development of the Chinese auto industry. The current policy of the 50 percent limit on foreign investment is disadvantageous; it does not protect the Chinese auto industry at all. On the contrary, it restricts foreign car companies from entering China.

Reflecting a refrain that Li has been preaching for years, he continues to be so confident in his company’s ability to compete with foreign producers (especially now that Geely owns Volvo) that he welcomes increased competition. (Here's a post on this blog from March of 2009 where Li lays out his argument that the private firms will eventually triumph over the SOEs.)

What Li most likely expects is that increased foreign competition within China would more quickly drive out the weaker competitors. That, of course, is anathema to the central government.

Since an overwhelming majority of China’s automakers are state-owned, it logically follows that an overwhelming majority of the weaker players are state-owned. And because the auto industry has been designated as a "pillar" industry since the mid-80s, it just wouldn't do to have an auto industry dominated by foreign and/or private enterprises.

Well, ... nevermind

The interesting news that came across the wires today is that Liu Shijin has now completely backed away from his earlier suggestion: "I never said I support opening up the restrictions on foreign investment."

Setting aside the fact that he clearly said exactly that at the conference, we have to ask why he's now backing down. Either he said something he shouldn't have, and was threatened with punishment if he didn't go to the media and retract what he said, or he was deliberately floating a trial balloon to gauge the reaction.

Knowing that Chinese planners at the NDRC and MIIT are hard at work on the next version of China's auto policy right now, I am leaning toward the latter explanation. And since he's backing away, it seems reasonable to assume that the 50 percent ownership restriction will remain in the next iteration of the auto policy.

Let the flowers bloom!

From an objective point of view (i.e. from someone who has no vested interest in which auto companies succeed) I think this is a mistake, and here's why.

Joint-ventures are notoriously inefficient -- particularly those that attempt to meld vastly different business cultures. Having worked for a 50/50 US-Japanese JV, I have experienced this first hand. When no single owner dominates, everything -- and I mean everything -- has to be negotiated, from corporate strategy to the temperature of the office.

I am not saying that all JVs are, by definition, contentious -- there are exceptions that prove the rule -- but the exceptions are extremely rare.

The original intent of forcing all foreign auto companies into joint-ventures was technology transfer, but over time, it became clear that the foreigners were withholding their best stuff from their Chinese partners. So why didn't the Chinese decide to dispense with the foreigners altogether and just import their cars to reverse-engineer?

Because Chinese consumers love foreign brands. And they love them so much that Chinese-foreign JVs have become cash-cows. National pride runs pretty deep in China, but if there's anything that runs deeper, it's a love of money, and the huge SOEs have become drunk off of cash generated by their partners' foreign-branded cars.

And here's why I think Liu's suggestion was a trial balloon. If the true goal of having foreign partners is no longer tech transfer (though I recognize the ostensible reason is still tech transfer), then why not be willing to take a smaller share of what could become a much larger pie?

Rather than take 50% of the profits of an inherently inefficient JV, why not take 49% of a much more efficient, foreigner dominated JV? And if there are certain things you don't want the foreigners to do with their increased economic control, then just circumscribe those behaviors by law.

If Li Shufu and the handful of China's planners who believe increased competition would more quickly lead to a shaking out and consolidation of China's auto industry are correct, then the quickest way would be to remove the 50 percent restriction. Entering the WTO did not devastate China's auto industry in the way that everyone feared it would. Indeed, it has become even larger and stronger.

No matter how much the SOEs are urged and ordered to be innovative, they will never do anything more than copy what others have already done. The problem is that SOE incentives are political, not economic. SOE leaders are only interested in their next assignment, but private sector leaders don't have a next assignment. They have no choice but to succeed.

If China truly wants a dominant auto industry, it needs to get over its obsession with state ownership and unleash the creativity of its hungry private sector. One way to do that is to open up competition.

UK platform + US battery = Chinese EV?

2010-11-11T10:04:00.000-08:00

A123 Systems announced that its lithium-ion batteries will be used in Shanghai Auto's (SAIC) Roewe branded electric vehicles.

The Roewe brand (荣威 - rong wei -- yes, it sounds like "wrong-way" -- go figure) was created by Shanghai Auto prior to its merger with Nanjing Auto, after which the two combined the intellectual property and auto platforms purchased from the UK's MG-Rover several years ago.

The first electric Roewe will be the 750 (pictured above) which is derived from the British Rover 75. The battery supplier (and IP-owner), A123 Systems, is a purely American company, headquartered in Massachusetts. Though SAIC does own the IP of the Roewe, it was not originally designed in China.

Since the introduction of China's 2004 Auto Industry Development Policy, the constant refrain from Beijing has been a wish for Chinese automakers to develop Chinese-branded "new energy vehicles" using Chinese intellectual property.

While it is a good thing that SAIC is on board with the new energy vehicle trend, I'm not sure this is exactly what Beijing had in mind when it urged Chinese automakers to develop their own hybrid and electric vehicles. The battery, after all, is the heart of the EV -- its most expensive component.

It also calls into question the viability of BYD's battery technology (or that of any other Chinese battery company) when a fellow Chinese automaker would rather pay royalties to an American battery company.

It seems a reasonable assumption that a Chinese-designed battery would be less expensive than an American-designed one. Perhaps the fact that SAIC's partner, GM, which is putting an A123 battery in the Chevy Volt was able to get SAIC a good deal on batteries?

IP issues aside, SAIC's Roewe 550 (below) which was designed in China, will eventually be electrified as well. (And it's a very nice-looking car, in my opinion.)

The sincerest form of flattery?

2010-11-09T08:17:00.001-08:00

For reasons I don't fully understand, Chery Auto chose to give itself a name very close to the shortened moniker of Chevrolet (Chevy).

But maybe that was a coincidence.

Then, Chery comes out with a car called the QQ that not only looks like the Chevy Spark but whose doors can be swapped with those of a Spark.

Yet another coincidence?

Now Chery has beat BYD to market with its first pure electric car, the M1-EV.

Well, at least it doesn't look too much like Mitsubishi's iMIEV.

What is China? It's all in the name.

2010-11-05T09:15:00.000-07:00

I've had little time for blog posting recently as I face the pressure of looming dissertation deadlines. But today I cannot hold my tongue as I observe the incredible audacity of a China that either does not understand the impact of its behavior on the rest of the world, or has simply decided it no longer cares.

I have been a scholar and watcher of China for a couple of decades, so by now, very little China does really surprises me; however, China's recent (over)reaction to Liu Xiaobo's Nobel Prize has caught me off guard. It caught me off guard, not because I never expected this kind of behavior from China, but because I just didn't expect it so soon. The latest news is that China's Foreign Ministry has delivered letters to other foreign embassies in Oslo, warning the representatives of other countries not to attend the awards ceremony for Liu Xiaobo.

Yesterday, China's Vice Foreign Minister Cui Tiankai made the warning even more explicit (from BBC website):

The choice before some European countries and others is clear and simple: do they want to be part of the political game to challenge China's judicial system or do they want to develop a true friendly relationship with the Chinese government and people? ... They have to make the choice according to their own judgment. If they make the wrong choice, they have to bear the consequences.

Excuse me? Is this the same China that constantly rants about people intervening in its internal affairs? Whatever happened to the China that was clever and reserved, the China that was supposed to be, according to Deng Xiaoping "concealing its capabilities and biding its time"?

What happened was that China decided the current recession affecting the West was the signal that China may now return to its rightful place as the "central kingdom".

Central kingdom? Yes, central, not middle. For years I have been trying (apparently ineffectively) to convince people that "middle kingdom" is not the proper translation of 中国. While the 中 may be translated as "middle", as in a physical location, it may also be translated as "central," as in importance, as in 中央政府 (central government).

This may be difficult for non-Chinese to understand, especially non-Chinese speakers, but to the Chinese, the name of the country has a meaning: it's not about a place, it's not even (primarily) about a race, it's about importance. When one is taught from the earliest age that the country in which he was fortunate enough to be born is the world's central kingdom, that means something.

To the rest of the world, it's just "China", a word applied centuries ago to a far way country due to one of its valued talents -- making really nice pottery.

I mean no disrespect for China. If anything, my respect for China has only grown over the years as I have spent much time in China and as I continue to learn much about the place and the people on a daily basis. My purpose today is to say that, if you, like me, are surprised at China's latest hubristic display, don't be. China is simply being what it is: the central kingdom. And that will never change, not as long as its name is 中国.

The difference now is that China's 150 years of misfortune at the hands of foreigners is over, and it is no longer the "central kingdom" in name only. And if the rest of the world refuses to recognize that, well, "they have to bear the consequences."

In China, not all politics is local

2010-10-19T10:38:00.000-07:00

I realize a lot of my posts are about BYD, and I think that attests to the prowess of their PR team and their ability to keep themselves in the news. (One could say the same for Geely.) Today's story, however, is not one that BYD's PR department would have wanted us to know about.

About a week ago the news emerged that BYD was being fined and having some of its factories in Xi’an confiscated as punishment for a land-use violation. This came as a bit of a surprise to me.

First, a little background

In July of 2009 BYD signed an agreement with the Xi’an High Tech Zone to build a factory that would expand production by 200,000 vehicles per year. That same month, two different village governments in Huxian County (in the Xi’an area) appropriated 725 acres of land for BYD’s project, and, according to law, compensated the people who were being moved off the land. As is turns out 91 percent of the land appropriated was arable.

Huxian County then asked the Xi’an city government to approve an expansion of the BYD project land to about 807 acres (90 percent of which would be arable). Xi’an City then passed this request up to the Shaanxi Provincial government who approved the request in November of 2009.

By the following month, BYD had begun construction on seven factory buildings including a dormitory, a mixing plant and surrounding roads on about 121 acres of land, 92 percent of which was arable. (The difference between the acreage being used by BYD and that requested by Huxian County is not immediately apparent.)

All of this came to light in July of 2010 when the Ministry of Land and Natural Resources ordered a halt in construction and launched an investigation into illegal development of arable land.

As I mentioned in an earlier post, the development of arable land has become a serious issue in China, drawing much discussion at the National People’s Congress in March of 2010. The law, as it pertains to this issue, also seems pretty serious: any potential non-farm use of arable land, anywhere in China, must be submitted to China’s State Council (the Cabinet) for approval.

By agreeing to BYD’s use of arable land for factory construction, the Shaanxi Provincial Government was clearly in violation of this law. It had no authority to grant an approval.

BYD, for its part, thought it had covered all its bases. It went to the local government and filed its request, and within a few months, it received the approval it wanted. And this kind of behavior by BYD and local governments was not out of the ordinary.

The Ministry of Land and Natural Resources, however, did not see it that way. It fined BYD nearly $500,000 and confiscated all of its illegally constructed buildings. And since an entire hierarchy of local officials from village to county to city to province had granted approvals, Beijing handed out punishments to them as well, meting out fines, warnings and demerits to 14 officials at various levels.

What this means

The fact that both BYD and local officials were punished was a clear signal from Beijing that this law in particular is not to be broken – killing a few chickens to scare the monkeys. Monkeys all over China are now duly warned.

What initially surprised me upon the announcement of the investigation in July was that the Ministry of Land and Natural Resources (MLNR) would enforce this law against BYD, a company that appeared to be among Beijing’s favorite private companies due to its success in selling low-emission cars and development of new energy vehicles. BYD was even the favored recipient of a loan from Bank of China last December for building a solar plant.

My assumption had been that someone above the MLNR, perhaps in one of the more powerful ministries like MIIT or the NDRC, would trump MLNR’s decision, and BYD would get off lightly. Well, a nearly $500K fine and confiscation of buildings is anything but light. (Fortunately for BYD, they weren’t also forced to restore the land to its pre-construction arable state!)

And this comes at an unfortunate time for BYD whose sales have been dropping. In the summer it announced a significant scaling back in projected sales for 2010 from 800,000 to 600,000. Its F3 (a Toyota Corolla clone) was the best selling sedan in China in 2009, but it wasn’t even among the top-ten sellers last month. Also, for reasons that are not entirely clear, BYD has backed away from its previous intention to introduce its all-electric E6 crossover in California this year.

But BYD’s difficulties are not the most important part of this story. The issue here is that Beijing is getting serious about the use of arable land, and it is sending out the signal that such abuses of the law will no longer be tolerated.

(This is, in my opinion, related to China’s concern for self-sufficiency which borders on paranoia. The apparent fear is that other countries will hoard goods China needs as it may now be doing with the rare earth metals that Japan needs. Perhaps China is not aware that the United States sold grain to the Soviet Union at the height of the Cold War. But I digress…)

Many China-watchers observe local governments getting away with ignoring Beijing’s dictates and assume this means that Beijing is powerless to enforce its will in the provinces. This simply is not true. As this incident demonstrates, even a relatively weak ministry can get its way when it wants to. Just because you can get away with breaking the law today doesn’t mean you can do it tomorrow.

__________________

Chinese sources consulted for this article:

国土资源部公布四起部挂牌督办违法案件处理结果
比亚迪项目违规占地受罚
比亚迪西安违法占地案处理超预期 14名官员被问责

UPDATED--It's about M-O-N-E-Y, Mr. Friedman

2010-09-22T15:17:00.000-07:00

Last week New York Times columnist Thomas Friedman wrote another of his "Wow, China is awesome!" columns. This one is about how the Chinese are on top of climate change while the Americans are so caught up in partisan bickering that they have allowed an opportunity to slip out of their hands.

So far, so good. Nothing to disagree with there, at least as far as his impression of the US is concerned.

But Friedman takes comments by Peggy Liu (of JUCCCE) that the Chinese are running various clean energy pilot projects as a signal that the Chinese are serious about cleaning up their environment.

This is where I have to part ways with Tom. As someone who has, for the past 16 years, lived in or traveled frequently to China -- not just the big cities, but the countryside as well -- I can only verify that things have become worse, not better. There are many things China could have been doing for the past decade or so to clean up its environment or to reduce its carbon footprint, but it hasn't done any of them. I'm sorry, I like China, I love the people, but the place is filthy.

Still Friedman manages to make one valid connection -- that China's clean energy efforts are all about "J-O-B-S". He's pretty close on that one, but while J-O-B-S are certainly a nice side-effect, it's really more about M-O-N-E-Y. I've made these same assertions before on this blog:

Ultimately, Beijing sees great opportunity in the climate change movement. But contrary to outward appearances, the opportunity for China lies, not in cleaning up its environment, but in selling related technologies to foreigners.

Clean technology will be expensive, and a country facing a demographic time bomb in a decade or so cannot afford to waste a single percentage point in GDP growth to clean up its environment. China will, however, be more than happy to sell the necessary technology to those countries that are already on the bandwagon.

But don't take my word for it. Let's see how the Chinese government describes what it is doing. The following is a summary from China's 2009 Auto Industry Yearbook (a government publication) summing up the purpose of China's pursuit of "new energy vehicles":

新能源汽车行业有望为中国汽车提供赶超国际汽车先进国家的机会... 有望在全球新能源汽车产业分工中获取更大收益。

Translated:

The hope of the new energy vehicle industry is that it will provide China with an opportunity to overtake countries with advanced auto industries ... the hope is that, in the division of labor in the new energy vehicle industry, [China] can earn more profit.

While this is just part of the summary paragraph, there's nothing in the the entire section on "new energy vehicles" about climate change or environmental protection. Though the term "energy saving" is used once or twice.

The point here is not to pile on China and accuse it of being duplicitous. China is actually being very clear about what it wants. The problem is when the Tom Friedmans of the world fly into Beijing, stay in five-star hotels and then proceed to interpret Chinese actions through their own worldview.

I think it's great that China is undertaking all of these pilot projects. This work desperately needs to be done, and much more could be done in the US if our political leaders were more focused on the good of the country than they are on their careers (and if voters would punish them for it).

But it is way too early to draw the conclusion that China is concerned about climate change. This is a country that is concerned more about growth than anything else. If things continue on their current course, China will get what it wants: M-O-N-E-Y.

And they'll continue to get it from the US.

________________
UPDATE:

I came across this article today, from a law professor at Beijing University, that supports this idea. The basic message of "China's green laws are useless" is that, while China's environmental laws are impressive, they have had no effect on the country's environment.

China Auto Mergers: It's a sellers' market...

2010-09-14T11:07:00.000-07:00

...and nobody's selling.

An article in today's People's Daily (English) says that the auto industry tops the list of industries in which China's State Council wants to see an acceleration in mergers and acquisitions. The article goes further to say that the Ministry of Industry and Information Technology (MIIT) is drafting specific policies on mergers due to be released later this year.

The article is right in that consolidation of this industry is much needed. There are currently more than 100 auto assemblers in China, though only the top 20 or so really really count. Still, if China is to develop a globally competitive auto industry, they will need for a lot of the smaller producers to either disappear or be consolidated into larger producers.

If the article is correct, these new policies that MIIT is working on will do something to accelerate M&A in the auto industry. If those new policies are to do anything to accelerate mergers, however, it will require a pretty drastic change in Beijing's behavior.

Ever since China's government began to take notice of its auto industry around the mid-1980s, there has been an increasing desire to make China's industry globally competitive. And part of every auto policy that has been written to date has focused on a need for consolidation. I know this because I've read all of them.

Early on in the reform era, the auto bureaucracy du jour was always well aware of how other countries' auto industries had developed. For example, they knew that, in the early part of the 20th century, the United States also had more than 100 auto companies, and that number had shrunk to about half a dozen by the late 1950s, and only three by the century's end.

As the US has, until recently, been the one market China most wanted to emulate (since the US was, and still is, the world's largest economy), it seems to have made sense to auto planners in Beijing that the route taken by America's "Big 3" should soon be taken by China's largest auto companies.

And until now no matter how strongly the government has stressed the need for consolidation, implementation has always included allowing the market to determine the outcomes -- just as it presumably did in the US. Yet, while there have been a handful of mergers over the past decade (First Auto-Tianjin, Shanghai-Nanjing, Guangzhou-Changfeng, Chang'an-Hafei-Changhe), there have been nowhere nearly the number one might expect if the market were truly determining the outcomes.

Many of China's smallest auto companies continue to soldier on, year-after-year, cranking out a handful of cars. In a true market economy, these would never have survived on their own, yet in China, they do. Why? Because their local governments want them to. They employ people, they pay taxes, and they also very likely give local leaders a few vehicles to drive around every year.

If not for local governments who stand in the way, the market would have indeed taken care of China's fragmented auto industry. There is no lack of desire on the part of the CEOs of large auto groups to buy others; there's simply no desire on the part of small company CEOs and local governments to sell.

So these new policies that MIIT introduces later this year will probably not look much different from those we have seen to date. Beijing will very likely still want the strongest companies to take over the weaker ones. The question is whether Beijing will put any teeth in its policy. Will it change the incentive structures faced by local governments that keep them from supporting consolidation where necessary?

The tradeoffs are pretty clear. The status quo (little consolidation) helps to prevent social instability that could result from closure or merger of less efficient players. On the other hand, significant consolidation would help China's auto industry to become more globally competitive.

Which is really more important to Beijing?

Is China "skirting the rules" on clean tech support?

2010-09-09T09:43:00.001-07:00

Maybe, maybe not, but I think there's a far more important story here.

There's a great article by Keith Bradsher in today's New York Times, "On Clean Energy, China Skirts the Rules". Bradsher compares the extent to which clean tech firms in China and in the US receive government support. The upshot of the article is, as has become de rigeur recently, to paint a picture of a China that is getting ready to clean America's clock (pun intended).

Bradsher quotes the CFO of a US-based clean tech company on difficulties:

"You can’t get a penny in the United States, it doesn’t matter who you call — banks, government. It’s awful," he said. "Therein lies the hidden advantage of being in China."

Then he closes with this quote from the head of a Chinese tech company with operations in both China and the US:

"Who wins this clean energy race," Mr. Zhao of Sunzone said, "really depends on how much support the government gives."

Beijing-based lawyer, Stan Abrams, adds some illuminating commentary on this story at his blog, China Hearsay. He looks at it from more of a legal standpoint and concludes that, though China does appear to be skirting the rules, little to none of its behavior appears to be in gross violation of China's WTO commitments.

My sense is the recent rash of "China is kicking America's ass in clean tech" articles is really more about prodding the US government to take a larger role.

What concerns me is, if those who promote such views get their wish for more US government involvement in industry, would the US government know where to draw the line?

At some point government support in the US (and elsewhere) starts to result in diminishing returns. Once you unleash the state, it's hard to put that genie back in the bottle. Once you put in place a new bureaucracy, the people inside it begin immediately to plan for a perpetual existence.

During a recession, it becomes easy to clamor for government help, but when conditions improve, how likely is the government to withdraw?

This, to me, is a fascinating difference between the Chinese and US systems. We know that, over time, democracies bulk up with special interest driven programs that beneficiaries will fight for to the death, and that the rest of the population rarely have the collective will to fight.

On the other hand, China's "special interests" are all pretty much contained within the Politburo. They fight, someone wins, then they move on.

All the hand-wringing about whether the US should help with clean tech, though important, seems to be missing the much broader point (though raising the vital question) of whether the political system that has served the US well for over 200 years is sustainable in its current form.

US and China support for auto industries: not that different

2010-09-03T11:47:00.000-07:00

A comparison of auto industries: China's government supports its auto firms in growth and development while the US government only rescues its auto firms from bankruptcy. (Right?)

For the past several weeks, I have been plowing through this nearly complete set of China Automotive Industry Yearbooks, tracing China's auto policy since the early 1980s.

Toward the end of the 1990s, I began to see references to a supposed US government program the Chinese call "新一代汽车伙伴计划" (literally translated: "new generation vehicle partnership plan"). My first thought was, they have to be making this up to justify their own intervention in the auto industry. The US government does not intervene in the auto industry -- or at least it didn't until it had to rescue GM and Chrysler last year. Before that, the only other time was to rescue Chrysler (the first time) in the early '80s.

After seeing several references to this program and another one they called "自有汽车" (Freedom car? Seriously?), I decided I had to find out what this was all about. What I learned was that the US government has indeed established partnerships with the former "Big 3" American automakers to develop new vehicle technologies.

The first one "Partnership for a New Generation of Vehicles" (PNGV) was started in 1993 under the Clinton administration and, according to this article at Wikipedia, resulted in the development of some useful technologies that made vehicles lighter and more efficient. The program also resulted in diesel-burning cars built by each of the Big 3 that were able to get at least 72 miles per gallon. (You never heard of this? Funny. Neither had I.)

Curiously, this program was ended by the Bush Administration in 2001 (apparently at the request of the Big 3) and replaced with a new program called "Freedom Car". This new program dropped the focus on current technologies and began a push to make fuel-cell vehicles commercially viable.

In more recent times, I have become aware of funds have that been made available under a Department of Energy program to support the development of advanced lithium-ion batteries for electric vehicles, but my assumption had been that this was a one-off program put together under the stimulus program. However, as it turns out, I was wrong about that too. This program started in 2007, well over a year before we started to notice the economic downturn.

US government involvement in the auto industry, as it turns out, is not an aberation; it's quite the regularity. And it's not only about rescue from bankruptcy; the US government has been pushing all along for development of advanced vehicle technologies.

As is typically the case with Wikipedia articles, people with competing agendas are able to edit the pages to which I have linked above, so those articles do contain some bias. Still, it was interesting to discover that China isn't the only country whose government wants to see its automakers develop new technologies.

And I found it especially ironic that I had to learn about these US efforts from Chinese government documents.

Chevy's Volt in China: Why not call it the Volt?

2010-08-31T18:44:00.000-07:00

China Car Times reports that the new Chevrolet Volt was unveiled at an event in Shanghai today, though it won't be going on sale until sometime in 2011.

I'm always curious to know how the names of foreign products are Sinicized for sale in the Chinese market. In this case, GM has picked the Chinese name 沃蓝达 (wo lan da), a name apparently intended to sound somewhat like "volt". (Incidentally that's the same 沃 used in Wal-Mart in China: 沃尔玛.)

I wondered why they didn't simply call it "volt" in Chinese. I mean, they do have electricity there, and it's also measured in volts. So I looked it up.

The word "volt", meaning a measurement of electricity, is translated as 伏特 (fu te), which sounds exactly like the Chinese translation of Ford Motors, "福特" (fu te).

Elusive Innovation: Inventing Stuff is Hard

2010-08-17T10:01:00.000-07:00

Once one has climbed to the top of the hierarchy of the global division of labor, it really isn’t all that difficult to reach back down. However, if one has yet to make it to the top, getting there is extremely hard.

The US no longer manufactures most of what it buys, and many items it formerly manufactured are now being made elsewhere. But it’s not as if the US no longer has any economic activity. Much of that manufacturing activity was replaced by “higher level” knowledge work, part of which includes research and development that brings us such innovations as iPhones and this internet thing.

Despite the loss of manufacturing, one advantage the US has is that it can always decide to manufacture something if it wants to. All it has to do is throw money at the problem. The US rescue of General Motors is a case in point. It is quite likely that GM would no longer be building cars in the US if the US government had not determined to save the company. This is not to say the rescue of GM was necessarily a good strategy, just that, if the US government so desires, it has the wherewithal to pull it off.

China’s economy now provides a significant portion of the world’s manufacturing, a task for which it is currently well-suited. It has more people than it can count to throw at factories requiring unskilled labor. But an unfortunate disadvantage for China is that, whereas the US has the option of employing brute force (i.e., lots of money) to keep manufacturing onshore, China cannot simply employ brute force to encourage innovation.

Innovation is a higher level activity that requires a certain quality of education and a relatively free and open political environment. In absence of these requirements, China can throw all the money and slogans it wants at innovation and it will still not happen.

And this is why the US is in a far more favorable position relative to China. If, for whatever reason, all trade between China and the US were to stop for a period of time, not only could the US buy manufactured goods from other countries, but it would also have the option to begin rebuilding the manufacturing industries it once had. Again, while that may not be the optimal strategy, at least it is an option for the US. On the other hand, China, try as hard as it might, cannot become an innovative society without undertaking the kinds of political reform necessary to encourage innovation.

(And ironically, if China were to undertake such political reform, the probability of an interruption in trade between China and the US would quickly drop to about 0%, making this whole discussion more or less moot.)

To slightly oversimplify, while the US can do what China does, China cannot do what the US does. Not today.

But it is not as if China is a stranger to innovation. While my European ancestors were still banging sticks together, the Chinese were inventing cool things like gunpowder, the plow, the compass, paper. So I am quite certain the current lack of innovation is not an issue of human capacity, but more of a systemic one.

Of course, the bad news for Chinese citizens is that, in the short term, the system will not change. But the good news for many educated Chinese is that there is always the option of emigration to more innovative societies. Unfortunately for China, this is a double blow to the country as a whole. Nearly every educated Chinese who leaves is not only a minus-one for China, but also a plus-one for the country to which he or she immigrates.

The global hierarchy of the division of labor, as it currently stands, has brought the world both innovation and inexpensively manufactured goods. The current structure, despite its flaws, works pretty well, but a major problem China has with the current structure is that China is not in its traditional place on top. We can see this dissatisfaction in the central government’s continually unsatisfied demands for “indigenous innovation”.

For how long will insistence on rule by an unelected government continue to outweigh the Chinese desire to once again lead the world in innovation? For as long as China’s single greatest fear is instability. Until China's government can become comfortable with a little unpredictability, it should expect little in the way of breakthrough innovation.

BREAKING NEWS: China surpasses US in population!

2010-08-15T07:55:00.000-07:00

Does anyone think about quality anymore?

I came across this article to which someone linked on Twitter this morning. The article, entitled "China has Already Surpassed the U.S. in Cleantech" convincingly lists nine areas in which China is quantitatively miles ahead of the US:

IPOs
M&As
Solar
Rare earth elements
Stimulus
R&D
Speed
Nukes
Investment

I would add more items to this list as well:

Population
Food consumption
Particulate pollution
Carbon output
Land mass
Squat toilets
etc...

The point is that, when you compare China to other countries in strictly quantitative measures, it will increasingly come out on top. But what does that mean?

China is very good at mobilizing when the central government gives the orders. When Mao told Chinese to build furnaces in their backyards to make steel during the Great Leap Forward, that's exactly what everyone did. And, as it turned out, almost all of the steel was crap because no one really knew how to make steel.

This is not to say that Chinese people are incapable of innovation. Indeed, much of the innovation coming out of the US has the involvement of people of Chinese ethnicity. But the difference is in the environment for innovation.

To this day, China still lacks either the educational system or the political freedom to encourage innovation. There is a lot of talk about innovation, and there is a lot of money being thrown at it, but in the end, where is the innovation? Aside from a way to turn an iPod Touch into a cell phone, what innovations have come out of China?

What about BYD's hybrids and electric cars, you may ask. What about them? Out of the 400,000-plus cars they sold last year, only a hundred or so did not have traditional gasoline engines. So far this year, they've sold a few hundred more of their new energy cars, mostly to taxi fleets. By this time next year, there will be thousands more Chevy Volts and Nissan Leafs in the hands of consumers than BYD hybrids or electric vehicles.

In a previous post on ChinaBizGov, I referred to a quote from the Economist that, when it comes to cleantech, ultimately China will still do most of the manufacturing and the US will still do most of the inventing. This is what these two economies are set up to do.

China will not suddenly become a hotbed of innovation simply because the central government repeats over and over that it wants innovation. And the US is not going to stop innovating simply because it is going through a difficult recession. The underlying environments of these two countries have not changed.

Why? 'Cuz picking winners is bad, mmmkay.

2010-08-12T16:19:00.001-07:00

There's an interesting article in this week's Economist, "Picking winners, saving losers" that deserves a read if you're a subscriber. If not, I would like to highlight a few points.

As expected, the Economist still finds industrial policy to be largely unsuccessful, though the evidence they present is only anecdotal. They say that industrial policy is back in fashion now for four reasons:

Weakness in the world economy
Efforts to rebalance economies away from sectors such as finance and real estate. (They mention the US here, but I see no evidence whatsoever that the US is trying to rebalance away from real estate. Indeed, I'm pretty sure everyone in Washington gets on his or her knees every night and prays for a rebound in the real estate market.)
Emergency efforts to rescue recessionary economies has led to demands for more industrial policy
Rich countries are responding to the apparently successful policies of countries like China and South Korea.

All of these reasons sound plausible, and I think the last one is one of the most important. Why? Because, despite all of the economic theory telling us industrial policy is bad, China is the elephant in the room that no one seems to know how to address.

Is China, with its "state-led capitalism", making a huge mistake that it will pay for in the future, or is it the exception that proves the rule? And if China is right, where does that leave all of the other countries that are hoping to abandon industrial policy as soon as the recession is over?

One of the Economist's concluding lessons (which it says are "clear") is that, "the more [an industrial policy] is in step with a national or local economy's comparative advantage, the more likely it is to succeed". Okay, so the Economist is allowing that industrial policy could work, but how can it explain the fact that some countries have successfully created industries where none previously existed?

If Japan and South Korea had listened to the Economist's advice about comparative advantage, neither would have an auto industry right now. Same goes for China. Everyone would still be farming in the countryside.

The article quotes a Michael Liebreich, CEO of Bloomberg New Energy Finance, on industrial policies currently supporting clean technology. "Where the industry ends up will inevitably be different from where the money went in," he says.

Despite the fact that China and the US are both spending piles of money on clean technology, says Liebreich, China is still likely to end up with most of the manufacturing, and the US is still likely to end up with most of the R&D -- the implication being that money spent on R&D in China and on manufacturing in the US is probably being wasted.

Again, though no hard evidence is offered to support Liebreich's prediction, this does seem about right. But it's only because I see no real evidence that China is willing to make the kinds of political changes that would create an intellectual environment where innovation is encouraged.

On the other hand, we also see a US government completely willing and able to spend a lot of taxpayer money to keep manufacturing at home. Without question, GM would not exist if the Bush/Obama administrations had not saved it.

Since I am not an economist, I'm not sure I have the tools to solve the questions of industrial policy. Then again, I'm not sure the economists do either. The only thing that's "clear" to me is that the real world keeps throwing out examples that their models cannot explain.

China's green subsidies are an investment. America's are an expense.

2010-08-12T09:53:00.000-07:00

Here's one for my fellow finance geeks...

Having emerged from the recent global recession relatively unscathed, China has launched what appears to be an all-out assault in its ambitions to become a major player in the future of green technology. As one of the most polluted places on the planet, China’s motivation seems natural and unsurprising. However, there is a much more important motive than cleaning the environment behind China’s drive to dominate this sector. China understands very well that the world’s developed countries are prepared to shame each other into doing whatever is necessary to mitigate climate change. Whoever is able to develop these cutting-edge technologies, or to make existing technologies more affordable, stands to generate a lot of revenue.

When we see such news as the recent announcement that China is committing upwards of $15 billion toward “green” cars, we need to understand that, from China’s perspective, this is not just about cleaning up China. It is an investment in China’s future.

But could we not view America’s investments in the same manner? In a word, no. There is a big difference.

During the late 1990s / early 2000s, under the leadership of Jiang Zemin and Zhu Rongji, China embarked on a far-reaching program of privatization. Under Zhu’s direction, thousands of state-owned enterprises (SOEs) were closed, privatized or downsized, and over 40 million SOE workers lost their jobs (many to be reabsorbed by the private sector). But under the leadership of Hu Jintao, China has pulled back from the brink of privatization and begun to consolidate and solidify the role of the state in China’s most important industries.

And even in industries where private and state-owned enterprises compete, such as China’s automobile industry, the private players are typically beholden to local governments in a mutually beneficial relationship. The private enterprises provide employment and tax revenue while the local state provides land, tax breaks, and free or cheap utilities. Furthermore, when private enterprises in important industries become large enough, and are seen to be following the desired policies of Beijing, China’s central government has been more than willing to step in and provide assistance in the form of subsidies or easy access to credit.

Large loans by the state-owned Bank of China last year to BYD and Geely, two “private” auto manufacturers serve to underscore this point. BYD is seen by many to be on the cutting edge of development in electric vehicles, and Geely recently completed its acquisition of Volvo. In both cases, the central government was willing to lend a hand (and more importantly, yuan) to help these two companies in pursuit of Bejing’s auto policies.

Why is China’s government willing to support private companies that compete with its state-owned giants? Because ultimately, the returns on the state’s investments, whether they go to private or state-owned enterprises, are Chinese. Ultimately, technology developed (or copied) in China finds its way into the hands of massive state-owned enterprises. And ultimately, the profits generated by these massive SOEs finds its way into the hands of their owners: the state.

So when China subsidizes its companies to develop new green technologies – or to “borrow” and tweak such technologies from abroad – the goal is to generate a return on China’s investment.

By contrast, when the federal government of the U.S. chooses to channel $69 billion in subsidies, tax credits, low-interest loans and grants to green technology companies, most of which (with the glaring exception of General Motors) are in the private sector, the state is not generating a return for itself. The ultimate beneficiaries of U.S. generosity, assuming the recipients of government largesse are ultimately successful, will be the shareholders of the companies receiving the money.

In short, whether they are actually accounted for this way or not, China’s industry subsidies are an asset on its balance sheet and America’s are an expense on its P&L. But does the accounting really matter? I would argue that, in the short- to medium-term, it does.

In a country that faces major demographic challenges during the next decade or so (as retirees begin to significantly outnumber workers), China’s leaders fully understand that they need to generate as much economic growth as possible now while it is still relatively easy. Cash banked now will help to create the massive welfare state that China will eventually be forced to build.

China’s investments in green technology are not about cleaning up pollution or mitigating global warming, though these will surely be positive side-effects; they are about preparing China for an uncertain future. This is a battle that China’s state-owned enterprises have to win. By contrast, it is a battle that the U.S. government only hopes its private sector can win.

China's MIIT Orders Capacity Cutbacks

2010-08-09T17:33:00.000-07:00

According to an announcement on the website of China's Ministry of Industry and Information Technology (MIIT), 2,087 companies in 18 industries have been ordered to close outdated, heavily polluting factories by September.

While this sounds like a positive step by a government that values the environment, it also sounds like similar orders that have been given in the past -- long before it was cool to care about climate change. I hate to sound skeptical (and I would like to be wrong about this), but, frankly, I'm not buying it this time either.

The punishments suggested for companies failing to comply are restrictions on access to bank financing and new project approvals. First of all, most of the companies on MIIT's list are small or medium sized enterprises, and many of them are privately owned. These companies never had access to bank lending anyway. Furthermore, because they are so small, their approval processes -- if indeed there were any -- most likely never went further than their local governments.

In addition, local governments are still heavily incentivized on two very measurable criteria: social stability and economic growth. Closing local businesses is unlikely to help their job performance measurement under either criterion.

While local governments will, of course, have to be seen to follow central government orders, it's not hard to imagine that local authorities are already working with the owners of these businesses (which in many cases are the local governments themselves!) to find a way around Beijing's dictates.

Ultimately, Beijing sees great opportunity in the climate change movement. But contrary to outward appearances, the opportunity for China lies, not in cleaning up its environment, but in selling related technologies to foreigners.

Clean technology will be expensive, and a country facing a demographic time bomb in a decade or so cannot afford to waste a single percentage point in GDP growth to clean up its environment. China will, however, be more than happy to sell the necessary technology to those countries that are already on the bandwagon.

More Local "New Energy" Vehicle Subsidies

2010-07-29T10:42:00.000-07:00

In addition to the central government's subsidies for new energy vehicles in China, two more local governments have announced their own subsidy plans.

Shanghai is planning subsidies of 40,000 to 60,000 yuan for individual buyers of plug-in hybrid or electric vehicles, and the city of Changchun, along with Jilin Province, is also planning a subsidy of about 40,000 yuan.

Shanghai is the home of Shanghai Automotive which owns the MG and Roewe brands (bought from the UK) and has joint ventures with both Volkswagen and General Motors. Changchun is the home of First Auto Works, a centrally-owned company that has joint ventures with Volkswagen, Toyota and Mazda, and is producing some of its own-branded vehicles as well.

Shanghai and Changchun join Shenzhen which earlier announced it would provide new energy vehicle subsidies.

These are the subsidies available so far. ($1 = 6.8 RMB)

People buying pure electric vehicles in Shenzhen could get a subsidy of up to 120,000 RMB ($17,600). That approaches half the cost of an electric vehicle.

Now, if only they can find a place to plug it in...

US Senate happy to support Greentech - but not in an election year

2010-07-24T17:40:00.000-07:00

It is no secret that China’s leaders are keen on making their country into a world leader in green technology. The subsidies being provided by both central and local governments for purchase of hybrid and electric vehicles and support to companies pursuing R&D in this area have been widely reported over the past year.

Now it seems the US government is beginning to wake up to the importance of this new industry and its potential to provide, not only a cleaner environment, but jobs and tax revenue in the US. This past week, a Senate committee approved a couple of bills to support greentech, bills that, if approved, would begin to devote a serious amount of government money to support of the industry.

The first devotes $3.6 billion to promotion of plug-in hybrid technology. The bill includes, among other things, $1.5 billion to go directly to plug-in research, and a $10 million prize would go to the first person or company who demonstrates improved battery technology that will carry a vehicle 500 miles without recharging. This bill enjoys bipartisan support, including an endorsement from Lisa Murkowski, a Senator from Alaska, a state that earns a large portion of its revenue from oil extraction.

Another bill would expand a $25 billion Department of Energy program that has already lent $8.6 billion to makers of battery powered cars, and also make the funds available to makers of commercial vehicles while lifting the $25 billion cap.

While some may question the wisdom of the US government’s involvement in “picking winners”, it seems that we may no longer question whether the government sees the need to help US business gain a competitive foothold in this industry against other countries (particularly China), whose governments are heavily involved.

(And, yes, the phrase “picking winners” is still deemed by many in America to be the only words necessary to put an end to all argument as to whether the state should be involved in business – despite the lack of evidence to support the assertion that “picking winners” is, in all contexts, a bad thing. I'll have to save that idea for a future post.)

But not so fast. In the same article that informs us of these bills, we also see the concerns that Senate Leader Harry Reid may not allow these bills to come to a vote in the Senate – despite their bipartisan support – because he sees energy issues as a potentially hazardous issue to touch during an election year.

Yes, once again, politics in the US stands in the way of our elected leaders doing what they believe to be in the best interest of the country. Just once, it would be refreshing to hear our leaders say, “to hell with my re-election. I just want to do what’s right for the country.”

But perhaps that’s too much to hope for. Fortunately for China, they don’t have anything like re-election to to draw energy and money away from the more pressing matters of delivering prosperity to the people.

Well, except for all those tens of thousands of people employed to police the internet. That’s a massive waste of money. But other than that…

Well, yes, there’s also that whole parallel party structure that mirrors and oversees the entire government. But really, how much can that cost?

Ok, yes, there’s also that bureaucracy that oversees all media and censors films and books. But, other than that…

Well, yes, ok, there is the People’s Armed Police and Chengguan who are employed to keep citizens in line since the Army and the regular police, and the secret police, and the plainclothes police aren’t enough to do that.

Oh yeah, there are also all those locally-hired thugs to keep petitioners from going to Beijing, and the thugs hired in Beijing to send the petitioners home.

Oh, and I almost forgot, there’s that whole bureaucracy that oversees religions (and picks their leaders for them), making sure they don’t get out of hand.

But, honestly, aside from those few things, China really has it much better than the US. They don’t have to waste all those resources on elections.

Too bad for the US.

UPDATED-Still Lost in Translation: 垄断 ≠ Monopoly

2010-07-23T13:13:00.000-07:00

UPDATE: I have added some comments from Don Clarke of China Law Prof Blog at the bottom of this article.

Preface: My Twitter acquaintances sometimes accuse me of being pedantic, an inconvenient malady to suffer when one is restricted to 140-character soundbites. While most of this article may indeed sound overly pedantic, it has a real-world application concerning the role of foreign automakers in the Chinese market. If you read to the end, I promise it will all make sense. What you see here is the scaffolding surrounding an intellectual edifice that is still under construction. If you find this sort of thing boring, you may want to skip grad school. :-)

A few months ago, I wrote a series of posts (the first of which is here) in which I attempted to get a handle on the terms guo jin min tui and guo tui min jin. Part of the upshot was that many English speakers wrongly translated the latter term as “privatization” when in fact that was not the intention of the Chinese speakers who introduced the term. Furthermore, since the former term is the exact opposite of the latter, we translated it as “nationalization”, which was also incorrect.

Whether my dissertation will ultimately provide a better understanding of business-government relations and industrial planning in China remains to be seen. But one of the unexpected by-products of research in Chinese language documents is a discovery that, in many cases, Chinese and English speakers, even when relying on dictionaries and professional interpreters, often have very different concepts in mind for what they think is a common term.

Doesn't 垄断 mean monopoly?

The latest example is 垄断 (longduan) which is always translated as “monopoly.”

Google Translate, Babelfish and my Concise English-Chinese Chinese-English Dictionary all give the English word “monopoly” as the translation of "longduan". And, with the exception of Babelfish, they give “longduan” as the Chinese translation of of the English word "monopoly". (Babelfish, gives 独占 (duzhan) as the translation of monopoly.)

The context in which this discrepancy came up was my search for documentation of how China’s government and auto industry bureaucracy views the presence of foreign automakers in China’s market.

The first comes from a collection of essays on the auto industry written by a former Policy Research Director in China’s auto industry bureaucracy, published in 2009. This particular essay, written in 1998, was regarding the role of foreign automakers in China:

[跨国公司]最终是想在合资企业中取得资本、技术、产品、市场的控制权和垄断，已达到长期占据中国汽车大市场的战略目的。

My translation (again, assuming 垄断 means “monopoly”):

The ultimate aim of the multinational corporations (MNC) is to use joint ventures to gain capital, technology, products, market control and monopoly so as to achieve the longer term strategic purpose of occupying China’s big auto market.

This next one comes from a book published by the Ministry of Science and Technology intended to be used by government and auto industry officials and academics as a companion reference to the eleventh five-year plan. The series editor is one of the Vice Ministers of Science and Technology. It was written in 2009.

跨国公司的这一策略对我国经济发展的影响较之于单纯的股权控制更为隐藏、深入，严重削弱了国有经济的主导作用和制力，增强了跨国公司在中国市场的垄断地位。

My translation:

The impact of MNC strategy on China's economic development is hidden and much deeper than just equity control. It seriously undermines the state-owned economy and manufacturing power and enhances the MNCs' monopoly position in the Chinese market.

My first thought was, well, they simply don’t know what a monopoly is. In English, the word “monopoly” is pretty easy to understand. It comes from the Latin monopolium, mono meaning “one” and polium meaning “to sell”. It defines a situation in which a single company controls all, or nearly all, of the market for a particular product or service. In other words, the absence of competition.

But in the case of China’s auto market, there’s simply no way that any foreign company has a monopoly. First of all, the foreign automakers in China are not a unified group. There are dozens of foreign companies trying to sell cars in the China market, and competition among them is quite fierce. Second, even if the foreigners did have a unified group, foreign brands only comprised about 70 percent of passenger cars sold in 2009, down from about 80 percent in 2004.

What does it mean in Chinese?

Thinking the problem may lie, not with the word longduan, but with its translation into the word “monopoly”, I took a closer look at the Chinese word:

垄断

垄 (long) is defined as a ridge of earth dividing plots of farmland, and you can see that in the parts of the character. The top part 龙 is “dragon” and the bottom part 土 is “earth or soil”, so a 垄 is like a dragon lying in the fields dividing different plots of land. If my knowledge of Chinese history is correct, this refers to earthen walls or ridges made of stones separating one family’s plot of land from another, meaning that each family was responsible for its own plot. (In feudal China, the economic benefits derived, not to the family, of course, but to a landlord.)

断 (duan) means to break off, to sever or to judge.

Together, these two characters seem to indicate something that separates one part of something from another. What I don’t see is any meaning indicating that one party gets everything and all others get nothing. Nor do I see any indication that one party even gets most of something while others are left to share a small portion, though that could be implied -- and it might certainly describe the current situation in which foreign brands (collectively) occupy about 70 percent of China's passenger car market.

So the problem here isn’t that the Chinese don’t know what “monopoly” means; the problem is that I didn’t know what longduan means. Now that I do (and assuming my analysis isn’t way off base), I am able to read the above passages with a better understanding.

Now for the application

What these passages are lamenting is not the exclusive right to the Chinese market by a unified group of foreigners, but the fact that the foreigners have any market share at all!

The common refrain that surfaces repeatedly in official and semi-official documents is the fact that Chinese joint venture partners have learned very little from their foreign partners aside from how to assemble and sell cars. The all-important design element continues to exceed their grasp. There exists an almost palpable resentment of the fact that China has handed over market share to these foreigners without getting the technology they were expecting in return.

What’s even more amazing to me is that this complaint has been consistently aired throughout the past two-plus decades – which leads to a much more interesting question: If the lack of technology sharing has been a problem for so long, why does China continue to welcome new joint venture partners?

For the answer to that question, you’ll have to read my dissertation, but please feel free to venture a guess in the comment section below. :-)

________________________
UPDATE: I consulted with Don Clarke of the Chinese Law Prof Blog on how the term 垄断 is defined in China's anti-monopoly law.

Don says: "It is understood in Chinese legal discourse to be the Chinese equivalent of the English term "monopoly". The economic tests used in China to measure the degree of longduan in a market are similar in principle to the tests used in US antimonopoly law."

He adds further that, when we see officials using the term 垄断 as I excerpted above, they are just "misusing the Chinese word the way an American politician might misuse an American word".

In other words, don't confuse discourse for policy.

Thanks, Don, for your insight!

BYD Between a Rock and a Hard Place

2010-07-20T16:31:00.000-07:00

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.

America is rotten; China is awesome!

2010-07-15T09:00:00.000-07:00

Yesterday fellow Forbes ChinaTracker writer, Ray Kwong posted a summary of a shocking Computerworld article on the Forbes China Tracker site. Computerworld, a publication not exactly renowned for its expertise on China breathlessly exclaims that China is getting ready to clean America's technological clock. China's education system is producing far more engineering graduates than the US, and China's leaders are fully engaged in making China into a future technological powerhouse.

While the article was fact-based, I think its conclusions were way overdrawn.

This is very much an issue of quality vs quantity. I spent two years teaching at universities in China, and I continue to maintain close touch with the academic community there. While China is indeed turning out math and science whizzes up through high school level (the average middle schooler can plot the trajectory of a non-guided missile), nothing is being done to nurture the kind of creative and critical thinking that produces innovation.

Furthermore, among the engineers earning degrees in China, very few of them have a passion for what they are learning. It doesn't bother me that a relative handful of students in the US are choosing the sciences as long as the vast majority of these students love what they're doing and eventually find their ways to Silicon Valley, Austin, TX or other similar clusters of talent. Again, this is where the innovation comes from.

On the other hand, I think the Computerworld article may have been intended somewhat as hyperbole to shock our leaders into action, and I am pretty sure this was Ray's intention in excerpting the article. If at least one leader in Washington gets the message regarding the vital importance of education quality in the US, this can't be a bad thing, right?

_________________
UPDATE: It looks like Dan Harris, keeper of ChinaLawBlog, was also moved to comment on the Computerworld article. He makes some really good points that I hadn't considered, so take a look if this topic interests you. Also check out the vigorous discussion going on in the comment section there.

Shenzhen Subsidies, US-China Acquisition, EV Policy

2010-07-13T10:38:00.000-07:00

Three important stories in the China electric vehicle world. The first one is a Local BizGov story...

Shenzhen's new EV subsidies

A little over a month ago, Beijing announced a pilot plan for new energy vehicle subsidies in five Chinese cities, one of which is Shenzhen. In short, the plan calls for subsidies of up to 50,000 yuan for plug-in hybrids and up to 60,000 yuan for pure electric vehicles.

Shenzhen, home of battery and auto manufacturer BYD, has also announced its own subsidies to be added to those from Beijing. Shenzhen will provided subsidies of up to 30,000 yuan for plug-in hybrids and up to 60,000 yuan for pure electrics.

With total subsidies of up to 80,000 yuan ($11,800) for a plug-in hybrid or 120,000 yuan ($17,700) for a pure electric vehicle, these still experimental cars are reaching a price point where early adopters in China would be willing to consider them.

And Shenzhen wins brownie points: from Beijing for supporting low- or zero-emission vehicles, and from BYD who will, it is hoped, build more cars, employ more people and pay more taxes.

If there is another city in the world where new energy vehicles are more affordable than they are in Shenzhen, I am not aware of it.

US-China Acquisition

Santa Rosa, California based ZAP Motors (a company you've probably never heard of) has just signed an agreement to acquire 51 percent of Taizhou based Zhejiang Jonway Automobile for about $28 million in cash.

Yes, you read that right. This is not a joint venture; it's an acquisition.

ZAP, which has been in operation since 1994, has, until recently made electric vehicles designed for off-road use in such places as airports, military bases, large factories, etc. It gained some recognition by showing this futuristic electric car, the Alias at Beijing's Auto Show a few months ago.

And this is no mere concept car. Apparently ZAP had already (pre-acquisition) contracted with Jonway Auto to build the Alias with current plans to introduce it in the US later in 2010.

Jonway Auto is (or will be until this acquisition takes place) owned by Jonway Group which manufactures cars and motorcycles. I am unable to determine who owns Jonway Group, but due to its location in Taizhou, I think it is a pretty good bet that the company is private. And the fact that a foreign company is about to buy a majority stake in one of its subsidiaries is also a good indication that Jonway is most likely not state-owned. (Then again, the difference between public and private is still quite blurry in China.)

Even more interesting is the fact that Jonway has been quite profitable while ZAP, which reportedly hasn't earned a profit since 2002, has only recently emerged from bankruptcy.

On second thought, I'm quite certain Jonway isn't state-owned.

China's new energy vehicle policy is on the way

And finally, Dong Yang, secretary general of the China Association of Automobile Manufacturers announced that a policy on new energy vehicles is in the works and will probably be released in September or October.

About those subsidies I mentioned above, well, China is apparently just getting started. We can expect to see a more comprehensive plan laid out this fall with details on how China intends to dominate this space -- globally. Among other things we can probably expect to see further incentives for auto companies to conduct R&D in this area and further plans for rollout of charging stations.

The lines are being drawn In the global battle to dominate alternative energy vehicle manufacturing. We could not ask for a better real-life experiment to compare the results of state-led vs market-led capitalism.

Anshan's proposed investment in US: are we OK with this?

2010-07-07T07:58:00.000-07:00

A couple of days ago, news surfaced that Anshan Iron and Steel, one of the largest steel manufacturers in China intends to purchase a 20 percent stake in a near-bankrupt Mississippi steel mill. I say "surfaced" because the actual decision to pursue this investment apparently came in May, but for whatever reason never made the news in the US.

As would be expected, the Congressional Steel Caucus, a group of about 50 US lawmakers who are advocates of the US steel industry, raised objections to the proposed investment. These objections are similar to those raised by CNOOC's proposed takeover of Unocal back in 2005, so there is really nothing new here. The requisite "national security" implications are raised. And there is little doubt that the Steel Caucus's "investigation" will recommend against allowing this investment to happen.

Of course, the Steel Caucus can only make a recommendation; it does not have the final word, so it is not inconceivable that the investment could happen anyway. After all, a 20 percent stake is not a controlling stake, right? And even if it were, Anshan is just like any other profit-seeking business, right?

To address the first question, the answer is that we cannot always be certain whether 20 percent is a controlling stake. That really depends on who the other shareholders are and how large their stakes are. According to the Wall Street Journal, the Mississippi plant in question is owned by a private company, the Steel Development Co., which, according to its website is owned by "institutional investment firms headquartered in the United States, as well as [its] management group." So I think it is reasonable to assume that Anshan's proposed 20 percent stake would not be a controlling stake.

As for the question of whether Anshan is a profit-seeking business, the short answer is, yes, except for when it is not.

Beijing-based lawyer and blogger, Stan Abrams, posted a funny, and partially tongue-in-cheek, article today essentially making fun of the Congressional Steel Caucus's knee-jerk commie baiting (my term, not Stan's). While I largely agree with Stan's conclusion, I have to wonder whether the fact that Anshan is a state-owned enterprise is a significant factor that deserves further scrutiny.

Stan says (again, tongue-in-cheek):

Everyone knows that the company is controlled by China’s Assets Supervision Commission of the State Council (SASAC), which means that the company is merely a tool of the Communist Party. With all of those subsidies, Anshan is definitely up to no good.

Well, let's take this apart. First of all, I think we can be sure that not "everyone knows" this. Whether they should remains to be seen. Second, yes, Anshan is indeed owned by SASAC, the arm of the State Council that holds the shares of China's largest state-owned enterprises.

Third, while Anshan isn't "merely" a tool of the Communist Party (it is also other things), it is nevertheless a tool of the Communist Party. Anshan is 67 percent owned by SASAC, which doesn't necessarily make it a tool of the Communist Party -- until you take a closer look. The senior management of SASAC-owned companies, including Anshan, are appointed, not by their Boards of Directors, not by SASAC, not by the State Council, but by the Politburo of the Chinese Communist Party. (Richard McGregor's new book documents much of this. It's also a great read. McGregor explains some of this in an interview here on the China Beat.)

I also found it interesting that Qi Xiangdong, Deputy Secretary General of the Chinese Iron and Steel Association seemed to bend over backward to try to redefine what "state-owned" means:

"A market-economy country like the U.S. shouldn't make administrative intervention to corporate behavior," Mr. Qi said. "Western countries still have a stereotype of [Chinese] state-owned enterprises. ...Anshan Iron is a listed company, and not a Chinese state-owned enterprise in the traditional sense." (WSJ, 5 July 2010)

Setting aside the irony that the king of state interventionist governments would lecture the US about what a market economy is, it is extremely disingenuous of Mr. Qi to suggest that a company that is 67 percent owned by the government is not state-owned. If I were a conspiracy theorist, which I'm not, I might begin to suspect that there is a Chinese plot to redefine English language words such as state-owned, democracy, rule-of-law, etc., so as to confuse their foreign detractors.

What about "all of those subsidies"? Well, since Anshan is indeed a state-owned enterprise, we can be certain that, at some point in the past, and probably at some point in the future, Anshan will benefit from government subsidies. Part of the reason for continued government control of major enterprises in China is fear of instability that would be caused by massive layoffs if these giant firms were to go bankrupt. As long as any company is in state hands, that's not a problem. Anshan is "blessed" with a soft budget constraint, and they know it.

Is Anshan "up to no good"? Probably not, though when it comes to the murky world of Chinese state-owned enterprises, nothing can be said with all certainty. Anshan's external shareholders, a diffuse group of individuals and institutions who collectively own only 33 percent of Anshan's shares, have no say in what the company does. Anshan is part of a large group company, and there is absolutely zero visibility into the operations or financial statements of the unlisted entities. It may also give us pause that a Chinese official stretches reason in order to declare Anshan not to be a state-owned enterprise when it clearly is.

So while Anshan is probably just looking for a good investment in a business that it already knows, without visibility into the rest of Anshan's dealings, its leadership, its true controlling owners (i.e. the Politburo), we cannot be absolutely certain.

So are we OK with this investment?

Yeah, why not? Let the folks in Mississippi take Anshan's money. When it comes to the power of the Chinese state, it pretty much stops at the borders of the United States. Once Chinese money and people enter the US, they are subject to rule-of-law. And while the Chinese may wish to redefine what that term means within their own borders, they will find US courts quite unsympathetic to any attempts to do so elsewhere.

Ownership doesn't matter. Winning does.

2010-07-01T10:28:00.000-07:00

China is well-known for state direction of the economy, and China itself doesn't really try to hide the fact that its most important industries are dominated by state-owned enterprises. Among these industries are airlines, telecoms, banking, finance, steel, mining, shipping, petroleum and, yes, automobiles.

Consumer Subsidies for energy-saving cars

In yesterday's post, I noted that a good mix of Chinese and foreign auto companies sell "energy-saving" cars that are eligible for consumer subsidies of 3,000 yuan per car. Curiously though, the best selling small sedan in China, BYD's F3, doesn't appear on the list.

I am not sure about the reasoning behind this oversight, but I would be hesitant to read too much into it. Despite the fact that it is privately owned, BYD appears to have attracted the favorable attention of the central government. The list (Chinese pdf) of subsidy-eligible cars is identified as a first cut (第一批), so perhaps the F3 will appear on the second cut.

As I mentioned yesterday, China's "new energy vehicle" (NEV) policy calls for consumer subsidies of up to 50K yuan for plug-in hybrids and up to 60K yuan for pure electric vehicles. (The subsidies are calculated based on a formula of 3,000 yuan per kilowatt hour of battery pack capacity.)

Beijing Likes BYD

What is interesting about this distinction in vehicle types is that there is (to my knowledge) only one company in all of China manufacturing a plug-in hybrid: BYD. The only other plug-in hybrids slated to be sold in China are the Chevrolet Volt, which will be imported and, therefore, doesn't qualify, and the next generation Toyota Prius which will have a gasoline engine too large to qualify for subsidies.

So it appears that Beijing has handed BYD a nice little gift by creating a special subsidy category for its F3DM plug-in hybrid -- which would be really nice if BYD had any intention of taking advantage of it. According to BYD's Assistant General Manager, Wang Jianjun, at the beginning of the year BYD had planned to build only 1,000 "new energy vehicles" (NEVs). Now that the subsidies have been announced, there has been no change in plans. BYD still plans to build only 1,000 new energy vehicles in 2010, according to Wang.

This strikes me as a little odd. Just last fall, BYD CEO, Wang Chuanfu was quite vocal in his disappointment that Beijing had yet to announce subsidies for NEVs. He stated at a conference that BYD could not build more of these cars until the company had an idea of how much the subsidies would be.

Well, now they know. So 1) why aren't they ramping up production?, and 2) why are they so publicly announcing that they aren't ramping up production? This would seem to be an ungrateful reaction to help being offered by the central government, and I could only speculate as to the reason.

Not only has the central government created a category to subsidize cars that BYD no longer seems inclined to produce, but late last year, BYD was extended a 15 billion yuan ($2.2B) credit line by state-owned Bank of China.

This move was a little unusual as China's banks are traditionally hesitant to lend to private companies. Lending to SOEs is easy. If anything goes wrong with a loan to an SOE, the banker has political cover, but if a private firm were to fail to repay a loan, the banker may find his job on the line. My assumption (and I have no way to confirm this) is that someone in Beijing provided the political cover needed for Bank of China to grant this loan to BYD.

So why all the favorable attention from Beijing for this apparently ungrateful, privately-owned upstart from Shenzhen?

It's all about winning

Put simply, China intends to dominate the global auto market, and its concern is not that state-owned firms lead the way, but that Chinese firms lead the way. While this is no guarantee that, at some point, China's unaccountable Communist Party wouldn't decide to nationalize everything, for the moment, China sees value in what the private sector brings to its auto industry. And BYD, ungrateful or not, continues to push the envelope in terms of NEV technology as well as peripheral technologies like solar power and storage solutions.

Follow the Policy

By looking at China's recent NEV policy announcements, it is easy to see where China's priorities lie with respect to its auto industry.

The 3,000 yuan subsidy for energy-saving vehicles does not discriminate between Chinese or foreign brands (see yesterday's post). This indicates that China's short-term interest is in conserving fuel and pumping less CO2 into the atmosphere.

The 50-60K yuan subsidies for plug-in hybrids and pure electric vehicles indicate that China intends for Chinese companies to have a significant global market share in the auto market of the future.

Only time will tell whether Beijing's decision to pick the winning technology is more effective than those of other countries allowing the market a little more of a say in which technologies come out on top.

China Auto Subsidies: Who's on the List? Who's Not?

2010-07-01T08:26:00.000-07:00

A month ago, China announced subsidies to support sales of "new energy vehicles" and energy-saving vehicles. Yesterday, the government released a list of cars approved for subsidies under the "energy-saving" category. The list is interesting, not because of whose cars are on the list, but because of whose cars are not on the list.

"New energy vehicles", in this case, include both plug-in hybrids and pure electric vehicles. The former are eligible for a subsidy of up to 50,000 yuan and the latter of up to 60,000 yuan. Note that traditional hybrids of the non-plug-in variety are not included here.

"Energy-saving" vehicles have traditional internal combustion engines, but the engines must have a displacement of 1.6 liters or less. Readers may remember that early in 2009, China's government announced a 50 percent tax break to be applied to all cars with engines 1.6 liters or less.

The sales tax on these cars was decreased from 10 percent to five percent, and it led to a significant increase in sales of small cars, which further drove China's annual sales to eclipse those of the US for the first time ever. (Though, admittedly, this was helped by a steep drop-off in US sales due to the recession.) The biggest selling car in China last year was BYD's F3, a gasoline powered Toyota Corolla lookalike with a small engine.

Toward the end of 2010, the small car tax break was cut in half (tax increased from 5% to 7.5%), and extended for a few more months as part of China's stimulus plan. Now that the tax break has ended, the government has resorted to a one-time subsidy of 3,000 yuan that basically accomplishes the same task of encouraging sales of fuel-efficient cars.

Detailed List of 71 Models

Yesterday, the NDRC released a list of cars eligible for the 3K subsidy. There are 71 specific models from 16 companies, all with engines of 1.6 liters or less. (I won't list all of the cars here; the complete list can be found in this Chinese pdf.)

Before seeing the list, my expectation would have been that the number of Chinese-branded models would exceed those of foreign-branded models, but that is not the case. Among the 71 listed models, 32 are Chinese and 39 are foreign.

Why does this surprise me? Because when the tax break was enacted over a year ago, the government's intention was to pick a cutoff point (1.6 liters) at which Chinese brands would most benefit. According to research shown to me by an auto industry executive in Shanghai, cutoffs of 1.5 liters or 1.7 liters would not have benefited independent Chinese brands as much as the 1.6 liter cutoff. The executive's research estimated that, at the 1.6 liter cutoff, approximately 85 percent of sales were of Chinese brands.

And indeed, as the tax break was announced last year, many commentators pointed out that the foreign manufacturers had been caught flat-footed because they offered few cars that qualified for the tax break.

Well, apparently that has changed. The list now has 17 different model variations made by Shanghai GM (SAIC-GM) alone.

Because there has apparently been a crackdown in reporting on actual monthly sales numbers from China, I now have difficulty getting my hands on sales data. (Apparently someone figured out they could charge money for the data.) If I could, it would be easy to determine just how many of each of these 71 models has been sold in recent months to see who would be benefiting the most. Perhaps the numbers of Chinese vs foreign models would matter less than the absolute numbers of vehicles being sold.

Who's Not on the List

And one would assume that China's hottest selling sedan, the BYD F3 would ensure that most of this subsidy money would flow to Chinese brands. There's just one problem with that reasoning: the F3 is not on the list!

I'm not sure whether this was an oversight, but the only BYD model on the list is the F0, a car small enough to pick up and put in your pocket.

Who else isn't on the list? Toyota, Nissan, Ford, Mazda. Each of these companies makes cars in the 1.6 liter and below segment, but none of these is on the list.

And poor Toyota, the company that brought the world the first production hybrid, the Prius, doesn't appear to offer any car in China that is eligible for any kind of subsidy. Its small cars like the Yaris didn't make the 3K subsidy list, and its Prius won't qualify for the 50K hybrid subsidy because it isn't of the plug-in variety. Its next generation Prius, which will be a plug-in hybrid, won't qualify either because its gasoline engine is being upgraded from 1.5 liters to 1.8. Can these guys not catch a break in China?

I would suspect an anti-Japanese sentiment here, but the 3K subsidy list does have other Japanese-branded cars from Guangzhou Honda and Chang'an Suzuki.

There's another surprising wrinkle in China's new energy vehicle policy, and it concerns BYD. More on that tomorrow...

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Edit: The guys at China Car Times have put up an English list of models eligible for the 3K subsidy here.

A National Disgrace

2010-06-17T17:12:00.001-07:00

American politics is not the normal purview of this blog, but today I will make an exception.

This afternoon, Eric Garland posted this video clip on Twitter. It's a seven minute clip from The Daily Show in which Jon Stewart lambastes the last eight American Presidents for their empty words about "independence from foreign oil".

While it is classic Jon Stewart humor, it's also very sad. But I'm not sure which is sadder: the content of the video, or the fact that such an important statement has to come from a comedy program.

Lest we blame all of this on the President, there are another 535 parasites on Capitol Hill who bear just as much responsibility.

So enjoy the video, but if you're an American citizen, please think long and hard about who gets your vote this fall.

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Beijing's Promotion of EVs: Global, not Local

2010-06-10T12:56:00.001-07:00

Yang Jian, Managing Editor of Automotive News China, has a great commentary today entitled "Beijing's real goal in promoting electric vehicles" (free registration required to read -- and it's worth the trouble!).

Yang says:

The central government's real goal is to help key domestic automakers leapfrog their foreign competitors in the race to develop advanced powertrains.

In other words, this is not about getting Chinese consumers into electric vehicles. It's about pushing Chinese automakers -- both private and SOE -- to become global players in the rush to develop the newest green technologies.

The cities chosen for the electric vehicle subsidy pilot (as I referenced here recently) were chosen because their local automakers were deemed by the central government to be closest to having marketable electric or hybrid cars. The whole point of the subsidies is to give local automakers in these cities (Shanghai, Changchun, Shenzhen, Hangzhou and Hefei) enough test subjects to carry out credible testing of their technologies.

I agree 100 percent with Yang Jian's views. China's goal with new energy vehicle technology is not about getting Chinese consumers into EVs; it's about getting people all over the world into Chinese EVs.

The Missing Element in China Labor Issues

2010-06-09T14:18:00.000-07:00

Recent news has been full of accounts of dissatisfied workers in China. First, there was the string of suicides among workers at the massive Taiwan-owned Foxconn factory in southern China. Then there were the strikes against Japanese-owned Honda auto parts factories. Now it seems that worker unrest has spread north to another Taiwan-owned factory in Kunshan, Jiangsu province.

Not being much of an expert in labor issues, I have largely avoided comment on this issue while watching the labor experts analyze the minutiae of management-labor relations, rising wages and their potential impact on China's manufacturing base.

The one issue I have yet to see highlighted is the fact that, so far, all of these suicides, strikes, etc., have occurred at foreign-owned or controlled companies. China's state-owned enterprises have (thus far) remained unscathed by what looks like a trend of worker dissatisfaction.

Do SOEs treat their workers better than foreign companies? Do they pay their workers better? Or have the SOEs simply been lucky so far?

A China-Indiana Connection for New Energy Vehicles

2010-06-02T17:02:00.000-07:00

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.

Business-Academia Partnerships

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.

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Disclosure: The author's travel to Indianapolis was paid for by Ener1, Inc.

Consumer New Energy Vehicle Subsidy Pilot Announced

2010-06-01T11:26:00.001-07:00

Finally, it's official. After months of speculation, China's Finance Ministry released a statement on its website confirming consumer subsidies for purchases of "new energy vehicles" (statement can be found here, in Chinese). The announcement was made jointly by the Finance Ministry, the Ministry of Science and Technology, the Ministry of Industry and Information Technology and the National Reform and Development Commission.

The subsidy will be implemented first as a pilot in only five cities: Shanghai, Changchun, Shenzhen, Hangzhou and Hefei. Consumers will be able to apply for subsidies of up to 50,000 RMB for a plug-in hybrid or up to 60,000 for a pure electric vehicle. But these amounts are only ceilings. The subsidy will be calculated based upon the kilowatt hour capacity of the battery in each vehicle, 3,000 RMB per kilowatt hour.

Based on this calculation, the BYD F3DM plug-in hybrid with its 13.2kwh battery would be eligible for a subsidy of up to 39,600 RMB. BYD's E6 pure electric with its 48kwh battery would be eligible for the maximum subsidy of 60,000 RMB. (The Finance Ministry was not specific about how the calculation would be made, so these are only my estimates.)

The announcement also says that, after each respective auto company sells 50,000 subsidy-eligible cars, the amount of the subsidy given for that company's cars will be lowered. That seems to make this a very open-ended program as practically every major auto company in China is working on new energy vehicles. The Financial Times reports that the subsidy would be limited to only 50,000 cars total -- which would make more sense, but that's not what the announcement says. I'll let readers of Chinese be the judge of my translation of the following:

每家企业销售的插电式混合动力和纯电动乘用车分别达到5万辆的规模后，中央财政将适当降低补贴标准。

Also of particular interest is the cities chosen by Beijing (and the fact that Beijing isn't one of them). Shanghai, Changchun and Hefei have the headquarters of Shanghai Auto, First Auto Works and Jianghuai (and Chery in nearby Wuhu), respectively -- each a state-owned enterprise. Shenzhen and Hangzhou have the headquarters of BYD and Geely -- both private enterprises.

This is interesting because locally-headquartered auto companies tend to dominate local auto markets. Local governments do their best to ensure this. There are other companies aside from those listed above who are working on new energy vehicles, and while they are probably disappointed that their respective cities were not chosen for the pilot, they are probably now considering how to sell more of their vehicles in the pilot cities.

The announcement also said that the central government would provide funds to the pilot cities for building out the necessary infrastructure to support these cars.

How to Succeed in Tech Without Really Trying

2010-05-23T08:20:00.001-07:00

Okay, perhaps that isn't a completely fair characterization of BYD's business, but the Buffet factor looms large over BYD's shareholder returns since he invested.

Bloomberg BusinessWeek released its annual Tech 100 list, and look who's on top: BYD -- listed above such tech giants as Apple, Amazon and Google. And with revenue growth of 50 percent and shareholder return of an astounding 246 percent, it's no wonder that BYD tops the list. Apple, Amazon and Google, while performing well, can only dream of such growth in their much larger revenue bases.

So BusinessWeek's list would then appear to be biased in favor of smaller companies. Still, we shouldn't be surprised to see a company known for the world's first production plug-in hybrid (the F3DM) and an electric car that can go 190 miles on a charge (the E6) find a spot at the top of the list. Given the world's passionate search for alternatives to the internal combustion engine, cars such as these must be flying off the lots, right?

According to BusinessWeek's list, BYD had revenue of $5.8 billion in 2009. According to BYD's 2009 Annual Report, 53 percent of that revenue came from automobiles (the other 47 percent from the manufacture of batteries and mobile phone handsets). So BYD must have sold over $3 billion worth of "new energy vehicles", right?

Not even close.

So far, the F3DM plug-in hybrid has been used extensively by taxi and government fleets in BYD's native Shenzhen, but just last week, BYD revealed that so far, only 13 F3DMs have been bought by individual consumers in China. That's 13. Not 13 million or even 13,000. Just 13.

In all fairness, Chinese consumers are probably waiting around for the government to announce how much its subsidies will be for "new energy vehicles" before they start to buy the F3DM en masse.

What about the E6 electric car? So far, about 40 of these have gone into service as taxis in Shenzhen, but none have been sold to consumers. (Though BYD plans to introduce the E6 in the US later this year.)

So where did BYD's $3.1 billion in revenue from automobile sales come from? Traditional gasoline powered cars. BYD's F3 -- the gasoline powered version of the F3DM -- was the single best selling sedan in China last year.

The company at the top of BusinessWeek's Tech 100 list still makes the bulk of its revenue from selling very old, very polluting technology. Its other two revenue sources, handsets and batteries, are really nothing unique. Dozens of other companies from Nokia to Motorola to Samsung crank out the same thing at much higher volumes.

While BYD's revenue and profit growth are real, how can we justify their 246 percent shareholder return in 2009? Two words: Warren Buffet.

When someone with the stature of Warren Buffet buys a stock, this is a clear signal to the markets that the underlying company is worth a serious look. In the case of BYD, Warren Buffet and his team have evaluated the technology of BYD and see tremendous future value, so while that value has yet to materialize in terms of actual customers buying actual high-tech cars, BYD's stock is a bet on that future.

Unfortunately, given the 246 percent return over the past year, we can probably assume that much of BYD's future possibilities are already baked in to the stock price. If you aren't already on board, it's probably too late.

Public-Private Partnership Introduces Electric Taxis in Shenzhen

2010-05-18T11:04:00.000-07:00

BYD, a private, Hong Kong listed, automaker based in Shenzhen, announced Monday (17 May) it had put 40 all electric taxis into service in the city of Shenzhen.

The taxi is BYD's E6 model, a cross-over vehicle with a lithium-ion battery that, according to BYD will travel up to 300 km (186 mi) on a single charge. By comparison, Nissan's Leaf all-electric vehicle is expected to travel about 100 miles on a single charge. This is also the model with which BYD plans to make its entrance into the North American market later this year.

BYD expects to have as many as 100 E6 taxis plying the streets of Shenzhen by the end of June.

These taxis are being operated by Pengcheng Electric Taxi Company, a joint venture between BYD and the Shenzhen Bus Group (SBG).

Shenzhen Bus Group is a large operator of bus lines, taxis, and related businesses in the southern Guangdong region. Its largest shareholder (55 percent) is the Shenzhen City SASAC (State-owned Assets Supervision and Administration Commission). In other words, BYD's partner in this joint venture is none other than the city government of Shenzhen.

I recently asked a former BYD employee to describe BYD's relationship with the local government, to which he replied, "feichang, feichang, feichang hao (very, very, very good). Without local government support, it would be hard for BYD to have any success. Wang Chuanfu (BYD's CEO) devotes a lot of time to nurturing this relationship. BYD's relationships with the Xi'an government (where BYD's first auto factory is located) are also feichang, feichang, feichang zhongyao (very, very, very important)."

This blurring of the lines between public and private is not that unusual in China. In fact, no auto company would survive long outside the influence of its respective local government. Though a local state-owned automaker would be expected to have a close relationship with its owner, a privately owned automaker's relationship with the local government is nearly as close.

Because BYD's E6 costs the equivalent of about US$40,000, and because the technology is still fairly new and untested -- and because taxis drivers tend to drive their vehicles far more aggressively than the average driver -- one might guess that this joint venture between BYD and the City of Shenzhen will lose money for the foreseeable future. But this is where the public-private partnership proves to be a win-win.

BYD gets to test its vehicles in real-world conditions and gather a lot of data for improvements. Shenzhen gets publicity for its support of green technology and recognition from Beijing for supporting a company on the forefront of carrying out Beijing's policy for electric vehicles.

And this kind of partnership isn't unique to China. I recently spoke with Mark Perry, VP at Nissan USA, who told me that Nissan is also working with various local governments in the US to provide some of the infrastructure necessary to support electric vehicles in their cities.

Shanzhai Electric Cars in China

2010-05-05T14:31:00.000-07:00

Last December, my friend Charlie and I visited the factory and headquarters of Great Wall Motors, located in Baoding, Hebei Province, about an hour's train ride south of Beijing.

While the factory visit and interviews I conducted on-site were very interesting and informative, the Great Wall people were understandably concerned about security. I wasn't able to take many pictures except for a few of their crash test course, which, at 250 meters is the longest in China.

After our time at Great Wall, Charlie and I returned to the train station at Baoding for our trip back to Beijing. Since we had about an hour to kill before our departure time, we decided to take a stroll around the train station.

Here we encountered an unexpected sight: a small store selling electric vehicles (电动轿车).

We learned that these small, nondescript cars are assembled in Shandong Province. They run on an array of traditional lead-acid car batteries. The salesman lifted the rear seat of the neon-green car revealing four linked batteries, and he said there are another six under the hood, for a total of 10. (Notice also how the door molding on the green car above doesn't quite meet between the front and rear doors.)

The cars he had for sale on the lot retailed for 16,800 to 29,800 yuan ($2,500 - $4,440), but he said he typically gave discounts. The setup is pretty basic: a car with a radio, the necessary lighting and windshield wipers. No heater or air conditioner.

He told us that these cars did not require a license to be driven on the road in Baoding, but that, without the license plates, it would be illegal to drive them outside the city. I didn't pursue this observation, but it seems to me that, without some kind of "agreement" with the local government, these cars should also be illegal to drive in Baoding. China's MIIT (the Central Govt) produces a quarterly catalogue with the names of every car approved for driving on China's roads. If a car isn't listed there (and these shanzhai electric cars most certainly aren't), they cannot be issued a license.

The friendly salesman offered to take us for a quick spin in one of his cars. Below is a video taken during part of our ride. The car was very quiet, and it took off pretty quickly when he hit the accelerator, but you'll also notice a lot of rattling when we hit bumps in the road.

On Democracy, Authoritarianism and School Violence

2010-04-30T16:51:00.000-07:00

Democracy has a well-documented downside: an irresistible urge to vote oneself a share of the spoils disproportionate to one’s economic contribution.

Of course, the wealthy in any society have a stronger voice because of their wealth, and they naturally fight increasing redistribution of income. But in truly representative democracies, there will always be at least one political party whose major claim is to fight for the rights of the poor, the powerless, the downtrodden – basically, everyone who would like a greater share in their nation’s wealth. And in a truly representative democracy, that party occasionally – and in some cases, frequently – wins elections.

Perhaps this is why China continues to so vehemently reject any variant of what they term “Western-style” democracy. With a massive population, only a small sliver of whom have truly benefited from China’s experiments with markets and capitalism, China’s leaders are concerned with how the poor would handle the potential ability to vote themselves a massive redistribution of income. They are also concerned about maintaining the support of the co-opted bourgeoisie who seem content to keep their mouths shut as long as they have opportunities to increase their riches. As study after study have demonstrated, China’s wealthy are not interested in agitating for democracy.

Indeed, this is the single most common argument you will hear from average Chinese citizens about why democracy is not appropriate – not yet anyway. Try this. Go to China and ask any Chinese why China doesn’t have democracy. Nine out of ten people will tell you it is because China has too many poor and uneducated people who are incapable of making informed decisions. (To which I often respond, “Oh, like California?” – which, for me, has been a very enlightening revelation in and of itself.)

The Chinese path of partial economic reform, combined with practically no political reform, has produced some astounding results when viewed in aggregate. China’s 30-year average of double-digit economic growth is unprecedented. Deng Xiaoping’s market reforms have lifted hundreds of millions of people out of poverty – more than ever before in human history.

Given this astounding feat, is it any wonder then, that developing country dictators find China’s model to be far more palatable than constant Western harassment to clean up their governments and democratize in exchange for aid?

While the China model draws increasing interest from among poor developing countries, we increasingly see discontent bubbling up from China’s “poor and uneducated” population. The increasing number of public demonstrations is an open secret in China. The citizens of thousands of local communities have felt the need to gather in large numbers to counter what they perceive to be the capricious and unchecked power of local officials.

Lately, we have also seen a rash of school attacks in China. At the risk of reading too much into this situation, I would like to suggest that these are further symptoms of disappointment among China’s lower classes due to their powerlessness. If this were simply a matter of mental illness, as some observers have suggested, then why aren’t the mentally ill stabbing children worldwide? Why is this happening in China, and why now? And even if most of these are copycat incidents (and I believe that is the case) just how bad do things have to get before people start to think that killing children is an effective strategy for calling attention to injustice?

Since Hu Jintao and Wen Jiabao ascended to power in 2002, their concern for China’s common people has been quite visible. They chose to divert the Party’s sole focus away from getting the wealthy on-board toward getting the poor on-board as well, and some tangible results prove their dedication to this goal. However, despite all their efforts to shore up support among China’s poor, the number, frequency and intensity of demonstrations and protests in China continues to grow.

While the notion that democracies eventually vote for redistribution may be true, it doesn’t begin to address the real issue. Perhaps the hypothesis should be broadened to include the poor in any society – from democratic to fully authoritarian. Perhaps the idea is that poor people in any society eventually grow tired of their lack of opportunity and will resort to whatever means they have available to make their voices heard.

In democracies, the poor vote for redistribution and only occasionally demonstrate. In authoritarian countries, they frequently protest and demonstrate, and when those options seem no longer to get enough attention, some may resort to even more drastic means to get their points across.

The purely democratic option is beginning to seem unsustainable over the long term – for proof of this, we need look no further than California where direct democracy has allowed voters to tie government’s hands to such an extent that the state is ungovernable. But the authoritarian option, while it has allowed China’s leaders the freedom to experiment and develop the economy, has also failed to satisfy those at the bottom rungs of society.

Maybe it is time people in all countries begin to take an honest look at the political sustainability of their systems.

Is democracy nothing more than a 250-year march toward excess and disincentive? Does authoritarianism sow the seeds of its ultimate destruction by suppressing freedom? Is there a mode of governance somewhere in the middle that gives the poor an honest shot at improving their lives while simultaneously giving the rich a stake in the success of the poor?

The rich are going to get rich. That’s what they do when provided with a system that allows them to do so. Most of the rich, I believe, don’t hate the poor; they simply see the poor as unwilling to work hard or to educate themselves to a level that would allow them similar achievements.

But what if, in addition to all of the necessary elements such as relatively free markets, relatively low tax burdens, and solid property rights, the state were also to provide the rich with a stake in the future of poor people?

Our current systems – both Chinese and Western – offer the rich a stake in the existence of the poor: the poor work themselves to death for a minimal wage so the rich get richer. It’s a great system – if you happen to be on the right side of that equation.

But what if our systems, instead of offering the rich a stake in the existence of the poor, offered them a stake in the success of the poor? What would that look like?

The problem in the US is that we have two parties whose interests lie ostensibly with these two groups: the Democrats support the poor and the Republicans support the rich (while both claim to support the middle class).

In China, there is one party who claim to represent everyone, but who will only allow a select few to become members. Still, the fact that both rich and poor have been allowed to join is at least a tacit recognition of the importance of both segments of society for the continued reign of the Communist Party.

The truth, regardless of whether we are talking about the democratic West or authoritarian China, is that the lives of the rich and the poor are more intertwined than many are willing to recognize. The rich could not become rich if there were not millions of poor and middle class toiling away in the trenches of business day-in and day-out. The poor and middle class could not make a living if not for the capital investments of the rich that create the businesses for which they toil.

China’s Marxist-Leninist model clearly didn’t work. While it took aim at the right problem, the gap between the rich and the poor, its solution offered no incentive for innovation and made everyone equally poor. Its semi-capitalist model, while a vast improvement, doesn’t seem to be working very well either; now that China is more than thirty years into its capitalist reforms, the rich-poor gap is wider than ever and growing wider by the day.

Which brings the discussion back around to China’s recent school violence. Perhaps foreigners who are getting all hung up on China’s ban of media reporting about the school stabbing incidents have directed their disdain at the wrong problem. Clearly, there is an issue of copycatting going on, and China’s government is right to want to prevent other similarly disaffected people from getting any ideas.

The problem that foreigners – or indeed anyone, especially China’s government – should be focused on is not media coverage, but the root cause(s) of these incidents. How can China’s poor be given greater hope, greater opportunity and a larger voice in society?

If the answer to this question is “more of the same”, then we should not be surprised to see China’s trend of violence continue to escalate. Whether through democracy, or by some other means, China’s leaders have to figure out how to give their most successful citizens a stake in the future success of the poor.

When will China decide to subsidize electric vehicles?

2010-04-27T17:15:00.000-07:00

Without government subsidies, hybrid and electric vehicles are a hard sell for the average American consumer. Not surprisingly, this would also appear to be the case in China. Toyota has so far managed to sell only a few hundred Priuses per year in China. Perhaps this is due to its tariff-laden sticker price, the equivalent of about US$41,000.

Given the uncertainty of future demand for these vehicles in China, it is not surprising that few foreign manufacturers are willing to import these vehicles or their parts (which are still subject to WTO-allowed import tariffs) for sale in China.

China’s “New Energy” Vehicle Manufacturers

China also has a few home-grown manufacturers of “new energy” vehicles, a category that encompasses hybrids, plug-in hybrids, pure electric vehicles and fuel cell vehicles. The most well-known outside of China is BYD, a Shenzhen automaker with roots in the manufacture of batteries and mobile phone handsets.

BYD captured attention over a year ago when Warren Buffet’s Mid-American Energy, a Berkshire Hathaway subsidiary, invested over $200 million for about ten percent of the Hong Kong listed company. BYD has a couple of “new energy” offerings.

The F3DM, a plug-in hybrid, though announced to the public in December of 2008 was just last month finally made available for consumers to buy.

BYD’s E6, a pure electric vehicle will reportedly be tested as part of Shenzhen’s taxi fleet this year, and the company has also announced that the E6 will be its first entry into the US market, possibly as early as the end of 2010.

Zotye, a small Zhejiang province-based automaker also reportedly has an electric vehicle ready for sale, as do Chery of Anhui Province and Lifan of Chongqing. So far though, none of these has sold a single new energy vehicle to a Chinese consumer.

Vague Announcements on Subsidies

In March of 2009, China’s National Development and Reform Commission (NDRC) released its “Automotive Industry Adjustment and Revitalization Policy” which both encouraged the development of new energy vehicles and recognized the need for consumer subsidies to support their sales in China.

And in March of 2010, Miao Wei, China’s Vice Minister of Industry and Information Technology announced that the government is considering subsidies of between 50,000 and 60,000 yuan (approx. US$7,400 to $8,800) per vehicle. However, he was not specific about when the subsidy would be implemented.

Automakers’ Complaints

In the fall of 2009, BYD Chairman Wang Chuanfu, speaking at a conference, was vocal about his disappointment that the Central Government had still not announced subsidies for new energy vehicles. He said that BYD’s inability thus far to make these cars available to consumers was due to the lack of subsidies.

So while BYD was leading the way among Chinese automakers in fulfilling government policy by developing these vehicles, the government, according to Wang, was not yet upholding its end of the bargain by implementing subsidies.

Wang Chuanfu would not be the only leader of an automaker to prod China’s government toward a decision on new energy vehicle subsidies. Carlos Ghosn, head of Renault/Nissan, also announced just a few days ago at the Beijing Auto Show that Nissan’s new Leaf electric vehicle would probably not be sold in China until a subsidy is announced.

It’s all about who benefits

So if China’s government wants new energy vehicles to be developed and sold in China, why has it taken so long to announce a consumer subsidy? I asked the same question of a Chinese auto executive (who shall remain anonymous) about a year ago.

He responded. “Who is selling these vehicles in China right now? Toyota? Why would the government want to subsidize the purchase of foreign brands? You will not see an announcement on subsidies until the government can be sure most of the money will support domestic brands.”

Indeed, we should not be surprised that China’s government wants to support domestic brands. This was also the case with China’s tax breaks on small cars with engines of 1.6 liters or less beginning in early 2009. Another auto executive in China shared with me statistics demonstrating why the tax breaks went to cars with engines of 1.6 liters or less.

Though traditional categorization of engine sizes for statistical purposes are cut off at the zeros and fives (e.g. 1.0-1.5 liters, 1.5-2.0 liters, 2.0-2.5 liters, etc.) 1.6 liters was exactly the cutoff point at which domestic Chinese manufacturers would most benefit from the tax break. (Of course, this may no longer be the case as foreign manufacturers rushed to increase production of small cars in response to the tax break. The tax break was also scaled back earlier this year.)

The point here is that China’s government is very much involved in guiding the development of its automotive industry, but the focus, far from being on giving consumers the best options, is on giving its domestic manufacturers – whether state-owned or private – a leg up against foreign competition.

Whether China’s auto manufacturers ever become competitive outside of China (and I am betting they will), we can be certain that the government will ensure that ultimately, the China market belongs to the domestic manufacturers.

Forbes' new China Blog: The China Tracker

2010-04-22T09:55:00.000-07:00

Covering China is not the easiest of journalistic assignments.

First there's the language issue. Do you send a great journalist who needs a translator, or do you send a so-so journalist who already speaks Chinese -- or do you look for the rare combination of the two?

Then, once you've found a journalist willing to take on this assignment, and have smoke blown up his...well, you know... on a weekly basis by the foreign ministry, how does one person cover everything happening in Beijing, much less the rest of this continent-sized country?

For those of us who are out of China at least as often as we are in, fortunately there are multiple media organizations attempting to tackle the task of providing some understanding to the rest of the world. And we all benefit from the diversity of views.

Then there are those rare few organizations that get the fact that their readers come to them for a full understanding, not just a tiny piece of the picture. Forbes is one such media organization.

Not only does Forbes have several brilliant reporters in the field in Greater China, but now they are adding a new blog called "The China Tracker". Forbes has pulled together a fantastic group of volunteer bloggers who will be contributing their (uncensored) views alongside those of some regular Forbes reporters.

The list of bloggers who will be contributing contains a virtual who's who among contemporary China thinkers. And me. I'll be contributing the occasional post on my little corner of the China-verse as well. While I am honored to have been asked to contribute, I am especially excited to see such a concentration of diverse views on China, and I hope it will help to improve the understanding of China among non-China specialists.

Hana Alberts, Forbes' HK-based reporter, explains here what the new blog is all about. Check it out. There are already a few new articles up. And while you're there, go ahead and add this one to your RSS reader.

GM Repays its Loans Early

2010-04-21T11:03:00.000-07:00

Washington-appointed CEO of GM, Edward Whitacre reported with much fanfare today that GM had fully repaid its loans from Canada and the US five years ahead of schedule. GM had borrowed as much as $6.7 billion from the US government and $1.4 billion from Canada.

Now that the debt is repaid, GM is free of its government obligations, right? Not by a long shot. GM is still 61 percent owned by the US government and 11 percent owned by Canada.

Following his announcement, Whitacre boarded a plane for Washington to meet with one of his many bosses, House Speaker Nancy Pelosi.

The Washington-appointed Whitacre is actually well-suited for this position. Prior to retiring as CEO of AT&T, he had worked his entire career for Ma Bell.

The 8th Most Innovative Company IN THE WORLD?

2010-04-18T16:11:00.001-07:00

This week's Bloomberg Business Week contains the results of their annual "Most Innovative Company" survey, conducted in cooperation with Boston Consulting Group. (A sortable list of the top 50 can be found here.)

The number eight company on this list this year was a bit of a surprise to me: BYD, the automaker from Shenzhen. While it doesn't surprise me at all that the number of Chinese companies on this list should increase (from only one last year to four this year), I was shocked to see BYD at number eight -- with a bullet -- and ahead of the likes of GE, Sony, Samsung and Intel.

Among auto companies, only Toyota ranks above BYD at number five. (The survey was conducted last December before the extent of Toyota's current woes became known.) Behind BYD are Ford (13), VW (15), Tata (17 - also a bit of a surprise from the Indian automaker), BMW (18), Hyundai (22), Honda (26) and Fiat (43).

So why should BYD be ranked so highly its first time on this list? Is it because BYD makes the highest selling sedan in China? Hardly. The F3, though a hot seller, is basically a copy of a Toyota Corolla. And based on feedback from a number of auto journalists, a very poor copy at that. In all fairness, however, those same journalists credit BYD for great improvement since it entered the car business in 2003.

The BYD F3

The Toyota Corolla (2008)

Is it because BYD is the leading Chinese manufacturer of electric and hybrid vehicles? Perhaps. The plug-in hybrid version of the F3 (the F3DM) was announced to much fanfare back in December of 2008 as the world's first production plug-in hybrid. BYD had beaten the Japanese, the Americans and the Europeans to market. The only problem was, no one could actually buy one.

As of last August, only a few hundred had been sold, and only to fleet purchasers such as the local government of Shenzhen. Supposedly, consumers are finally, as of this month, able to buy the F3DM, but as even Business Week admits, it comes with a $24,900 pricetag. The regular version of the F3 only goes for about $9,000. (Why buy a Corolla for $19K when you can get a look-alike for $9K? Why buy a look alike-hybrid for $25K when you can get the real thing for $19K?)

And even if Chinese consumers had been able to buy the F3DM as early as December 2008, how exactly is a plug-in hybrid innovative? The Toyota Prius, a hybrid of the non-plug-in variety has been available in Japan since 1999. And nearly every car company in the world now has some variety of electric and/or plug-in hybrid in the works, most using the same lithium-ion battery technology.

I am not saying that BYD is not an innovative company. In fact, from what I have learned talking to current and former BYD employees, the company's internal philosophy is all about innovation -- learning, experimenting, finding new ways to do things. And it is because of this that I really want to see BYD succeed in its mission. What I am saying, however, is that, for all their innovative talk, they have still produced very little beyond a hot-selling copy of a gasoline car and a hybrid version that is still untested by the driving public.

Isn't ranking BYD high on a list of innovators sort of like handing out a Nobel Peace Prize to someone because he talks a lot about peace? Let us hope that both peacemakers, and innovative carmakers, can live up to their reputations.

国进民退: Is China Re-nationalizing? (III)

2010-04-12T13:34:00.000-07:00

Please note this is the final post in a series. Previous posts can be found (in order) here, here and here.

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This is going to be a long post, so I apologize to those of you who will have to scroll to reach the end of this in your Google Readers.

I ended my post of March 27 by mentioning this article from China Economic Weekly that was recommended to me by a friend. The article summarizes a rich debate going on in China right now about whether the company is backsliding in its economic reforms by, in effect, re-nationalizing its economy which had ostensibly been on a path of increasing privatization since the late 1990s.

What follows is a somewhat abbreviated translation of this article with a little of my own commentary.

According to the article a relatively small number of people from academic circles began last year to raise this question of whether the state was reversing course on privatization reforms, and the concept of guo jin min tui “theory” and 与民争利论 (yu min zheng li lun – theory of officials profiting at the people’s expense) just took off from there. This “sensitive and emotional concept” of guo jin min tui “theory” has drawn attention from outside China and generated much debate.

(The term “theory” may also be a mistranslation. In this case, I think the term “theory” may be better translated as “idea” or “concept” -- words that don’t carry the assumption of having been subject to rigorous scientific inquiry.)

Prior to last month’s National People’s Congress (NPC), Professor Hu Xingdou of Beijing Institute of Technology penned an article criticizing the apparent reversal saying, “China never actually had the intention of establishing a real market economy. Rather, the intention was to establish a so-called state-led socialist market economy. In fact, (what we have is) a bureaucrat- and government official-led economy.” (The word used for “bureaucrat” is 官僚 which has negative connotations of an unproductive government employee who doesn’t do any work.)

(http://www.huxingdou.com.cn/2010suggestion.htm Article headlines in English.)

Far from being a theoretical piece, Prof. Hu’s article begins with anecdotal evidence that the state’s share of assets has been growing at the expense of private capital in the following industries: steel, chemicals, coal, petroleum, mining, electricity generation, civil aviation, highways, water, finance, brokerage, insurance, real estate, posts, etc.

On the other side of the debate are people who question the concept calling it “hype” created by academics “in support of special interest groups”. (Yes, China has special interest groups too. Who knew?) They point out 民 of 国退民进 and 与民争利 do not have the same meaning.

One change the article does point to is that, in the past, the arguments of academics were rather weak, and had little influence on economic policy. That is no longer the case, they say. In the first half of 2009, academics and journalists used the term guo jin min tui to refer to the phenomenon of “local industry and regional emergence of guo jin min tui”. In the second half of the year, people began to use the term “guo jin min tui da chao” (the tidal wave of guo jin mi tui) to describe the trend.

And the people who have noticed this trend are not only academics and journalists. The assistant director of the Enterprise Institute within the State Council’s Development Research Council (a government-owned think tank) says that the “problem of guo jin min tui has become especially critical in certain local regions and certain industries.”

In April of 2009 China Entrepreneur magazine conducted a survey among senior enterprise managers, and one of the findings was that over 72 percent believed the trend toward guo jin min tui was increasing, and that China’s four trillion yuan stimulus was disproportionately benefiting state owned enterprises.

By the end of 2009, the discourse had changed from “finding a win-win for state-owned and private enterprises to calling on (the state) to give private enterprises a just and fair market environment.” People even began to worry aloud that reforms were being reversed, and call for resumption of the original guo tui min jin reforms.

In September of 2009 a professor from the China Europe International Business School said that the trend of guo jin min tui ran counter to China’s reform and opening (改革开放), and that it was causing social inequality and crony capitalism (权贵资本主义). In November of 2009, a professor from Beijing Institute of Economics told media that state takeovers of private coal mines in Shanxi Province represented a reversal of reforms.

In the face of such overwhelming criticism, official circles began to fight back.

At an economic conference in November of 2009, the Director of China’s National Bureau of Statistics said the statistics from 2005 to 2008 do not support people’s claims of guo jin min tui. The statistics he cited were total number of enterprises, industrial output, asset values, total profits, taxes paid and numbers of employees. (This particular article did not repeat his statistics, but I will give him the benefit of the doubt for the moment. I will, however, point out that the discussion trend of guo jin min tui began to gather momentum toward the end of 2009, a period that would not have been covered in his statistics.)

One month later, this same official admitted that while, yes, the phenomenon of guo jin min tui did exist, it was only in some specific areas, but not in the economy as a whole. And he expressed his wish that people’s discussion of the phenomenon would be “vigorous and meaningful.”

While here was a central government official who had changed his mind about the existence of this phenomenon, most local officials were adamant that guo jin min tui was not an accurate description of what had been happening.

Local officials in Shanxi Province (where private coal mines had been nationalized) were at pains to describe what had happened, not as guo jin min tui but as “you jin lie tui” (优进劣退) or “the excellent enter; the inferior withdraw”. Another defense of these moves (and a far more plausible one in my view) was that it was an attempt to improve safety conditions in these mines.

The Chairman of China National Building Material Group Corporation, an SOE, explained at a press conference that the phenomenon of guo jin min tui has not happened in China. And the primary reason he gave is that, because so many formerly wholly state-owned enterprises launched public offerings, their ownership had become diversified; the people were now part owners of these enterprises.

The Bureau Chief of China’s Civil Aviation Administration said, the fact that there had been mergers and acquisitions in the aviation sector was a testament to “market behavior”. The mergers that had happened were in the best interest of the industry as a whole. (He failed to recognize, however, that most of China’s private startup airlines were acquired by state-owned airlines.) And anyway, he said, because the airlines are publicly listed, they have diversified ownership. (In other words, people were welcome to buy minority positions in publicly traded shares -- an issue I also addressed in a previous post.)

Regardless of whether people believe in the existence of guo jin min tui, the debate has served to highlight the question of its existence as an issue. The news spokesperson of the CPPCC had no choice but to face this issue when asked about it at a press conference. His response was a curt denial: “guo jin min tui does not exist in China.”

At the NPC meetings that took place last month, several local government officials were asked by journalists about the phenomenon of guo jin min tui. The governor of Shanxi Province responded to a question about nationalization of coal mines in his province with prepared statistics: the ratio of state-owned to private to mixed ownership mines in Shanxi is 2:3:5. (He apparently did not address the trend.)

(The Shanxi Governor might have also mentioned the abysmal safety record of Shanxi’s mines and that government control was considered the last straw at an attempt to reign in safety violations that have lead to thousands of needless deaths in recent years.)

The Mayor of Chongqing said that guo jin min tui is a "false concept. During the financial crisis, the government provided funds to...help enterprises during their difficulties. This is not guo jin min tui; this is a rescue. (People who are now calling our rescue) during the financial crisis guo jin min tui are Monday morning quarterbacks (事后诸葛亮).”

Also during the NPC, SASAC, the state shareholder of 127 of China’s largest central state-owned enterprises, weighed in on the issue by prominently posting on its website articles with titles such as “Analysis: Is guo jin min tui true or false?”, “Mergers and acquisitions (by SOEs) are qiang jin ruo tui (strong enter, weak withdraw) not guo jin min tui”, and “The Falsehood of SOE Monopoly Theory”.

(I found these articles on the SASAC website, and while I only took the time to skim them, what I did not see were the typically shrill name-calling and denunciations to which the state has resorted in the past. Rather, SASAC lays out a reasoned defense for the existence of a “state-led socialist market economy with Chinese characteristics” and it also addresses, point by point, every one of the arguments made by those who do believe in the reality of guo jin min tui. Whether one buys the logic or reasoning employed by either side, it is refreshing to see such a vigorous and well-mannered debate taking place regarding this issue.)

While the article does not really answer the question, it does a surprisingly good job of balancing views from both sides of the argument – for a Party-owned publication, that is. Those who would read to the end of this fairly long article would probably still find that the article’s sentiment seems to slightly favor the arguments of those who do not believe in the existence of this phenomenon. At least that is the view of this non-native speaker of Chinese.

Continuously Lost in Translation

2010-04-07T10:56:00.000-07:00

Part of the challenge of dealing with culture not one's own, whether it be for business, academia or diplomacy is finding a common language in which one can communicate with others.

A few comments on Twitter and Google Reader about yesterday's post bring this difficulty to light. Part of the upshot of that post was that perhaps many outside of China had mistranslated guo tui min jin to mean "privatization" when that was not the understanding of those in China who propounded the policy.

I would even suggest that when Chinese use the word "privatization" in English language conversation, their understanding may also be different from that of native English speakers who use the same word.

We tend to define both 民营化 (minyinghua) and 私有化 (siyouhua) as "privatization", and vice-versa. As I showed in yesterday's post, the Chinese do not define minyinghua and siyouhua as the same thing. However, a glance at both Google Translate and Babelfish shows these two terms as interchangeable with the English word "privatization".

Based on discussions that have taken place since yesterday's post, I feel safe in saying that privatization and minyinghua do not have precisely the same meanings. As nearly as I can tell, here is what they do mean:

privatization = absence of government involvement

民营化 = presence of non-government involvement

To illustrate, when the US Government finally sells its 60 percent stake in General Motors, this will be considered a "privatization". But the Chinese definition of minyinghua is already satisfied at the present because the other 40 percent of General Motors shares are in the hands of non-governmental entities (the UAW, institutional and private investors).

In China the fact that many of China's large SOEs are now publicly traded and minority positions are held by non-governmental entities counts as 民营化, and if our dictionaries are to be believed, it also counts as privatization. However, in this case, we are better off not trusting our dictionaries.

As a bonus, here's another term that we often get wrong.

Our dictionaries define 外国人 (waiguoren, literally, "outside person") as "foreigner", and vice-versa. However, when Chinese citizens visit the United States, they do not consider themselves to be 外国人.

Why?

Because the opposite of 外国人 is 中国人 (zhongguoren) or Chinese person (literally, person from the Central Kingdom). Their identities as 中国人 do not change when they leave China.

So while I refer to Chinese visitors in America as "foreigners", and I refer to myself as a "foreigner" when I visit China, the Chinese always refer to me as 外国人 and themselves as 中国人, irrespective of location.

And while I fully agree with the sage advice of Dan Harris at ChinaLawBlog to write your agreements with Chinese counterparties in Chinese, you may also want to ensure that you and your counterparties agree on what all of the words mean.

I know there are many other equally confusing Chinese-English translations. Which ones have you come across?

The next post in this series can be found here.

国进民退: Is China Really Re-nationalizing? (II)

2010-04-06T17:02:00.000-07:00

Following up on my post from March 27, I first wanted to look back in history a bit to the origin of the term guo tui min jin to determine how it entered the lexicon of policy a decade ago. I am not certain whether this particular exercise buys us any better understanding of whether the state is re-nationalizing businesses today, but perhaps it sheds a little light on why the idea is generating debate.

Referring once again to an official history of the reforms of China's state-owned enterprises, as I mentioned before, the credit for guo tui min jin is given to a Professor Wang Jue of the Central Party School.*

In 1999, Professor Wang was interviewed about this concept, and the following few lines are important for an understanding of what policymakers were apparently hearing from the originator of this concept. I will quote a line or two of the original Chinese and follow with my (possibly flawed) translations. Words in brackets "[ ]" are my own exegesis.

国退民进—就是国家退出来，让老百姓进去。有人说国退民进是搞私有化，其实不是，民有经济和私有经济是两个概念，

Guo tui min jin means the state withdraws to let the common people go in. Someone said that guo jin min tui means privatization [um, like me a few posts back], but that is not the case. People’s economy (民有经济) and private economy (私有经济) are two different concepts. [Note that he’s distinguishing between “the people” collectively and private individuals.]

私有经济是民有经济的一个部分。集体经济、股份制经济都是民有民营的。

The private economy is part of the people’s economy. The collective economy [encompassing some of the few remaining township and village enterprises or TVEs] and the shareholder ownership economy [encompassing firms that have undergone conversion to a shareholding, though not necessarily publicly listed, corporation] are also part of the people’s economy.

民有民营是相对国有国营说的。不是国有国营的都是民有民营的，它既有公有性质的也有四有性质的，也有公私混合所有制的。

“People owned and managed” (民有民营) should be contrasted with “state owned and managed” (国有国营). If a company is not state owned and managed then it is people owned and managed. [He’s saying these two types are mutually exclusive.] The people owned and managed (economy) contains the natures of both public and private ownership. [If I’m not mistaken, here he is saying that people owned and managed enterprises can have both the state and individuals as owners – which, again, if I’m not mistaken, violates the mutual exclusivity implied by his previous sentence.]

So what, in a nutshell, does all of this mean? Assuming the policy truly was influenced by Professor Wang, as this official state-owned enterprise history says it was, then this is what I have learned:

Everyone outside China (or inside, for that matter) who interpreted guo tui min jin as privatization was simply wrong.

The many shareholder reforms among state-owned enterprises that took place over the past couple of decades all qualify as guo tui min jin reforms. That despite the fact that few of these shareholding enterprises were listed on China’s stock markets (only about 1,800 firms are traded), and among those, all but about 200 continue to have either the state, or a state-owned entity, as the controlling shareholder.

One may also say that this has all been a wasted effort anyway: how unusual is it, really, for politicians and officials to interpret rules and policies for their own benefit?

As promised last time, I will later post a summary in English of a good article in Chinese describing the current debate around guo jin min tui. But I’ve taken enough of your time for today.

Thanks for reading.

And, by the way, I welcome clarifications anyone has to offer in translating the Chinese material above.

The next post in this series can be found here.

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* 章迪诚，著，中国国有企业改革编年史，（北京：中国工人出版社，2006） pp.556-7.

Questions raised by Geely’s Volvo Purchase

2010-03-29T11:04:00.000-07:00

As recently as the day-before-yesterday, I was still expressing my skepticism that the Geely-Volvo deal would ever happen. From my perspective, Ford had far more reasons to keep Volvo than it did for selling it at a huge loss, and for a comparatively small amount of cash that will barely knock a dent in its debt.

But neither Li Shufu nor Alan Mulally asked for my opinion, so the deal has apparently gone through.

What now?

Now that Li Shufu appears to have succeeded, against all odds, in his quest of owning a well-known foreign brand, how will he repay the generosity of the various organizations that helped him to achieve his dream?

A Political Issue

As the Financial Times’ "Lex" column points out today, “(China’s) biggest auto deal to date is not a strictly private transaction”. Of the total purchase price of $1.8 billion, $1.6 billion is in cash. Of that amount, about half is coming from several local governments in China who will be “helping” Geely to build Volvo factories in their areas. In addition, about $900 million in working capital is coming from state-owned banks – the banks that are frequently criticized for lending only to state-owned companies.

Furthermore, now that a global luxury brand has Chinese ownership, we can be almost certain that the black sedan of choice for state officials will no longer be an Audi or a Mercedes. It will be a Volvo.

China’s government has made no secret of the fact that the state intends to remain the major player in the automobile industry, nor of their desire to build “national champions” able to compete on a global scale. Geely is ostensibly private, but it has needed government help to move into the big leagues, further blurring the line between public and private (an issue I highlighted in relation to Geely last June).

What will be the eventual cost of this help? Will Beijing now begin to have influence on Geely’s strategic direction?

As before, I think many Chinese may find this line of questioning a bit ridiculous: Well of course the government will expect something in return! This is how business works! The business brings in expertise, the government offers support. It is a symbiotic relationship.

I approached this question from a different direction just a few weeks ago in relation to the failed Hummer deal. Sichuan Tengzhong was unsuccessful in its bid for Hummer largely because the proposed deal was in violation of government policy. Geely has been successful in its bid for Volvo for the opposite reason: it is completely in keeping with government policy.

The lesson seems clear. The price of not following policy is likely to be failure. The reward for following policy is not only a greater chance of success, but also material support where needed – regardless of whether the business is private or state-owned. But what will be the price of following policy? For this we can only speculate at this point.

What is fascinating about this case, however, is that following government policy in China need not always be detrimental to business strategy. Perhaps the goals of both the government and Geely are met in this single transaction, and neither side loses.

To me, this is a mind-blowing revelation. Neo-liberal economic theory tells us that governments cannot run businesses because they are conflicted with political objectives (and perhaps the US government’s ownership of GM bears this out), but is China the exception that proves the rule, or has it found some way around the strictures of Western economic theory? Is China re-writing the rules of capitalism, or is it merely breaking them?

There is one other question this transaction raises, and it is more of a business issue than one of political economy.

A Business Issue

In discussing the Geely-Volvo deal with a (Chinese) executive at a Chinese automobile company about two months ago, I asked whether he thought Geely could manage Volvo if the deal were consummated. His response was that Geely would need a lot more money than it currently has.

As he explained it, an auto company not only needs to fund research and development for new models, but it also requires about $1 billion of R&D a year on each existing product line, just to keep the models fresh and to introduce incremental innovation. (The figure seemed high to me, so I asked again, and he repeated the number, $1 billion.)

“If Geely is relying on the government for at least half of a comparatively small purchase of Volvo, how can Geely possibly fund Volvo’s ongoing R&D pipeline? Add to this the likelihood that Ford has probably way underinvested in Volvo over the past few years. I’m not sure Li Shufu fully understands what he is getting into”.

Will Geely need to get further into bed with the state in order to feed the R&D pipeline? And if so, at what further cost, if any, will this help come?

国进民退: Is China Really Re-nationalizing? (I)

2010-03-27T12:16:00.000-07:00

Please note that this is the first in a series of several posts on this topic. Subsequent posts can be found here, here and here.

Follow-up Edit (August 2011): Please note that some of my initial speculation in this particular post about the meaning of certain Chinese terms proved to have been misguided. It is important to read the three posts that followed this one for a better understanding of these terms and the guo jin min tui phenomenon.
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This is the first of at least a couple of posts on the topic of public vs private ownership of business in China. Chinese speakers may find the beginning of this post a bit tedious, but I want to lay out a few definitions for those who may be interested in the topic, but whose Chinese isn't quite up to speed.

Those who follow Chinese economic discourse may have noticed the terms 国退民进 and 国进民退 in the news recently. (I also wrote another post on this topic about a year ago.) If you speak Chinese, you already get the subtle -- yet profound -- difference between these two terms. For non-Chinese speakers, let me briefly explain these terms.

Each term contains two nouns and two verbs.

The nouns are:

国 meaning "state" (pronounced guo)
民 meaning "people" (pronounced min)

The verbs are:

进 meaning "to enter" (pronounced jin)
退 meaning "to withdraw" (pronounced tui)

So the first term "guo tui min jin" means "the state withdraws and the people enter". The second term "guo jin min tui" means the opposite: "the state enters and the people withdraw".

These two terms refer to processes. Guo tui min jin, at the risk of oversimplification, is basically the process of privatization. Guo jin min tui, again at the risk of oversimplification is the opposite: nationalization. From here forward, I will refer to these terms as "privatization" and "nationalization", respectively (quotation marks included). (Again, let me acknowledge that these are gross oversimplifications.)

One might think that these two terms emerged simultaneously in economic debate; however, those who have followed the Chinese economy for a decade or more know that this is not the case.

"Privatization" (国退民进） was first introduced over a decade ago to describe a deliberate continued policy of privatization that had begun under Prime Minister Zhu Rongji. The idea, at least on its surface, was that, as the state continued to withdraw from ownership of business, the people would gradually move in to take the state's place.

To determine to origin of "privatization" I consulted an official economic history of China which credits Professor Wang Jue (王珏) of the Central Party School for introducing the term in 2000.*

"Nationalization" (国进民退) did not really begin to emerge until very recently, but it did not emerge as a statement of policy. Rather it arose as a criticism of what appeared to be a reversal in economic reforms as the state's share of a number of important industries has begun to increase.

In order to determine whether my perception of the emergence of these terms matched reality, I consulted a couple of sources: a database of Chinese academic journals** and People's Daily, the main Communist Party daily newspaper.*** Below are two charts showing the trends in usage of these two terms.

This first chart shows that the number of academic articles using the term "privatization" (国退民进) became significant around 2000, and peaked around mid-decade before falling off significantly. The number of articles using the term "nationalization" (国进民退) did not become significant until around 2008, nearly surpassing usage of the other term, "privatization" in 2009.

The point here is that China's academic community appears to at least acknowledge a trend in behavior, if not in policy.

A search for these terms in the People's Daily archives yielded the following chart. Not quite as exciting (and with numbers so small as to be of questionable significance) the data seem to support the academic debate. "Privatization" clearly emerged as a policy around 2000, got a few mentions around mid-decade, then barely got a mention in 2009 -- except possibly in contrast to mentions of "nationalization" which began to show up for the first time last year.

So clearly, there is some sort of a debate going on in China. But this is China, so the debate cannot be very vigorous, nor can it be held in the open, right? While the average Chinese may not be surprised to learn this, the richness of debate taking place in China, particularly in the economic arena, may surprise some outside observers.

A fascinating article about this debate was published this week in China Economic Weekly, a news weekly published by People's Daily. (Thanks to Paul Denlinger for bringing this article to my attention.) The article, entitled “国进民退” 真伪 is the cover story of this week’s issue, and, roughly translated, it means, “'Nationalization' True or False?”

Over several pages, the article presents a fascinating debate that has been taking place in China over the past year, and that managed to generate some attention during the recent annual meeting of the National Peoples Congress. Is the Hu-Wen government really in the process of re-nationalizing a lot of the enterprises that were privatized under Zhu Rongji and Jiang Zemin?

In a later post, I will summarize the debate and identify some of the players. I will also take a look at the origin of the term "privatization" (国退民进) to determine whether the original meaning was everything we thought it was (or is).

The next post in this series can be found here.

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* 章迪诚，著，中国国有企业改革编年史，（北京：中国工人出版社，2006） pp.556-7.
** CNKI.com database of full-text Chinese academic journals, through UCLA East Asian Library.
*** http://search.peopledaily.com.cn.

Hummer rejection: It's all right there in the policy

2010-02-25T10:06:00.000-08:00

The recent failure of a Chinese company to buy the Hummer brand from GM highlights an interesting aspect of business-government relations in China.

Nearly every news article on this failed transaction has contained quotes from people at China's Ministry of Commerce stating that Sichuan Tengzhong, the intended purchaser of Hummer, never even submitted an application. An article in today's Wall Street Journal contains a similar quote, and also includes the NDRC, China's main economic planner, in the mix:

On Wednesday, Assistant Commerce Minister Wang Chao said his ministry never received an application from Tengzhong, echoing other comments from the ministry in recent months. An official in the foreign affairs department of the NDRC said the commission also hasn't received any application.

"It looks like no one took responsibility" for the deal inside the bureaucracy, said the person. But since Tengzhong's application "was never formally received" by regulators, "it's not going to be formally rejected."

Seriously? Are we to believe that Sichuan Tengzhong was so absent-minded that they neglected even to fill out the paperwork?

Of course not. We can be certain that representatives of Tengzhong have been living in Beijing for at least the past eight months, doing their best to gain approval for this deal. But since there does not exist a clear set of criteria as to how such an approval decision would be made, discussions had to be conducted on an informal basis.

Though I am privy to no confidential information, I can imagine most of the discussions could be summarized as follows:

Tengzhong: If we apply to you for approval, will you approve it?

Random representative of any number of agencies: Hmmm, that would be, um ... difficult.

Throughout the past year, as I conducted interviews among various auto industry related people, I was continually amazed that no one seemed to have a full picture as to how approvals for business deals should work. Those who appeared confident in their answers often provided me with information that conflicted with what I had heard from others.

It finally occurred to me that I was trying to shoehorn China into my own expectation of how a government should work, and that the lack of clarity in the rules isn't necessarily a bad thing. Of course, it isn't necessarily a good thing either.

Still, as I pointed out in my previous post on Hummer, the deal was unworkable from the Chinese perspective because it did not conform to central government policy. What Tengzhong's representatives were essentially doing in Beijing was asking the Ministry of Commerce, NDRC, et al, to approve their attempt to violate Central Government policy.

China's Central Government may lose the occasional battle, but it ultimately gets what it wants. If you want to know what the Central Government wants, the best place to start is their policies.

Why is this Hummer Deal Taking so Long? (Updated)

2010-02-23T10:28:00.000-08:00

Last June, news first surfaced that General Motors (GM) had found a buyer to take its much loved and hated Hummer brand off its hands. The prospective buyer, Sichuan Tengzhong, a maker of heavy equipment came from out of nowhere to make a bid for the Hummer brand. (Please see previous posts on Tengzhong here and here.)

Auto industry related people I spoke with in China at the time told me that the CEO of Tengzhong was friends with the heads of a lot of mining companies who are also customers of Tengzhong's heavy equipment. Most of the miners favored Hummers as their personal vehicles, so Tengzhong's CEO jumped at the opportunity to grab the American icon. Of course, this was only hearsay.

As of today, the Hummer deal still has yet to be approved by China's Ministry of Commerce which has the authority to approve outbound investment by Chinese companies. Why is it taking so long?

This article by Patti Waldmeir of the Financial Times contains a few quotes that very nicely sum up the reason:

Producing the hulking Hummer, with its image of wasteful excess, could hardly be less consistent with Beijing’s pro-green automotive policies, said Mike Dunne of Dunne & Co, an Asia-based automotive consultancy: “For them to approve the Hummer deal would be a big contradiction”.

The deal would violate not just Beijing’s environmental goals but also the government’s insistence on consolidation in the Chinese car industry, which has up to 100 carmakers, according to Yale Zhang of CSM Automotive in Shanghai.

Beijing isn't against purchase of foreign auto companies and assets, as can be seen by its support for Shanghai/Nanjing Auto's purchase of MG-Rover in 2007, and more recently, BAIC's purchase of Saab technology and Geely's (ongoing) attempt to buy Volvo from Ford.

Beijing's problem with the Hummer purchase is very simple: it violates policy. Support, or lack thereof, doesn't appear to stem from whether an auto company is state-owned or private (BAIC and Geely, are, respectively, an SOE and a private company), but from whether a potential deal conforms to central government policy. The current policy in force calls for both improvements in the environmental impact of automobiles and consolidation of China's many automakers into fewer, larger companies that will be more competitive on a global scale.

So that's the end of it, right?

Not quite. Apparently Tengzhong remains so keen to get its hands on Hummer that it will try an end-around. This article from Reuters reports:

"Tengzhong has not given up hope yet to win government approval, but buying Hummer through an offshore investment vehicle could be an option if it can't get the green light," said a source close to the deal, who asked for anonymity due to the sensitivity of the issue.

So Tengzhong could, theoretically, establish an offshore entity to purchase Hummer. And as long as Hummer production isn't brought onshore, there wouldn't be a problem. But then Tengzhong would lose the ability to take advantage of China's lower cost labor force. Tengzhong could also run into issues with a sorely disappointed Central Government when trying to import Hummers manufactured abroad.

Furthermore, the offshore route will probably require the use of foreign exchange (which, again, is controlled by the Central Government) to complete the deal -- that is, unless GM could be persuaded to sell Hummer for non-convertible Chinese Renminbi.

If I had to bet, I'd say this deal isn't going to happen.

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UPDATE: About 24 hours after I posted the above, official word has come from GM. The Tengzhong deal is off, and Hummer will be wound down.

While this may sound like the end for Hummer, there may still be a faint glimmer of hope. GM has previously said the same of both Saturn and Saab after their respective deals fell through. Though Saturn is indeed being wound down, Saab was rescued at the 11th hour by Dutch investor group Spyker Cars.

And now Sichuan Tengzhong can return to the obscurity from whence it came.

The Cost of a Camaro in China

2010-02-05T12:13:00.001-08:00

The guys at China Car Times posted this entry about the biggest auto discounts in China. Topping the list is the Chevrolet Camaro with a stunning 160,000 RMB (US$23,500) discount from list. The Camaro's base price in the US is only $22,995, which is even smaller than the amount by which it is being discounted in China!

Frankly, I'm not surprised that the Camaro would need to be discounted so much. While it appeals to me as an American who remembers the '68 Camaro, it is hardly suitable for the rough streets of China or for China's fuel-conscious drivers. (Gasoline is more expensive in China than in the United States at the moment.)

What is most interesting to me about CCT's post is how much the Camaro costs in China.

The Camaro lists in China for about $117K, and is now discounted to $93K. That's $93K for a car you can buy in the US for under $30K! So if we take $30K as the cost of a nicely-equipped Camaro, and add to that a generous shipping charge of $10K, we have a car for which GM should want to collect about $40K in China.

Of course, China will want a cut of that as well. Under its WTO commitment, China may charge a maximum import tariff of 25%, which would bring the price to $50,000.

Even with a huge discount, the Camaro's price in China is still $43,000 more expensive than the same car sold in the United States. Why?

Is it demand driven? Is Chevrolet simply unable to build Camaros fast enough that they can get away with charging that much for a car in China?

What is missing here? Why is the Camaro so expensive in China?

In Lieu of an Actual Blog Post (II)

2010-01-28T18:20:00.000-08:00

As I near the end of my current data-gathering trip in China (which has lasted longer than I expected), I anticipate another year or so of analysis and writing. Needless to say, I have neglected my blog in recent months, but I hope to remedy that after my return to the States. My last couple of months have been a mad dash to complete as many interviews as possible, and get out of China before Spring Festival.

In the meantime, here's a link to a short interview I did with Michael McCune of the China Business Network. The content of the intro paragraph doesn't entirely reflect my views (I wouldn't say that BYD, Geely and SAIC-GM are all "full steam ahead" in development of low emission vehicles -- really, only BYD is), and the text says that BYD is in "Tianjin" (it's in Shenzhen). But aside from that, the interview does accurately reflect some of what I have learned over the past year.

China Business Network: "China's Auto Makers Shift into High Gear"

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

2009-12-06T17:39:00.000-08:00

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.