How to Succeed in Tech Without Really Trying

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.

When will China decide to subsidize electric vehicles?

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.

Private Chinese Firms Don't Get Bank Loans? Think Again.

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.

Electric Vehicles: China can do no Wrong. Right?

Think Again.

This past week, columnists Anil Gupta and Haiyan Wang published an opinion piece in Business Week that dares to go against the flow. While the rest of the world seems ready to declare China the winner in electric vehicle technology, Gupta and Wang explain why China has no real advantage -- a position with which I agree. They make two important points that are worth highlighting:

1. Despite the apparent importance of battery technology for cars in the future, batteries are merely one component among many others. The apparent early success of China's BYD in battery technology (which is also questionable) does not mean that BYD is certain to enjoy success in other important factors such as "performance, safety, reliability, comfort, styling, dealership network, service quality, and price". In an article in the Wall Street Journal this week, Norihiko Shirouzu quotes the tech chief of a global automaker who had test-driven BYD's E6 as calling it "half-baked".
2. First mover advantage ain't what it used to be. Gupta and Wang give plenty of examples in which non-first movers eventually came to dominate an emerging technology, leaving first-movers in the dust.

Gupta and Wang don't dismiss the importance of battery technology, and indeed, BYD seems to have somewhat of an advantage because, after all, they've been a battery company since the early '90s. But when you put the whole package together -- battery, auto body, electric motor, etc. -- BYD's success has been less than stellar. Through the first eight months of 2009, they only managed to sell 100 of their F3DM plug-in hybrids.

They also seem to speculate, as have I before, that Buffet's consolation prize with BYD may very well be the battery technology itself. Even if they cannot manage successfully to assemble the entire package for a mass market, BYD's battery technology -- if it is advanced as they claim -- could be licensed to dozens of global auto manufacturers. Indeed, Volkswagen has already partnered with BYD on battery technology.

I would add to this argument the fact that, among all of the auto specialists and insiders I have interviewed in China this year, I have yet to find anyone who believes that BYD -- let alone any other Chinese automaker -- has a lock on EV technology. They all see it as very experimental, and while they believe China is finally on a level playing field with developed countries in this emerging technology, they all acknowledge that the solution is just as likely to come out of Japan, Europe or North America. (I have yet to interview anyone at BYD, so perhaps this will change once I make it to southern China.)

I don't want this post to be interpreted as attempt to knock BYD. In fact, I admire BYD's CEO, Wang Chuanfu, for his courage and optimism and I wish the company every success. However, I think the rest of the world (i.e., all three people who still read my blog) deserve to read views contrasted with those of non-Chinese speaking foreign correspondents who fly first class, ride in limousines, stay in 5-star hotels, then return home to tell everyone China is the new land of milk and honey and BYD will own the future of electric vehicles.

How Many Hybrids has BYD Sold?

Last December, Shenzhen-headquartered BYD Corp. announced the launch of the F3DM plug-in hybrid sedan. BYD's gasoline version F3 is basically a Toyota Corolla lookalike that was the highest selling sedan in all of China during the first eight months of 2009. The F3DM is a plug-in hybrid of the same model. ("DM" stands for "dual mode", meaning that the car has two ways of charging its battery: through the on-board gasoline engine -- like a Prius -- or by simply plugging into an electrical outlet.)



Those who haven't been hiding in a cave (or watching America rearrange the deck chairs on its Titanic health care system 24/7), will also be aware that BYD's li-ion battery technology has attracted the attention -- and the money -- of Warren Buffet. Mid-America Energy, a subsidiary of Buffet's Berkshire Hathaway empire has invested about $230 million to buy 9.9 percent of BYD's Hong Kong traded shares.

Given the fact that BYD is the first company in the world to launch a production plug-in hybrid last December, how many F3DMs might BYD have sold by now? 1,000? 10,000? Nope. Apparently they only managed to sell 100 during the first eight months of 2009.

The initial idea was that BYD was going to sell thousands of F3DMs to government and corporate fleets before opening up sales to individuals in July of 2009. Apparently not even the fleet sales attracted much interest.

Having previously expressed my skepticism about the readiness of both the technology and of China's consumers to pay extra for fuel efficiency, I am not surprised by the poor sales -- though I would have expected at least a few thousand to have been sold by now. I think BYD had higher expectations as well.

None of this means that BYD's technology is not ready for prime time (though I still have yet to see public evidence that anyone has road tested the F3DM with the air conditioner running). What it does mean is that Chinese drivers are just like American drivers: they expect value for their money, and none of the alternative methods of propulsion offers a good value proposition yet.

BYD Doesn't Really Need Buffet's Money

Buffet's Midas Touch is Enough

A story appearing on Bloomberg's website yesterday reported that Warren Buffet's Berkshire Hathaway had already earned a US$1 billion paper profit on shares in Hong Kong listed, Chinese automaker BYD.

What makes this interesting is that, as of yesterday, Berkshire Hathaway (or more precisely, Berkshire's subsidiary Mid-American Energy) had yet to actually purchase any of BYD's shares. Only on July 30 did BYD receive approval from the China Securities Regulatory Commission (CSRC) to sell the shares to Buffet's company.

Since the joint announcement by Buffet and BYD last September 27, the value of BYD's shares have increased nearly fivefold -- before Buffet had invested a single dime in BYD stock. Apparently BYD only needed for the world to see that Warren Buffet approved in the direction the company is going to benefit from his Midas touch.

Of course, there is more credit to be handed out. BYD's sales of 176,814 vehicles in the first half of 2009 more than doubled their sales in the same period last year. Credit can also be given to China's State Council whose 50% tax break on small engine passenger cars have boosted sales of China's domestic automakers. BYD's F3 (the gasoline model) is China's fourth most popular passenger car.

A New Shanghai Bubble?

Unfortunately, there may have also been some irrational exuberance at work. China's stock market has been one of the best performing in the world so far this year, and this has also provided some lift to the Hong Kong market. Analysts are concerned that the sudden resumption of IPOs may have unleashed pent-up demand and begun to inflate a stock market bubble.

And speaking of IPOs, BYD is also considering one of its own on the Shanghai market. This will be a key for the growth of the company as Chinese auto companies may only draw 50 percent of their capital from overseas sources. And despite the fact that Hong Kong now belongs to China, capital raised on its stock market is still considered to be "overseas".

While the run up in BYD's Hong Kong stock price is certainly welcomed by the company, this will increase pressure on them to raise more funds on the mainland. Now that the CSRC has turned on the tap again, there is apparently a lot of money waiting on the sidelines, eager for more IPOs. Two other Chinese auto companies, Chery and Lifan, are also considering IPOs.

But what will happen when the CSRC turns off the tap again? I'm afraid the CSRC will soon discover they are riding a tiger.

GM Exports and China's New Energy Vehicles

GM's China Exports to the US

A few days ago we saw the news that GM is planning to export a surprisingly precise number of cars from China to the US in 2011 -- 17,335, to be exact. Today, Bloomberg reports that GM is negotiating with the UAW over the number of cars to be exported from China.

A few days ago, the number of cars to be exported from China was, as far as anyone knew, zero. How clever of GM to suddenly introduce this straw man into the negotiations! I'll admit that I'm not a big fan of the UAW, but I'm pretty sure they're smart enough to figure this out.

China Will Lead the World in New Energy Vehicles. China Daily says so.

Last week I posted my views that the new energy vehicle market is not China's for the taking. Today, China Daily offers the opposite view, supporting its view with many of the arguments I countered last week including the fact that China's plan calls for the production of 500,000 electric cars annually by 2011, and the fact that "Warrant" Buffet has invested in BYD.

Their ace-in-the-hole, however is the fact that Peter Stevens, British designer of Lamborghini and Lotus models, was wowed by the electric bicycles he saw in the streets on a recent visit to China.

Maybe I need to re-think this...

Will China Lead the World in New Energy Vehicles?

China's auto companies have captured the world's attention in recent months with announcements of alternative energy vehicles, and China's government is making a concerted effort to lead and incentivize development in this sector.  Some commentators have even speculated that this nascent industry may be China's for the taking.  (Okay, maybe I've even joined in the cheerleading a bit myself.)

China's new comprehensive auto policy released in March contains not only a target for producing as many as 500,000 "new energy vehicles" (新能源汽车) per year by 2011, but also contains provisions for research subsidies, infrastructure support and consumer incentives.

And it seems that China's automakers have heard the government's message loud-and-clear. Hardly a week has passed since the beginning of 2009 without at least one announcement from a Chinese automaker about the development of some type of new energy vehicle, battery technology or green R&D project.

Furthermore, Shanghai's recently ended Auto Show saw the exhibition of some 50 different models of new energy vehicles from hybrids, to fuel cells, to pure electrics.  Almost every manufacturer had at least one vehicle on display with unmistakeably green-sounding words emblazoned on the sides.

Another argument one often hears favoring China's future leadership is the "leapfrog" argument. China was able to leapfrog directly to mobile phones because it had not been saddled with legacy fixed-line telecom assets.  Now China is poised to do the same with new energy vehicle technology.  China will benefit from a "level playing field" in terms of new energy vehicle development because the technology is still in its infancy in the developed auto markets.

If none of the above is argument enough, I have two words:  Warren Buffet.

Buffet is not the kind of guy to go throwing Berkshire-Hathaway's money around for social causes. When he invests, he fully expects to earn a return.  This is why he has very publicly decided to buy up to ten percent of Shenzhen's BYD, the only company in the world to have put a plug-in hybrid into production.  Surely this is enough reason to believe that the Chinese have a leg-up in the race to build an affordable new energy car.

I hate to be one to stop the music while the party is getting underway, but I have yet to see any convincing evidence that China can inevitably lead the world in this technology.

First, anyone who watches China closely enough knows that China's Central Government does not control everything that happens in the country.  For example, the very same policy document that contains the new energy vehicle provisions also contains a provision for consolidation in China's auto industry. Even before this document was released, the Central Government had been preaching for years of the need for consolidation among China's 100-plus vehicle assemblers. Since the turn of this century, there have been exactly two mergers among major auto manufacturers.

Just because the government has proclaimed its desire to develop a world-leading new energy vehicle industry does not mean that it is destined to happen.

But what about all those announcements from China's auto companies about their new energy projects?  

Earlier this week I had a conversation with a local "expert" in China's auto industry, someone who has advised the NDRC on China's auto and high technology policies.  In answer to this question he asked me, "who is selling these cars in China?  Who is buying these cars in China?  All the companies are talking about it, but very little is actually being done.  (Conversation in English, speaker's emphasis.)

Why?

His belief is that the auto companies see all of this new energy talk as a possible key to preferential policy.  If they are seen to be working hard toward this goal, it may be of some benefit to them in the future.

Furthermore, he says, "if the United States, Japan and Germany have not yet figured out a way to get consumers to buy these kinds of cars in large numbers, what makes you think China can do it?" The fact that Chinese want to sit in cars in heavy traffic during a time that Chinese cities are spending billions on subways and other public transportation should tell you that environmental protection is not a high priority for them.  "They will not pay a premium for a car in order to help the environment.  If they could afford the premium, they would use it to buy a bigger car or a more famous brand."

And while the government has offered some pretty generous subsidies to cover the gasoline vs new energy price differential, some have questioned whether it would still be enough to convince consumers to pony up for the environment.

What about all those new energy vehicles displayed at the Shanghai Auto Show?

I have to admit that the auto show left me a bit skeptical of some of the displayed offerings.  I talked with someone at the First Auto display about their "hybrid" vehicle, and though she had approached me first and asked if I had any questions about the vehicle, she actually knew very little about it. (Thinking it was a language issue, I switched to Chinese which seemed to make her all the more eager to get away from me.) 

At another manufacturer's booth, I noticed that their "plug-in hybrid" appeared to be just a regular SUV with a fancy paint job and an electrical cord emerging through the front grill.  I was tempted pull on it to see if it was connected to anything.

What about the "leapfrog" argument?

I must admit that this one makes some sense at first.  I remember being a little embarrassed that blue-suited farmers on a train had better mobile phones than mine back in 2002.  However, there's a big difference between buying a new technology invented elsewhere (as mobile phones had been) and developing a new vehicle technology to the extent that consumers can afford it and would willingly choose it.

And while I have the utmost respect for Chinese engineering prowess, I don't believe that they have already won the race.  Furthermore, assuming the Chinese surmount the engineering challenges, there's also the marketing challenge.  The Japanese have been at this for longer than anyone else, and they still haven't figured out how to get Americans outside of California to buy the Prius.

What about Buffet's investment in BYD?

This one has me scratching my head.  So far, BYD has sold few (if any) of their F3DM plug-ins to consumers.  (I saw a recent report that said they had only sold 80.)  While this vehicle may indeed be available for sale, I am beginning to have doubts as to its marketability.  If people really wanted them, would not BYD have figured out how to ramp up production by now?

So what's in it for Buffet?

My guess, and it's only a guess, is that BYD's battery technology may be Buffet's consolation prize. Remember that BYD was a battery company for over a decade before buying a small state-owned car manufacturer in Xi'an.  From someone who has visited that factory, I understand that, while the vehicles were basically junk when BYD took over, they have made significant improvements in quality.  However, I think that where BYD may be able to make a bigger splash in the world is to license its battery technology to a much bigger auto company with the scale to crank out vehicles at a price point at which consumers almost want to buy them.

BYD simply doesn't have the scale, and despite Wang Chuanfu's ambitions to overtake Toyota within a few years, they will need a lot more Warren Buffets to come forward to fund such expansion.  His best bet may be to sell his technology for a cut of every vehicle that a Toyota or a GM can sell with his technology.

Don't get me wrong, I want to see a green vehicle revolution as much as anyone.  I just don't believe that China has a lock on the future of this market.  At this point, it's too early to declare a victor, and China has no natural advantage in this race.

State-Led Development and Auto Battery Technology

An article in Business Week asks whether the U.S. government should get involved in helping U.S. automakers to develop battery technology. They raise this question because the U.S. suddenly finds itself playing catch-up in development of a new technology -- a position to which the U.S. is not accustomed.

Should Uncle Sam provide billions in loans and grants to a promising but unproven business? Or should the government wait for the market to sort things out before it backs a U.S. company? The risk is that by then another major industry could go the way of memory chips, digital displays, the first solar panels, and the original lithium-ion batteries used in notebook PCs and cell phones.

American scientists, funded by federal dollars, were at the forefront of each of those. Yet the industries—and the high-paying manufacturing jobs that go with them—quickly ended up in Asia. U.S. labor costs and taxes drove many operations abroad, but often industries fled simply because Asian governments, banks, and companies were more willing than Americans to risk big capital investments.

As the article points out, "the Asians" (I think they mean "East Asians") already have a couple of advantages in auto batteries: 1) a jump on lithium-ion technology on which the new generation of auto batteries are being built and 2) deep pockets from which to finance its further development.

What I find most interesting about this situation is that U.S. automakers are now struggling with some of the same questions that China's state-owned automakers struggled with 20 years ago as they developed their auto industry.

General Motors and Ford both assert that a domestic lithium-ion industry is vital if the U.S. is to be a major player in green cars. Otherwise, Detroit's fate would be in the hands of suppliers half a world away.

According to Eric Thun's Changing Lanes in China, back in the 1980s and early '90s, as the Chinese attempted to develop an auto industry, several development models surfaced:

• A local developmental state in which Shanghai's government coordinated the development of a local ("local" meaning Shanghai, not China) network of supply firms.
• A local laissez-faire state as typified by Beijing and Guangzhou's hands-off approaches that allowed assembly firms to take advantage of competition among supply firms.
• A centrally-controlled SOE model in which the Central Government and local municipalities did not coordinate development efforts.

Thun's analysis demonstrates that Shanghai's developmental state model produced the best outcomes and was most suitable for the initial stage of auto industry development.

Beijing and Guangzhou's willingness to allow supply firms to duke it out when assembly plants did not yet have adequate scale to support a supply network resulted in their assembly firms buying parts from wherever they could get them, and that included both Shanghai's parts suppliers as well as foreign JV partners. This defeated the whole purpose of trying to develop a "local" auto industry.

The centrally-owned SOE firms located in Changchun (FAW) and Wuhan (Dongfeng) had similar difficulties in that their local governments, who were motivated to spur their development, were unable to coordinate with the Central Government. The Central Government was far more concerned about development of their firms than of the local regions in which the assembly plants were located.

Without delving too much further into Thun's findings (hang on, I do have a point!) it is important to point out that these models were not selected by city officials from a menu of options. To a large degree, they were path dependent; each model could have been predicted based on local bureaucratic traditions.

My point here (whew!) is that, when a brand new industry was under development, and when it was taking place in a world in which other countries had already begun to blaze a path for that industry, Shanghai's coordinated model seemed to work best. It provided Shanghai with an auto industry that was increasingly self-reliant, and that produced the highest-quality cars in China (at the time).

Given China's experience with development of a new industry, do current conditions call for some sort of state-coordinated development in order for the U.S. electric auto industry not to be prematurely lost to those of other countries?

Does the fact that German, Japanese, Korean and Chinese firms have what seems to be a head-start in development of battery technology justify the intervention of the U.S. government?

Well, looking only at the example of China, we see that China's government is currently pouring a tremendous amount of funds into development of "new energy" autos. However, the only Chinese company currently marketing a plug-in hybrid is a private company, BYD, whose most prominent investor is none other than Warren Buffet.

What do you think? If Shanghai's coordinated model was most successful in giving its local auto industry an advantage, why wouldn't a similar model apply to the development of electric auto technology?

Local Protectionism Rears Its Ugly Head

An excellent article in the 21st Century Business Herald outlines an increasing number of local protectionist policies that are beginning to pop up all over China.

Local protectionism, or policies that encourage purchasing locally-made products (or discourage buying products from elsewhere) used to be a problem in China that received a lot of attention in the 1980s and '90s, but it hasn't received much press over the past decade or so. Perhaps that was because the long bull market brought enough of a rising tide to lift all boats.

To quote Warren Buffet (and mix my metaphor somewhat), now that the tide is receding, we can see who has been swimming naked. A lot of local regions desperate to bolster their economies are enacting policies to keep as much money as possible at home. Unfortunately, even some who had been wearing swimming trunks are also joining in the beggar-thy-neighbor games.

According to the article:

• The City of Hangzhou is adding 5 percent on top of the already announced 13 percent "home appliances to the countryside" rebates -- but only for purchasing local brands.
• The City of Changchun is waiving new car inspection fees, but only for cars made by First Auto Works which just happens to be headquartered in Changchun. They are also requiring that no less than 50 percent of equipment purchases for large projects be of locally-made equipment. And they are adding a further 10 percent subsidy to the Central Government's subsidy for tractors and farm equipment made locally.
• An Anhui Province internal document obtained by a reporter contains the following provisions:

1. Infrastructure projects should use equipment made in Anhui Province
2. Anhui party and government organizations, as well as city taxi companies, should buy cars made in Anhui. (Cars made by Chery and Jianghuai, two Anhui auto manufacturers, are specifically mentioned.)
3. Enterprises in Anhui, especially in the auto and home appliance industries, are instructed to use steel produced in Anhui.
4. Anhui government projects are instructed to use Anhui-produced steel, concrete, doors and windows, glass, wiring and electrical equipment.
5. Anhui energy producers are to purchase coal from Anhui.
6. Promotion of Anhui-produced tobacco and alcohol products.
7. Purchases made by all levels of government are to be of Anhui products.
8. In implementing the Central Government's "home appliances to the countryside" policy, Anhui-made farm equipment and fertilizer are to be promoted. (Which seems a strange directive given that the policy is intended to promote purchases of "home appliances" -- hence the name -- not farm equipment.)

When asked whether this policy amounted to local protectionism, an official of the Anhui provincial economic commission stated that this only applies to state and public institutions. For privately owned enterprises, they are "only advocating" purchase of locally-made goods (emphasis added). He further noted that, "our cement industry is very well developed, so giving priority to buying this province's cement is not a bad thing".

But all is not lost. Apparently some people have been listening to economists (or at least to their own common sense).

At the beginning of the year, the City of Wuhan's draft government work report contained a provision recommending that plans be drawn up to encourage consumers to buy products made in Wuhan. After discussion, this provision was excised from the final document as some believed the government "should not use the excuse of the financial crisis to violate the market economy by intervening".

Apparently the Central Government is powerful enough to stiff-arm Chongqing's attempt to stimulate its local real estate market. Is it strong enough to stop the self-destructive spiral of local protectionism?