Why is Chery Losing Talent?

A few days ago, the Wall Street Journal's ace auto journalist in China, Nori Shirouzu, reported that Beijing Auto has recruited away Chery's current Chief of R&D.

While this news, in and of itself, is certainly no cause for alarm, it seems to be part of a larger trend that may portend difficulties for Chery. According to several well-placed insiders with whom I have recently spoken in China, Chery may be having a bit of a problem hanging on to its talent.

The R&D Chief who has recently left, Gu Lei, brought with him to Chery 11 years of experience at Ford Motor Co. Mr. Gu's predecessor was also highly sought after to run Chery's R&D, but he departed for academia after only three years -- and several very successful model launches, I might add.

Some of the discontent -- and this is only speculation -- may be arising from Chery's ambitious launch schedule. The company has announced that it would launch an astounding 15 new models this year -- a schedule that, at this point, no longer looks possible, but which nevertheless may work Chery's people to death as they attempt to achieve it.

One Chery insider, who also recently came from a foreign producer, confessed to me that he no longer has weekends off since he joined the company. While he's excited to be working for a domestic automaker, he wasn't certain how long he could keep up the pace.

How do Australia's Foreign Investment Rules Apply to China?

Australia's government announced yesterday an easing of foreign investment rules. The rules have apparently come under criticism recently for causing delays that may be overly burdensome to foreign investors.

One recent deal, the proposed purchase of a controlling interest in Aussie miner Rio Tinto by Chinese metals company Chinalco, was canceled during Australia's review process. According to Reuters, some critics have complained that the delay caused by Australia's review process injected doubt and uncertainty, possibly causing Rio to cancel the deal before a decision was rendered. There is, of course, no evidence to support this speculation.

The Reuters story also points out that the changes to Australia's rules only affect private investment. Sovereign investment, that is, investment by foreign governments, is still subject to the same rigorous review process. So in fact, this change in rules would have had no effect at all on the Rio Tinto purchase. Chinalco is owned by China's central government, and its proposed controlling purchase of Rio was only a small part of the $12 billion in Chinese state investment into Australia proposed during the first five months of 2009.

One question not addressed is how exactly Australia will distinguish between "public" and "private". Among most countries with market economies, the question is not so difficult to answer.

For example, if Ford Motor Co. from the US wanted to buy an Australian parts company, this would be considered "private" investment. But if General Motors wanted to buy the same parts company (and assuming it were able, which I know is a bit of a stretch) this would be considered "public" since GM's majority shareholder is the US government.

But how would these rules apply to Chinese companies?

For example, Lenovo, maker of the Thinkpad on which I write this post, is a publicly traded company. If it wanted to buy an Australian software firm, surely it would be considered private, right? Not exactly. When you follow the trail, you find that Lenovo's controlling (though not majority) shareholder is the Chinese Academy of Sciences, a government-controlled thinktank.

What about Geely Motors? Geely is traded in Hong Kong, and its controlling shareholder is the company's Chairman, Li Shufu, a private Chinese citizen. I think this case would be more clear cut, and indeed, apparently Australia thought so when they allowed Geely to buy DSI, an Australian maker of drivetrains.

However, as I pointed out in a recent post about Geely, the line between "public" and "private" in China can be blurry. Despite the private ownership of Geely, China's State Council apparently maintains the right to sign off on Geely's strategy for expansion.

China's Auto Policy: Under-Promise, Over-Deliver?

People's Daily reports some surprisingly strong numbers in terms of the domestic market share of China-branded passenger cars:

In the first half of 2009, Chinese-brand car sales reached 955,300, an increase of 4.21 percentage points year-on-year and accounting for 45.32 percent of the total passenger vehicle sales and 29.45 percent of the total sedan sales respectively.

Compare these numbers with the three-year goals stated in China's recent "Automobile Industry Adjustment and Stimulus Plan" (which I previously wrote about here). This policy was released only in March of 2009:

自主品牌乘用车国内市场份额超过40%，其中轿车超过30%。

Chinese brands will surpass 40 percent of the passenger car market, among which sedans will surpass 30 percent.

If I read this correctly (and if People's Daily's statistics are to be believed), the State Council's three-year market share goals were achieved about two-and-a-half years ahead of schedule!

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.

Malcolm Bricklin and Chery, The Movie

I stumbled upon this fascinating documentary today, and dropped what I was doing to watch the entire film in the middle of the day. The Entrepreneur documents the efforts of Malcolm Bricklin to introduce cars made by Chery of China into the United States. Bricklin previously had success with introducing Subaru to the US, and later, initial success by introducing the Yugo (which later turned out to be a fiasco).

The film was made by Bricklin's son, Johnathan, who was apparently given uncensored access, not only to Bricklin's board meetings, but also to negotiations with senior Chery management in China.

What I found most fascinating is the way Bricklin basically browbeats his Chinese hosts into signing an agreement with him. This goes against everything that China "experts" tell us about negotiating with the Chinese -- that typical Western emotional reactions have no effect on Chinese negotiators.

I don't think I am giving anything away by revealing the fact that Bricklin's venture was ultimately unsuccessful. If it had been, we would see Cherys on US roads today. However, I must admit surprise at how it all ended. My original assumption had been that the failure lay completely at Bricklin's feet. Indeed, the entire documentary, except for the last five or so minutes, gives one the impression that this excitable, hot-tempered entrepreneur could not possibly succeed in holding up his end of the contract.

So why did it all fall apart? Well, I'll leave that for you to judge -- that is, if you have about an hour and a half to watch a fascinating story.

You can find the entire documentary online at Hulu.com. Once you've watched it, feel free to return here and post your thoughts.

How does Bricklin get away with breaking all the "rules" of negotiating in China?

Did he ever really have an agreement with Chery?

Whose fault was it that this venture never got off the ground?

In Lieu of an Actual Blog Post...

A decision to spend the rest of the summer in LA, followed by a decision to move to a different apartment, have interrupted my original research plans. Once my move is out of the way, I expect to spend the rest of the summer absorbing the content of the 30+ interviews I have conducted in China thus far and planning my return to China later in the year, as well as hopefully resuming a more regular blog posting schedule.

Meanwhile, I was recently interviewed about my research by the intrepid Aimee Barnes, a New Yorker and China specialist who interviews other China specialists with diverse backgrounds. I am honored to have been added to the mix.

You can find a transcript of the interview on Aimee's blog, here.

The Blurry Line Between Public and Private

According to my original plans, I should be touring a factory right now. Unfortunately, I'm a bit under the weather, so I have a few moments to post an interesting story about someone else's factory visit. (No, I don't have H1N1 "swine" flu.)

A few weeks ago, Chinese Premier, Wen Jiabao paid a visit to Geely's automotive factory in Hunan Province. Despite the fact that Geely is not a state-owned enterprise, this visit is not all that surprising. State leaders all over the world pay visits to privately owned businesses from time to time.

Standing behind Wen's right shoulder is Li Shufu, founder, Chairman and controlling shareholder of Geely.

What makes Wen's visit interesting, however, is the fact that Wen's government itself directly and indirectly owns or controls several competing auto manufacturers. Wen also had some interesting things to say while there:

我今天的讲话就是为吉利今后的发展指明了方向，并请吉利半年后再向国务院提交专题报告，我将再次批示继续支持吉利汽车工业发展。

Today I am speaking about the future direction of Geely's development. I am also asking Geely to submit a special report to the State Council again after six months. I will once again give instructions to continue to support Geely's industrial development.* (emphasis added)

So apparently, at some point in the past, Geely has submitted a "special report" to the State Council (China's "cabinet"), and from the sound of this story, Wen is offering Geely a chance to re-submit this report for consideration. I hesitate to read too much into this, but it does sound to me as if Geely's first report may not have been acceptable.

An automobile analyst with whom I have met here in Shanghai tells me that this "report" is a development plan that charts the strategic direction of the company. The fact that China's government has identified the auto industry as a "pillar" industry over which it intends to continue to exercise heavy influence, plus the fact that Geely is solidly among China's top ten auto manufacturers are reason enough for the government's concern. Despite the fact that Geely is nominally "private", its strategic plans will have to be approved in Beijing.

The surprise for me here is that Beijing is taking a visible lead in the plans of a private firm. I would not have been surprised to learn that the local government of Zhejiang Province, where Geely's headquarters are located, exercises this level of influence, but I am surprised that Beijing is taking such an interest.

In fact, this challenges what I thought I knew about the level of government influence in this industry. My previous impression had been that the central government was only involved at a strategic level with the handful of firms that it directly owns (FAW and Dongfeng), and that all other auto firms were more heavily influenced by local government.

In addition to its apparent role in Geely's strategic direction, the central government also has perks to offer. In the story referenced above, the final sentence says "年初，中央各大新闻媒体也纷纷对吉利的成功经验作了报道。" ("At the beginning of the year, all of the major central news media outlets made reports on Geely's successful experience.")

This confirms what an executive of one of China's major auto firms personally told me a few weeks ago. "The Central Government offers a kind of support that no local government in China can offer. The Central Government is the only government that controls national level media -- local government only control local media -- and many favorable news stories about a car company can have a big influence on consumer perceptions."

Of course, this brings up questions for which I have no answer. For example, how does the central government choose which auto companies it wants to support? Is there a quality about the company (not necessarily related to the quality of its products) that draws government support? Or do auto companies have to proactively seek this kind of government support? And if so, what does it take to win them over?

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* I'm a little unsure as to my translation of 批示 in this context, so please feel free to offer an alternative translation in the comments.