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.
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.
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?
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. ;-)
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.
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.
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