China's Green Car Sales in 2012

Just a few years ago, pretty much everyone (except Chinese auto industry insiders whom I interviewed) thought China was about to take ownership of the global green car market. (Here's just one example from the excitable Tom Friedman of the New York Times.)

In 2009 China's industrial planners announced plans to have 500,000 green cars ("New Energy Vehicles" or "新能源汽车" -- a combination of electrics and hybrids) on Chinese roads by the end of 2011. That obviously didn't happen, so last year, that same target of 500,000 was pushed out to 2015.

So how did green car sales fare in 2012? Overall, hybrids plus electrics grew a respectable 52 percent.

So while sales grew pretty well in percentage terms, it is clear that overall numbers are still inconsequential when you consider that 19.3 million vehicles were sold in China last year. 

How do these numbers compare to the US?  Green car sales in the US grew 73 percent to over 440,000 in 2012.  (Includes electrics, hybrids and plug-in hybrids.) So China's aim of 500,000 sales may still be a bit ambitious when you consider that not even the world's largest market for green cars has reached that number yet. Nevertheless, just as China has eclipsed the US in overall vehicle sales since 2009, China can probably be expected eventually to eclipse the US in green vehicle sales too.

One thing that we can surmise from these numbers is that China has clearly yet to become the global green car powerhouse it had aspired to become. The reason is simple, and it also explains why China's auto industry -- despite having been relaunched over 30 years ago -- has yet to produce a globally-competitive home-grown brand. (Investigation of this question consumes a major portion of my book, Designated Drivers: How China Plans to Dominate the Global Auto Industry.)

The state-dominated structure of Chinese industry does not provide the proper incentives for innovative leadership. China has private automakers, but they continue to be marginalized in terms of state support and access to funding. The big state-owned enterprises (SOEs) continue to receive every benefit that central and local governments can hand out, yet they are still led by politicians who have no incentive to take risks or invest for the long term.

The green technologies being used in Chinese EVs and hybrids are, for the most part, purchased, licensed or copied from foreign automakers. This is not a recipe for ownership of a global market.


_______________________
Green car sales data sources:
2010, 2011, 2012

Comparing Corruption in China and the US

Today's WSJ China Realtime reports on a study by a George Mason University economist who attempts to compare corruption in the US and China.  His conclusion is that corruption in America's Gilded Age (1877-1893)* was worse than corruption in China today.

Perhaps the conclusion is correct, but the methodology used by this professor is flawed.  US corruption is measured by mentions of corruption in US newspapers 1870-1930.  China corruption is measured by mentions of corruption in US (not Chinese!) newspapers 1990-2011.

So he is measuring corruption in two countries by the number of times the newspapers of only one of the countries mentions the word.  Even if the researcher had used Chinese newspapers, the study still would have been flawed due to Communist Party control of Chinese print media throughout the period in question.  (Why the author of the study did not even attempt to scan Chinese newspapers for mentions of corruption, I don't know, but I'll venture a guess that it's because he doesn't speak Chinese.)

The question the researcher is asking is a valid one.  America during its Gilded Age was extremely corrupt, as is modern day China.  An answer as to which one is/was more corrupt would be enlightening.  It would be interesting to consider whether actions taken to curb corruption in the democratic America of the Gilded Age are even remotely applicable to modern authoritarian China.

Nice try, but we're still no closer to a valid measure for corruption that we may compare across countries.

____________________
* The official dates of the Gilded Age are considered to be 1877-1893, after which the Progressive Era began, but the author of the quoted study extends his analysis to 1930.

GM and SAIC: Trouble in Paradise?

General Motors (GM) and Shanghai Auto (SAIC) announced in December of 2009 that they were deepening their partnership beyond their joint venture in China.  Together they created a 50:50 joint venture, registered in Hong Kong, for expansion outside of China.  Now that partnership appears to be coming apart.

Initially, the plan for the HK JV was for the two sides to work together in India and possibly elsewhere in the future.  (For further insight into this particular deal, please see Chapter 4 of Designated Drivers.) As for the India venture, GM would contribute two existing factories in India, along with its Chevrolet brand, and SAIC would contribute cash -- something that GM had been seriously lacking as it had emerged from bankruptcy earlier that same year.

Another part of the deal was for GM to hand over 1% of its ownership in its 50:50 China-based JV with SAIC in exchange for about $85 million.  As GM's people explained it, SAIC would be able to help GM gain bank financing outside of North America (as if no one outside the US had been aware GM was in bankruptcy).

Thanks to a clever analyst who has combed through GM's SEC filings, it has now emerged that SAIC appears to have backed out of the India joint venture, and GM has stepped in to buy out SAIC's portion for $125 million -- ironic since GM was previously so desperate that it was willing to hand over control of SAIC-GM to SAIC for a mere $85 million.  The India joint venture has now gone from an equal 50:50 partnership to a 93:7 partnership in favor of GM.

One can only speculate as to why SAIC has decided to pass up an opportunity to participate in the burgeoning demand for small cars in India. Until now, the two partners, SAIC and GM, have been considered to be among the "most harmonious" Sino-foreign joint ventures.

Now that GM has regained its profitability in North America, has GM perhaps decided it no longer needs SAIC's cash to expand to other markets? Has SAIC decided it would also prefer to go it alone?

If things have truly soured between the two partners (or if they are merely less keen on each other than they were before), SAIC has the most to lose here.  In China, SAIC still makes most of its money by selling GM- (and VW-)branded vehicles.  While SAIC has its "own" brands, MG and Rover, these were purchased outright from the UK and not self-developed. GM, on the other hand, appears once again to be running its massive research and development pipeline full steam ahead back at home.

But will China's smart, young automotive managers ever get to lead?

There is a great piece by Automotive News China Managing Editor, Yang Jian, on their site this week.  (The full article is reproduced on the AdAge site here without restriction.)

Yang Jian notes that, at the recent Global Automotive Forum in Chengdu, a lot of senior auto executives couldn't be bothered to address the crowd, so they sent younger managers in their place. The result was a level of candor not normally expected of senior auto execs.

A few examples:

A Chang'an VP on electric vehicles: "you will find there are still a lot of problems with these vehicles when you develop them with taxpayers' money."

Chery's sales chief admitted to short-termism: "We strived to rank first or second in sales among domestic brands,...but we forgot to ask what our future direction should be." (There are a few other examples in the original article.)

Yang rightly praises the pragmatism of this younger generation, and expresses hope that these younger guys will turn around the erosion of Chinese brands' market share when they get to the top. And I largely agree -- if they do get to the top, that is.

In order for that to happen, China will have to do a radical re-think of how SOEs are managed. 

The way it works now is that SOE (state-owned enterprise) leaders tend to be more politician than business person. Most of them held political positions before landing in or near the head office of an SOE, and many will return to political positions after their tenures are up. 

Unlike a lot of these younger managers, most of these senior managers didn't come up through the ranks in the auto industry. Even the few who may have worked in the auto industry when they were young may have possibly been just as pragmatic as today's younger managers, but something apparently changed along the way.

Leadership, unfortunately, tends to drive out a lot of idealism and replace it with survival instinct. The CEOs of state-owned enterprises work, not for a diverse group of shareholders who just want to get rich. They work for the Communist Party whose overarching goal is to remain in power -- a goal often at odds with efficient, productive and profitable business.

Fragile Bridge: Conflict Management in Chinese Business

In March of 2012, Andrew Hupert released his first e-book, Guanxi for the Busy American, a quick yet thorough read on how to navigate the potentially treacherous waters of guanxi in China.  He now follows Guanxi with his second book (within less than a year!), Fragile Bridge: Conflict Management in Chinese Business.

As much as I enjoyed Guanxi for the Busy American, I found Fragile Bridge to be even more interesting and applicable across many more situations.  Hupert provides the reader not just with practical advice on structuring agreements and contracts, but more importantly, he spells out the warning signs of future conflict.  Many behaviors that come natural to the Western business person appear as red flags to their Chinese counterparts, and avoidance of these behaviors are a real key to setting up a partnership for success.

Even the word “conflict” in the title of this book should be an indicator of just how differently the Chinese and Western sides of a partnership approach business.  Much of what counts for “conflict” in this book is indeed “conflict” from a Western perspective, but from the Chinese perspective, it is simply part of doing business.  While Westerners are accustomed to a fair amount of conflict leading up to the signing of a contract, the general expectation is that this is the point at which conflict ends, and both parties do their best to adhere to the terms of the contract.

While it has now become practically cliché to say that Chinese and Westerners view contracts differently, Hupert opens a door on what the Chinese side is thinking both before and after contract signing, how they constantly assess the performance of both the business and their foreign partner, and how they will maneuver to improve the terms of the deal for themselves.  Having this knowledge certainly will not prevent conflict, but understanding what motivates the Chinese side, and having Hupert's advice on how to address Chinese concerns (most of which they will never verbally express) will equip Western business people far better than an entire lifetime of experience in a Western-only business setting.

This 10-chapter book is structured to mirror the life of a Chinese-Western partnership from beginning to end – whether that end is a continuance of the partnership or a dissolution.  In each chapter, Hupert  provides clear theoretical explanations of how and why Chinese and Western expectations differ, and then he provides case studies that illustrate both successful and unsuccessful ways of dealing with conflict.

There is also a larger, fictional case study about an American partner, Stan, and a Chinese partner, Jimmy who meet in college in the US and establish a business together in Shanghai.  Each chapter ends with a telling of the portion of the Stan & Jimmy story that applies to that chapter, and the story is so well-told, that the reader will find it hard to stop reading at the end of any given chapter.  (In my case, I read the entire book on a flight from Los Angeles to Taipei in about three or four hours.)

I am not certain whether it was intended this way, but Hupert's new book seems to be a sort of prequel to his first book in that it is a longer and broader work covering many aspects of Chinese-foreign business partnerships, just one of which happens to be guanxi (which can be loosely translated as “connections” though there is much more to it than that).  To anyone who has yet to read Guanxi for the Busy American, my advice would be to read Fragile Bridge first, then pick up Guanxi for a more in-depth treatment of this very important topic.

For those who have already read Guanxi, you will find that Fragile Bridge contains the same kind of practical advice, except that it is extended to many more situations in addition to the building of guanxi.  And regardless of the order in which you read Andrew Hupert's two excellent books, if you're serious about succeeding in business (or any kind of negotiation) in China, you really cannot afford not to have both of these books in your e-reader.

Fragile Bridge: Conflict Management in Chinese Business is available for $9.99 in Kindle format at Amazon.com and in many other e-book formats at Smashwords.com. 

In praise of public-private partnership

Today's splashdown of the SpaceX Dragon capsule off the coast of California completes the first successful visit of a private spacecraft to the International Space Station.

This news isn't really China-related, but it illustrates an important aspect of state vs private sector investment. To over-generalize a bit, (American) conservatives would prefer that the private sector do everything, and (American) liberals would prefer that the state do everything.

Here we have illustrated the importance of public-private partnership. Without the initial leadership of the state, the US would not have reached the moon in 1969. It took far more investment than any private sector investor would have been willing to risk for what was basically a huge experiment with no monetary payoff.

Based on a few decades of learning, a private company has now managed to come up with a solution far less expensive, and at least as effective, as anything the state could have come up with to send supplies to the space station. And this was apparently just the beginning; the Dragon capsule will someday ferry people too.

Bringing this lesson closer to my area of interest, perhaps it also makes sense that governments subsidize the development of alternative methods of fueling personal transportation. Right now, the economics of electric vehicles simply don't make sense. This is why it is important that governments step in to subsidize the experimental phase.

As with the original moon shot, alternative fuels and methods of propulsion are experimental (and arguably far more important), but no private sector investor would be willing to take such a risk to build a product that doesn't yet provide a positive return on investment.

This isn't to say that governments will always be right, but that's the nature of experimentation. Thomas Edison conducted over 3,000 experiments with different materials for filaments until he finally made a lightbulb that worked. For small experiments such as Edison's, no government help was needed, but without government regulation and assistance, we would never have moved beyond the traditional gas guzzlers we were driving back in the 1970s.

Scorn of conservatives: The Chevrolet Volt

When I began to research business-government relations in China's auto industry several years ago, I started with a question of why China seemed to be achieving such great success under the heavy hand of the state. What I have since learned is that, while, yes, the state can drive outstanding growth in an agrarian society with low living standards, the ability of the government to make good decisions declines as technology becomes more complex.

China has now reached a point where its government needs to be smart enough to step back and allow the private sector to compete freely (and not just talk about it). All the government assistance in the world will not make state-owned businesses competitive. They simply lack the proper incentives.

At the same time, the American people also need to realize that the US will never grow as fast as China has grown over the past three decades (and neither will China again). We also need to realize that there is a place for government to invest in experimentation that will result in much-needed future technology. Sometimes the government will make mistakes, but fear of making mistakes will deprive us of potential successes.

Being counted among the most advanced countries on earth is not easy, as the Chinese are about to discover, but the notion that either the government OR the private sector is best suited to drive future innovation is a false choice. We need both. We need the competitive zeal of the private sector, and, sometimes, we also need the deep pockets of the government to take on problems too big for the private sector.

The Chinese system of dominant state ownership is nearing the end of its usefulness, and if the Chinese don't figure that out, they are doomed to stagnation and chaos. US arguments over "socialism" vs "free-markets" are also pointless. Somewhere, in the middle, there is an ideal system in which ownership still lies primarily with the private sector, but the government takes the big risks that can potentially save the planet for our children and grandchildren.

Book Giveaway!

To celebrate the imminent release of my book, Designated Drivers: How China Plans to Dominate the Global Auto Industry, I will be giving away three signed copies next week.

Designated Drivers is about much more than the auto industry. It uses China's auto industry to tell a story about how China's central government manages its economy in its drive to create global industrial champions. It's an important story for anyone considering doing business in or with China as well as for policymakers who want to better understand business-government relations in what is still the world's most consistently fast-growing economy.

If you would like a chance to win a free copy of my book, all you need to do is "like" the Designated Drivers Facebook page and share it on your page. The Facebook page is here:

          https://www.facebook.com/DesignatedDriversChina
 
On Tuesday, May 29 at 08:00, pacific time, I will select three "likers" at random* and send each of them an autographed copy of Designated Drivers.

And if the number of "likes" surpasses 500, I'll throw in another two copies for a total of five possibilities to win!

This morning a friend emailed me a picture taken at a bookstore in Hong Kong showing a few copies already on the shelves there, so it should only be another week or so before copies reach North America.

_______________
* To ensure randomness, I will copy all names into an Excel spreadsheet, number them consecutively, and use Excel's random function to select three (or maybe five!) numbers from the list.