Monday, June 29, 2009

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:

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?

* 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.

Saturday, June 20, 2009

How far should governments go to protect us?

A big difference between doing research back home in Los Angeles and here in China is that I feel like I'm on the clock 24 hours a day. Not that I have had much fun over the past five years that I've been attending UCLA, but when I'm away from home, there's this constant feeling that, for every moment of fun or relaxation I may have here, that's one moment longer that I will be away from home.

I guess all of this is to say that, I've been neglecting my blog, and I feel a little guilty about it -- but not so guilty that I'm going to start posting frequently again. Which is a shame because there have been so many interesting events for which I have started outlining blog posts in my head only to decide later that my time would be better spent reading an article, reviewing my field notes or preparing for my next interview.

One recent topic of interest for which I would love to write a much longer analytical article has been the reaction by various governments to the H1N1 swine flu. The contrast between the responses of the US and Chinese governments (including Hong Kong) could not be more stark.

Whereas China and Hong Kong are checking temperatures on planes before allowing people to disembark, and forcing anyone with an elevated temperature (as well as anyone who has been in close proximity to them) into quarantine, the US government has done very little.

While I have an uneducated opinion about the efficacy and necessity of various preventative measures being taken in China and Hong Kong, the purpose of my writing about this topic is not to criticize, but to point out the huge disparity in reactions.

Back in 2003, China's reaction to SARS was widely criticized, but the criticism was not about what China did to prevent SARS. Rather, it was about what local Chinese officials did to cover up the presence of the disease. China's actions now to prevent the spread of H1N1, a disease only slightly more fatal than common seasonal flu, appear to be intended, if nothing else, to demonstrate to the Chinese people that their government can indeed protect them from disease. And the complaints about quarantine that I have been reading online are coming primarily from foreigners (i.e. citizens of countries other than China) who have been forced to waste time and money confined in Chinese hotels. Commentators in China and Hong Kong seem (from my perspective) fairly supportive of their governments' respective actions to protect them.

The US government, on the other hand, is behaving pretty much the same as during the SARS outbreak of 2003. Though SARS was a far more deadly disease, in both cases, the US government basically assessed the risks and allowed American citizens to make their own decisions as to whether they should travel.
Only today did the US government issue a travel warning, and ironically, the warning was not about the dangers of contracting swine flu, but of the risks of being quarantined by the Chinese government which does not reimburse lost travel expenses.

While I know there are certainly exceptions, my guess is that most Chinese and American citizens reading this post are thinking "well, of course, our government is doing exactly what we expect of them!". Chinese aren't complaining about quarantine, and Americans aren't begging for more protection. In the end, whether democratic or not (and depending on whether it threatens their hold on power), governments tend to run day-to-day operations in ways that they think will best serve the interests and wishes of their citizens.

In a few weeks, I will be meeting my wife, whom I haven't seen in over two months, in Hong Kong. If you happen to see a mushroom cloud over HK during that time, that will be my head exploding due to one or both of us being quarantined by the nanny state. :-)

Thursday, June 4, 2009

So Who IS Buying Hummer?

Short answer: no one really knows, and those who do aren't saying much.

The name of the company that appears to be ready to take Hummer off GM's hands is 四川腾中重工机械有限公司, or Sichuan Tengzhong Heavy Industrial Machinery Company, Ltd. Their company website is located here, but it has periodically been down ever since the announcement. Apparently a lot of people are curious about this company.

I was fortunate enough to catch the website working a few minutes ago, but I'll save you the time. The site (both Chinese and English versions) has only the bare minimum of information about the company. It only tells what businesses they are in, but does not discuss the company's ownership.

Here is a timeline of the company's brief history from the site:
  • In early 2005, the company acquired Sichuan Changdian Electric Co., Ltd and renamed it Tengzhong Electrics Co., Ltd. Sichuan Changdian Electric Co., Ltd was established in 1965.
  • In 2006, the Company was renamed Sichuan Tengzhong Machinery Manufacturing Co., Ltd.
  • In 2006, the Company acquired Guangyuan Construction Machinery Group which was established in 1958.
  • In 2007, the Company established an additional production base in Xinjin, Sichuan. The Company was again renamed Sichuan Tengzhong Heavy Industrial Machinery Co., Ltd.
  • In 2008, the Company acquired Xinjin Road Construction Machinery Factory from China Communication Construction Corp.
  • In 2008, the Company entered into the energy equipment manufacturing business.
I did some additional searching, and I am quite certain that Tengzhong is not listed on any stockmarkets. I searched Shanghai, Shenzhen and Hong Kong exchanges, and there is no company with either 腾中 or the pinyin equivalent.

I also searched the ISI Emerging Markets database. Most, but not all, of the articles (in English and Chinese) refer to Tengzhong as "private". None of them even suggest that it is controlled by a state-owned entity.

This story I found on PR Newswire lists the Brunswick Group as Tengzhong's PR contacts, and even lists names, phone numbers and email addresses. (I'm not suggesting that you contact them, but I'm not telling you not to either.)

A few people I have corresponded with have suggested that it has "military connections", but all I can find are claims that it makes equipment for the military. By that standard, we could also say that Boeing has "military connections".

Today, journalists from the Wall Street Journal actually visited the site of Tongzheng, about an hour south of Chengdu in Sichuan Province. Aside from a few pictures, their story only adds to the mystery about this company.

From all I can tell, this is a company that does not appear to want any publicity. However, there are about 800 workers in Shreveport, LA, who are probably eager to know more about their new bosses.

Anyway, the point could prove to be moot. China's central government still has yet to approve the purchase, and both SASAC and the NDRC have warned Chinese companies not to buy foreign assets, or at least to be careful about it.

Tuesday, June 2, 2009

Who's Not Buying Hummer / Chery's New not-so-Private Equity

Who's Not Buying Hummer

News surfaced today that GM has finally found a buyer for its Hummer division. The buyer is Sichuan Tengzhong Heavy Industrial Machinery, and the undisclosed price is rumored to be in the neighborhood of $500 million.

This was preceded by the improbable story back in February that the previously unheard of Sichuan Auto was rumored to be the buyer of Hummer. The management of Sichuan Auto (not affiliated with Sichuan Tengzhong) appeared to have been genuinely perplexed as to how their company, with only $146 million in assets at the time, could possibly buy Hummer.

Now it would seem that a leaker close to the story apparently got the Sichuan part right, but not the actual company that would ultimately buy Hummer.

How this company will manage to make Hummers conform to China's newly proposed fuel economy standards is a mystery.

Chery's New Not-So-Private Equity

Let's get this out of the way first. Chery is NOT a private company. Its controlling shareholder is the City of Wuhu in Anhui Province. Its next largest shareholder is Anhui Province.

Perhaps a lot of journalists continue to confuse Chery with a private company because, according to some people I have talked to, it "acts like a private company". Well, from what I have observed, even that notion is highly debatable.

Without further belaboring the point, I'll move on to today's news which is that Chery has just received two billion yuan ($293 million) in "private equity" funding.

It has been no secret that Chery is dying to do an initial public offering (IPO) in recent years, but for whatever reason, continues to be kept out of the equity markets. Last December, China's Export-Import Bank provided Chery with 10 billion yuan in loans. This was presumably because Chery is China's largest exporter of cars.

Today's additional two billion yuan in funding comes from a "private equity" consortium that includes Bohai Industrial Investment Fund Management and CDH Investments. How much of these funds are actually private? Well, we're not supposed to know that, but we do know that the majority owner of the Bohai Management company is none other than the Bank of China. And CDH has raised a large portion of its funding from China's Social Security Fund.

This equity is hardly "private".