SASAC's Budget End-Run

According to a story in today's Economic Observer Online, China's SASAC (国资委) is trying to shake things up a little.

Currently, only the Finance Ministry (财政部)has the authority to compile public budgets in China. SASAC's only role when it comes to money is to collect dividends from the SOEs that it controls and hand them off to the Finance Ministry.

A few years ago, when SASAC's role of "dividend handoff" was established, it followed a bitter battle between SASAC and the Finance Ministry for control of these monies. SASAC's reasoning was that, as controlling shareholder of these SOEs, it should naturally control the dispensation of dividends to which it is entitled. In the end, the Finance Ministry was simply too powerful, and managed to relegate SASAC to its handoff role. Though it controls the shares of China's largest and most important SOEs, SASAC has no source of revenue and must depend on the Finance Ministry for its own budget.

Now SASAC is at it again. They have apparently been circulating a draft resolution among local government SASACs that would give SASAC the authority to independently draw up the budget for central state-owned enterprises (独立编制央企预算). This is not an inconsequential sum. In 2008, central SOEs submitted over 500 billion yuan ($73.5 billion) in dividends to the central government.

A Finance Ministry official who was asked for comment expressed his surprise that such an action was being considered. Apparently SASAC circulated a draft in the Finance Ministry last week, but the draft "on the whole, had no major problems" -- the implication being that it contained no such provision for SASAC to take over budget preparation for the SOEs.

Central SASAC is not just pulling this idea out of the air. Apparently some local SASACs have been doing this already. Shenzhen's SASAC has, since 1995, controlled the budgets of local SOEs, and only recently has the local finance department even been invited to take part in the budgeting process for SOEs.

This story illustrates a couple of interesting aspects about governance in China. One is the constant battle over resources that takes place at the ministerial level. Money is power, and China is no different from any other country whose various departments fight over resources. The other is the variety of policies being implemented by local governments. Foreign observers so often talk of China as if it is a monolith, but this story illustrates that, when you open the box, there are a lot of moving parts, some of which don't rub each other very well.

Only time will tell whether SASAC is successful in its attempt to increase its span of control. One thing we can be sure of is that the Finance Ministry will not let this happen without a fight -- a fight they will probably win.

If you build it, will they come?

A group of Chinese investors is planning to build a hybrid car plant in Alabama. HK Motors ("Hybrid Kinetic", not "Hong Kong") would begin operations in 2013 and create 5000 jobs.

The venture is headed by Yang Rong, former head of China Brilliance, an auto company headquartered in Shenyang, Liaoning Province. Brilliance continues to operate in Shenyang, primarily through a JV with BMW, but it also produces some of its own-branded vehicles. Yang apparently had to leave Brilliance a few years ago after a falling out with the local government, which then took ownership of Brilliance and made it into an SOE. (More on Yang's story here at Automotive News, sub reqd.)

But all of that is beside the point. What I don't understand is how any venture can expect to sell vehicles when they have no brand. And in an industry suffering from significant over-capacity, what will differentiate HK's cars from all of the other established names?

A factory that would provide 5000 jobs will be able to turn out a substantial number of cars. What gives Yang Rong the confidence that anyone will buy them?

China: Leading the Transition to Electric Cars?

My friend Bill Russo has posted a very interesting powerpoint slideshow from his recent presentation to the European Chamber of Commerce in Shanghai. The topic of his presentation was China's Next Revolution: Leading the Transition to Electric Cars.

If you are interested in this topic, you will find his presentation to be filled with interesting data that leads to his conclusion that China enjoys favorable conditions for widespread adoption of electric cars. Among those conditions is the fact that China is not saddled with as much legacy infrastructure as the developed world, and therefore, it will be easier for Chinese consumers to make the leap to new energy vehicles.

While I tend to agree, I think this is not as much of an advantage as some think it is. The obvious comparison is telecommunication technology. According to the story, China had an advantage in making the leap to mobile telecoms because it wasn't saddled with a massive wired infrastructure.

In the early to mid-'00s, I found this to be generally true as I envied the mobile phones carried by Chinese whenever I visited China. The US was late to the mobile telecoms game because we all had easy access to wired telephones, and therefore had no real urgency around getting our hands on mobile technology.

Of course, by now that has all changed. The United States has launched 3G networks faster than China, and the US-designed iPhone is the envy of many Chinese who wanted it so badly they have paid upwards of $700 for a smuggled iPhone.

While I don't want to claim that EV technology will follow exactly the same path as that of mobile telecoms, my point is that new technology, regardless of its origin, moves into new markets at an accelerating pace. Whether the next big battery breakthrough originates in China, the US or Iceland doesn't really matter. These technologies will be of interest to everyone.

I think the most important point that Bill makes in his presentation is on the final page:

It takes a combination of business and government working together to make this revolutionary change possible and nowhere in the world is there a closer link between business and government than in China.

The switch from gasoline powered to battery powered cars is so revolutionary that it is hard to imagine any large country pulling this off without partnerships between business and government. Tesla may have built the coolest electric vehicle available, but Tesla isn't going to build charging stations all over the country. And until those charging stations are available, the Tesla will remain an overpriced golfcart for people with too much money on their hands. Someone has to step in and build the infrastructure.

In the US, Nissan is already working with local governments and public utilities to prove their concept that electric vehicles are a viable replacement for gasoline powered cars for the everyday commute. I would be surprised if there aren't already several other manufacturers following a similar path.

While this may seem rather novel for the US, in China, it is simply the way things are done. Among the top 15 Chinese automakers, all but three are SOEs. In other words, they are the government. The question is whether the Chinese system is flexible enough to allow the market to dictate which alternatives to the internal combustion engine are the most commercially viable.

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.

GM is Exporting China-made Vehicles to the US (sort of)

Automotive News China (free sub reqd) reports that an electric truck made by Wuling is being distributed in the US by ZAP of Santa Rosa California.



These odd-looking trucks are categorized as low-speed vehicles or LSVs, and are only licensed to travel at speeds of 25 mph (40 kph) or less on US roads. Being classified as "low-speed" and weighing less than 3000 pounds, they are also not subject to US crash-testing requirements.

The body, chassis, brakes, steering, etc., are manufactured by Shanghai-GM-Wuling and outfitted with German EV technology. They are designed to be used primarily on the premises of large businesses such as military bases and airports.

The first batch of 100 were exported to the US earlier this year, so, in a sense, there are already vehicles made by GM in China driving the roads somewhere in the US.

From Concept to Showroom - Ford C-Max

When I visited the Shanghai Auto Show this past April, I was quite taken with the Ford Iosis Max concept car. This past week, Ford, America's only non-state-owned domestic automaker, released pictures of its new C-Max, to be shown at the upcoming Frankfurt Auto Show, and to be sold in Europe next year and in the US in 2011. (Why so long coming to the US?)

While the "concept" Iosis Max was promoted as either hybrid or fully electric, the C-Max will be sold with a traditional internal combustion engine. The C-Max has also been toned down a bit, but you can see that not a lot was changed, down to the cool greenish-yellow paint scheme.

The Iosis at the Shanghai Auto Show (photo by yours truly).




The New Ford C-Max (from New York Times auto blog)

Re-nationalization?

Today ChinaStakes posted an article warning of difficulties to come related to China's mis-spent stimulus funds.

During the economic crisis, the government has issued stimulus policies to avoid in the short term business closures and layoffs, but the side effects of this "medicine" are becoming apparent as market mechanisms have not been allowed to play a role and resources have flowed into inefficient sectors.

Both the government's 4 trillion yuan stimulus package and the banks' first half 7.4 trillion yuan lending splurge have been feasts for SOEs in the economic winter.
...

Flush SOEs are turning their attention to high profit areas where the private economy is relatively active, such as real estate and mining and steel, and getting involved. Central firms bid for "Land Kings," private coal mines in Shanxi Province are being snatched up by SOEs, reconstruction in the private steel sector has stopped while loss-making, laggard, and inefficient state-owned steel firms are helping themselves to private iron and steel companies with government assistance.

Unable to expand capacity in their own industries, many SOEs took government stimulus funds anyway, apparently hoping to think of how to spend them later. And now it looks as if the SOEs have discovered what economists have been saying for years, that the private sector is better suited to creating value than the public sector.

And since stimulus funds have basically been off-limits to private firms, they may find offers of cash from big SOEs to be irresistible, choosing to accept the embrace of the state over inevitable bankruptcy. (While it would be interesting to see some statistics on how many private sector firms have been swallowed up, it may be awhile before they are available.)

The SOEs, on the other hand, may be hoping to cash in on private sector innovation and efficiency. While the learning opportunity certainly exists, once the SOEs control these private firms, who will be learning from whom?

On PhD Degrees and Honesty in Business

I found in my emails this morning, an occasional email from David Webb, self-appointed guardian of corporate governance in Hong Kong. As some may know, Mr. Webb, formerly a member of the board of the HK Stock Exchange runs his eponymous webb-site.com which exists to point out shortcomings in HK corporate governance.

His email this morning announced that the newly-appointed CEO of HK-listed Neo-Neon Holdings Ltd, Mr. Tseng Jinsui, had, at best, misrepresented his educational qualifications. Mr. Tseng claims to have earned a doctorate at Edendale University in the UK. The only problem is that no one, not even the South China Morning Post, seems able to find proof that Edendale University exists, or if it does, that it offers an accredited degree.

Based my own very unscientific survey, I have learned that in China there are doctorates, and then there are Doctorates. Some are real, and some are not, and this fact is pretty much an open secret.

Many high level political and business officials in China claim to have doctorates, and indeed, some of them do. But many others somehow managed to obtain doctorates with only a six-month gap on their CVs during which the doctorate was supposedly earned. They must either be super-brilliant, or their education was somehow lacking.

As a real PhD candidate from a Chinese university put it to me: "Some of these doctorates held by senior officials are earned by attending a few seminars and writing a paper. Everyone knows they aren't real. But there is pressure for leaders to have an advanced degree, so those who hope for promotion have to attend one of these programs."

None of this is to say that Mr. Tseng of Neo-Neon is an incapable leader. He appears to have been promoted from within the organization, so one could reasonably assume that he knows the business well.

Why the fake degree then?

This is something that baffles me. Why, in an age in which pretty much any "fact" can be quickly researched on anyone's mobile phone, would people risk damaging their credibility by making false claims, or paying for degrees without having to do any actual learning?

On the mainland, there seems to be a pretty good explanation.

One of my interviewees in Shanghai, talking about a completely different subject, explained this phenomenon. "Many of you foreigners think of China as the model Confucian society full of humble, hard-working people. What you don't know is that the Mao years instilled in many Chinese this need to brag and exaggerate -- to convince people they have achieved something that they have not really achieved. This tendency is hard for people to change, and we still see it often among the auto companies (when talking of their achievements in electric vehicle technology)".

Though the context was electric vehicles, I wonder if this explains the tendency of some to put degrees on their CVs that were either never earned, or earned over only a few months.

As to why this happens so frequently in Hong Kong, I am still at a loss.

Having a PhD does not make one smart. All it means is that you have the tenacity to stick out a long program of learning and research that offers little hope of a financial payoff. Surely a long history of successes in industry are worth more than that when it comes to demonstrating one's ability to run a company.

Nissan's Global EV Infrastructure Partnerships (and a cool website!)

In my quest to understand the nature of business-government relationships in China's auto industry, I talk to a lot of people, rack up a fair amount of frequent flyer miles, and visit a lot of websites. Today I had the occasion to visit Nissan's zero-emission website to learn more about their new "Leaf" electric vehicle.




Nissan has an important joint venture with Dongfeng, one of China's larger manufacturers of passenger cars, and I wanted to know what Nissan is doing to bring their zero-emission technology to China.

Because I visit dozens, perhaps hundreds, of websites weekly, I've suffered through a lot of poorly designed sites and very unnecessary eye-candy in an effort to find the information I seek. This Nissan-global zero-emission website, however, is not only impressive for its sleek and intuitive design, but its content as well. (And, no, Nissan is not paying me to plug their site; I am honestly that impressed with what I have seen.)

First, on the content side, I am interested by the fact that Nissan is touting its partnerships with governments, not other companies as I had expected. While I know they have some corporate partners as well, this interactive map shows the governments that Nissan is working with to roll out technology infrastructure to support zero-emission vehicles.

Also of interest is the fact that Nissan is working with different levels of governments. In some countries such as Portugal and Ireland, their partnership is with a central government, and covers an entire country. In other countries, such as the United States, their partnerships are with various state and local governments: the State of Oregon, Sonoma County, CA, San Diego, Phoenix-Tucson, the State of Tennessee, etc.

In China, they have both a central government partner, the Ministry of Industry and Information Technology, and a local government partner, the City of Wuhan (which also happens to be the headquarters city of Nissan's JV partner, Dongfeng).

I know that some commentators have been critical of Renalt-Nissan's leader Carlos Ghosn for leapfrogging the hybrid stage and aiming straight for zero-emission vehicles, but I am impressed with the way in which Nissan has been charging forward on this. Rather than taking an interim, incremental step with hybrids, Nissan is partnering with governments to confront directly the chicken-and-egg issue of electric cars and charging infrastructure.

I cannot opine as to whether this makes business sense, but, as someone who would like to breathe cleaner air now, not 20 years from now, I wish Nissan well. As a political scientist, I agree with Nissan that governments are really the only likely partners for building out infrastructure. Bound as they are not to achieve a short-term return on their investments, governments lack the disincentives that would prevent most private sector businesses from taking such a bold move.

Why is Nissan taking this risk? My guess is that it has something to do with the guy at the top. Carlos Ghosn is no shrinking violet, and my sense is that, having fallen a little behind on hybrid development, Mr. Ghosn sees the only wise move as making a giant leap forward rather than running to catch up with pretty much everyone else on the hybrid bandwagon.

As for Nissan's zero-emission website, all I can say is that it's pretty cool. In about five minutes, I was able to get a pretty good idea of the projects Nissan has cooking. I also learned enough about the new Leaf electric vehicle to know that I want one. (Okay, to be honest, I'd rather have a Tesla, but the Leaf would probably be a more practical option for my bank account.) Check out the Leaf's gallery.

Shopping bags: China's sticks or Ralph's carrots?

During the several months I recently spent in China, I occasionally found myself feeling a little miffed that I was charged for the privilege of carrying away food items I had purchased in plastic bags. In Shanghai, I was charged five mao per bag (roughly 7 US cents). The longer I was there, the more I found myself making a conscious decision to take used plastic bags with me to the store.

Over the past five years that I have lived in LA, I have noticed that supermarkets have begun their own attempts to discourage the use of plastic bags -- or rather, to encourage their non-use. The Ralph's in Westwood, where I have been shopping lately, gives you back five cents for any reusable bag you bring in.

So where am I going with this? I think there are a few lessons here about both political systems and human motivation. (Think of this as a hodge-podge post if you want.)

In China's case, it was the central government in Beijing, not local governments, that made the decision to charge for plastic bags. Regardless of how business owners feel about this issue, they have no choice but to charge for bags. (I will make no assumptions about where all of this money ends up.)

Due to the federal system in the United States, issues like this typically fall to state and local governments, and sometimes, directly to the voters. Unfortunately (from the point-of-view of someone who wants to see less usage of plastic bags) the closer such decisions get to voters, the greater the likelihood that taxes of this nature will not be passed -- unless, of course, one lives in San Francisco, whose relatively wealthy voters often happily tax themselves for green causes. Seattle's voters, given an opportunity to vote for a bag tax a couple of years ago, chose to vote it down. When Seattle later passed an ordinance, the plastic bag business lobby (who knew there was such a lobby?) successfully batted it down.

In New York City, bag taxes or bans have been discussed in the past, and, as far as I know, have still not been passed. In Los Angeles, the City Council has passed an outright ban on plastic bags to go into effect in July 2010 unless the State of California passes a statewide bag tax in the interim. The latest information I have been able to find is that California's legislature has still not been able to pass a bag tax. The plastic bag business lobby in California has also successfully sued cities that have banned plastic bags.

In doing a little Googling for this post, I have discovered that there is a lot of activity in the US surrounding plastic bags, but apparently none of the action is happening at the federal level. And, aside from Washington D.C. and North Carolina's Outer Banks, no local community has been able to pass bag taxes and make them stick. (If my facts on your particular community are out-of-date, please feel free to set me straight via the comments section below.)

My point here is that, aside from the exceptions mentioned above, the only policies in the US on plastic bags that appear to be approaching success are those taken all the way down at the store level. Our central government is (thus far) taking a hands-off approach, and our local governments are not powerful enough to fight a nationwide plastic bag business lobby.

Yet, while China's central government has approached this issue with a stick, local stores in Los Angeles are voluntarily offering carrots.

Which method is more successful? While I am sure China's Statistics Bureau has come up with some numbers on this, our intuition should tell us that China's policy has been more successful -- if for no other reason than that it is a nationwide policy. However, even if you could compare the cities of Shanghai and Los Angeles, I am certain we would see that Shanghai's bag use has fallen further than has LA's.

My intuition tells me that people will respond more to a stick than a carrot on an issue such as this, even if the values of the sticks and carrots are negligible. People don't want to lose something they already have, even if it's small, but they will also not go out of their way just to get a few cents back -- especially if they feel stupid doing it, or if it creates a little inconvenience.

While my wife is keen to make use of reusable bags, and I go along with it when I'm with her, I will admit that I sometimes bring home plastic bags when I'm shopping by myself. China's sticks did more to change my behavior than have Ralph's carrots.

• Can you think of similar comparisons between how China and the US attempt to legislate human behavior?
• Do you agree that sticks can be more effective than carrots on issues of conservation, or can you think of examples in which carrots have been more effective than sticks?
• Does the federal nature of the US government place the US at a long-term disadvantage when it comes to changing destructive human behavior? Or is there a price to be paid for the heavy-hand of China's unitary system?
• What are the tradeoffs between these two styles of governing?
  

(Apologies to my readers who haven't been in school for awhile and find such academic questions to be a bit of a shock. ;-)