Thursday, July 29, 2010

More Local "New Energy" Vehicle Subsidies

In addition to the central government's subsidies for new energy vehicles in China, two more local governments have announced their own subsidy plans.

Shanghai is planning subsidies of 40,000 to 60,000 yuan for individual buyers of plug-in hybrid or electric vehicles, and the city of Changchun, along with Jilin Province, is also planning a subsidy of about 40,000 yuan.

Shanghai is the home of Shanghai Automotive which owns the MG and Roewe brands (bought from the UK) and has joint ventures with both Volkswagen and General Motors. Changchun is the home of First Auto Works, a centrally-owned company that has joint ventures with Volkswagen, Toyota and Mazda, and is producing some of its own-branded vehicles as well.

Shanghai and Changchun join Shenzhen which earlier announced it would provide new energy vehicle subsidies.

These are the subsidies available so far. ($1 = 6.8 RMB)

People buying pure electric vehicles in Shenzhen could get a subsidy of up to 120,000 RMB ($17,600). That approaches half the cost of an electric vehicle.

Now, if only they can find a place to plug it in...

Saturday, July 24, 2010

US Senate happy to support Greentech - but not in an election year

It is no secret that China’s leaders are keen on making their country into a world leader in green technology. The subsidies being provided by both central and local governments for purchase of hybrid and electric vehicles and support to companies pursuing R&D in this area have been widely reported over the past year.

Now it seems the US government is beginning to wake up to the importance of this new industry and its potential to provide, not only a cleaner environment, but jobs and tax revenue in the US. This past week, a Senate committee approved a couple of bills to support greentech, bills that, if approved, would begin to devote a serious amount of government money to support of the industry.

The first devotes $3.6 billion to promotion of plug-in hybrid technology. The bill includes, among other things, $1.5 billion to go directly to plug-in research, and a $10 million prize would go to the first person or company who demonstrates improved battery technology that will carry a vehicle 500 miles without recharging. This bill enjoys bipartisan support, including an endorsement from Lisa Murkowski, a Senator from Alaska, a state that earns a large portion of its revenue from oil extraction.

Another bill would expand a $25 billion Department of Energy program that has already lent $8.6 billion to makers of battery powered cars, and also make the funds available to makers of commercial vehicles while lifting the $25 billion cap.

While some may question the wisdom of the US government’s involvement in “picking winners”, it seems that we may no longer question whether the government sees the need to help US business gain a competitive foothold in this industry against other countries (particularly China), whose governments are heavily involved.

(And, yes, the phrase “picking winners” is still deemed by many in America to be the only words necessary to put an end to all argument as to whether the state should be involved in business – despite the lack of evidence to support the assertion that “picking winners” is, in all contexts, a bad thing. I'll have to save that idea for a future post.)

But not so fast. In the same article that informs us of these bills, we also see the concerns that Senate Leader Harry Reid may not allow these bills to come to a vote in the Senate – despite their bipartisan support – because he sees energy issues as a potentially hazardous issue to touch during an election year.

Yes, once again, politics in the US stands in the way of our elected leaders doing what they believe to be in the best interest of the country. Just once, it would be refreshing to hear our leaders say, “to hell with my re-election. I just want to do what’s right for the country.”

But perhaps that’s too much to hope for. Fortunately for China, they don’t have anything like re-election to to draw energy and money away from the more pressing matters of delivering prosperity to the people.

Well, except for all those tens of thousands of people employed to police the internet. That’s a massive waste of money. But other than that…

Well, yes, there’s also that whole parallel party structure that mirrors and oversees the entire government. But really, how much can that cost?

Ok, yes, there’s also that bureaucracy that oversees all media and censors films and books. But, other than that…

Well, yes, ok, there is the People’s Armed Police and Chengguan who are employed to keep citizens in line since the Army and the regular police, and the secret police, and the plainclothes police aren’t enough to do that.

Oh yeah, there are also all those locally-hired thugs to keep petitioners from going to Beijing, and the thugs hired in Beijing to send the petitioners home.

Oh, and I almost forgot, there’s that whole bureaucracy that oversees religions (and picks their leaders for them), making sure they don’t get out of hand.

But, honestly, aside from those few things, China really has it much better than the US. They don’t have to waste all those resources on elections.

Too bad for the US.

Friday, July 23, 2010

UPDATED-Still Lost in Translation: 垄断 ≠ Monopoly

UPDATE: I have added some comments from Don Clarke of China Law Prof Blog at the bottom of this article.

Preface: My Twitter acquaintances sometimes accuse me of being pedantic, an inconvenient malady to suffer when one is restricted to 140-character soundbites. While most of this article may indeed sound overly pedantic, it has a real-world application concerning the role of foreign automakers in the Chinese market. If you read to the end, I promise it will all make sense. What you see here is the scaffolding surrounding an intellectual edifice that is still under construction. If you find this sort of thing boring, you may want to skip grad school. :-)

A few months ago, I wrote a series of posts (the first of which is here) in which I attempted to get a handle on the terms guo jin min tui and guo tui min jin. Part of the upshot was that many English speakers wrongly translated the latter term as “privatization” when in fact that was not the intention of the Chinese speakers who introduced the term. Furthermore, since the former term is the exact opposite of the latter, we translated it as “nationalization”, which was also incorrect.

Whether my dissertation will ultimately provide a better understanding of business-government relations and industrial planning in China remains to be seen. But one of the unexpected by-products of research in Chinese language documents is a discovery that, in many cases, Chinese and English speakers, even when relying on dictionaries and professional interpreters, often have very different concepts in mind for what they think is a common term.

Doesn't 垄断 mean monopoly?

The latest example is 垄断 (longduan) which is always translated as “monopoly.”

Google Translate, Babelfish and my Concise English-Chinese Chinese-English Dictionary all give the English word “monopoly” as the translation of "longduan". And, with the exception of Babelfish, they give “longduan” as the Chinese translation of of the English word "monopoly". (Babelfish, gives 独占 (duzhan) as the translation of monopoly.)

The context in which this discrepancy came up was my search for documentation of how China’s government and auto industry bureaucracy views the presence of foreign automakers in China’s market.

The first comes from a collection of essays on the auto industry written by a former Policy Research Director in China’s auto industry bureaucracy, published in 2009. This particular essay, written in 1998, was regarding the role of foreign automakers in China:

My translation (again, assuming 垄断 means “monopoly”):
The ultimate aim of the multinational corporations (MNC) is to use joint ventures to gain capital, technology, products, market control and monopoly so as to achieve the longer term strategic purpose of occupying China’s big auto market.
This next one comes from a book published by the Ministry of Science and Technology intended to be used by government and auto industry officials and academics as a companion reference to the eleventh five-year plan. The series editor is one of the Vice Ministers of Science and Technology. It was written in 2009.
跨国公司的这一策略对我国经济发展的影响较之于单纯的股权控制更为隐藏、深入,严 重削弱了国有经济的主导作用和制力,增强了跨国公司在中国市场的垄断地位。
My translation:
The impact of MNC strategy on China's economic development is hidden and much deeper than just equity control. It seriously undermines the state-owned economy and manufacturing power and enhances the MNCs' monopoly position in the Chinese market.
My first thought was, well, they simply don’t know what a monopoly is. In English, the word “monopoly” is pretty easy to understand. It comes from the Latin monopolium, mono meaning “one” and polium meaning “to sell”. It defines a situation in which a single company controls all, or nearly all, of the market for a particular product or service. In other words, the absence of competition.

But in the case of China’s auto market, there’s simply no way that any foreign company has a monopoly. First of all, the foreign automakers in China are not a unified group. There are dozens of foreign companies trying to sell cars in the China market, and competition among them is quite fierce. Second, even if the foreigners did have a unified group, foreign brands only comprised about 70 percent of passenger cars sold in 2009, down from about 80 percent in 2004.

What does it mean in Chinese?

Thinking the problem may lie, not with the word longduan, but with its translation into the word “monopoly”, I took a closer look at the Chinese word:


垄 (long) is defined as a ridge of earth dividing plots of farmland, and you can see that in the parts of the character. The top part 龙 is “dragon” and the bottom part 土 is “earth or soil”, so a 垄 is like a dragon lying in the fields dividing different plots of land. If my knowledge of Chinese history is correct, this refers to earthen walls or ridges made of stones separating one family’s plot of land from another, meaning that each family was responsible for its own plot. (In feudal China, the economic benefits derived, not to the family, of course, but to a landlord.)

断 (duan) means to break off, to sever or to judge.

Together, these two characters seem to indicate something that separates one part of something from another. What I don’t see is any meaning indicating that one party gets everything and all others get nothing. Nor do I see any indication that one party even gets most of something while others are left to share a small portion, though that could be implied -- and it might certainly describe the current situation in which foreign brands (collectively) occupy about 70 percent of China's passenger car market.

So the problem here isn’t that the Chinese don’t know what “monopoly” means; the problem is that I didn’t know what longduan means. Now that I do (and assuming my analysis isn’t way off base), I am able to read the above passages with a better understanding.

Now for the application

What these passages are lamenting is not the exclusive right to the Chinese market by a unified group of foreigners, but the fact that the foreigners have any market share at all!

The common refrain that surfaces repeatedly in official and semi-official documents is the fact that Chinese joint venture partners have learned very little from their foreign partners aside from how to assemble and sell cars. The all-important design element continues to exceed their grasp. There exists an almost palpable resentment of the fact that China has handed over market share to these foreigners without getting the technology they were expecting in return.

What’s even more amazing to me is that this complaint has been consistently aired throughout the past two-plus decades – which leads to a much more interesting question: If the lack of technology sharing has been a problem for so long, why does China continue to welcome new joint venture partners?

For the answer to that question, you’ll have to read my dissertation, but please feel free to venture a guess in the comment section below. :-)

UPDATE: I consulted with Don Clarke of the Chinese Law Prof Blog on how the term 垄断 is defined in China's anti-monopoly law.

Don says: "It is understood in Chinese legal discourse to be the Chinese equivalent of the English term "monopoly". The economic tests used in China to measure the degree of longduan in a market are similar in principle to the tests used in US antimonopoly law."

He adds further that, when we see officials using the term 垄断 as I excerpted above, they are just "misusing the Chinese word the way an American politician might misuse an American word".

In other words, don't confuse discourse for policy.

Thanks, Don, for your insight!

Tuesday, July 20, 2010

BYD Between a Rock and a Hard Place

The multinationals think they have it hard? It seems that one of China's rising stars of the auto world, BYD, has run afoul of the authorities in Beijing.

BYD, a Hong Kong listed automaker based across the border in Shenzhen, has aims of becoming bigger than Toyota someday, but in the short term at least, they may have to scale back their expectations. At the beginning of this month BYD broke ground on its second factory in the city of Xi'an. This new 5 billion yuan factory, due to open in 2011, has a projected capacity of 400,000 cars a year.

Yesterday, BYD was ordered by the central Ministry of Land and Resources to halt construction of its new factory because of a "land use violation".
The Ministry's announcement gave no further specifics as to the nature of the violation. In its defense, BYD said that it had conducted due diligence and obtained the necessary approvals from local government. So it would appear that the violation has been committed not by BYD, but by the local government.

Perhaps the violation comes as Beijing has stepped up its enforcement of land use policies. There was much talk during this year's National People's Congress of the need to prevent local governments from appropriating farmland to sell to developers, a situation that has led to much social unrest in recent years. Regardless, BYD has become yet another victim of the vagaries of doing business in China.

Until now, the conventional (yet somehow simultaneously unorthodox) wisdom has been for foreign companies to worry more about local governments when setting up their businesses in China. Just because you got approval from someone in Beijing didn't mean that all problems were solved. Local governments are the ones with the real power to make or break your business, and "as everyone in China knows" the central government devolved a lot of their powers to the local governments back in the 1980s.

So which governments should you be worried about? Perhaps the received wisdom (conventional or unorthodox, or whatever you want to call it) needs to be revisited. The real answer is, you need to worry about both.

Thursday, July 15, 2010

America is rotten; China is awesome!

Yesterday fellow Forbes ChinaTracker writer, Ray Kwong posted a summary of a shocking Computerworld article on the Forbes China Tracker site. Computerworld, a publication not exactly renowned for its expertise on China breathlessly exclaims that China is getting ready to clean America's technological clock. China's education system is producing far more engineering graduates than the US, and China's leaders are fully engaged in making China into a future technological powerhouse.

While the article was fact-based, I think its conclusions were way overdrawn.

This is very much an issue of quality vs quantity. I spent two years teaching at universities in China, and I continue to maintain close touch with the academic community there. While China is indeed turning out math and science whizzes up through high school level (the average middle schooler can plot the trajectory of a non-guided missile), nothing is being done to nurture the kind of creative and critical thinking that produces innovation.

Furthermore, among the engineers earning degrees in China, very few of them have a passion for what they are learning. It doesn't bother me that a relative handful of students in the US are choosing the sciences as long as the vast majority of these students love what they're doing and eventually find their ways to Silicon Valley, Austin, TX or other similar clusters of talent. Again, this is where the innovation comes from.

On the other hand, I think the Computerworld article may have been intended somewhat as hyperbole to shock our leaders into action, and I am pretty sure this was Ray's intention in excerpting the article. If at least one leader in Washington gets the message regarding the vital importance of education quality in the US, this can't be a bad thing, right?

UPDATE: It looks like Dan Harris, keeper of ChinaLawBlog, was also moved to comment on the Computerworld article. He makes some really good points that I hadn't considered, so take a look if this topic interests you. Also check out the vigorous discussion going on in the comment section there.

Tuesday, July 13, 2010

Shenzhen Subsidies, US-China Acquisition, EV Policy

Three important stories in the China electric vehicle world. The first one is a Local BizGov story...

Shenzhen's new EV subsidies

A little over a month ago, Beijing announced a pilot plan for new energy vehicle subsidies in five Chinese cities, one of which is Shenzhen. In short, the plan calls for subsidies of up to 50,000 yuan for plug-in hybrids and up to 60,000 yuan for pure electric vehicles.

Shenzhen, home of battery and auto manufacturer BYD, has also announced its own subsidies to be added to those from Beijing. Shenzhen will provided subsidies of up to 30,000 yuan for plug-in hybrids and up to 60,000 yuan for pure electrics.

With total subsidies of up to 80,000 yuan ($11,800) for a plug-in hybrid or 120,000 yuan ($17,700) for a pure electric vehicle, these still experimental cars are reaching a price point where early adopters in China would be willing to consider them.

And Shenzhen wins brownie points: from Beijing for supporting low- or zero-emission vehicles, and from BYD who will, it is hoped, build more cars, employ more people and pay more taxes.

If there is another city in the world where new energy vehicles are more affordable than they are in Shenzhen, I am not aware of it.

US-China Acquisition

Santa Rosa, California based ZAP Motors (a company you've probably never heard of) has just signed an agreement to acquire 51 percent of Taizhou based Zhejiang Jonway Automobile for about $28 million in cash.

Yes, you read that right. This is not a joint venture; it's an acquisition.

ZAP, which has been in operation since 1994, has, until recently made electric vehicles designed for off-road use in such places as airports, military bases, large factories, etc. It gained some recognition by showing this futuristic electric car, the Alias at Beijing's Auto Show a few months ago.

And this is no mere concept car. Apparently ZAP had already (pre-acquisition) contracted with Jonway Auto to build the Alias with current plans to introduce it in the US later in 2010.

Jonway Auto is (or will be until this acquisition takes place) owned by Jonway Group which manufactures cars and motorcycles. I am unable to determine who owns Jonway Group, but due to its location in Taizhou, I think it is a pretty good bet that the company is private. And the fact that a foreign company is about to buy a majority stake in one of its subsidiaries is also a good indication that Jonway is most likely not state-owned. (Then again, the difference between public and private is still quite blurry in China.)

Even more interesting is the fact that Jonway has been quite profitable while ZAP, which reportedly hasn't earned a profit since 2002, has only recently emerged from bankruptcy.

On second thought, I'm quite certain Jonway isn't state-owned.

China's new energy vehicle policy is on the way

And finally, Dong Yang, secretary general of the China Association of Automobile Manufacturers announced that a policy on new energy vehicles is in the works and will probably be released in September or October.

About those subsidies I mentioned above, well, China is apparently just getting started. We can expect to see a more comprehensive plan laid out this fall with details on how China intends to dominate this space -- globally. Among other things we can probably expect to see further incentives for auto companies to conduct R&D in this area and further plans for rollout of charging stations.

The lines are being drawn In the global battle to dominate alternative energy vehicle manufacturing. We could not ask for a better real-life experiment to compare the results of state-led vs market-led capitalism.

Wednesday, July 7, 2010

Anshan's proposed investment in US: are we OK with this?

A couple of days ago, news surfaced that Anshan Iron and Steel, one of the largest steel manufacturers in China intends to purchase a 20 percent stake in a near-bankrupt Mississippi steel mill. I say "surfaced" because the actual decision to pursue this investment apparently came in May, but for whatever reason never made the news in the US.

As would be expected, the Congressional Steel Caucus, a group of about 50 US lawmakers who are advocates of the US steel industry, raised objections to the proposed investment. These objections are similar to those raised by CNOOC's proposed takeover of Unocal back in 2005, so there is really nothing new here. The requisite "national security" implications are raised. And there is little doubt that the Steel Caucus's "investigation" will recommend against allowing this investment to happen.

Of course, the Steel Caucus can only make a recommendation; it does not have the final word, so it is not inconceivable that the investment could happen anyway. After all, a 20 percent stake is not a controlling stake, right? And even if it were, Anshan is just like any other profit-seeking business, right?

To address the first question, the answer is that we cannot always be certain whether 20 percent is a controlling stake. That really depends on who the other shareholders are and how large their stakes are. According to the Wall Street Journal, the Mississippi plant in question is owned by a private company, the Steel Development Co., which, according to its website is owned by "institutional investment firms headquartered in the United States, as well as [its] management group." So I think it is reasonable to assume that Anshan's proposed 20 percent stake would not be a controlling stake.

As for the question of whether Anshan is a profit-seeking business, the short answer is, yes, except for when it is not.

Beijing-based lawyer and blogger, Stan Abrams, posted a funny, and partially tongue-in-cheek, article today essentially making fun of the Congressional Steel Caucus's knee-jerk commie baiting (my term, not Stan's). While I largely agree with Stan's conclusion, I have to wonder whether the fact that Anshan is a state-owned enterprise is a significant factor that deserves further scrutiny.

Stan says (again, tongue-in-cheek):
Everyone knows that the company is controlled by China’s Assets Supervision Commission of the State Council (SASAC), which means that the company is merely a tool of the Communist Party. With all of those subsidies, Anshan is definitely up to no good.
Well, let's take this apart. First of all, I think we can be sure that not "everyone knows" this. Whether they should remains to be seen. Second, yes, Anshan is indeed owned by SASAC, the arm of the State Council that holds the shares of China's largest state-owned enterprises.

Third, while Anshan isn't "merely" a tool of the Communist Party (it is also other things), it is nevertheless a tool of the Communist Party. Anshan is 67 percent owned by SASAC, which doesn't necessarily make it a tool of the Communist Party -- until you take a closer look. The senior management of SASAC-owned companies, including Anshan, are appointed, not by their Boards of Directors, not by SASAC, not by the State Council, but by the Politburo of the Chinese Communist Party. (Richard McGregor's new book documents much of this. It's also a great read. McGregor explains some of this in an interview here on the China Beat.)

I also found it interesting that Qi Xiangdong, Deputy Secretary General of the Chinese Iron and Steel Association seemed to bend over backward to try to redefine what "state-owned" means:
"A market-economy country like the U.S. shouldn't make administrative intervention to corporate behavior," Mr. Qi said. "Western countries still have a stereotype of [Chinese] state-owned enterprises. ...Anshan Iron is a listed company, and not a Chinese state-owned enterprise in the traditional sense." (WSJ, 5 July 2010)
Setting aside the irony that the king of state interventionist governments would lecture the US about what a market economy is, it is extremely disingenuous of Mr. Qi to suggest that a company that is 67 percent owned by the government is not state-owned. If I were a conspiracy theorist, which I'm not, I might begin to suspect that there is a Chinese plot to redefine English language words such as state-owned, democracy, rule-of-law, etc., so as to confuse their foreign detractors.

What about "all of those subsidies"? Well, since Anshan is indeed a state-owned enterprise, we can be certain that, at some point in the past, and probably at some point in the future, Anshan will benefit from government subsidies. Part of the reason for continued government control of major enterprises in China is fear of instability that would be caused by massive layoffs if these giant firms were to go bankrupt. As long as any company is in state hands, that's not a problem. Anshan is "blessed" with a soft budget constraint, and they know it.

Is Anshan "up to no good"? Probably not, though when it comes to the murky world of Chinese state-owned enterprises, nothing can be said with all certainty. Anshan's external shareholders, a diffuse group of individuals and institutions who collectively own only 33 percent of Anshan's shares, have no say in what the company does. Anshan is part of a large group company, and there is absolutely zero visibility into the operations or financial statements of the unlisted entities. It may also give us pause that a Chinese official stretches reason in order to declare Anshan not to be a state-owned enterprise when it clearly is.

So while Anshan is probably just looking for a good investment in a business that it already knows, without visibility into the rest of Anshan's dealings, its leadership, its true controlling owners (i.e. the Politburo), we cannot be absolutely certain.

So are we OK with this investment?

Yeah, why not? Let the folks in Mississippi take Anshan's money. When it comes to the power of the Chinese state, it pretty much stops at the borders of the United States. Once Chinese money and people enter the US, they are subject to rule-of-law. And while the Chinese may wish to redefine what that term means within their own borders, they will find US courts quite unsympathetic to any attempts to do so elsewhere.

Thursday, July 1, 2010

Ownership doesn't matter. Winning does.

China is well-known for state direction of the economy, and China itself doesn't really try to hide the fact that its most important industries are dominated by state-owned enterprises. Among these industries are airlines, telecoms, banking, finance, steel, mining, shipping, petroleum and, yes, automobiles.

Consumer Subsidies for energy-saving cars

In yesterday's post, I noted that a good mix of Chinese and foreign auto companies sell "energy-saving" cars that are eligible for consumer subsidies of 3,000 yuan per car. Curiously though, the best selling small sedan in China, BYD's F3, doesn't appear on the list.

I am not sure about the reasoning behind this oversight, but I would be hesitant to read too much into it. Despite the fact that it is privately owned, BYD appears to have attracted the favorable attention of the central government. The list (Chinese pdf) of subsidy-eligible cars is identified as a first cut (第一批), so perhaps the F3 will appear on the second cut.

As I mentioned yesterday, China's "new energy vehicle" (NEV) policy calls for consumer subsidies of up to 50K yuan for plug-in hybrids and up to 60K yuan for pure electric vehicles. (The subsidies are calculated based on a formula of 3,000 yuan per kilowatt hour of battery pack capacity.)

Beijing Likes BYD

What is interesting about this distinction in vehicle types is that there is (to my knowledge) only one company in all of China manufacturing a plug-in hybrid: BYD. The only other plug-in hybrids slated to be sold in China are the Chevrolet Volt, which will be imported and, therefore, doesn't qualify, and the next generation Toyota Prius which will have a gasoline engine too large to qualify for subsidies.

So it appears that Beijing has handed BYD a nice little gift by creating a special subsidy category for its F3DM plug-in hybrid -- which would be really nice if BYD had any intention of taking advantage of it. According to BYD's Assistant General Manager, Wang Jianjun, at the beginning of the year BYD had planned to build only 1,000 "new energy vehicles" (NEVs). Now that the subsidies have been announced, there has been no change in plans. BYD still plans to build only 1,000 new energy vehicles in 2010, according to Wang.

This strikes me as a little odd. Just last fall, BYD CEO, Wang Chuanfu was quite vocal in his disappointment that Beijing had yet to announce subsidies for NEVs. He stated at a conference that BYD could not build more of these cars until the company had an idea of how much the subsidies would be.

Well, now they know. So 1) why aren't they ramping up production?, and 2) why are they so publicly announcing that they aren't ramping up production? This would seem to be an ungrateful reaction to help being offered by the central government, and I could only speculate as to the reason.

Not only has the central government created a category to subsidize cars that BYD no longer seems inclined to produce, but late last year, BYD was extended a 15 billion yuan ($2.2B) credit line by state-owned Bank of China.

This move was a little unusual as China's banks are traditionally hesitant to lend to private companies. Lending to SOEs is easy. If anything goes wrong with a loan to an SOE, the banker has political cover, but if a private firm were to fail to repay a loan, the banker may find his job on the line. My assumption (and I have no way to confirm this) is that someone in Beijing provided the political cover needed for Bank of China to grant this loan to BYD.

So why all the favorable attention from Beijing for this apparently ungrateful, privately-owned upstart from Shenzhen?

It's all about winning

Put simply, China intends to dominate the global auto market, and its concern is not that state-owned firms lead the way, but that Chinese firms lead the way. While this is no guarantee that, at some point, China's unaccountable Communist Party wouldn't decide to nationalize everything, for the moment, China sees value in what the private sector brings to its auto industry. And BYD, ungrateful or not, continues to push the envelope in terms of NEV technology as well as peripheral technologies like solar power and storage solutions.

Follow the Policy

By looking at China's recent NEV policy announcements, it is easy to see where China's priorities lie with respect to its auto industry.

The 3,000 yuan subsidy for energy-saving vehicles does not discriminate between Chinese or foreign brands (see yesterday's post). This indicates that China's short-term interest is in conserving fuel and pumping less CO2 into the atmosphere.

The 50-60K yuan subsidies for plug-in hybrids and pure electric vehicles indicate that China intends for Chinese companies to have a significant global market share in the auto market of the future.

Only time will tell whether Beijing's decision to pick the winning technology is more effective than those of other countries allowing the market a little more of a say in which technologies come out on top.

China Auto Subsidies: Who's on the List? Who's Not?

A month ago, China announced subsidies to support sales of "new energy vehicles" and energy-saving vehicles. Yesterday, the government released a list of cars approved for subsidies under the "energy-saving" category. The list is interesting, not because of whose cars are on the list, but because of whose cars are not on the list.

"New energy vehicles", in this case, include both plug-in hybrids and pure electric vehicles. The former are eligible for a subsidy of up to 50,000 yuan and the latter of up to 60,000 yuan. Note that traditional hybrids of the non-plug-in variety are not included here.

"Energy-saving" vehicles have traditional internal combustion engines, but the engines must have a displacement of 1.6 liters or less. Readers may remember that early in 2009, China's government announced a 50 percent tax break to be applied to all cars with engines 1.6 liters or less.

The sales tax on these cars was decreased from 10 percent to five percent, and it led to a significant increase in sales of small cars, which further drove China's annual sales to eclipse those of the US for the first time ever. (Though, admittedly, this was helped by a steep drop-off in US sales due to the recession.) The biggest selling car in China last year was BYD's F3, a gasoline powered Toyota Corolla lookalike with a small engine.

Toward the end of 2010, the small car tax break was cut in half (tax increased from 5% to 7.5%), and extended for a few more months as part of China's stimulus plan. Now that the tax break has ended, the government has resorted to a one-time subsidy of 3,000 yuan that basically accomplishes the same task of encouraging sales of fuel-efficient cars.

Detailed List of 71 Models

Yesterday, the NDRC released a list of cars eligible for the 3K subsidy. There are 71 specific models from 16 companies, all with engines of 1.6 liters or less. (I won't list all of the cars here; the complete list can be found in this Chinese pdf.)

Before seeing the list, my expectation would have been that the number of Chinese-branded models would exceed those of foreign-branded models, but that is not the case. Among the 71 listed models, 32 are Chinese and 39 are foreign.

Why does this surprise me? Because when the tax break was enacted over a year ago, the government's intention was to pick a cutoff point (1.6 liters) at which Chinese brands would most benefit. According to research shown to me by an auto industry executive in Shanghai, cutoffs of 1.5 liters or 1.7 liters would not have benefited independent Chinese brands as much as the 1.6 liter cutoff. The executive's research estimated that, at the 1.6 liter cutoff, approximately 85 percent of sales were of Chinese brands.

And indeed, as the tax break was announced last year, many commentators pointed out that the foreign manufacturers had been caught flat-footed because they offered few cars that qualified for the tax break.

Well, apparently that has changed. The list now has 17 different model variations made by Shanghai GM (SAIC-GM) alone.

Because there has apparently been a crackdown in reporting on actual monthly sales numbers from China, I now have difficulty getting my hands on sales data. (Apparently someone figured out they could charge money for the data.) If I could, it would be easy to determine just how many of each of these 71 models has been sold in recent months to see who would be benefiting the most. Perhaps the numbers of Chinese vs foreign models would matter less than the absolute numbers of vehicles being sold.

Who's Not on the List

And one would assume that China's hottest selling sedan, the BYD F3 would ensure that most of this subsidy money would flow to Chinese brands. There's just one problem with that reasoning: the F3 is not on the list!

I'm not sure whether this was an oversight, but the only BYD model on the list is the F0, a car small enough to pick up and put in your pocket.

Who else isn't on the list? Toyota, Nissan, Ford, Mazda. Each of these companies makes cars in the 1.6 liter and below segment, but none of these is on the list.

And poor Toyota, the company that brought the world the first production hybrid, the Prius, doesn't appear to offer any car in China that is eligible for any kind of subsidy. Its small cars like the Yaris didn't make the 3K subsidy list, and its Prius won't qualify for the 50K hybrid subsidy because it isn't of the plug-in variety. Its next generation Prius, which will be a plug-in hybrid, won't qualify either because its gasoline engine is being upgraded from 1.5 liters to 1.8. Can these guys not catch a break in China?

I would suspect an anti-Japanese sentiment here, but the 3K subsidy list does have other Japanese-branded cars from Guangzhou Honda and Chang'an Suzuki.

There's another surprising wrinkle in China's new energy vehicle policy, and it concerns BYD. More on that tomorrow...

Edit: The guys at China Car Times have put up an English list of models eligible for the 3K subsidy here.