Tuesday, August 31, 2010

Chevy's Volt in China: Why not call it the Volt?

China Car Times reports that the new Chevrolet Volt was unveiled at an event in Shanghai today, though it won't be going on sale until sometime in 2011.

I'm always curious to know how the names of foreign products are Sinicized for sale in the Chinese market. In this case, GM has picked the Chinese name 沃蓝达 (wo lan da), a name apparently intended to sound somewhat like "volt". (Incidentally that's the same 沃 used in Wal-Mart in China: 沃尔玛.)

I wondered why they didn't simply call it "volt" in Chinese. I mean, they do have electricity there, and it's also measured in volts. So I looked it up.

The word "volt", meaning a measurement of electricity, is translated as 伏特 (fu te), which sounds exactly like the Chinese translation of Ford Motors, "福特" (fu te).

Tuesday, August 17, 2010

Elusive Innovation: Inventing Stuff is Hard

Once one has climbed to the top of the hierarchy of the global division of labor, it really isn’t all that difficult to reach back down. However, if one has yet to make it to the top, getting there is extremely hard.

The US no longer manufactures most of what it buys, and many items it formerly manufactured are now being made elsewhere. But it’s not as if the US no longer has any economic activity. Much of that manufacturing activity was replaced by “higher level” knowledge work, part of which includes research and development that brings us such innovations as iPhones and this internet thing.

Despite the loss of manufacturing, one advantage the US has is that it can always decide to manufacture something if it wants to. All it has to do is throw money at the problem. The US rescue of General Motors is a case in point. It is quite likely that GM would no longer be building cars in the US if the US government had not determined to save the company. This is not to say the rescue of GM was necessarily a good strategy, just that, if the US government so desires, it has the wherewithal to pull it off.

China’s economy now provides a significant portion of the world’s manufacturing, a task for which it is currently well-suited. It has more people than it can count to throw at factories requiring unskilled labor. But an unfortunate disadvantage for China is that, whereas the US has the option of employing brute force (i.e., lots of money) to keep manufacturing onshore, China cannot simply employ brute force to encourage innovation.

Innovation is a higher level activity that requires a certain quality of education and a relatively free and open political environment. In absence of these requirements, China can throw all the money and slogans it wants at innovation and it will still not happen.

And this is why the US is in a far more favorable position relative to China. If, for whatever reason, all trade between China and the US were to stop for a period of time, not only could the US buy manufactured goods from other countries, but it would also have the option to begin rebuilding the manufacturing industries it once had. Again, while that may not be the optimal strategy, at least it is an option for the US. On the other hand, China, try as hard as it might, cannot become an innovative society without undertaking the kinds of political reform necessary to encourage innovation.

(And ironically, if China were to undertake such political reform, the probability of an interruption in trade between China and the US would quickly drop to about 0%, making this whole discussion more or less moot.)

To slightly oversimplify, while the US can do what China does, China cannot do what the US does. Not today.

But it is not as if China is a stranger to innovation. While my European ancestors were still banging sticks together, the Chinese were inventing cool things like gunpowder, the plow, the compass, paper. So I am quite certain the current lack of innovation is not an issue of human capacity, but more of a systemic one.

Of course, the bad news for Chinese citizens is that, in the short term, the system will not change. But the good news for many educated Chinese is that there is always the option of emigration to more innovative societies. Unfortunately for China, this is a double blow to the country as a whole. Nearly every educated Chinese who leaves is not only a minus-one for China, but also a plus-one for the country to which he or she immigrates.

The global hierarchy of the division of labor, as it currently stands, has brought the world both innovation and inexpensively manufactured goods. The current structure, despite its flaws, works pretty well, but a major problem China has with the current structure is that China is not in its traditional place on top. We can see this dissatisfaction in the central government’s continually unsatisfied demands for “indigenous innovation”.

For how long will insistence on rule by an unelected government continue to outweigh the Chinese desire to once again lead the world in innovation? For as long as China’s single greatest fear is instability. Until China's government can become comfortable with a little unpredictability, it should expect little in the way of breakthrough innovation.

Sunday, August 15, 2010

BREAKING NEWS: China surpasses US in population!

Does anyone think about quality anymore?

I came across this article to which someone linked on Twitter this morning. The article, entitled "China has Already Surpassed the U.S. in Cleantech" convincingly lists nine areas in which China is quantitatively miles ahead of the US:
  • IPOs
  • M&As
  • Solar
  • Rare earth elements
  • Stimulus
  • R&D
  • Speed
  • Nukes
  • Investment
I would add more items to this list as well:
  • Population
  • Food consumption
  • Particulate pollution
  • Carbon output
  • Land mass
  • Squat toilets
  • etc...
The point is that, when you compare China to other countries in strictly quantitative measures, it will increasingly come out on top. But what does that mean?

China is very good at mobilizing when the central government gives the orders. When Mao told Chinese to build furnaces in their backyards to make steel during the Great Leap Forward, that's exactly what everyone did. And, as it turned out, almost all of the steel was crap because no one really knew how to make steel.

This is not to say that Chinese people are incapable of innovation. Indeed, much of the innovation coming out of the US has the involvement of people of Chinese ethnicity. But the difference is in the environment for innovation.

To this day, China still lacks either the educational system or the political freedom to encourage innovation. There is a lot of talk about innovation, and there is a lot of money being thrown at it, but in the end, where is the innovation? Aside from a way to turn an iPod Touch into a cell phone, what innovations have come out of China?

What about BYD's hybrids and electric cars, you may ask. What about them? Out of the 400,000-plus cars they sold last year, only a hundred or so did not have traditional gasoline engines. So far this year, they've sold a few hundred more of their new energy cars, mostly to taxi fleets. By this time next year, there will be thousands more Chevy Volts and Nissan Leafs in the hands of consumers than BYD hybrids or electric vehicles.

In a previous post on ChinaBizGov, I referred to a quote from the Economist that, when it comes to cleantech, ultimately China will still do most of the manufacturing and the US will still do most of the inventing. This is what these two economies are set up to do.

China will not suddenly become a hotbed of innovation simply because the central government repeats over and over that it wants innovation. And the US is not going to stop innovating simply because it is going through a difficult recession. The underlying environments of these two countries have not changed.

Thursday, August 12, 2010

Why? 'Cuz picking winners is bad, mmmkay.

There's an interesting article in this week's Economist, "Picking winners, saving losers" that deserves a read if you're a subscriber. If not, I would like to highlight a few points.

As expected, the Economist still finds industrial policy to be largely unsuccessful, though the evidence they present is only anecdotal. They say that industrial policy is back in fashion now for four reasons:
  1. Weakness in the world economy
  2. Efforts to rebalance economies away from sectors such as finance and real estate. (They mention the US here, but I see no evidence whatsoever that the US is trying to rebalance away from real estate. Indeed, I'm pretty sure everyone in Washington gets on his or her knees every night and prays for a rebound in the real estate market.)
  3. Emergency efforts to rescue recessionary economies has led to demands for more industrial policy
  4. Rich countries are responding to the apparently successful policies of countries like China and South Korea.
All of these reasons sound plausible, and I think the last one is one of the most important. Why? Because, despite all of the economic theory telling us industrial policy is bad, China is the elephant in the room that no one seems to know how to address.

Is China, with its "state-led capitalism", making a huge mistake that it will pay for in the future, or is it the exception that proves the rule? And if China is right, where does that leave all of the other countries that are hoping to abandon industrial policy as soon as the recession is over?

One of the Economist's concluding lessons (which it says are "clear") is that, "the more [an industrial policy] is in step with a national or local economy's comparative advantage, the more likely it is to succeed". Okay, so the Economist is allowing that industrial policy could work, but how can it explain the fact that some countries have successfully created industries where none previously existed?

If Japan and South Korea had listened to the Economist's advice about comparative advantage, neither would have an auto industry right now. Same goes for China. Everyone would still be farming in the countryside.

The article quotes a Michael Liebreich, CEO of Bloomberg New Energy Finance, on industrial policies currently supporting clean technology. "Where the industry ends up will inevitably be different from where the money went in," he says.

Despite the fact that China and the US are both spending piles of money on clean technology, says Liebreich, China is still likely to end up with most of the manufacturing, and the US is still likely to end up with most of the R&D -- the implication being that money spent on R&D in China and on manufacturing in the US is probably being wasted.

Again, though no hard evidence is offered to support Liebreich's prediction, this does seem about right. But it's only because I see no real evidence that China is willing to make the kinds of political changes that would create an intellectual environment where innovation is encouraged.

On the other hand, we also see a US government completely willing and able to spend a lot of taxpayer money to keep manufacturing at home. Without question, GM would not exist if the Bush/Obama administrations had not saved it.

Since I am not an economist, I'm not sure I have the tools to solve the questions of industrial policy. Then again, I'm not sure the economists do either. The only thing that's "clear" to me is that the real world keeps throwing out examples that their models cannot explain.

China's green subsidies are an investment. America's are an expense.

Here's one for my fellow finance geeks...

Having emerged from the recent global recession relatively unscathed, China has launched what appears to be an all-out assault in its ambitions to become a major player in the future of green technology. As one of the most polluted places on the planet, China’s motivation seems natural and unsurprising. However, there is a much more important motive than cleaning the environment behind China’s drive to dominate this sector. China understands very well that the world’s developed countries are prepared to shame each other into doing whatever is necessary to mitigate climate change. Whoever is able to develop these cutting-edge technologies, or to make existing technologies more affordable, stands to generate a lot of revenue.

When we see such news as the recent announcement that China is committing upwards of $15 billion toward “green” cars, we need to understand that, from China’s perspective, this is not just about cleaning up China. It is an investment in China’s future.

But could we not view America’s investments in the same manner? In a word, no. There is a big difference.

During the late 1990s / early 2000s, under the leadership of Jiang Zemin and Zhu Rongji, China embarked on a far-reaching program of privatization. Under Zhu’s direction, thousands of state-owned enterprises (SOEs) were closed, privatized or downsized, and over 40 million SOE workers lost their jobs (many to be reabsorbed by the private sector). But under the leadership of Hu Jintao, China has pulled back from the brink of privatization and begun to consolidate and solidify the role of the state in China’s most important industries.

And even in industries where private and state-owned enterprises compete, such as China’s automobile industry, the private players are typically beholden to local governments in a mutually beneficial relationship. The private enterprises provide employment and tax revenue while the local state provides land, tax breaks, and free or cheap utilities. Furthermore, when private enterprises in important industries become large enough, and are seen to be following the desired policies of Beijing, China’s central government has been more than willing to step in and provide assistance in the form of subsidies or easy access to credit.

Large loans by the state-owned Bank of China last year to BYD and Geely, two “private” auto manufacturers serve to underscore this point. BYD is seen by many to be on the cutting edge of development in electric vehicles, and Geely recently completed its acquisition of Volvo. In both cases, the central government was willing to lend a hand (and more importantly, yuan) to help these two companies in pursuit of Bejing’s auto policies.

Why is China’s government willing to support private companies that compete with its state-owned giants? Because ultimately, the returns on the state’s investments, whether they go to private or state-owned enterprises, are Chinese. Ultimately, technology developed (or copied) in China finds its way into the hands of massive state-owned enterprises. And ultimately, the profits generated by these massive SOEs finds its way into the hands of their owners: the state.

So when China subsidizes its companies to develop new green technologies – or to “borrow” and tweak such technologies from abroad – the goal is to generate a return on China’s investment.

By contrast, when the federal government of the U.S. chooses to channel $69 billion in subsidies, tax credits, low-interest loans and grants to green technology companies, most of which (with the glaring exception of General Motors) are in the private sector, the state is not generating a return for itself. The ultimate beneficiaries of U.S. generosity, assuming the recipients of government largesse are ultimately successful, will be the shareholders of the companies receiving the money.

In short, whether they are actually accounted for this way or not, China’s industry subsidies are an asset on its balance sheet and America’s are an expense on its P&L. But does the accounting really matter? I would argue that, in the short- to medium-term, it does.

In a country that faces major demographic challenges during the next decade or so (as retirees begin to significantly outnumber workers), China’s leaders fully understand that they need to generate as much economic growth as possible now while it is still relatively easy. Cash banked now will help to create the massive welfare state that China will eventually be forced to build.

China’s investments in green technology are not about cleaning up pollution or mitigating global warming, though these will surely be positive side-effects; they are about preparing China for an uncertain future. This is a battle that China’s state-owned enterprises have to win. By contrast, it is a battle that the U.S. government only hopes its private sector can win.

Monday, August 9, 2010

China's MIIT Orders Capacity Cutbacks

According to an announcement on the website of China's Ministry of Industry and Information Technology (MIIT), 2,087 companies in 18 industries have been ordered to close outdated, heavily polluting factories by September.

While this sounds like a positive step by a government that values the environment, it also sounds like similar orders that have been given in the past -- long before it was cool to care about climate change. I hate to sound skeptical (and I would like to be wrong about this), but, frankly, I'm not buying it this time either.

The punishments suggested for companies failing to comply are restrictions on access to bank financing and new project approvals. First of all, most of the companies on MIIT's list are small or medium sized enterprises, and many of them are privately owned. These companies never had access to bank lending anyway. Furthermore, because they are so small, their approval processes -- if indeed there were any -- most likely never went further than their local governments.

In addition, local governments are still heavily incentivized on two very measurable criteria: social stability and economic growth. Closing local businesses is unlikely to help their job performance measurement under either criterion.

While local governments will, of course, have to be seen to follow central government orders, it's not hard to imagine that local authorities are already working with the owners of these businesses (which in many cases are the local governments themselves!) to find a way around Beijing's dictates.

Ultimately, Beijing sees great opportunity in the climate change movement. But contrary to outward appearances, the opportunity for China lies, not in cleaning up its environment, but in selling related technologies to foreigners.

Clean technology will be expensive, and a country facing a demographic time bomb in a decade or so cannot afford to waste a single percentage point in GDP growth to clean up its environment. China will, however, be more than happy to sell the necessary technology to those countries that are already on the bandwagon.