Thursday, December 23, 2010

The missing link in China's auto development?

An interesting article in today’s WSJ by ace China auto reporter Nori Shirouzu summarizes an interesting trend in China’s auto development. China’s state-owned automakers, along with their foreign joint-venture partners, are beginning to develop China-only brands.

Battleground in the small car segment

At least part of the impetus behind this trend, I believe, is the popularity of small economy cars in China. Beginning in early 2009, when China halved the sales tax on cars with engines 1.6 liters or smaller, sales of these small cars have really blossomed. (The number of cars sold in the less than 1.6 liter category rose by 71 percent over 2008 while sales of larger cars rose by only 23 percent.) The tax on smaller cars was increased slightly at the beginning of 2010, but small cars have nevertheless remained hot sellers in China.

The good news for makers of Chinese-branded autos was that the foreigners had almost nothing to offer in the less than 1.6 liter space, so Chinese brands dominated. The bad news for Beijing, however, was that the SOEs also had very little to offer in this space. It was the private automakers (along with independent SOEs such as Chery) that benefited most.

New Strategy: Joint development

Enter this new strategy of jointly-developed, Chinese-branded cars that, nearly as I can tell, is a win-win for the big SOEs and their foreign partners – at least in the short-run.

This strategy appears to have two variations. One is for the Chinese and foreign partner to develop a car together, combining the intellectual property of both sides. SAIC-GM-Wuling have taken this route with the Baojun (pictured below). According to the authoritative China Car Times, “The platform was designed in Korea, whilst the body design was done in China with GM’s help, the brand was developed in China and also the engine was developed by [Shanghai Auto] in the UK technical center.”

The SAIC-GM-Wuling Baojun

Shirouzu’s article today reveals that Volkswagen and PSA Peugeot Citroen are considering a similar strategy.

The other variation is simply to re-badge an older model from the foreign partner. Honda and Nissan are doing this with their respective partners in China, Guangzhou Auto and Dongfeng Auto. Guangzhou-Honda is a new Linian model which is a re-badged Honda City from a few years back, and Dongfeng Nissan are building the Qichen from old Nissan technology.

What's driving this trend?

There are a couple of factors at work behind this trend. First, although China’s central government has been pushing hard for development of Chinese brands since China joined the WTO, only China’s independent automakers (both private and local SOEs without JV partners) have made significant headway in introducing Chinese brands. Yes, the big SOEs have also introduced their own brands, but they have been “developed” mostly through purchased technology. That is, the big SOEs have yet to demonstrate any real engineering prowess.

Second, there is a big gap between the foreign-branded, mid-sized cars sold in China and the small, Chinese-branded cars. It’s a gap in terms of both price and quality, and Chinese consumers understand this very well. This is why, despite the growth of Chinese brands (they now make up over 30 percent of passenger cars sold in China), Chinese consumers would still prefer a foreign brand if they can afford it.

The Missing Link

These new, jointly-developed, Chinese-branded cars are, I believe, the missing link between foreign- and Chinese-branded cars. And the fact that this kind of development is happening in almost all of China’s big SOEs at the same time tells me there is some kind of central coordination going on – either that, or it’s just a big coincidence. Regardless, I think the strategy here is to provide Chinese consumers with a new product intended to wean them away from foreign cars and make them more accepting of Chinese brands.

And, if I am right, this should call into question the future role of foreign automakers in China’s market.

Another interesting wrinkle to this story is of whether Chinese automakers are learning any better how to design their own cars.

What some of these SOEs are doing is simply buying (or being given) old designs by their foreign partners, and then slapping on a Chinese badge. On the other hand, China’s private automakers have essentially been doing that for years ... only, they don’t have foreign partners ... and, um, they don’t pay for the stuff they copy. But in the process, the private automakers have probably gotten better at auto design. Even the process of copying must have imparted to the private firms some useful engineering skills that the SOEs have yet really to develop.

Perhaps this new method of (legally) copying what their foreign partners have already done will impart to SOE engineers some of those same skills.

Saturday, December 11, 2010

Umm...What's my motivation here?

Some people were "stunned" this week when the results of the latest OECD-administered exam comparing the performances of students across countries showed Shanghai's students to be the smartest in the world. This isn't something I would normally cover in this blog, but I would like to offer a slightly different perspective on these exam results.

First, I was not at all stunned that the Chinese came out on top. This is a country that teaches math as if their children's lives depend upon it. As I've stated before on this blog "
the average Chinese middle schooler can plot the trajectory of a non-guided missile." The only Americans who can do that are the handful who, for reasons that their friends can hardly fathom, opt to take a physics elective in 12th grade.

Fortunately, a few people did rush to put these results in perspective. Some Chinese experts acknowledged that, while their children are indeed pretty good at math and at taking exams, where they fall far short of their American counterparts is in creativity. (See articles here in ChinaDaily, and an editorial in WSJ by the Deputy Principal of Beijing University High School.) And James Fallows, in the Atlantic, quotes an educator who questions the representative nature of the exam given.

While I saw a lot of chatter about this news item on twitter this week, and read a few blog posts, I have yet to see anyone bring up the thought that originally came to my mind when these results were released. (Perhaps I missed it since I've been doing a lot more writing than reading recently.)

The point I would like to add is that I think various groups of students taking this exam most certainly had different levels of motivation.

Do any Americans remember the PSAT that we had to take in our 10th or 11th grade years? I would be surprised if many did. Does anyone remember the SAT or the ACT? Whether you got into college or not, you almost certainly do.

The only difference between these two exams was that one (the SAT or ACT) mattered, but the PSAT did not. I remember thinking about the PSAT: this has absolutely no bearing on my future, so I'm not going to sweat it. I may have even started to make patterns on the answer sheet as I colored in the dots.

My guess is that the American students who took this OECD exam approached it in pretty much the same way. Unless they could see how it would benefit them personally, they had no stake in the outcome.

As for the Chinese students who took the OECD exam, I have no way to prove this, but I am fairly certain that it was presented to them as something they must do for the honor of the Motherland.

This kind of pressure, combined with the fact that the Chinese system is already geared toward producing outstanding performance on standardized tests, was far more likely ensure a higher proportion of the students were motivated to perform well -- that, and the fact that the average Chinese student can do circles around the average American student in math.