Monday, August 22, 2011

Outside world belatedly catches up to China reality

There's a big difference between reporting on reality in China and merely analyzing the news or talking to the government.

From the fall of 2008, when Warren Buffett first took his 10 percent stake in BYD, until very recently, practically every foreign news report or commentary about alternative energy vehicles had already declared China the ultimate winner. I long ago stopped trying to save every article I could find about China's “new energy vehicle” (NEV) industry because they began to appear formulaic.

Here's how it went. A foreign reporter, commentator or business leader would visit China, stopping first in Beijing to meet with government officials, then hop a plane to Shenzhen to test drive one of BYD's hybrids or EVs. Then he or she would return and write an article, based on no more than official government projections and a 10-minute test drive, proclaiming that the rest of the world was already far behind.

Of course, anyone who regularly follows news about China knows that those early stories – which persisted throughout 2009 and 2010, and even into 2011 – were way too optimistic. (A couple of stories on this very topic that came up today are here and here.) The once-vaunted BYD, having suffered a growth rate only half that of China's auto industry as a whole in 2010, and having seen its profits drop a further 89 percent in the first half of this year, is no longer the darling of innovation it once appeared to be. (Recall that BusinessWeek ranked BYD the 8th most innovative company IN THE WORLD in 2010!)

So how did those early visitors to China get their assessments so wrong? They didn't talk to the right people. So many foreign business leaders head off to China, meet with government leaders and return assuming they know everything they need to know. After all, China's government is in charge. They get what they want, right?

Well, anyone willing to swallow Chinese government policy back in 2009 would still be expecting to see 500,000 NEVs plying China's roads by the end of this year. While I don't have a final count of the number sold so far, I do know that in 2010, only about 1,000 of these cars were put into service in all of China. And the news I've seen so far this year, though not comprehensive, seems to suggest that maybe even fewer of these NEVs have been sold in 2011.

Of course, I cannot really point my finger at anyone else because, early on, I was just as guilty. My early blog posts about BYD should have been more skeptical, less optimistic. I won't be too hard on myself though, because, by the spring of 2009, I had turned somewhat pessimistic, asking "Will China Lead the World in New Energy Vehicles?" (May 2009). Or maybe “realistic” is a better word.

What led to my newfound skepticism? I went to China. But I didn't talk to central government officials (though I tried); I talked to analysts, auto company insiders, scholars, and business people.

My point here is not to say that I “get China” and no one else does. What I am trying to say is that, at one time I did get at least one aspect of China, and only because I went there and managed to talk to some of the right people. In all fairness there were also a few foreign journalists in China who also got it at the time, though their voices were in the minority.

The difference for anyone who truly reaches a level of understanding about any aspect of China is not only about being on the ground there, but also about talking to the right people. The May 2009 post I linked to above was written from my hotel room in Shanghai after I had only been in-country for about three weeks. But what a difference those three weeks made in how I viewed China's NEV prospects.

As I now sit here at my desk in Los Angeles, I feel, unfortunately, about as disconnected from China as I have been in quite awhile. Not having been there to talk to people (I've been busy with a little writing project for the past year-plus), all I can do is read the news coming out of China, try to distill fact from fiction, and apply theories I have developed based on previous experience.

That said, one can learn much about China in general by watching and reading from a distance. In this way we can hone theories that help us to understand what we see. Then we can test those theories with later events or situations to determine whether those theories were correct.

Unfortunately for investors, economists and business people, the operative theory regarding China's NEV industry in 2008-2010 seems to have been twofold: First,
China's government always gets what it wants. And second, if Warren Buffett is investing there, it must be a sure thing.

In this case, I think we can safely toss that theory aside – or at least be careful in how we apply it in the future. Theories are nice, and they will do in a pinch, but there's really no substitute for doing the footwork to truly understand what is going on in the world.

We China-watchers need to return periodically and fill our buckets with new data points to chew on.

Friday, August 12, 2011

American Wheels, Chinese Roads: a review

For several months I have been eagerly awaiting the arrival of Michael J. Dunne's new book, American Wheels, Chinese Roads: The Story of General Motors in China (Singapore: John Wiley & Sons Asia, 2011).

If you have read any news stories covering China's auto industry over the past decade, you have almost certainly read quotes from Mike Dunne. Until recently he was in charge of J.D. Power's China unit, and now he runs his own consulting company.

There are few people more qualified than Mike Dunne to write about China's auto industry. He grew up in Detroit, worked at GM, and earned his MBA from the University of Michigan. He has also spent over two decades of his life living and working in China.

American Wheels, Chinese Roads is a more-or-less chronological telling of the experience of General Motors in China, but at appropriate points, Dunne interjects relevant stories about other auto companies and their experiences in China.
And it is a pretty quick read because the story is so entertainingly told.

The stories are all fascinating because many reveal lessons that GM learned along the way and often contain fly-on-the-wall details about negotiations between Chinese and foreign automakers. Dunne makes these stories even more interesting (and demonstrates his China credentials) by weaving in little Chinese language lessons and references to Chinese philosophers and historical figures. He doesn't just lay the lessons on us; he often delves deeper into why things are the way they are in China.

At a few points, GM is portrayed almost as a naive victim, caught off guard by the machinations of the government or GM's competitors. For example, when GM inked its deal with Shanghai Auto (SAIC), it was promised a monopoly in the luxury vehicle segment only to be surprised a few months later that Shanghai Auto's other partner, Volkswagen was being allowed to introduce a competing vehicle.

Dunne also retells the story about how Chery Auto managed to beat GM to market with the QQ, a copy of the Chevrolet Spark, adding new details that I had not seen elsewhere.

GM's curious sale of one percent of its joint venture to Shanghai Auto in 2009 is also covered here, though little is said about the possible motivation of SAIC. (But you will be able to find SAIC's side of the story in my forthcoming book on China's auto industry.)

In the penultimate chapter, Dunne sums up the experiences, not only of GM, but most foreign companies attempting to succeed in China:

While placing their bets, companies must never forget that to be dealt a hand in the game of electric cars -- or almost any business in China -- you will need to get approval for a license.

And get a partner.

Once those are secured, you will begin to compete with both the house and the player. The ones making the rules are also playing the game -- and they're determined to triumph.
This nicely sums up much of my own research on China's auto industry. Getting into China is hard, and once there, you will only be there as long as the Chinese find you useful.

In terms of the details, I was very pleased to find that Dunne's take on China's auto industry largely agrees with my own -- not that it has to, but having spent several years researching this industry in which Dunne is an expert, I am happy to note that my own research was not off-base. This is not always the case when two writers tackle the same topic in relation to China: it often depends on which part of the elephant one is touching.

As enjoyable as this book was to read (it is truly a page-turner!), as a researcher, I often wished to see footnotes to support certain quotes, figures or other claims. For some reason, the non-academic world has an aversion to footnotes. From the point-of-view of a researcher, footnotes make a particular work more attractive as a documentary source, and ensures that the book is cited more frequently. More citations will very likely translate into more sales. (And if you're the kind of reader who hates footnotes, you may also be happy that the book comes in a Kindle edition.)

My sense in this case is that many of the quotes come from Dunne's first-hand experience, although I would not have minded his saying so in the text. There seems to be a trend toward increasing acceptable use of the first person in non-fiction nowadays, a trend that I fully support: if you did the work, conducted the interview, etc., I think you should feel free to say so.

But this minimal criticism only reflects my personal preference, and in no way does it detract from this book as both an entertaining work of non-fiction and a source of wise advice on the pleasures and pitfalls of doing business in China.

In the conclusion, Dunne leaves no doubt as to where he stands in his own assessment of the business environment for foreigners in China. His parting shot takes the form of a fictitious memo from a foreign auto executive in China to the US Auto Task Force. His final recommendations aren't delivered in anger; they are a matter-of-fact assessment of a playing field on which foreign businesses have been forced to face down the entire Chinese government all on their own for far too long.