In praise of public-private partnership

Today's splashdown of the SpaceX Dragon capsule off the coast of California completes the first successful visit of a private spacecraft to the International Space Station.

This news isn't really China-related, but it illustrates an important aspect of state vs private sector investment. To over-generalize a bit, (American) conservatives would prefer that the private sector do everything, and (American) liberals would prefer that the state do everything.

Here we have illustrated the importance of public-private partnership. Without the initial leadership of the state, the US would not have reached the moon in 1969. It took far more investment than any private sector investor would have been willing to risk for what was basically a huge experiment with no monetary payoff.

Based on a few decades of learning, a private company has now managed to come up with a solution far less expensive, and at least as effective, as anything the state could have come up with to send supplies to the space station. And this was apparently just the beginning; the Dragon capsule will someday ferry people too.

Bringing this lesson closer to my area of interest, perhaps it also makes sense that governments subsidize the development of alternative methods of fueling personal transportation. Right now, the economics of electric vehicles simply don't make sense. This is why it is important that governments step in to subsidize the experimental phase.

As with the original moon shot, alternative fuels and methods of propulsion are experimental (and arguably far more important), but no private sector investor would be willing to take such a risk to build a product that doesn't yet provide a positive return on investment.

This isn't to say that governments will always be right, but that's the nature of experimentation. Thomas Edison conducted over 3,000 experiments with different materials for filaments until he finally made a lightbulb that worked. For small experiments such as Edison's, no government help was needed, but without government regulation and assistance, we would never have moved beyond the traditional gas guzzlers we were driving back in the 1970s.

Scorn of conservatives: The Chevrolet Volt

When I began to research business-government relations in China's auto industry several years ago, I started with a question of why China seemed to be achieving such great success under the heavy hand of the state. What I have since learned is that, while, yes, the state can drive outstanding growth in an agrarian society with low living standards, the ability of the government to make good decisions declines as technology becomes more complex.

China has now reached a point where its government needs to be smart enough to step back and allow the private sector to compete freely (and not just talk about it). All the government assistance in the world will not make state-owned businesses competitive. They simply lack the proper incentives.

At the same time, the American people also need to realize that the US will never grow as fast as China has grown over the past three decades (and neither will China again). We also need to realize that there is a place for government to invest in experimentation that will result in much-needed future technology. Sometimes the government will make mistakes, but fear of making mistakes will deprive us of potential successes.

Being counted among the most advanced countries on earth is not easy, as the Chinese are about to discover, but the notion that either the government OR the private sector is best suited to drive future innovation is a false choice. We need both. We need the competitive zeal of the private sector, and, sometimes, we also need the deep pockets of the government to take on problems too big for the private sector.

The Chinese system of dominant state ownership is nearing the end of its usefulness, and if the Chinese don't figure that out, they are doomed to stagnation and chaos. US arguments over "socialism" vs "free-markets" are also pointless. Somewhere, in the middle, there is an ideal system in which ownership still lies primarily with the private sector, but the government takes the big risks that can potentially save the planet for our children and grandchildren.

Book Giveaway!

To celebrate the imminent release of my book, Designated Drivers: How China Plans to Dominate the Global Auto Industry, I will be giving away three signed copies next week.

Designated Drivers is about much more than the auto industry. It uses China's auto industry to tell a story about how China's central government manages its economy in its drive to create global industrial champions. It's an important story for anyone considering doing business in or with China as well as for policymakers who want to better understand business-government relations in what is still the world's most consistently fast-growing economy.

If you would like a chance to win a free copy of my book, all you need to do is "like" the Designated Drivers Facebook page and share it on your page. The Facebook page is here:

          https://www.facebook.com/DesignatedDriversChina
 
On Tuesday, May 29 at 08:00, pacific time, I will select three "likers" at random* and send each of them an autographed copy of Designated Drivers.

And if the number of "likes" surpasses 500, I'll throw in another two copies for a total of five possibilities to win!

This morning a friend emailed me a picture taken at a bookstore in Hong Kong showing a few copies already on the shelves there, so it should only be another week or so before copies reach North America.

_______________
* To ensure randomness, I will copy all names into an Excel spreadsheet, number them consecutively, and use Excel's random function to select three (or maybe five!) numbers from the list.

Thoughts on the 2012 Beijing Auto Show

I recently traveled to Beijing to attend the 2012 Beijing Auto Show as well as to attend the Automotive News China Conference. While no one can expect to gain a full understanding of China during a quick trip like this one (indeed, one must live there for an extended period in order to learn that he can never fully understand China), such trips are often helpful for taking the pulse of what's going on at the moment.

First, a bit about the conference. Like most industry conferences, this one is basically a big networking opportunity surrounded by presentations from industry notables. My greatest impression was that, despite less than impressive growth numbers in the first quarter of this year, everyone seemed very optimistic about the prospects for longer term growth in China's auto market.

A lot of the discussion centered around the still largely untapped markets in China's Tier-3 and Tier-4 cities, and how dealer networks have aggressive expansion plans to take advantage of burgeoning demand among middle class Chinese consumers. And because the majority of auto purchases in China are still cash transactions, dealers see the ability to expand and sell their finance offerings as another key to getting more people behind the wheel.

From a personal point-of-view, while I learned much from the presentations, also I could not help but wonder why, for all of its stated intention of doing its own thing, going its own way, doing everything with "Chinese characteristics," China seems determined to build a consumer society with "American characteristics." Why is China copying some of the least attractive of American characteristics such as streets crowded with slow-moving vehicles, polluted air and consumer debt that has allowed us to live beyond our means?

While I wouldn't want to deny China the opportunity to develop itself and to improve standards of living, I wonder why China's planners cannot look down the road and foresee the kinds of problems that already exist in the US. Here is a chance for creative thinkers to leap ahead to solutions that will allow Chinese citizens the kind of personal mobility that will enhance their lives without bringing many of their negative characteristics.

And speaking of leaping ahead, this is a good point for me insert a few pictures and observations from the Auto Show.

This first picture is of a concept car shown by Chery, a local state-owned automaker from Anhui province. Actually, it's two cars, called the @Ant, connected to each other.
 
While I have to give Chery kudos for its creativity on this one, I felt like their design was more of a novelty than something that could truly solve problems. First, even though these cars are intended to be smaller, their footprints are actually quite large. Because the front wheels are intended to link up with another car in front, when the car is driven solo, those extended front wheels still take up a lot of room.

Also (and I really hate to nitpick here) aren't we pretty close to having technology what would allow cars to "link up" virtually with the use of software and proximity sensors? Such wireless technology would eventually allow for linkages to take place on the fly without the vehicles even needing to slow down. I'm guessing that the physical linkage suggested by Chery would require the vehicles to slow down, if not stop altogether, in order to establish a link.

In terms of more realistic concept vehicles, my impression this time was that Chinese designers (in some cases) have improved their design skills and visions since the last auto show I attended in Shanghai in 2009.

This crossover concept, also from Chery, really flows with some clever use of side panel creasing.

And this MG concept from Shanghai Auto was also an eye-catcher. I like the way they were able to integrate the traditional MG look with the round headlights into a very contemporary design.

And here's another nice concept from First Auto Works with really smooth lines. Unfortunately, FAW had it displayed in such a way that it was nearly impossible to capture the whole car in a single photo.

As in Shanghai 2009, everyone this year was still eager to demonstrate that they were developing new energy vehicles. Also like Shanghai 2009, practically none of the green vehicles on display could actually be bought by Chinese consumers.  (Of course, the foreign automakers also showed their NEV offerings like the Toyota Prius, Nissan Leaf, Chevy Volt, etc.)

Here's the apparently electric version of Guangzhou Auto's Trumpchi which is built on an older Alfa Romeo platform (no doubt acquired from its new partner Fiat which owns Alfa).

I say this is an "apparently" electric version because, like many NEVs at the show, the only indication of their NEV status was a nearby sign or decals on the side. A look at the interior of some of these cars revealed the traditional shifter associated with an automatic or manual transmission -- which electric vehicles don't need.

This is the Denza, a new brand created by a joint venture between the private Chinese firm BYD and Daimler of Germany. This NEV is slated to go on sale in 2014.

Suicide doors also seemed to be all the rage this year, though no one actually has the guts to sell a car with this really cool feature.

Another common theme I noted was the traditional Chinese blue and white pottery theme on this sedan by local Chinese automaker Hawtai and a custom version of the Smart for Two.

And in case you are still wondering why Beijing wouldn't let Sichuan Tengzhong buy Hummer a few years ago...

... here's the Chinese version made by Dongfeng Motor. As you can see it's every bit as pretentious as the old US version which (fortunately) is no longer made, depriving some Americans of opportunities to unwittingly make fools of themselves.  ;-)

I didn't take a lot of photos of the non-Chinese automakers' stands as my interest on this trip was primarily in what the Chinese are working on. However, I did notice that all of the Detroit Three are projecting a lot more confidence than they did in 2009. If you remember, GM and Chrysler were still on the ropes then, and Ford was also pretty deep in debt. This year, all three had much larger stands, a lot more vehicles (including some really fascinating concepts) and were drawing such huge crowds that it was hard to walk through.

Here's a cool batmobile-looking concept from Chevrolet called the Miray.

The dancing blondes at the Ford stand attracted every red-blooded Chinese man with a point-and-shoot camera like bees to clover, so I couldn't get a good look at the new SUV Ford was displaying.

 

And finally, here's a shot of an Audi stand outside of one of the pavilions. What's so interesting about this? The characters on the building are inviting people to check out their used cars (二手车, literally "second hand car").

China's auto market is still so new that about 85% of car buyers today are still first-time buyers. But since 2005 over 80 million vehicles have been sold in China. This means that an increasing number of used vehicles will be available as many previous first-time buyers trade up.

I would not have expected to see used cars being touted at an auto show, but since Chinese consumers still overwhelmingly consider foreign brands to be superior to Chinese brands, it makes sense that a first-time buyer might be persuaded to buy a used car, certified by a foreign automaker, rather than a brand new Chinese-branded car.

As for the auto show itself, I have to say that it was a bit of a disappointment. The organizers of this show appeared to be more interested in how many tickets they could sell than in putting on a good show. Even though they designated different days as media days, industry days and public days, there appeared to be no real distinction as tickets were offered for sale to anyone who showed up.

China's biggest auto show alternates between Bejing and Shanghai on even and odd years, respectively. In the future, I think the odd years will be enough for me.