Just a few years ago, pretty much everyone (except Chinese auto industry insiders whom I interviewed) thought China was about to take ownership of the global green car market. (Here's just one example from the excitable Tom Friedman of the New York Times.)
In 2009 China's industrial planners announced plans to have 500,000 green cars ("New Energy Vehicles" or "新能源汽车" -- a combination of electrics and hybrids) on Chinese roads by the end of 2011. That obviously didn't happen, so last year, that same target of 500,000 was pushed out to 2015.
So how did green car sales fare in 2012? Overall, hybrids plus electrics grew a respectable 52 percent.
So while sales grew pretty well in percentage terms, it is clear that overall numbers are still inconsequential when you consider that 19.3 million vehicles were sold in China last year.
How do these numbers compare to the US? Green car sales in the US grew 73 percent to over 440,000 in 2012. (Includes electrics, hybrids and plug-in hybrids.) So China's aim of 500,000 sales may still be a bit ambitious when you consider that not even the world's largest market for green cars has reached that number yet. Nevertheless, just as China has eclipsed the US in overall vehicle sales since 2009, China can probably be expected eventually to eclipse the US in green vehicle sales too.
One thing that we can surmise from these numbers is that China has clearly yet to become the global green car powerhouse it had aspired to become. The reason is simple, and it also explains why China's auto industry -- despite having been relaunched over 30 years ago -- has yet to produce a globally-competitive home-grown brand. (Investigation of this question consumes a major portion of my book, Designated Drivers: How China Plans to Dominate the Global Auto Industry.)
The state-dominated structure of Chinese industry does not provide the proper incentives for innovative leadership. China has private automakers, but they continue to be marginalized in terms of state support and access to funding. The big state-owned enterprises (SOEs) continue to receive every benefit that central and local governments can hand out, yet they are still led by politicians who have no incentive to take risks or invest for the long term.
The green technologies being used in Chinese EVs and hybrids are, for the most part, purchased, licensed or copied from foreign automakers. This is not a recipe for ownership of a global market.
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Green car sales data sources:
2010, 2011, 2012
General Motors announced today that it has signed a memorandum of understanding with the China Automotive Technology and Research Center (CATARC) in which CATARC will reportedly...
...manage GM’s fleet of demonstration Volts and will assist GM China in meeting certain objectives.
These [objectives] will include gaining the support of key decision makers crafting vehicle electrification policy in China.
Who is CATARC? From their English website:
China Automotive Technology and Research Center (CATARC) was established in 1985 response to the need of the state for the management of auto industry and upon the approval of the China National Science and Technology Commission. It is now affiliated to SASAC.
As a technical administration body in the auto industry and a technical support organization to the governmental authorities, CATARC assists the government in such activities as auto standard and technical regulation formulating, product certification testing, quality system certification, industry planning and policy research, information service and common technology research.
CATARC is "affiliated to SASAC" (State-owned Assets Supervision and Administration Commission) which is essentially the organization that holds the shares of central state-owned enterprises. CATARC is also a major regulatory organization in that all automobiles need to be tested by CATARC before they may be certified for the road in China.
Since part of GM's purpose is to gain influence over policymakers, this relationship with an organization that is part of the central government cannot hurt. But there is more to CATARC than meets the eye.
Not only is CATARC an auto industry regulator that is essentially owned by the central government, but it is also a competitor of GM's through its ownership in the Tianjin Qingyuan Electric Vehicle Company (Qingyuan). According to Qingyuan's website, the company both develops and produces clean energy vehicles and components, which sounds remarkably like something that GM does.
Qingyuan's "principal shareholder" is CATARC, and another of Qingyuan's shareholders is the Tianjin Lishen Battery Company, a producer of lithium-ion batteries for electric vehicles, which is, of course a competitor of LG Chem, the manufacturer of the battery in the Chevrolet Volt. (Lishen, incidentally, makes the li-ion battery for the Coda electric car.)
So what does all of this mean? Am I saying that GM has handed its intellectual property over to CATARC so they may copy at will? Not exactly. CATARC, after all, also has a reputation to protect, so I am doubtful that they would so blatantly copy GM's Volt technology. But how certain can GM be that its technology will not find its way, through CATARC, into the hands of Qingyuan, or Lishen, or any of the dozens of Chinese automakers who bring their cars to CATARC for testing?
GM is no stranger to having its IP copied in China. Back in 2003, GM discovered that Chery had somehow obtained the plans to the Chevrolet Spark, and used them to develop the QQ which Chery got to market several months ahead of the Spark. And when GM went to its partner, Shanghai Auto, to complain about this miscreant that had been copying its technology, only then did GM learn that Shanghai Auto was also a part owner of Chery. (Long story short, GM sued, then settled out of court with Chery, which admitted no wrongdoing, and Shanghai Auto got rid of its shares in Chery.)
In all honesty, I find it hard to blame Chinese automakers for copying foreign technology and designs. After all, this is what all developing countries do when they are trying to catch up. All developed countries -- including the US -- at one time or another, copied other countries' technologies with reckless abandon.
I do, however, blame foreign automakers (and manufacturers in pretty much any industry) for sometimes naively risking their shareholders' valuable IP for a share of the Chinese market. The goal of the Chinese automakers is to win -- as it should be. But foreign automakers need to understand that the ultimate goal of China's automakers is to no longer need them. When Chinese partners say their aim is for a "win-win," this means they get to win twice.*
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* I don't know for certain whether I was the first person to say this about the concept of "win-win", but I had not heard it before I tweeted it from my hotel room in Shanghai in January of 2010 (as documented by @rudenoon on his blog). :)
Several weeks ago I gave a talk related to my forthcoming book at the University of Southern California. Watch as I attempt to summarize four years of research and a 300-page book in less than an hour. :)
Last week New York Times columnist Thomas Friedman wrote another of his "Wow, China is awesome!" columns. This one is about how the Chinese are on top of climate change while the Americans are so caught up in partisan bickering that they have allowed an opportunity to slip out of their hands.
So far, so good. Nothing to disagree with there, at least as far as his impression of the US is concerned.
But Friedman takes comments by Peggy Liu (of JUCCCE) that the Chinese are running various clean energy pilot projects as a signal that the Chinese are serious about cleaning up their environment.
This is where I have to part ways with Tom. As someone who has, for the past 16 years, lived in or traveled frequently to China -- not just the big cities, but the countryside as well -- I can only verify that things have become worse, not better. There are many things China could have been doing for the past decade or so to clean up its environment or to reduce its carbon footprint, but it hasn't done any of them. I'm sorry, I like China, I love the people, but the place is filthy.
Still Friedman manages to make one valid connection -- that China's clean energy efforts are all about "J-O-B-S". He's pretty close on that one, but while J-O-B-S are certainly a nice side-effect, it's really more about M-O-N-E-Y. I've made these same assertions before on this blog:
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.
But don't take my word for it. Let's see how the Chinese government describes what it is doing. The following is a summary from China's 2009 Auto Industry Yearbook (a government publication) summing up the purpose of China's pursuit of "new energy vehicles":
新能源汽车行业有望为中国汽车提供赶超国际汽车先进国家的机会... 有望在全球新能源汽车产业分工中获取更大收益。
Translated:
The hope of the new energy vehicle industry is that it will provide China with an opportunity to overtake countries with advanced auto industries ... the hope is that, in the division of labor in the new energy vehicle industry, [China] can earn more profit.
While this is just part of the summary paragraph, there's nothing in the the entire section on "new energy vehicles" about climate change or environmental protection. Though the term "energy saving" is used once or twice.
The point here is not to pile on China and accuse it of being duplicitous. China is actually being very clear about what it wants. The problem is when the Tom Friedmans of the world fly into Beijing, stay in five-star hotels and then proceed to interpret Chinese actions through their own worldview.
I think it's great that China is undertaking all of these pilot projects. This work desperately needs to be done, and much more could be done in the US if our political leaders were more focused on the good of the country than they are on their careers (and if voters would punish them for it).
But it is way too early to draw the conclusion that China is concerned about climate change. This is a country that is concerned more about growth than anything else. If things continue on their current course, China will get what it wants: M-O-N-E-Y.
And they'll continue to get it from the US.
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UPDATE:
I came across this article today, from a law professor at Beijing University, that supports this idea. The basic message of "China's green laws are useless" is that, while China's environmental laws are impressive, they have had no effect on the country's environment.
Maybe, maybe not, but I think there's a far more important story here.
There's a great article by Keith Bradsher in today's New York Times, "On Clean Energy, China Skirts the Rules". Bradsher compares the extent to which clean tech firms in China and in the US receive government support. The upshot of the article is, as has become de rigeur recently, to paint a picture of a China that is getting ready to clean America's clock (pun intended).
Bradsher quotes the CFO of a US-based clean tech company on difficulties:
"You can’t get a penny in the United States, it doesn’t matter who you call — banks, government. It’s awful," he said. "Therein lies the hidden advantage of being in China."
Then he closes with this quote from the head of a Chinese tech company with operations in both China and the US:
"Who wins this clean energy race," Mr. Zhao of Sunzone said, "really depends on how much support the government gives."
Beijing-based lawyer, Stan Abrams, adds some illuminating commentary on this story at his blog, China Hearsay. He looks at it from more of a legal standpoint and concludes that, though China does appear to be skirting the rules, little to none of its behavior appears to be in gross violation of China's WTO commitments.
My sense is the recent rash of "China is kicking America's ass in clean tech" articles is really more about prodding the US government to take a larger role.
What concerns me is, if those who promote such views get their wish for more US government involvement in industry, would the US government know where to draw the line?
At some point government support in the US (and elsewhere) starts to result in diminishing returns. Once you unleash the state, it's hard to put that genie back in the bottle. Once you put in place a new bureaucracy, the people inside it begin immediately to plan for a perpetual existence.
During a recession, it becomes easy to clamor for government help, but when conditions improve, how likely is the government to withdraw?
This, to me, is a fascinating difference between the Chinese and US systems. We know that, over time, democracies bulk up with special interest driven programs that beneficiaries will fight for to the death, and that the rest of the population rarely have the collective will to fight.
On the other hand, China's "special interests" are all pretty much contained within the Politburo. They fight, someone wins, then they move on.
All the hand-wringing about whether the US should help with clean tech, though important, seems to be missing the much broader point (though raising the vital question) of whether the political system that has served the US well for over 200 years is sustainable in its current form.
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.
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:
- Weakness in the world economy
- 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.)
- Emergency efforts to rescue recessionary economies has led to demands for more industrial policy
- 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.
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