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 a story emerged that China's industrial planner, the National Development and Reform Commission (NDRC), has announced that it will stop supporting foreign investment in its auto industry. (News stories may be found here, here and here.)
This bit from a China Daily article explains a little about why these restrictions were being put in place:
China...has removed industries from the list of those it encourages foreign companies to invest in. No longer part of that group are automakers, large coal-to-chemical operations and manufacturers of polycrystalline silicon.
"The restrictions generally apply to industries that have excessively large capacities and that pollute the environment," said Zhang Xiaoji, senior researcher at State Council's development research center. (emphasis added)
My take on this story is that the NDRC actually has no real intention of restricting foreign investment in its auto industry. To understand why this is so, one needs only a limited understanding of the history of foreign involvement in China's auto sector, which I lay out in an op-ed in today's Asian Wall Street Journal.
In short, I make the claim that:
... the NDRC's announcement is more about improving Chinese leverage in negotiations with foreign automakers so Chinese automakers can more quickly overcome their innovation deficit.
For the rest of the op-ed at the WSJ site, click here.
And for all of the stories behind the main story of business-government relations in China's auto sector, my book, Designated Drivers: How China Plans to Dominate the Global Auto Industry, will be published by Wiley and Sons this year.
Coming to a bookstore, mailbox or e-reader near you in Spring 2012. Stay tuned!
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EDIT:
I was just notified that my article was also picked up by WSJ's US op-ed page. It will run in Thursday's edition. (January 5)
The Wall Street Journal reports on a brief debate that took place yesterday between US Ambassador to China, Gary Locke and an advisor to the People's Bank of China, Li Daokui. The exchange took place during a panel discussion at the World Economic Forum meeting currently taking place in Dalian, China.
The apparently civil discussion surrounded a disagreement as to the repercussions of China's difficulties in enforcing intellectual property rights (IPR) protections. In short, Locke expressed his view that lack of IPR enforcement would stifle Chinese innovation. Li, on the other hand, merely expressed his disagreement and noted that China's policy focus instead needed to be on supporting entrepreneurs and removing barriers to their success. (Notice how Li cleverly took Locke's cue and changed the topic from IPR to innovation?)
So who is right about innovation? Where should China focus its policy in order to better support innovation? Should it beef up IPR enforcement, or should it focus on removing barriers to the private sector? Which would give it the biggest bang for its policy buck? (Not that this is necessarily an either/or proposition -- China is big and rich enough now to do both -- but humor me on this.)
Some of my readers may be surprised to learn that I think Li Daokui was right. While Locke was certainly carrying out his duty as Ambassador by saying that China needs to improve IPR protection, the truth is that IPR protection has very little to do with innovation in a developing country like China. In fact, history tells us that, since the dawn of the Industrial Revolution, every subsequent country to jump on the development bandwagon has copied those who came before.
...every country that became economically great began by copying: the Germans copied the British; the Americans copied the British and the Germans, and the Japanese copied everybody.*
This is not to excuse the Chinese companies that blatantly copy foreign products and the government that often chooses to look the other way, but since Locke chose to introduce innovation into the discussion, the issue deserves a closer look.
My research on China's auto industry reveals that the most innovative among China's automakers are the private and independent automakers, not the massive state-owned enterprises (SOEs) with their foreign joint venture partners. While private players have yet to introduce any real breakthrough innovation, their progress in developing new energy vehicles and unique Chinese brands is ahead of the SOEs. The reason for this (and you'll have to take my word for it until my book comes out) is twofold.
First, leadership positions in SOEs are essentially political positions. The men who run these companies have their eyes on their next job, which will be a political appointment to run an association or a local government, or even to become a Vice Minister or Minister in the central government. In order to better assure themselves of a good position, they tend to be risk-averse in their decision making.
Second, because these guys have short-term investment horizons, "wasting" money on R&D is not high on their agendas. R&D spending only helps the next guy. It is much easier to rake in profits building and selling foreign branded cars. They simply lack the career incentives to take the kind of risks that result in significant innovation.
(Here is another story today about how "JV brands" have not resulted in the innovation that the central government had been hoping for. Why? Again, forcing foreign partners to hand over technology does not translate into innovation, especially when leadership incentives are not changed. I previously wrote about this "JV brands" or "sub brands" issue several months back.)
So while Li Daokui seemed to be changing the subject above, he was actually addressing Locke's point about innovation. And if China's auto industry is any kind of indication for China as a whole, the central government would do well to follow Li's advice and remove the barriers that continue to marginalize private business in China.
Of course, as an American, I would like to see the home team do well, so if China continues to insist on a preponderance of state control over all of its major industries, I believe that will ultimately be to the advantage of China's competitors. And they need every advantage they can get.
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* William Kingston, “An Agenda for Radical Intellectual Property Reform,” in International Public Goods and Transfer of Technology Under a Globalized Intellectual Property Regime, ed. Keith E. Maskus and Jerome H. Reichman (New York: Cambridge University Press, 2005), 658.
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