Time for a Shakeout in China's Auto Industry?

Yesterday China Bureau Chief of Automotive News, Yang Jian posted an interesting article (free registration reqd.) speculating as to possible consequences of a recent slowdown in auto sales in China.  In the first two months of 2012, auto sales decreased four percent, year-on-year – and this comes on the heels of (for China) a rather anemic 2011 in which sales only grew about 2.5% and Chinese-branded passenger vehicles gave up nearly two percentage points in market share to the foreign brands.

In short, Yang Jian's point is that, should this drop in sales become a trend that lasts through 2012, some of the weaker players in China's auto industry could be forced into bankruptcy or possibly out of business altogether.

From the perspective of China's central government, which has been begging and pleading for this heavily fragmented industry to consolidate itself for nearly three decades, this wouldn't be such a bad thing.  (Of course it would be a bad thing for the employees of those companies that went out of business.)  There are still well over 100 vehicle manufacturers operating in China (compared to only 24 in the United States), and this fragmentation prevents the industry as a whole from becoming more competitive vis-à-vis the foreign automakers.

So what is the likelihood that a decline in sales could lead to a shakeout of the weaker players?  Well, let's take a look at what happened the last time China's auto industry experienced a slowdown in sales growth.  After enjoying annual sales growth of anywhere between 14% and 37% since 2001, the onset of the Great Recession in 2008 caused China's growth rate to drop to a horrifyingly low 7%.  (Yes, the word “horrifyingly” should be interpreted sarcastically.)

I remember talking to a lot of auto industry insiders in China in the spring of 2009 when some of them lamented the fact that the much hoped-for shakeout didn't happen back then.  (And it seems like Yang Jian himself may have been among those who expressed such sentiment to me then.)

Why didn't the shakeout happen?  

The central government rode to the rescue with a far-reaching stimulus program that not only prevented another year of miserably low sales growth, but that, for the first time ever, launched China into position as the world's single largest market for automobiles in 2009.  Hence the lamentations from some of my interviewees at the time.  As Yang Jian hopes today, many of them also hoped soft sales growth would kill off some of the weaker players in 2009.

So will the central government ride to the rescue again this year? 

I think it is less likely.  With large cities in China already limiting the number of cars that can be sold and driven on their streets, and with the central government clamping down on overcapacity in the industry, AND now that China is already the number one auto market in the world (they can't go any higher), a rescue is probably not in the cards.

Does that mean a shakeout will occur? 

I wouldn't bet on that either.  Among the top-10 automakers, Chang'an, Chery and BYD each experienced sales declines in 2011, which doesn't look good for them.  Except that Chang'an is among China's “Big 4” and Chery is among China's “Small 4.”  What this means is that the central government has designated these automakers to be among those remaining after the industry consolidates.  And BYD is privately-owned (its shares are traded in Hong Kong), and, though it hasn't sold as many EVs and hybrids as it had hoped to by now, it is probably China's best chance of having an automaker who can compete in this space.

Will a shakeout then occur among the dozens of tiny, inefficient and unprofitable automakers scattered around the country? 

I think this is the best hope, but whether the downturn will be deep enough and long enough to outlast local governments' ability to prop up these firms remains to be seen.  Local governments tend to be rather fond of their automakers -- even the ones that lose money.

Book Talk at USC

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.  :)

GM Wants its 1% back. Good luck.

GM announced yesterday (again) that it wants to repurchase a one percent stake in its joint venture with Shanghai Auto (SAIC) that it sold for a handful of magic beans a few years ago.

Back in December of 2009, GM and SAIC announced a major change to their partnership which involved GM selling one percent of the SAIC-GM joint venture (JV) to SAIC for $85 million.  This announcement also included details on a new Hong Kong-registered joint venture through which GM and SAIC would partner to conduct business in other countries, primarily India.

The net result was that GM and SAIC were no longer 50:50 owners in the main China JV.  With the one percent transfer, SAIC became the majority owner with a 51 percent stake.  On paper at least, GM had been reduced to the role of junior partner.

At the time, GM management explained that the purpose of the one percent transfer was in consideration of some future help from SAIC.  And though it wasn't explicitly stated, GM statements sort of hinted that SAIC's help may come in the form of help with future funding.

Early speculation was that GM needed the money.  And since GM had emerged from bankruptcy only a few months earlier, that seemed to make sense, except that, in the whole scheme of things, $85 million didn't really seem like a lot of money.  At year-end 2009, the company had over $14 billion in cash on its balance sheet, so it wasn't cash poor.  And with a current ratio (current assets/current liabilities) of 1.13, it wasn't facing an impending liquidity crisis.

Since I happened to be in Shanghai only a few weeks after this announcement was made, and since I was fortunate enough to land an interview with a senior SAIC executive who was integral to the negotiations with GM, I asked the SAIC executive to explain why GM would give up any leverage it had over the JV for a measly $85 million.  His explanation made a little more sense.

In short, SAIC wanted to be able to consolidate the top-line revenues of the JV into its parent company income statement, and under accounting rules, it could only do this if it owned more than 50 percent of the company.  Chinese companies were (and are) under a great deal of pressure from Beijing to move up in the rankings of the Global Fortune 500, and since the Fortune list looks at sales, not profits, SAIC needed to make its sales number bigger.

Does this sound ridiculous?  It did to me too.  But it's also the truth, as this particular executive, on two different occasions, emphasized to me the importance of moving up the list of the Fortune 500.

So what did GM get for handing over control?  According to the SAIC executive, GM wanted desperately to continue expanding its global footprint, but was facing two hurdles.  First, as GM had recently exited bankruptcy, the terms it could receive on bank lending were highly unfavorable.  Second, still being majority owned by the taxpayers of the US, GM was restricted in its ability to fund any activity that didn't somehow create American jobs or shore up the US-side of its business.

And this is where SAIC came in.  Through this partnership, SAIC, with its stellar credit rating, not to mention being a major state-owned corporation with access to favorable loan terms from both state-owned mainland banks as well as Hong Kong banks, would be able to help GM out with its funding needs overseas.

The SAIC executive did suggest that GM and SAIC could have entered into an agreement whereby the two companies would create an entirely separate sales JV to which all vehicles manufactured would be sold.  Then SAIC would own 51 percent of the sales JV, also allowing it to consolidate revenue into the parent company's income statement.  (SAIC and its other major partner, Volkswagen have a similar arrangement.)

However, this particular arrangement didn't work for GM either as, once again, GM's government minders in Washington were not interested in entering into any arrangements that didn't serve the interests of the US.

Fast-forward a couple of years, and now GM wants its one percent back.  The only way I can see this happening is if GM were to agree to set up the sales organization that SAIC had first proposed, which may be possible now that the US government is no longer a majority owner in GM (though still technically the controlling owner).

Of course, since the time of that transaction, GM has been very vocal about the importance of the China market to the company's future.  In fact, GM now sells more vehicles in China than in the US (2.6 million vehicles in China vs 2.5 million in US in 2011.)

One wonders how eager SAIC will be to give up the majority control it has enjoyed for more than two years.  Furthermore, given the importance of its China JV, GM can probably expect to pay considerably more than $85 million for the return of its one percent.

End of the Road for Foreign Automakers in China?

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)

Hold on to your lugnuts! It's time for a Trade War!

The Wall Street Journal is reporting today that China is preparing to levy duties on certain autos imported from the US. This would be on top of the 25 percent duties that China is still allowed to levy under its WTO commitments.

China's Ministry of Commerce said in a statement late Wednesday that it will levy antidumping and antisubsidy duties on imports from the U.S. of some vehicles with engine capacities above 2.5 liters beginning on Thursday and lasting through the next two years. ...

The ministry said several U.S. companies, including General Motors Co., Chrysler Group LLC and the U.S. arm of Honda Motor Co., engage in dumping and subsidizing. The statement said the move would also affect cars made by the U.S. arms of Mercedes-Benz and BMW AG, though it said their level of dumping was smaller.

Note that China's Commerce Ministry singled out not only the traditional US automakers GM and Chrysler, but also the US arms of Honda, Mercedes and BMW.

While China could have plausibly argued that GM and Chrysler benefit from government subsidies due to the bailouts these two companies received, they instead chose to make this about all cars with engines larger than 2.5 liters made in the US (but not in Japan or Germany!).

Does anyone think the US Congress will choose to view this as any less than an attack on the livelihoods of American workers -- and in an election year no less? Of course, Congress cannot portray themselves as innocents in all of this as Congress has already singled out China's solar panel industry for US-imposed tariffs. Then again, Congress can point to China's currency...

And on and on it goes. One thing I learned in grad school about wars (the kind in which people shoot at each other) is that it is nearly impossible to identify who started it. No matter which incident one side points to, the other side can go further back in history to identify another.

If we look at this incident only with regard to China's auto industry, it is also easy to see a kind of pattern here. Back in 2009, when China launched the stimulus heard round the world, they chose to subsidize consumer purchases of vehicles with engines smaller than 1.6 liters.

Why 1.6 liters? Because the foreign automakers that were dominating China's auto market had very little to offer in the small car segment. That subsidy was intended to boost sales of Chinese-branded cars.

Of course, the foreign automakers didn't stand still. Many of them already had small cars in the pipeline, so they got them to market faster -- just in time for China to cancel the subsidy toward the end of 2010.

Why are the import duties now focused on 2.5 liters? Because this is an area in which the foreign automakers pretty much own the market. This effort to make these imports more expensive may ideally (from China's point-of-view) accomplish two things: 1) make Chinese consumers more likely to consider a less expensive Chinese-branded car, and 2) make foreign automakers consider moving more assembly of their larger models to China.

In reality China's new tariff may not accomplish either purpose. For one, the Chinese consumers who are more interested in these larger cars (as the WSJ article points out) are less price sensitive anyway. They are already interested in these large foreign brands because they perceive them to have higher quality. In addition, because the volume of these larger cars in China is still comparatively small, it is highly doubtful that much, if any, of their production would be moved to China. (Perhaps that second one is a straw man argument.)

So what does China really stand to gain? Not much, really. In the end, China will get the trade war that it has been warning us about for years, and its home-grown automakers will still face a quality gap with their foreign partners/competitors.

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In case you're wondering where the picture at the top came from:

Who cares about IPR, what about innovation in China?

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.

Creating 'Chinese' brands now 'part of the deal' for foreign automakers

Last December I wrote about a trend among Chinese-foreign automotive joint ventures in which the foreign partner gives technology to the JV to sell under a Chinese brand. Some of the English language China auto blogs refer to these as "sub-brands."

For example, Honda contributed the design of an outdated City vehicle it no longer makes to its JV with Guangzhou Auto. The JV now sells it under the Chinese brand Linian.

At the time I noticed this trend among several automakers (Guangzhou Honda, Dongfeng Nissan, Shanghai-GM), my assumption was that this was an attempt on the part of the Chinese automakers to wean Chinese consumers away from foreign brands. Chinese consumers still overwhelmingly prefer foreign brands (if they can afford them), because they perceive them to have higher quality.

Now several other foreign automakers including Volkswagen and PSA Peugeot-Citroen are discussing similar arrangements with their Chinese partners. PSA Peugeot-Citroen's CEO told the Financial Times that helping their partner to develop a local brand is now "part of the deal".

Last December I speculated that this may have been under central government coordination, but I had no evidence of that. Today, evidence seems to have surfaced in this report from the Financial Times.

The story quotes Mike Dunne, formerly of JD Power in China, who now has his own consulting company:

Nothing is written down, but when automakers go to apply for capacity expansion, in their application it’s clear that they should have a plan for an indigenous brand with jointly owned product rights and some provision for new energy vehicles. Foreigners want more capacity; China is saying: ‘We want more own brands’.

Back in 2001, when China joined the WTO, they gave up the right to demand technology transfer as a condition for approval of foreign investment. Of course, this new rule did nothing to change China's appetite for foreign technology.

The new demand, rather than for "technology transfer", appears to be: if you want to expand capacity, then X% needs to be devoted to Chinese-branded cars.

The foreign automakers now have a choice. They can pour precious R&D money into joint development of cars that compete directly with their own, or they can just hand over technology they already have.

The technology the foreigners are now handing over may be slightly outdated, so the foreigners aren't being forced to hand over their latest and greatest innovations. But again, it seems to me that these foreign-designed, Chinese-branded cars that the central government is now forcing the JVs to sell will fill the perceived quality gap between Chinese- and foreign-branded cars.

China's central government fully intends that its largest state-owned automakers will be global contenders, and they are patiently finding ways to make that happen. The WTO will not stand in the way. Wherever there's a rule, there's a way around it.

How fragmented is China's auto industry?

For anyone wondering where I've been for the past several months, I've been right here at my desk. But instead of posting to this blog, I've been in a push to complete a full first draft of my dissertation by the end of March -- which is beginning to look like a real possibility.

For now, here's a quick post of some numbers I've been looking at for the past few days on market shares in China's auto industry.

Probably the most consistent component of China's auto policy since the mid-80s has been the insistence of the central government on consolidation in the industry. Just looking at the raw numbers, I think most people would agree that this demand has been completely justified.

In 1978, the year that Deng Xiaoping launched the first experimental market reforms in China, there were 55 auto assemblers. The number peaked at 124 in the mid-90s, and by 2008 (the latest numbers available) there were still 117 -- clearly, way too many.

But just how fragmented is China's auto industry? Here is a quick comparison with the US.

This chart compares cumulative 2010 market shares for the top five auto companies in the US and China.








If China were to take the US as its example, then it would seem to have already achieved a fair amount of consolidation. China’s largest auto group has a slightly larger share of its market than does the largest automaker in the U.S., and the top five in both markets are practically even.

Of course, we already know that the US market is somewhat less concentrated than it used to be. In 1980, for example, the Detroit Three held 76 percent of the US market. But I think few people would argue that less concentration in the US market has not been good for consumers.

So while it would appear that China is starting to see some solid growth out of the players at the top of its auto industry, the problem lies with all of those tiny companies at the bottom that, for some reason, refuse to go away.

Who are these small players? Quite a few are small, locally-owned automakers that lack any kind of scale to be profitable. In any given year, they probably break even on a cash flow basis, which means that the local government is absorbing their cost of capital. If exposed to true market competition, these small firms would quickly disappear.

So why haven't they? Local governments don't want them to. They employ anywhere from a few dozen to maybe even a few hundred local people, and local governments are not inclined to create any more of an unemployment problem than they have to.

Of course, the central government, through the NDRC or MIIT, could force these local enterprises to close, but why would they? The central government is no more interested in putting people out of work than are the local governments.

So if we simply accept that some of these small players are part of a welfare system that keeps people gainfully employed, then China's leaders should at least be satisfied that, at the top of its auto industry, it appears to have the makings of an increasingly strong and competitive industry. Right?

I don't think so, and this next chart reveals why.

Here we have the top five companies in both the US and China along with their respective market shares.









What I notice about this chart is that each of the companies on the US side also corresponds with a brand, but each of the companies on the Chinese side is just a big old state-owned enterprise that assembles cars for foreign companies.

SAIC makes most of its money selling VW and GM cars. Dongfeng sells Nissan and Citroen. FAW sells Toyota and VW. Chang'an sells Ford, Mazda and Suzuki. BAIC sells Hyundai and Mercedes.

Yes, each of these companies also sells some cars under its own brand, but the numbers are comparatively small. Overall, only 30.9 percent of sedans sold in China in 2010 were of local brands -- up only slightly from 30 percent in 2009.

And therein lies the problem. China's central government wants its biggest SOEs to get bigger so that they can compete with the foreign multinationals. For now, they would just like to dominate in their own market, but eventually, they want to compete in overseas markets as well.

The problem is that, while these SOEs are indeed developing their own brands, it's just so easy to sit back and rake in profits while the foreigners contribute all of the intellectual property.

Designing your own stuff is hard.

Let's have more competition!...Just kidding!

An interesting bit of news came across the teletype today. The annual China-Europe Auto Manufacturers' Forum took place toward the end of last month (October 2010). Sometime during the discussion, the Assistant Director of the State Council's think tank, the Development Research Council, made a provocative statement that apparently freaked out a lot of people.

Let the foreigners have more than 50 percent?

The Assistant Director, Professor Liu Shijin, someone whose views on the auto industry are highly respected and influential, suggested that it was about time for China to end its 50 percent ownership restriction on foreign auto companies that invest in China. Currently, China's policy limits foreign auto assembly joint-venture (JV) partners to an ownership stake of 50 percent or less. (This only applies to whole vehicle assembly operations; parts companies may be wholly foreign-owned.)

(A Chinese source for Liu's statement and the controversy that followed may be found here.)

According to a writer for China's "First Finance" website, "the audience members with blonde hair and blue eyes applauded and nodded in agreement, while those with dark hair and dark eyes shook their heads [in disagreement]." I think what the writer intended to convey was that the foreigners in the audience agreed with Liu and the Chinese did not.

No! We're still not ready!

The Chinese arguments against Liu echoed those made prior to China’s joining the WTO: the Chinese auto industry is not yet mature enough to take on the foreigners head-on. If restrictions were lifted, foreigners would completely occupy China’s market to the exclusion of the Chinese manufacturers.

However, there was at least one Chinese auto executive who fully agreed with Liu: Li Shufu, Chairman of Geely. Li was later quoted:

Only complete lifting of the restrictions [on foreign investment] will help the development of the Chinese auto industry. The current policy of the 50 percent limit on foreign investment is disadvantageous; it does not protect the Chinese auto industry at all. On the contrary, it restricts foreign car companies from entering China.

Reflecting a refrain that Li has been preaching for years, he continues to be so confident in his company’s ability to compete with foreign producers (especially now that Geely owns Volvo) that he welcomes increased competition. (Here's a post on this blog from March of 2009 where Li lays out his argument that the private firms will eventually triumph over the SOEs.)

What Li most likely expects is that increased foreign competition within China would more quickly drive out the weaker competitors. That, of course, is anathema to the central government.

Since an overwhelming majority of China’s automakers are state-owned, it logically follows that an overwhelming majority of the weaker players are state-owned. And because the auto industry has been designated as a "pillar" industry since the mid-80s, it just wouldn't do to have an auto industry dominated by foreign and/or private enterprises.

Well, ... nevermind

The interesting news that came across the wires today is that Liu Shijin has now completely backed away from his earlier suggestion: "I never said I support opening up the restrictions on foreign investment."

Setting aside the fact that he clearly said exactly that at the conference, we have to ask why he's now backing down. Either he said something he shouldn't have, and was threatened with punishment if he didn't go to the media and retract what he said, or he was deliberately floating a trial balloon to gauge the reaction.

Knowing that Chinese planners at the NDRC and MIIT are hard at work on the next version of China's auto policy right now, I am leaning toward the latter explanation. And since he's backing away, it seems reasonable to assume that the 50 percent ownership restriction will remain in the next iteration of the auto policy.

Let the flowers bloom!

From an objective point of view (i.e. from someone who has no vested interest in which auto companies succeed) I think this is a mistake, and here's why.

Joint-ventures are notoriously inefficient -- particularly those that attempt to meld vastly different business cultures. Having worked for a 50/50 US-Japanese JV, I have experienced this first hand. When no single owner dominates, everything -- and I mean everything -- has to be negotiated, from corporate strategy to the temperature of the office.

I am not saying that all JVs are, by definition, contentious -- there are exceptions that prove the rule -- but the exceptions are extremely rare.

The original intent of forcing all foreign auto companies into joint-ventures was technology transfer, but over time, it became clear that the foreigners were withholding their best stuff from their Chinese partners. So why didn't the Chinese decide to dispense with the foreigners altogether and just import their cars to reverse-engineer?

Because Chinese consumers love foreign brands. And they love them so much that Chinese-foreign JVs have become cash-cows. National pride runs pretty deep in China, but if there's anything that runs deeper, it's a love of money, and the huge SOEs have become drunk off of cash generated by their partners' foreign-branded cars.

And here's why I think Liu's suggestion was a trial balloon. If the true goal of having foreign partners is no longer tech transfer (though I recognize the ostensible reason is still tech transfer), then why not be willing to take a smaller share of what could become a much larger pie?

Rather than take 50% of the profits of an inherently inefficient JV, why not take 49% of a much more efficient, foreigner dominated JV? And if there are certain things you don't want the foreigners to do with their increased economic control, then just circumscribe those behaviors by law.

If Li Shufu and the handful of China's planners who believe increased competition would more quickly lead to a shaking out and consolidation of China's auto industry are correct, then the quickest way would be to remove the 50 percent restriction. Entering the WTO did not devastate China's auto industry in the way that everyone feared it would. Indeed, it has become even larger and stronger.

No matter how much the SOEs are urged and ordered to be innovative, they will never do anything more than copy what others have already done. The problem is that SOE incentives are political, not economic. SOE leaders are only interested in their next assignment, but private sector leaders don't have a next assignment. They have no choice but to succeed.

If China truly wants a dominant auto industry, it needs to get over its obsession with state ownership and unleash the creativity of its hungry private sector. One way to do that is to open up competition.

UK platform + US battery = Chinese EV?

A123 Systems announced that its lithium-ion batteries will be used in Shanghai Auto's (SAIC) Roewe branded electric vehicles.

The Roewe brand (荣威 - rong wei -- yes, it sounds like "wrong-way" -- go figure) was created by Shanghai Auto prior to its merger with Nanjing Auto, after which the two combined the intellectual property and auto platforms purchased from the UK's MG-Rover several years ago.

The first electric Roewe will be the 750 (pictured above) which is derived from the British Rover 75. The battery supplier (and IP-owner), A123 Systems, is a purely American company, headquartered in Massachusetts. Though SAIC does own the IP of the Roewe, it was not originally designed in China.

Since the introduction of China's 2004 Auto Industry Development Policy, the constant refrain from Beijing has been a wish for Chinese automakers to develop Chinese-branded "new energy vehicles" using Chinese intellectual property.

While it is a good thing that SAIC is on board with the new energy vehicle trend, I'm not sure this is exactly what Beijing had in mind when it urged Chinese automakers to develop their own hybrid and electric vehicles. The battery, after all, is the heart of the EV -- its most expensive component.

It also calls into question the viability of BYD's battery technology (or that of any other Chinese battery company) when a fellow Chinese automaker would rather pay royalties to an American battery company.

It seems a reasonable assumption that a Chinese-designed battery would be less expensive than an American-designed one. Perhaps the fact that SAIC's partner, GM, which is putting an A123 battery in the Chevy Volt was able to get SAIC a good deal on batteries?

IP issues aside, SAIC's Roewe 550 (below) which was designed in China, will eventually be electrified as well. (And it's a very nice-looking car, in my opinion.)

UPDATED--It's about M-O-N-E-Y, Mr. Friedman

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.

________________
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.

China Auto Mergers: It's a sellers' market...

...and nobody's selling.

An article in today's People's Daily (English) says that the auto industry tops the list of industries in which China's State Council wants to see an acceleration in mergers and acquisitions. The article goes further to say that the Ministry of Industry and Information Technology (MIIT) is drafting specific policies on mergers due to be released later this year.

The article is right in that consolidation of this industry is much needed. There are currently more than 100 auto assemblers in China, though only the top 20 or so really really count. Still, if China is to develop a globally competitive auto industry, they will need for a lot of the smaller producers to either disappear or be consolidated into larger producers.

If the article is correct, these new policies that MIIT is working on will do something to accelerate M&A in the auto industry. If those new policies are to do anything to accelerate mergers, however, it will require a pretty drastic change in Beijing's behavior.

Ever since China's government began to take notice of its auto industry around the mid-1980s, there has been an increasing desire to make China's industry globally competitive. And part of every auto policy that has been written to date has focused on a need for consolidation. I know this because I've read all of them.

Early on in the reform era, the auto bureaucracy du jour was always well aware of how other countries' auto industries had developed. For example, they knew that, in the early part of the 20th century, the United States also had more than 100 auto companies, and that number had shrunk to about half a dozen by the late 1950s, and only three by the century's end.

As the US has, until recently, been the one market China most wanted to emulate (since the US was, and still is, the world's largest economy), it seems to have made sense to auto planners in Beijing that the route taken by America's "Big 3" should soon be taken by China's largest auto companies.

And until now no matter how strongly the government has stressed the need for consolidation, implementation has always included allowing the market to determine the outcomes -- just as it presumably did in the US. Yet, while there have been a handful of mergers over the past decade (First Auto-Tianjin, Shanghai-Nanjing, Guangzhou-Changfeng, Chang'an-Hafei-Changhe), there have been nowhere nearly the number one might expect if the market were truly determining the outcomes.

Many of China's smallest auto companies continue to soldier on, year-after-year, cranking out a handful of cars. In a true market economy, these would never have survived on their own, yet in China, they do. Why? Because their local governments want them to. They employ people, they pay taxes, and they also very likely give local leaders a few vehicles to drive around every year.

If not for local governments who stand in the way, the market would have indeed taken care of China's fragmented auto industry. There is no lack of desire on the part of the CEOs of large auto groups to buy others; there's simply no desire on the part of small company CEOs and local governments to sell.

So these new policies that MIIT introduces later this year will probably not look much different from those we have seen to date. Beijing will very likely still want the strongest companies to take over the weaker ones. The question is whether Beijing will put any teeth in its policy. Will it change the incentive structures faced by local governments that keep them from supporting consolidation where necessary?

The tradeoffs are pretty clear. The status quo (little consolidation) helps to prevent social instability that could result from closure or merger of less efficient players. On the other hand, significant consolidation would help China's auto industry to become more globally competitive.

Which is really more important to Beijing?

Is China "skirting the rules" on clean tech support?

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.

US and China support for auto industries: not that different

A comparison of auto industries: China's government supports its auto firms in growth and development while the US government only rescues its auto firms from bankruptcy. (Right?)

For the past several weeks, I have been plowing through this nearly complete set of China Automotive Industry Yearbooks, tracing China's auto policy since the early 1980s.



Toward the end of the 1990s, I began to see references to a supposed US government program the Chinese call "新一代汽车伙伴计划" (literally translated: "new generation vehicle partnership plan"). My first thought was, they have to be making this up to justify their own intervention in the auto industry. The US government does not intervene in the auto industry -- or at least it didn't until it had to rescue GM and Chrysler last year. Before that, the only other time was to rescue Chrysler (the first time) in the early '80s.

After seeing several references to this program and another one they called "自有汽车" (Freedom car? Seriously?), I decided I had to find out what this was all about. What I learned was that the US government has indeed established partnerships with the former "Big 3" American automakers to develop new vehicle technologies.

The first one "Partnership for a New Generation of Vehicles" (PNGV) was started in 1993 under the Clinton administration and, according to this article at Wikipedia, resulted in the development of some useful technologies that made vehicles lighter and more efficient. The program also resulted in diesel-burning cars built by each of the Big 3 that were able to get at least 72 miles per gallon. (You never heard of this? Funny. Neither had I.)

Curiously, this program was ended by the Bush Administration in 2001 (apparently at the request of the Big 3) and replaced with a new program called "Freedom Car". This new program dropped the focus on current technologies and began a push to make fuel-cell vehicles commercially viable.

In more recent times, I have become aware of funds have that been made available under a Department of Energy program to support the development of advanced lithium-ion batteries for electric vehicles, but my assumption had been that this was a one-off program put together under the stimulus program. However, as it turns out, I was wrong about that too. This program started in 2007, well over a year before we started to notice the economic downturn.

US government involvement in the auto industry, as it turns out, is not an aberation; it's quite the regularity. And it's not only about rescue from bankruptcy; the US government has been pushing all along for development of advanced vehicle technologies.

As is typically the case with Wikipedia articles, people with competing agendas are able to edit the pages to which I have linked above, so those articles do contain some bias. Still, it was interesting to discover that China isn't the only country whose government wants to see its automakers develop new technologies.

And I found it especially ironic that I had to learn about these US efforts from Chinese government documents.

Elusive Innovation: Inventing Stuff is Hard

Once one has climbed to the top of the hierarchy of the global division of labor, it really isn’t all that difficult to reach back down. However, if one has yet to make it to the top, getting there is extremely hard.

The US no longer manufactures most of what it buys, and many items it formerly manufactured are now being made elsewhere. But it’s not as if the US no longer has any economic activity. Much of that manufacturing activity was replaced by “higher level” knowledge work, part of which includes research and development that brings us such innovations as iPhones and this internet thing.

Despite the loss of manufacturing, one advantage the US has is that it can always decide to manufacture something if it wants to. All it has to do is throw money at the problem. The US rescue of General Motors is a case in point. It is quite likely that GM would no longer be building cars in the US if the US government had not determined to save the company. This is not to say the rescue of GM was necessarily a good strategy, just that, if the US government so desires, it has the wherewithal to pull it off.

China’s economy now provides a significant portion of the world’s manufacturing, a task for which it is currently well-suited. It has more people than it can count to throw at factories requiring unskilled labor. But an unfortunate disadvantage for China is that, whereas the US has the option of employing brute force (i.e., lots of money) to keep manufacturing onshore, China cannot simply employ brute force to encourage innovation.

Innovation is a higher level activity that requires a certain quality of education and a relatively free and open political environment. In absence of these requirements, China can throw all the money and slogans it wants at innovation and it will still not happen.

And this is why the US is in a far more favorable position relative to China. If, for whatever reason, all trade between China and the US were to stop for a period of time, not only could the US buy manufactured goods from other countries, but it would also have the option to begin rebuilding the manufacturing industries it once had. Again, while that may not be the optimal strategy, at least it is an option for the US. On the other hand, China, try as hard as it might, cannot become an innovative society without undertaking the kinds of political reform necessary to encourage innovation.

(And ironically, if China were to undertake such political reform, the probability of an interruption in trade between China and the US would quickly drop to about 0%, making this whole discussion more or less moot.)

To slightly oversimplify, while the US can do what China does, China cannot do what the US does. Not today.

But it is not as if China is a stranger to innovation. While my European ancestors were still banging sticks together, the Chinese were inventing cool things like gunpowder, the plow, the compass, paper. So I am quite certain the current lack of innovation is not an issue of human capacity, but more of a systemic one.

Of course, the bad news for Chinese citizens is that, in the short term, the system will not change. But the good news for many educated Chinese is that there is always the option of emigration to more innovative societies. Unfortunately for China, this is a double blow to the country as a whole. Nearly every educated Chinese who leaves is not only a minus-one for China, but also a plus-one for the country to which he or she immigrates.

The global hierarchy of the division of labor, as it currently stands, has brought the world both innovation and inexpensively manufactured goods. The current structure, despite its flaws, works pretty well, but a major problem China has with the current structure is that China is not in its traditional place on top. We can see this dissatisfaction in the central government’s continually unsatisfied demands for “indigenous innovation”.

For how long will insistence on rule by an unelected government continue to outweigh the Chinese desire to once again lead the world in innovation? For as long as China’s single greatest fear is instability. Until China's government can become comfortable with a little unpredictability, it should expect little in the way of breakthrough innovation.

Why? 'Cuz picking winners is bad, mmmkay.

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:

1. Weakness in the world economy
2. 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.)
   
3. Emergency efforts to rescue recessionary economies has led to demands for more industrial policy
4. 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.

China's green subsidies are an investment. America's are an expense.

Here's one for my fellow finance geeks...

Having emerged from the recent global recession relatively unscathed, China has launched what appears to be an all-out assault in its ambitions to become a major player in the future of green technology. As one of the most polluted places on the planet, China’s motivation seems natural and unsurprising. However, there is a much more important motive than cleaning the environment behind China’s drive to dominate this sector. China understands very well that the world’s developed countries are prepared to shame each other into doing whatever is necessary to mitigate climate change. Whoever is able to develop these cutting-edge technologies, or to make existing technologies more affordable, stands to generate a lot of revenue.

When we see such news as the recent announcement that China is committing upwards of $15 billion toward “green” cars, we need to understand that, from China’s perspective, this is not just about cleaning up China. It is an investment in China’s future.

But could we not view America’s investments in the same manner? In a word, no. There is a big difference.

During the late 1990s / early 2000s, under the leadership of Jiang Zemin and Zhu Rongji, China embarked on a far-reaching program of privatization. Under Zhu’s direction, thousands of state-owned enterprises (SOEs) were closed, privatized or downsized, and over 40 million SOE workers lost their jobs (many to be reabsorbed by the private sector). But under the leadership of Hu Jintao, China has pulled back from the brink of privatization and begun to consolidate and solidify the role of the state in China’s most important industries.

And even in industries where private and state-owned enterprises compete, such as China’s automobile industry, the private players are typically beholden to local governments in a mutually beneficial relationship. The private enterprises provide employment and tax revenue while the local state provides land, tax breaks, and free or cheap utilities. Furthermore, when private enterprises in important industries become large enough, and are seen to be following the desired policies of Beijing, China’s central government has been more than willing to step in and provide assistance in the form of subsidies or easy access to credit.

Large loans by the state-owned Bank of China last year to BYD and Geely, two “private” auto manufacturers serve to underscore this point. BYD is seen by many to be on the cutting edge of development in electric vehicles, and Geely recently completed its acquisition of Volvo. In both cases, the central government was willing to lend a hand (and more importantly, yuan) to help these two companies in pursuit of Bejing’s auto policies.

Why is China’s government willing to support private companies that compete with its state-owned giants? Because ultimately, the returns on the state’s investments, whether they go to private or state-owned enterprises, are Chinese. Ultimately, technology developed (or copied) in China finds its way into the hands of massive state-owned enterprises. And ultimately, the profits generated by these massive SOEs finds its way into the hands of their owners: the state.

So when China subsidizes its companies to develop new green technologies – or to “borrow” and tweak such technologies from abroad – the goal is to generate a return on China’s investment.

By contrast, when the federal government of the U.S. chooses to channel $69 billion in subsidies, tax credits, low-interest loans and grants to green technology companies, most of which (with the glaring exception of General Motors) are in the private sector, the state is not generating a return for itself. The ultimate beneficiaries of U.S. generosity, assuming the recipients of government largesse are ultimately successful, will be the shareholders of the companies receiving the money.

In short, whether they are actually accounted for this way or not, China’s industry subsidies are an asset on its balance sheet and America’s are an expense on its P&L. But does the accounting really matter? I would argue that, in the short- to medium-term, it does.

In a country that faces major demographic challenges during the next decade or so (as retirees begin to significantly outnumber workers), China’s leaders fully understand that they need to generate as much economic growth as possible now while it is still relatively easy. Cash banked now will help to create the massive welfare state that China will eventually be forced to build.

China’s investments in green technology are not about cleaning up pollution or mitigating global warming, though these will surely be positive side-effects; they are about preparing China for an uncertain future. This is a battle that China’s state-owned enterprises have to win. By contrast, it is a battle that the U.S. government only hopes its private sector can win.

China's MIIT Orders Capacity Cutbacks

According to an announcement on the website of China's Ministry of Industry and Information Technology (MIIT), 2,087 companies in 18 industries have been ordered to close outdated, heavily polluting factories by September.

While this sounds like a positive step by a government that values the environment, it also sounds like similar orders that have been given in the past -- long before it was cool to care about climate change. I hate to sound skeptical (and I would like to be wrong about this), but, frankly, I'm not buying it this time either.

The punishments suggested for companies failing to comply are restrictions on access to bank financing and new project approvals. First of all, most of the companies on MIIT's list are small or medium sized enterprises, and many of them are privately owned. These companies never had access to bank lending anyway. Furthermore, because they are so small, their approval processes -- if indeed there were any -- most likely never went further than their local governments.

In addition, local governments are still heavily incentivized on two very measurable criteria: social stability and economic growth. Closing local businesses is unlikely to help their job performance measurement under either criterion.

While local governments will, of course, have to be seen to follow central government orders, it's not hard to imagine that local authorities are already working with the owners of these businesses (which in many cases are the local governments themselves!) to find a way around Beijing's dictates.

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.

More Local "New Energy" Vehicle Subsidies

In addition to the central government's subsidies for new energy vehicles in China, two more local governments have announced their own subsidy plans.

Shanghai is planning subsidies of 40,000 to 60,000 yuan for individual buyers of plug-in hybrid or electric vehicles, and the city of Changchun, along with Jilin Province, is also planning a subsidy of about 40,000 yuan.

Shanghai is the home of Shanghai Automotive which owns the MG and Roewe brands (bought from the UK) and has joint ventures with both Volkswagen and General Motors. Changchun is the home of First Auto Works, a centrally-owned company that has joint ventures with Volkswagen, Toyota and Mazda, and is producing some of its own-branded vehicles as well.

Shanghai and Changchun join Shenzhen which earlier announced it would provide new energy vehicle subsidies.

These are the subsidies available so far. ($1 = 6.8 RMB)



People buying pure electric vehicles in Shenzhen could get a subsidy of up to 120,000 RMB ($17,600). That approaches half the cost of an electric vehicle.

Now, if only they can find a place to plug it in...

US Senate happy to support Greentech - but not in an election year

It is no secret that China’s leaders are keen on making their country into a world leader in green technology. The subsidies being provided by both central and local governments for purchase of hybrid and electric vehicles and support to companies pursuing R&D in this area have been widely reported over the past year.

Now it seems the US government is beginning to wake up to the importance of this new industry and its potential to provide, not only a cleaner environment, but jobs and tax revenue in the US. This past week, a Senate committee approved a couple of bills to support greentech, bills that, if approved, would begin to devote a serious amount of government money to support of the industry.

The first devotes $3.6 billion to promotion of plug-in hybrid technology. The bill includes, among other things, $1.5 billion to go directly to plug-in research, and a $10 million prize would go to the first person or company who demonstrates improved battery technology that will carry a vehicle 500 miles without recharging. This bill enjoys bipartisan support, including an endorsement from Lisa Murkowski, a Senator from Alaska, a state that earns a large portion of its revenue from oil extraction.

Another bill would expand a $25 billion Department of Energy program that has already lent $8.6 billion to makers of battery powered cars, and also make the funds available to makers of commercial vehicles while lifting the $25 billion cap.

While some may question the wisdom of the US government’s involvement in “picking winners”, it seems that we may no longer question whether the government sees the need to help US business gain a competitive foothold in this industry against other countries (particularly China), whose governments are heavily involved.

(And, yes, the phrase “picking winners” is still deemed by many in America to be the only words necessary to put an end to all argument as to whether the state should be involved in business – despite the lack of evidence to support the assertion that “picking winners” is, in all contexts, a bad thing. I'll have to save that idea for a future post.)

But not so fast. In the same article that informs us of these bills, we also see the concerns that Senate Leader Harry Reid may not allow these bills to come to a vote in the Senate – despite their bipartisan support – because he sees energy issues as a potentially hazardous issue to touch during an election year.

Yes, once again, politics in the US stands in the way of our elected leaders doing what they believe to be in the best interest of the country. Just once, it would be refreshing to hear our leaders say, “to hell with my re-election. I just want to do what’s right for the country.”

But perhaps that’s too much to hope for. Fortunately for China, they don’t have anything like re-election to to draw energy and money away from the more pressing matters of delivering prosperity to the people.

Well, except for all those tens of thousands of people employed to police the internet. That’s a massive waste of money. But other than that…

Well, yes, there’s also that whole parallel party structure that mirrors and oversees the entire government. But really, how much can that cost?

Ok, yes, there’s also that bureaucracy that oversees all media and censors films and books. But, other than that…

Well, yes, ok, there is the People’s Armed Police and Chengguan who are employed to keep citizens in line since the Army and the regular police, and the secret police, and the plainclothes police aren’t enough to do that.

Oh yeah, there are also all those locally-hired thugs to keep petitioners from going to Beijing, and the thugs hired in Beijing to send the petitioners home.

Oh, and I almost forgot, there’s that whole bureaucracy that oversees religions (and picks their leaders for them), making sure they don’t get out of hand.

But, honestly, aside from those few things, China really has it much better than the US. They don’t have to waste all those resources on elections.

Too bad for the US.