China's Auto Makers Shift Into High Gear

1/27/2010 - China's "Big 3" automakers, Geely, BYD, and Shanghai Auto, got on board too late to be major players with internal combustion engine automobiles, but they are full steam ahead developing zero and low emission vehicles for the future.  Greg Anderson has been researching China's automotive industry for the last few months.  Hear what he thinks is coming next.




TCBN: Greetings everyone I’m Michael McCune and this is The China Business Network.

With an interest in China that spans over 20 years, Greg Anderson has connected with the China market in a variety of roles: teacher, consultant, executive, and now as an academic. A specialist in the role of the state in Chinese industry, his current research is focused on the China auto sector and the affects different ownership structures have on enterprise performance. He joins us now via Skype from Shanghai.

Thanks a lot for having the time to speak with us today, Greg.

ANDERSON: Thanks for having me Michael. Good to talk to you.

TCBN: I know we’ll hear more about Chinese car brands entering the US market in the coming years. I was hoping you could give us background key players that we can expect to see.

ANDERSON: There are three key players that I think all have a fairly even chance of showing up the United States someday those are BYD, based in Shenzhen. We’ve seen them in the news recently having taken a 10% investment from Warren Buffet. The other is Geely, based in Zhejiang province. Geely has been in news recently because of their attempts to buy Volvo from Ford. And it looks like hasn’t happened yet it looks like might actually be coming to fruition in the first quarter of this year. The third is Shanghai Auto, which is a state-owned enterprise. BYD and Geely are both private and listed in Hong Kong. Shanghai Auto is the China partner of General Motors, or one of the partners here - the primary partner of GM in China. So I think those three probably more than any will have a fairly even chance if not US immediately certainly in other markets. We’re going to see those three, probably more than any, if now showing up in the US immediately, certainly in other markets, and we’ll see them eventually in the US.

TCBN: So you’ve got three different companies here, three different backgrounds, you could say three different ownership structures just based on where their money’s coming from. I wonder, given your research on the impact of ownership structures in these automotive firms, can you tell us about how the quality of their government relations affect opportunities and outcomes they hope to have?

ANDERSON: Well, in the case of Shanghai Auto, it’s pretty obvious. Because they are state owned essentially that is the government that you’re dealing with. So the relations there are sort of self evident. With Geely and BYD, both of those being private, people I’ve talked to in both companies emphasize the importance the local relationships – relationships with local government, I should say. 

Interestingly though, both of these companies are listed in Hong Kong, and for reasons I’ve not yet able to determine didn’t list on the mainland markets. A fair amount of their equity came from outside the mainland. But in both cases the local government is very big supporter, for the obvious reasons. These companies bring in local tax revenues. These companies employ local people. One of the important job criteria for any local government official here is to have social stability. One of the best ways to keep people out of trouble, keep them working. They’re happy to have these auto companies, even though they’re not state owned. The fact that they’re there, they’re working, they’re producing tax revenue, they’re keeping people employed, makes them very natural friends of the local state.

TCBN: Well let’s look at this from slightly different angle. You mentioned BYD’s origins and interest in zero emission, clean tech. Also environmental impact of automotive ownership in China is a big deal for the Chinese government, keeping anticipating maintenance of good quality of life. Should we expect to see a lot of innovation and leadership from Chinese auto companies in this clean tech or zero emissions space?

ANDERSON: It’s hard to say at this moment. What I can say is the government is very interested in this. It was part of an important policy they released back in March 2009 for what they called “revitalization of the industry.” One of the key tenants of that policy was the development of these so-called new energy vehicle technologies. What they call 新能源汽. It’s a push for auto companies to step into this space. I think China sees a great opportunity here to take a leadership position. They’ve already missed the boat on the internal combustion engine. We’ve kind of got that done. So the next step is these low or zero emission vehicles. The technology is still fairly immature. The Japanese have done well with the Prius hybrid, but we know that’s sort of an interim step for the future that’s going to be even lower emissions. But it’s a horse race at the moment. Everybody is working hard – all countries – in Western Europe, North America, Japan, and now China are all working on this. I think China has an even chance at taking a big role in this.

TCBN: I know we talked about Geely and its Volvo play. Removing that, I just want to procure Chinese brand point of view. Before we end our interview today I was hoping you could give us your best guess at what Chinese car brand will be the first to win the trust of US consumers.

ANDERSON: That’s an interesting question. BYD has some pretty big ambitions. They are saying for certain they’re going to launch their E6 in Los Angeles later this year. It wouldn’t surprise me to see some Hollywood types, who probably aren’t very good at math, buy these cars to demonstrate their green credentials, showing up at Oscar events and those sorts of things. So I think we’ll see some of those being sold, but I think it’ll be seen as a novelty. If I had to put my money on one Chinese company that I think is going to win the trust of Chinese consumers, my guess is going to be it will come from Shanghai General Motors. You bring the General Motors that people in America know that ultimately is not going to be the state owned enterprise that it is right now. The US Treasury will eventually sell its stake, and a lot of that stake could end up going to Shanghai Auto. My bet will be on Shanghai GM as being the first quasi-Chinese brand that we see with wide acceptance in the United States.

TCBN: So we’ll sort of back into one of our legacy brands becoming Chinese owned and in that sense being accepting one already before a new name comes “across” the ocean.

ANDERSON: That makes complete sense to me. I don’t think … the Japanese, the Koreans, all manage to come into the United States in the 70s and 80s and set up their brands, but it took a long time. My sense is the Chinese are not as patient. In fact, Li Shufu, the Chairman of Geely, has even said we want to go abroad and sell cars in North America because we believe this will give us more brand recognition back in China. In fact, that is the attitude Chinese consumers have toward cars right now. If they can afford them they prefer the foreign brands, even those that are assembled by joint ventures in China.

TCBN: I’ve been speaking today with Greg Anderson, who is a Ph.D. candidate at UCLA. He has been spending most of the last six months or more in China interviewing almost 70 different executives and analysts in the China auto sector. Greg, I’m sure you’re looking to going home by Chinese New Year. And after you have a chance to distill your findings, I look forward to having another chance to talk and look at how we’ve moved along in the Chinese auto market evolution.

ANDERSON: Absolutely I look forward to it.