China's Auto Sector: A Look Under the Hood [Part I]

10/20/2012 - In which a corporate finance executive becomes a PhD in Political Science, decides to write a book based on asking and answering: "If State ownership of industry is so bad, then why has China been able to do so well with it for so long? Further, is the growth that China's model has been generating sustainable?"
CARMOSKY: Greg Anderson is an author who has been living in or frequently travelling to East Asia for decades. He has recently completed a PhD in Political Science from UCLA. the topic of his research became a book, Designated Drivers:  How China Plans to Dominate the Global Auto Industry. It’s published by Wiley, and if you have any interest at all in getting a very clear picture of exactly how China builds wealth in its country and what role foreigners play in it, it’s really worth the read.

Tell us a little bit about where you came from professionally and how you came to pick China’s automotive industry as a focus for your PhD research.


ANDERSON: I had a career for 15 years in finance - corporate finance - so I’ve been in on the discussions in terms of, “Ok how do we improve our quarterly numbers?” those sorts of things.  One of the things that really intrigued me the most was the political environment in which our companies operated. And having lived in China for a few years, having lived in Japan for a few years, and of course having grown up in the US and worked here quite a bit as well, I was often intrigued about how businesses had to adapt to different political environments. And the fact that we as business people just didn’t get that.  Which led me in to try to understand what sort of political system is ideal in terms of driving economic growth and development.

China obviously looms very large in that discussion and having spent a lot of time in China, a really simple question that was driving my research from the beginning was, “Well if State involvement in the economy is such a bad thing, then how come has China been able to do so well with it for so long?” and that sort of runs counter to a lot of Western economic thinking that, you know, the State should be minimized. I mean, certainly in the US there’s a big debate about the extent to which the State ought to be involved.  Even on the left in America, the idea is that the State should be less involved than it is in China. And so just that question alone really drove my initial inquiries.
I chose the auto industry because I just wanted to be able to narrow down onto a single industry in China that could give me a good view of how China’s planning process worked. The auto industry in China is dominated by State Owned Enterprises - as are the major industries in China - but you’ve also got some  private companies that are in there competing and you’ve also got heavy foreign involvement. All of the big SOE’s in China - SOE’s are State Owned Enterprises – are partnered with the major multinational foreign auto makers.  So this good mix of ownership, I felt, would give me an interesting mix to study.

CARMOSKY: How did you find the process of collecting data about the auto industry? Was there a lot available?

ANDERSON: Well yes and no. One of the things that China does a really good job of, is, producing year end reports.  It’s pretty astounding. I don’t know if a lot of people realize the extent of reports that China puts out, that the government puts out.  And it’s of course it’s at the macro level, but also by industry.  There are these really thick annual summaries of polices and major events and statistics for all of the major industries in China. For the auto industry in particular, there are these annuals that are published every year that are about 2 ½ inches thick – they’re huge.  Fortunately for me the University of California library has a subscription to these and so I was able to look at these industry annuals all the way back into the 80’s. That gave me an anchor to go through and see where policy has gone how China, since reforms began, how China perceived its auto industry, the importance of it, the routes that they took in terms of planning, what the government wanted to see in each given year, how China’s auto industry wrapped itself into the 5-Year Plan.

In addition to that, I went to China and spent over a year altogether just talking to people in the auto industry, connected to the auto industry, government think tanks, academics connected with the auto industry. Some expats, but mostly Chinese. Some of my discussions took place in Chinese. Some in English often depending on where I was.

That was a little more difficult because you don’t always know what people want to talk about.  So I came in with these ideas that there must be some sort of corporate governance mechanism that the Chinese were using to try to maintain the profitability.

CARMOSKY: Anyone would think that there would be corporate governance.

ANDERSON: The Chinese State Owned Enterprises are unique, in that they are obviously strictly tied to the government and the government’s plans. But at the same time China has created this organization called SASAC – State Owned Asset Supervision and Administration Commission -  there’s one at the Central level and then each of the local levels also have a SASAC. They were intended to be the shareholders of State Owned Enterprises at the very various levels.  Which was intended to put a sort of an extra layer between the government and these state-owned enterprises, to allow them to act in a more market-oriented fashion. At least that was the intention.  And I thought this was really worthy of study, to try and find out. But once I started asking that line of questions, no one was really interested in that line of questioning. They found it to be irrelevant, basically. And so you have to adjust your approach to what your interviewees want to talk about. 

 I want to say, what has made the growth happen, what is driving this tremendous growth, what is good about the model? At the same time, how sustainable is the model?  Can China continue to operate in this fashion and continue to achieve the same kind of results it has achieved so far? And I did this with a view of trying to understand not just a single industry, but to look for principles that drive planning in China across the board.

Really what it came down to was, while yes, the Chinese have been successful, in building a big auto industry where practically none existed, it’s been done on the backs of foreign technology - and just sort of brute force, making it happen. You could also throw in there that China joined the WTO which brought down import tariffs on automobiles, which brought down the prices of cars overall, which was a huge driver of growth in auto sales from the beginning of the previous decade as well. So while they’ve done a great job, you start to see weaknesses though, in the model.