Sunday, March 8, 2009

Geely's Li Shufu: Only Private Firms Can Compete

One of the biggest mysteries regarding China's auto industry is not only why private firms believe they can compete with the state-owned giants, but why some of them are actually quite successful. Three of China's top 15 auto firms are private: Geely, BYD and Great Wall.

State-owned enterprises are not only economic entities, but they are also political. The politicians who exert control over them tend to be more concerned with their own political futures than the economic viability of state-owned enterprises, and they find that SOEs are great vehicles for boosting employment and distributing favors to political allies. With the state purse at one's disposal, a politician can pay for this influence by subsidizing SOEs that are forced to operate in an economically imprudent manner.

Given the advantages held by SOEs, why do private firms bother?

Today's Economic Observer Online has an interview with the Chairman of Geely Auto, Li Shufu. While Li doesn't directly answer the question in this interview, he gives reasons as to why he believes that private firms will ultimately dominate China's auto industry.

Why does he bother competing with the SOEs? Because he believes he will win.

The interviewer asks Li what he thinks about the provision in the recent auto industry stimulus plan to promote consolidation in the industry. He responds (translated):
I firmly believe this is a competitive process: first, state-owned firms are defeated by foreign capital; then foreign capital (will be) defeated by private firms.

The auto industry has all along had a high degree of competition. At the same time, this industry is highly technology-, talent- and capital-intensive. It is not suitable to be developed by state-owned enterprises. From an economic perspective, the auto industry is a competitive mainstay (pillar) industry ... it is presently dominated by state-owned enterprises. But from a development perspective, the auto industry will experience a long, competitive process...

Right now, (the industry) is only at the beginning stages. Currently the domestic market is led by the foreign joint-venture brands. This situation is protected by current policy. As policy gradually becomes more open, the foreign enterprises will inevitably, gradually occupy the Chinese market...

Private enterprises have the innate advantage of localization. (Private enterprises) have accumulated many years of rich industry experience, upstream and downstream industry resources, distribution network systems, etc. The foreign enterprises cannot compete with these advantages.

I believe that the competitive process of the auto industry will continue for another 10 years. When the private Chinese enterprises ultimately win, I hope Geely will be among the best.

In summary, Li believes that,
as auto industry policy gradually becomes more open, SOEs will increasingly lack the ability to compete head-to-head with foreign firms. Of course, whether policy indeed becomes more open remains to be seen. Furthermore, what is to prevent SOEs, with their access to government funding, from also developing the advantages that Li ascribes to private firms?

It is, however, difficult not to admire Li's optimism. Until now, we in the West have been content to believe that private firms are driven by a hunger to survive, a hunger that cannot be found among state-owned enterprises. And it is this hunger that ultimately pushes private firms to be more efficient, productive and profitable than SOEs.

In the longer term, however, will that hunger be enough for China's private automakers?