Saturday, April 11, 2009

Finance vs Engineering

There's a great article in today's NYT by Keith Bradsher outlining some of China's plans for electric vehicle development (h/t @christinelu). It offers a few highlights of a recent conference held to discuss the government's plans.

Bradsher's first paragraph is very revealing in terms of how differently China and the US are approaching the issue of alternative energy vehicles
Senior Chinese officials outlined on Friday how they aimed to turn their country into the world’s largest producer of electric cars, including a focus on consumer choice rather than corporate subsidies.
A comparison of money outlay:

China also has a 10 billion yuan ($1.46 billion) program to help the industry with automotive innovation.

In the United States, the government is providing $25 billion to help cover Detroit’s research costs in the coming years.
China is supporting its 100+ auto assemblers (and thousands of parts suppliers) with $1.46 billion while the US is supporting the Big Three with $25 billion. Of course, the US also offers some tax deductions for alternative energy vehicles, as does China. Bradsher quotes a Vice Minister:

Zhang Shaochun, a vice minister of finance, said that the government wanted to let the market determine which electric vehicle models would become popular. So while the government is providing some research subsidies, the main step will be to provide very large subsidies for buyers of electric cars — already up to 60,000 yuan, ($8,800), for purchases by taxi fleets and local government agencies.

“The fiscal subsidy gives voting rights to the consumer,” he said.
It seems that, with all the anti-market sentiment brought on by the global financial crisis, China's leaders still see the value in letting the market make some decisions. This is not to say that they have become free-market champions overnight. (As long as China's economic planner, the NDRC exists, that would be difficult to prove.)

Furthermore, this NYT article only discusses the Central Government. There are a host of local governments in China that are far less eager to allow the market to decide whether their local auto manufacturers live or die, and they are going all out to support them with subsidies, local tax breaks and local government purchases.

So how is electric vehicle strategy being plotted differently at top levels in the US?

Let's look at some of the key players. The NYT article points out that China's Minister of Science and Technology is a former Audi engineer who used to work in Germany. (Incidentally, he's also not a Communist Party member. h/t @darnoc.) In fact, a look at China's Communist Party Politburo and the State Council reveals an overwhelming majority of scientists and engineers with a mere handful of lawyers and MBAs sprinkled among them.

Who in the US government is in charge of auto strategy? Steve Rattner, a former journalist and investment banker, is leading President Obama's Auto Task Force. While Mr. Rattner (and his boss) are undoubtedly smart individuals, it seems clear that the focus is very different from China's.

China's leaders are looking at auto strategy as an engineering question while the US government sees it as more of a finance question.

I don't want to over-generalize this observation. Certainly China must also deal with issues of finance, and the US industry must also continue its impressive record of innovative engineering. However, while China is focused on dominating the future of automobile manufacturing, the US is merely focused on how (or whether) to continue pouring money into a once-proud industry that is saddled with legacy costs and hostile unions.