Tuesday, July 20, 2010

BYD Between a Rock and a Hard Place

The multinationals think they have it hard? It seems that one of China's rising stars of the auto world, BYD, has run afoul of the authorities in Beijing.

BYD, a Hong Kong listed automaker based across the border in Shenzhen, has aims of becoming bigger than Toyota someday, but in the short term at least, they may have to scale back their expectations. At the beginning of this month BYD broke ground on its second factory in the city of Xi'an. This new 5 billion yuan factory, due to open in 2011, has a projected capacity of 400,000 cars a year.

Yesterday, BYD was ordered by the central Ministry of Land and Resources to halt construction of its new factory because of a "land use violation".
The Ministry's announcement gave no further specifics as to the nature of the violation. In its defense, BYD said that it had conducted due diligence and obtained the necessary approvals from local government. So it would appear that the violation has been committed not by BYD, but by the local government.

Perhaps the violation comes as Beijing has stepped up its enforcement of land use policies. There was much talk during this year's National People's Congress of the need to prevent local governments from appropriating farmland to sell to developers, a situation that has led to much social unrest in recent years. Regardless, BYD has become yet another victim of the vagaries of doing business in China.

Until now, the conventional (yet somehow simultaneously unorthodox) wisdom has been for foreign companies to worry more about local governments when setting up their businesses in China. Just because you got approval from someone in Beijing didn't mean that all problems were solved. Local governments are the ones with the real power to make or break your business, and "as everyone in China knows" the central government devolved a lot of their powers to the local governments back in the 1980s.

So which governments should you be worried about? Perhaps the received wisdom (conventional or unorthodox, or whatever you want to call it) needs to be revisited. The real answer is, you need to worry about both.