Thursday, July 1, 2010

Ownership doesn't matter. Winning does.

China is well-known for state direction of the economy, and China itself doesn't really try to hide the fact that its most important industries are dominated by state-owned enterprises. Among these industries are airlines, telecoms, banking, finance, steel, mining, shipping, petroleum and, yes, automobiles.

Consumer Subsidies for energy-saving cars

In yesterday's post, I noted that a good mix of Chinese and foreign auto companies sell "energy-saving" cars that are eligible for consumer subsidies of 3,000 yuan per car. Curiously though, the best selling small sedan in China, BYD's F3, doesn't appear on the list.

I am not sure about the reasoning behind this oversight, but I would be hesitant to read too much into it. Despite the fact that it is privately owned, BYD appears to have attracted the favorable attention of the central government. The list (Chinese pdf) of subsidy-eligible cars is identified as a first cut (第一批), so perhaps the F3 will appear on the second cut.

As I mentioned yesterday, China's "new energy vehicle" (NEV) policy calls for consumer subsidies of up to 50K yuan for plug-in hybrids and up to 60K yuan for pure electric vehicles. (The subsidies are calculated based on a formula of 3,000 yuan per kilowatt hour of battery pack capacity.)

Beijing Likes BYD

What is interesting about this distinction in vehicle types is that there is (to my knowledge) only one company in all of China manufacturing a plug-in hybrid: BYD. The only other plug-in hybrids slated to be sold in China are the Chevrolet Volt, which will be imported and, therefore, doesn't qualify, and the next generation Toyota Prius which will have a gasoline engine too large to qualify for subsidies.

So it appears that Beijing has handed BYD a nice little gift by creating a special subsidy category for its F3DM plug-in hybrid -- which would be really nice if BYD had any intention of taking advantage of it. According to BYD's Assistant General Manager, Wang Jianjun, at the beginning of the year BYD had planned to build only 1,000 "new energy vehicles" (NEVs). Now that the subsidies have been announced, there has been no change in plans. BYD still plans to build only 1,000 new energy vehicles in 2010, according to Wang.

This strikes me as a little odd. Just last fall, BYD CEO, Wang Chuanfu was quite vocal in his disappointment that Beijing had yet to announce subsidies for NEVs. He stated at a conference that BYD could not build more of these cars until the company had an idea of how much the subsidies would be.

Well, now they know. So 1) why aren't they ramping up production?, and 2) why are they so publicly announcing that they aren't ramping up production? This would seem to be an ungrateful reaction to help being offered by the central government, and I could only speculate as to the reason.

Not only has the central government created a category to subsidize cars that BYD no longer seems inclined to produce, but late last year, BYD was extended a 15 billion yuan ($2.2B) credit line by state-owned Bank of China.

This move was a little unusual as China's banks are traditionally hesitant to lend to private companies. Lending to SOEs is easy. If anything goes wrong with a loan to an SOE, the banker has political cover, but if a private firm were to fail to repay a loan, the banker may find his job on the line. My assumption (and I have no way to confirm this) is that someone in Beijing provided the political cover needed for Bank of China to grant this loan to BYD.

So why all the favorable attention from Beijing for this apparently ungrateful, privately-owned upstart from Shenzhen?

It's all about winning

Put simply, China intends to dominate the global auto market, and its concern is not that state-owned firms lead the way, but that Chinese firms lead the way. While this is no guarantee that, at some point, China's unaccountable Communist Party wouldn't decide to nationalize everything, for the moment, China sees value in what the private sector brings to its auto industry. And BYD, ungrateful or not, continues to push the envelope in terms of NEV technology as well as peripheral technologies like solar power and storage solutions.

Follow the Policy

By looking at China's recent NEV policy announcements, it is easy to see where China's priorities lie with respect to its auto industry.

The 3,000 yuan subsidy for energy-saving vehicles does not discriminate between Chinese or foreign brands (see yesterday's post). This indicates that China's short-term interest is in conserving fuel and pumping less CO2 into the atmosphere.

The 50-60K yuan subsidies for plug-in hybrids and pure electric vehicles indicate that China intends for Chinese companies to have a significant global market share in the auto market of the future.

Only time will tell whether Beijing's decision to pick the winning technology is more effective than those of other countries allowing the market a little more of a say in which technologies come out on top.