Designated Drivers E-Book

G. E. Anderson

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 521

Veröffentlichungsjahr: 2012

Beschreibung

An in-depth look at the Chinese car industry that sheds new light on the delicate nature of China's planned economy China's unprecedented growth over the last three decades, along with the recent financial crisis in the West, has raised questions about the superiority of state-led capitalism. In Designated Drivers: How China Plans to Dominate the Global Auto Industry, G.E. Anderson, a specialist in finance and Chinese political economics, uses the auto industry to examine how China's industrial planning works, and explores whether state involvement in the economy really is a winning formula for sustainable growth. Bringing to light the strengths and weaknesses that define the Chinese economy, Anderson finds that in some ways the government has become its own worst enemy, unable to choose between industrial competitiveness and social stability. While the economy is booming now, evidence suggests that long-term success is far from assured. Tracing the evolution of the post-Mao auto industry through thirteen case studies, Designated Drivers raises the difficult questions about the future of China that few people have dared to ask. * Offers a unique insight into the Chinese economy through the lens of the auto industry * Explores how successful the central government has been in spurring economic growth and the long-terms costs of intervention * Uses case studies to illustrate China's explosive growth over the last three decades A painstakingly researched analysis of the Chinese automobile industry, Designated Drivers explains the risks and rewards inherent in doing business in China that anyone interested in, or already working there need to understand.

Leseprobe

Contents

Map of Chinese Provinces and Cities Mentioned in the Book

List of Terms and Acronyms

Foreword

Preface

Acknowledgments

Chapter One: Building National Champions

Chery: A State-Owned Startup

What Chery Reveals About Chinese Industry

Why China?

A Challenge to the West

Why Autos?

Conclusion, and a Roadmap

Chapter Two: The System

The Players

Their Objectives

The Outcomes

Conclusion

Chapter Three: The Policy

Stage One: State-Centric

Stage Two: Global Partnering

Stage Three: Indigenous Innovation

Conclusion

Chapter Four: The Joint Ventures

Beijing-Jeep

Shanghai-Volkswagen

Shanghai-GM

Guangzhou-Peugeot

Conclusion

Chapter Five: The Independents

Geely

BYD

Great Wall

Brilliance China

Sichuan Tengzhong

Conclusion

Chapter Six: The Mergers

FAW–Tianjin Xiali Merger

SAIC-Nanjing Merger

Guangzhou-Changfeng Merger

Subsequent Mergers

How Fragmented Is China’s Auto Industry?

Conclusion

Chapter Seven: The Neighbors

Ownership

Key Institutions

Technology Acquisition

Foreign Involvement

Industry Support

Industry Structure

Conclusion

Chapter Eight: In Conclusion

Summary of Findings

Looking Forward

Remaining Challenges

Appendix A

Appendix B

Selected Bibliography

About the Author

Index

Additional Praise for Designated Drivers

“Refreshingly unbound by conventional assumptions about weak corporate governance in a state-dominated economy, and unconstrained by ponderous academic jargon, Greg Anderson uses his personal experience as a former financial executive to inform his analysis of the world’s fastest-growing automobile industry. In the course of his investigation, he discovers that the apparent success of China’s SOEs is not about corporate governance, as he first suspected; rather, it’s about industry structure. It’s about how central and local governments, in uneasy partnership with industry players both state-owned and private, have acted to create the complex, dynamic, rapidly expanding industry we see today. This is a first-rate book on an important subject.”

—Richard Baum, Distinguished Professor Emeritus of Political Science, UCLA

“With Designated Drivers, G. E. Anderson provides an indispensable roadmap to the world’s most important automotive market. Anderson gives a dramatic account of the growth of China’s auto industry and clearly lays out the key policies, institutions, and firms that have shaped this trajectory. In doing so, he gives important insight not only into the automotive sector, but also China’s development path more generally.”

—Eric Thun, Saïd Business School, University of Oxford, author of Changing Lanes in China

“A problem with many books about China’s auto industry is that by the time they hit the shelves they are outdated in many respects. Greg Anderson’s book avoids this trap by explaining the framework in which China makes decisions regarding its auto industry. This book will be required reading for years to come for anyone trying to understand why China’s government and its automakers behave as they do, and the development course the industry takes.

And while his subtitle is How China Plans to Dominate the Global Auto Industry, I think this book provides evidence of why China may not, in fact, achieve the world dominance many seem to believe is a fait accompli.”

—Alysha Webb, former China Bureau Chief, Automotive News, consultant and publisher of China-EV.org

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Dedicated to the memory of Richard E. Anderson

Map of Chinese Provinces and Cities Mentioned in the Book

List of Terms and Acronyms

Words Used to Describe Types of Automobiles and Their Chinese Equivalents

automobiles = passenger vehicles + commercial vehicles

commercial vehicle = trucks, buses, delivery vans

passenger vehicle = passenger cars, MPVs, SUVs, crossovers

, MPV, SUV,

car/passenger/sedan =

MPV = multipurpose vehicle (commonly known as a minivan in the United States)

SUV = sport-utility vehicle

crossover =

Other Terms and Acronyms

AMC: American Motors Corporation, owner of the Jeep brand at the time the Beijing-Jeep joint venture was formed.

BAW: Beijing Auto Works, the local automaker that formed the Beijing-Jeep joint venture with AMC.

CAIY:China Automotive Industry Yearbook (), an annual compendium of facts, figures, policy recap, and documentation of significant events produced currently by the state-owned China Automotive Technology and Research Center. Published sporadically in the 1980s and annually since 1991.

CATARC: China Automotive Technology and Research Center.

CCP: Chinese Communist Party.

CKD: complete knock-down, a vehicle shipped in kit form to be assembled elsewhere. (See SKD.)

CNAIC: China National Automotive Industry Corporation. First formed by the central government in 1964 to oversee China’s automobile industry. Disbanded during the Cultural Revolution. Reestablished in 1982 for a similar purpose, but reduced in authority from a corporation to an association in 1987.

CNG: compressed natural gas, a cleaner alternative fuel to gasoline.

CSOE: central state-owned enterprise, a term I introduce to distinguish enterprises owned by the central government and those owned by local governments. (See LSOE.)

DTI: Department of Trade and Industry, an organization of the British state that attempted to aid MG Rover Group and subsequently investigated its sale to new Chinese owners. Replaced by the Department for Business, Enterprise and Regulatory Reform and the Department for Innovation, Universities and Skills in 2007.

EV: electric vehicle.

FAW: First Auto Works, a central state-owned automaker.

foreigners/foreign – non-Chinese.

GAC: Guangzhou Automobile Group Company Ltd., a subsidiary of GAIG.

GAIG: Guangzhou Automobile Industry Group, parent company of GAC.

GM: General Motors.

ICE: internal combustion engine, describes the engine in a traditional gasoline-burning car.

JV: joint venture.

LPG: liquefied petroleum gas, a cleaner alternative fuel to gasoline.

LSOE: local state-owned enterprise, a term I introduce to distinguish enterprises owned by local governments and those owned by a central government. (See CSOE.)

MES: minimum efficiency scale, a “rule-of-thumb” term used to describe the minimum output at which an auto factory could conceivably break even on an accrual basis. In the auto industry, the general MES is approximately 250,000 vehicles per year.

MGRG: MG Rover Group, British auto group including the brands, MG, Rover, and Austin Healy, sold by BMW to a British consortium in 2000.

MIIT: Ministry of Industry and Information Technology, regulatory body charged with oversight and planning for China’s automobile industry since 2008.

MITI: Ministry of International Trade and Industry, Japan’s industrial planning agency during the formative years of its auto industry.

MMI: Ministry of Machinery Industry, organization responsible for regulatory oversight and planning for China’s auto industry prior to MIIT.

MOST: Ministry of Science and Technology, organization responsible for China’s technology policy. Has a major role in evaluating new automobile technologies and recommending strategic direction.

MTI: Ministry of Trade and Industry, South Korea’s industrial planning organization during the formative years of its auto industry.

NDRC: National Development and Reform Commission, China’s economic planning organization, which was named the successor to the State Development and Planning Commission in 2003.

NEV: new energy vehicles. An English translation of the Chinese term “”; describes vehicles powered by fuels other than gasoline and diesel. Can include vehicles powered by electricity (via on-board battery), hybrid gasoline-electric vehicles, plug-in hybrid vehicles, hydrogen fuel-cell vehicles, and vehicles powered by CNG or LPG.

NPC: National People’s Congress, China’s legislature.

PATAC: Pan-Asia Technical Automotive Center. A joint venture design and engineering firm established by General Motors and Shanghai Auto.

PHEV: plug-in hybrid electric vehicle. A gasoline-electric hybrid vehicle with a drive battery that may be charged by plugging into the mains.

Private company: a Chinese company in which the state does not hold a controlling ownership. Not to be confused with the American definition of a company whose shares are not listed on a stock exchange. In China, a “private” company may (or may not) be listed on a stock exchange.

Public company: a Chinese company in which the state holds a controlling ownership. Not to be confused with the American definition of a company whose shares are listed on a stock exchange. In China, a “public” company may (or may not) be listed on a stock exchange.

Renminbi: the currency of the People’s Republic of China. Interchangeable with the term yuan.

SAIC: Shanghai Automotive Industry Corporation. An LSOE automaker headquartered in Shanghai. Not to be confused with the central government organization, State Administration for Industry and Commerce.

SASAC: State-owned Assets Supervision and Administration Commission. Formed in 2003 as a the unified shareholder of all of China’s CSOEs. Local governments were also ordered to form their own similar organizations at the same time.

SAW: Second Auto Works, a central state-owned automaker. Its name was changed to Dongfeng in the early 1990s.

SGM: Shanghai-General Motors, a joint venture between SAIC and GM.

SGMW: Shanghai-General Motors-Wuling, a joint venture among SAIC, GM, and Wuling Auto.

SKD: semi-knock-down, a vehicle shipped in partially assembled kit form for assembly elsewhere. (See CKD.)

SOE: state-owned enterprise. Includes both CSOEs and LSOEs.

Yuan: the currency of the People’s Republic of China. Interchangeable with the term renminbi.

Foreword

China’s economic growth model is notoriously difficult to describe. One confronts a series of contradictions: between a Leninist single-party state and a vibrant market economy; between a central government that sometimes seems all-powerful and local governments that often defy the center’s mandates with impunity; between state-owned national champion enterprises awash with subsidies and scrappy private firms that sometimes manage to mobilize state backing. How much of China’s spectacular economic growth and industrial development results from state-led planning, and how much from the unleashing of market forces, is endlessly debated.

In many respects, China since the beginning of economic reforms in 1979, and more particularly in the past decade, seems the latest example of the “East Asian developmental state,” a term coined to describe the political economy of postwar Japan and South Korea. The goal of the developmental state is to achieve rapid economic growth and technological autonomy, via the development of broad-based industrial capacity and a relentless focus on exports. The principal mechanisms include industrial policy, financial repression through low administered interest rates, and a tightly regulated financial sector whose function is to channel household savings into investments in infrastructure and sunrise industries. Finally, export requirements are used to ensure that the industries benefiting from infusions of low-cost credit actually achieve technological progress, rather than simply growing fat on cheap funding and protected local markets.

Over the past three decades, China has clearly emulated both the goals and many of the mechanisms of the classic developmental state. In the 1980s paramount leader Deng Xiaoping sponsored the slogan “fazhan cai shi ying daoli” (“development is the only hard truth”), and successive generations of leaders since have consistently kept front and center the goals of rapid economic growth, a vibrant export economy, and aggressive technology acquisition. Today China is easily the world’s largest producer of steel, cement, ships, motor vehicles, textiles, power generation equipment, telecoms network switches, textiles and consumer electronics, in volume if not in value terms. It is also the world’s largest exporter, accounting for around 11 percent of global export value in 2011, a market share that has tripled in the past 15 years.

Yet beneath the surface China’s economy differs dramatically from that of its East Asian predecessors. One crucial difference is the mechanism of technological upgrading. Japan and South Korea protected their national champion companies from competition at home but compelled them to upgrade their technology by imposing stringent export requirements, which could not be met without keeping pace with changes in global technology. China, by contrast, welcomed vast amounts of foreign direct investment and tried to induce technology transfer via joint ventures between multinational corporations and domestic state-owned enterprises (SOEs). One consequence is that while Japan’s exports were generated exclusively by domestic private firms, over half of China’s exports, and nearly 90 percent of its high-tech exports, are generated by foreign-invested firms. Most of the remaining exports are generated by small-scale domestic private firms that benefit from an undervalued exchange rate but have little access to subsidized credit. The principal beneficiaries of subsidized credit are SOEs, whose main job is to build national infrastructure, and who in aggregate are net importers.

The differences between China’s development path and those of its East Asian predecessors arose from fundamental differences in starting points. China was less able to protect its domestic market in the 1980s than Japan and South Korea were in the 1960s, because its desperation for foreign exchange and foreign technology were greater, because evolving world trade rules made it harder, and perhaps most important because China was not a military ally of the United States and so could not gain preferential trade treatment in exchange for permitting U.S. military bases. On the other hand, China’s domestic market potential was so enormous that it proved a powerful lure to entice investments from multinational companies on terms that they would have accepted in no other market.

A second key difference in conditions is that in addition to being a developing country, China is also a post-communist society, governed by a Leninist single party. In the 1980s and 1990s the task of catch-up development was paired with the task of dismantling an inappropriate and highly inefficient socialist industrial structure, while at the same time ensuring the continuity of Communist Party rule. Much of that structure has been demolished, but substantial vestiges remain and continue to exercise a powerful influence on policy and on the way markets function. In particular, reformed SOEs, shed of their costly social welfare obligations, continue to dominate many major industries and have increased their influence in the policy process. An enduring policy dilemma is finding the right balance between SOEs, which are effective agents of state directives, and private companies, which are far more efficient users of capital and generate far more employment.

Finally, China’s late entry into the development game has several interesting consequences. One is that it has compressed in a relatively short period of time development phases that unfolded sequentially and over a much longer period in other countries. In some respects China today resembles Japan in the 1920s, when economic growth was very rapid but indigenous innovation and technological development capacity were still very weak and international influence was minimal. In others it seems more like Japan circa 1970: an export powerhouse with a disruptive influence on global trade and capital flows. Another is that by the time China started developing key industries, such as passenger cars and consumer electronics, global control of these industries was firmly in the hands of U.S., European, and Asian multinationals, and technological barriers to entry were far higher than when Japanese and Korean companies began their entry into these industries. Despite decades of effort, China has failed to produce a single globally competitive carmaker or consumer electronics firm (with the ambiguous exception of personal computer maker Lenovo, the vast majority of whose sales are in its home market).

G. E. Anderson’s study of the Chinese automotive industry is an excellent introduction to the complexities and conflicting forces of China’s unique development process. The passenger car business is a particularly telling exemplar of the strengths and weaknesses of the joint-venture model, under which foreign multinationals enter into joint ventures with domestic SOEs. This system enabled China to ramp up passenger car production very rapidly once household incomes got high enough to support large-scale car purchases. But the SOE partners have been largely captives of their joint ventures, and have so far failed to generate their own technology, designs and brands, as was the original intention of state planners. Meanwhile, China’s huge size and high degree of economic decentralization meant that local governments could back smaller, independent carmakers—some privately owned and some controlled by local governments. Even though these firms emerged outside the central government’s industry plan—and sometimes directly contravened Beijing’s directives—they flourished because they satisfied two crucial state objectives that the SOE automakers could not. They generated substantial new employment, and they succeeded in developing their own designs and brands, although the designs are still heavily dependent on foreign models and the brands have yet to achieve traction outside of China. And it is a small independent firm (Geely), not a national-champion SOE, that engineered China’s only successful takeover of an internationally significant carmaker (Volvo).

More broadly, this work illustrates the complexities of China’s current economic structure, and the uncertainties about where Chinese companies—and the economy as a whole—are headed. The ambitions of central government economic planners, the differing aspirations of the leaders of SOE, multinational and domestic private companies, and the imperatives of local government officials, have created an intricate economic ecosystem with a bewildering variety of domestic and foreign stakeholders. State policy and market forces both continue to play crucial roles. Technology provides both a source of conflict (as the state presses for ever more technology transfer as the price of increased market access) and a means of collaboration (as foreign and Chinese automakers combine forces to develop new-energy vehicles). The example of the auto industry, as vividly portrayed here, enables us to understand how a complex and seemingly chaotic cocktail of forces produced the most impressive sustained economic growth in history. And while it provides no definitive answers about where that growth will lead in future, it gives us a better basis for asking the right questions.

Arthur Kroeber

Arthur Kroeber is managing director of GK Dragonomics, an economic research firm based in Beijing, and editor of the China Economic Quarterly.

Preface

It is human nature to fear what we don’t understand. It is also human nature to ask “why,” to satisfy our curiosity, to improve our understanding. Why, I am often asked by curious Americans, do you keep going back to China? My answer is typically along the lines of, “I still haven’t figured it all out.” China first came to my attention as I watched events in Beijing unfold on television in 1989. At the time I had no inkling that five years later I would first set foot in China, thereby launching myself into a lifelong effort to understand China better, nor did I realize that my efforts to understand China better would also make me want to understand my home country, the United States, better.

While I had long been interested in how politics affects economic decision making, I began the empirical research for this book in 2008, a year in which the first major cracks began to appear in the edifice of Western political economy. (The cracks, in hindsight, had been there all along, but few of us wanted to see them.) Having worked for over 15 years in the field of finance and having completely bought into the neoclassical economic theory that underpinned the system, I was amazed at how quickly things seemed to unravel once Lehman Brothers declared bankruptcy in the fall of 2008. How, I began to ask, can China continue to break all the rules—industrial planning, heavy state ownership, fixed interest and foreign exchange rates, an authoritarian political system—yet continue to turn in double-digit economic growth year-in and year-out? If we in the West possessed all of the answers, why weren’t we the ones enjoying all of that growth? And, given that China does appear to be enjoying success, is there anything they are doing that we in the West could adopt to pull ourselves out of our collective funk?

While I was motivated by these big questions, my goal with this book is somewhat more modest. I hope to illuminate a small corner of these much larger questions, to shed light on China’s method of industrial planning and business-government relations. It is my firm belief that, before other countries can make decisions regarding how to treat China as a trade partner/adversary, before they can adapt their own economies to the reality of a rising China, and indeed, before they can make investment decisions, they are all better served by fully understanding the politics behind the Chinese economy.

My approach to this question was to choose a single industry into which I could dive deeply so as to understand the nature of ownership, business-government relations, central-local relations, China’s innovative capacity and the perceived role of foreign players. And while I hope anyone interested specifically in the auto industry will find much of interest here, it is also my hope that the reader who is interested in China, or in economic development in general, will benefit from an illumination of the overall political principles that drive economic decision making at the top of the Chinese system. I chose the automobile assembly industry because it offered a variety of ownership forms: massive state-owned enterprises, scrappy private enterprises, and foreign multinational firms all clamoring for a share of China’s market. At the time I made this choice, I honestly had no idea that the auto industry would in 2009 and 2010 become one of China’s hottest sectors, but in hindsight this worked to my benefit: Everyone in China wanted to talk about cars.

In the process of gathering information, I made three separate trips to China in 2008, 2009, and 2010, and interviewed over 100 professionals, academics, and government researchers with connections to China’s auto industry. I also conducted an examination of Chinese-language source material documenting the development and evolution of China’s auto industrial policy over the past 30-plus years. In keeping with UCLA’s Human Research Protection Program, I guaranteed my interviewees anonymity. This guarantee accomplished two purposes. First, and most importantly, it ensured that the Chinese citizens whom I interviewed would not later be punished or harassed for their willingness to speak with a foreign researcher. Secondly, it decreased the likelihood that interviewees would alter their answers to my questions out of fear of repercussions from employers or other authorities.

A Few Notes for the Reader

Any reader who is familiar with China’s economic development efforts, and particularly those of China’s auto industry, will inevitably note that certain events presented in this book may have since been overshadowed by subsequent events. Such is the nature of writing about China: At least some of what one writes may have already been invalidated by subsequent events even before the ink is dry. My goal with this book is not to say, “this is the way China works, and it will never change.” My goal here is to describe the path that actors in China’s political-economy have taken to reach a certain point and to project what that may mean going forward. Of course, changes can and will happen, and these changes can send China’s development on any number of interesting trajectories.

For the past 60-plus years, everything in China has happened within the boundaries of the immutable goal of the continued rule of the Communist Party, and my assumption is that this will not change anytime soon. Then again, very few people expected the Soviet Union to disintegrate when it did; nor did they expect the subsequent reconsolidation of power under Russian President/Prime Minister/President, Vladimir Putin. The point here is that life is full of surprises. We can implement detailed planning to cover the highest probability outcomes, but, if the events of the Great Recession have taught us anything, it is that we need also to ask ourselves how we might handle the sudden appearance of a “black swan.” In short, while we are probably wise to plan for the continued rule of the Communist Party in China, our scenarios should at least consider how we might approach a sudden change in leadership.

And a few notes for academic readers. . .

The necessity of a publisher’s page limits, e-book versions, and other guidelines requires that some content be deleted and the footnotes be moved to the ends of the chapters. Please visit www.designateddrivers.co for additional material including photos, a more extensive literature review, and a printable version of the footnotes, references, and source material for this book. Please also note that, while I make occasional use of Chinese characters in this book, knowledge of Chinese is not essential to understanding the story. The use of characters is merely an added benefit for Chinese speakers who may wonder how I chose to translate certain terms, or for those who want to more quickly locate a Chinese language source. In general I adhere to tradition of presenting Chinese names with surname first and given name second (e.g., Deng Xiaoping), except for when a Chinese person has published a work in English under the Western tradition of given name first, surname second (e.g., Yasheng Huang).

Acknowledgments

Of course, no competent researcher should be willing or able to conduct research in a vacuum, and I was fortunate to benefit from the advice, support and oversight of many individuals who gave of their time. At the top of the list are my PhD dissertation committee: Richard Baum, Mike Thies, James Tong, and Barry Naughton. Each took his time to help me formulate my research questions, put together a research design, and then worked with me to make sense of my findings once I had returned from the field. I am grateful for their support and advice, and especially for pushing back when I attempted to get away with unfounded assumptions. If this book proves coherent and useful to others, they will have my committee to thank. To the degree that mistakes remain, I alone am responsible.

I am also grateful to UCLA’s Center for Chinese Studies and the Department of Political Science for providing partial funding that helped me to carry out my field research.

I would also like to thank a number of UCLA political science colleagues whose help and advice either directly or indirectly served to improve this work: Hiroki Takeuchi, Zhang Xin, Vivian Zhan, Eric Zusman, Zhang Yongle, James Paradise, Wooyeal Paik, Stan Wong, Josh Eisenman, and James Lo. I should also thank a number of scholars, business people, journalists, friends, and commenters to my blog who took the time to discuss with me research ideas and fieldwork methods or to provide logistical help and contacts in China. Special thanks to Jamil Anderlini, Clint Baines, Aimee Barnes, Janet Carmosky, Amy Chang, Crystal Chang, Don Clarke, Jason Dean, Dominik Declercq, Paul Denlinger, Mike Dunne, Gady Epstein, Peter Fischer, John Garnaut, Nancy Gougarty, Andrew Grieve, Gerwin Ho, Scott Kennedy, Dune Lawrence, Jing Liu, Rose Liu, Andy Mok, Malcolm Moore, Patrick Murphy, Phil Murtaugh, Klaus Paur, Mike Pettis, Will Pirie, Bill Russo, Victor Shih, Norihiko Shirouzu, Dorothy Solinger, Ed Steinfeld, Edith Terry, Eric Thun, Patti Waldmeir, William Wang, Alysha Webb, Calla Weimer, Boss Wu, Shirley Yam, Yunxiang Yan, and John Zeng. I also want to thank my dear friends, the Reece family for their love and support. Extra special thanks to Arthur Kroeber for helping me to brainstorm and for writing the book’s foreword.

An even larger number of Chinese friends and interviewees contributed to my understanding and to the success of this research project, and though they are deserving of individual thanks, a big, group “thank you” will have to suffice. For reasons mentioned in the Preface, I am unable to list each of these helpful people by name. Among those I can mention are Zhou Congjun and Fan Zheng, two friends (with no connection to my research) who helped me to acquire and hone the language skills necessary to carry out my research. I am thankful to them for their patience and dedication, and for not allowing me to get away with ignoring my tones. I would also like to thank Beijing friends, Bernardo, Charlie, Jiwei, and Winser, for their logistical help, moral support, and warm friendship.

Special thanks is also due to the good folks at Wiley who made the process of writing and publishing a book remarkably pain free for a first-time author, particularly Nick Melchior, who shepherded the entire project, also Emilie Herman and Stefan Skeen, who improved the book’s readability, and Cindy Chu who helped with marketing.

I owe many thanks to my family who shaped me into the person I have become. The steadfast support of my mother and sister throughout all of my research and travel has been invaluable. Though my dad did not live to see me finish this project, I know he was proud of my efforts. He taught me from an early age to be open-minded, to challenge the status quo, and never to allow the opinions of others to keep me from pursuing my dreams. Were it not for the influence of my family, this book would not exist.

Finally, my deepest gratitude goes to my lovely wife Yan, who suffered through many months while I conducted research in China, and through many more lonely nights and weekends while I toiled at my desk. Thank you for your kindness, patience, and love during my frequent absence and absentmindedness. Your support has made all the difference in the world. You are God’s greatest gift to me.

Chapter One

Building National Champions

Insofar as the international division of labor is a hierarchy, worrying about development means worrying about your place in the hierarchy.

—Peter B. Evans, Embedded Autonomy: States and Industrial Transformation

China’s passenger car industry has received very little share of the benefit in the international division of labor in processing and manufacturing.

—Chen Xiaohong, ed., [China enterprise internationalization strategy]* (Beijing: Renmin Chubanshe, 146. Development Research Council, State Council of the PRC, 2006)

Perhaps the first Chinese automaker that many business-minded people in the developed world ever heard of was Chery. The company’s name surfaced in Western publications in early 2005 when Malcolm Bricklin, the auto entrepreneur known for having imported the Yugo to America in the 1980s, announced that cars made by Chery would be the first Chinese-made automobiles sold in the United States beginning in 2007. But the agreement between Bricklin and the Anhui Province–based Chery Automobile collapsed in 2006, and as of this writing, Chinese automakers have yet successfully to export a passenger car to the United States.1

The story of how Chery came to exist is not well known outside of China, yet it is an interesting tale illustrating the evolution of business-government relations in China during the reform era. The story is interesting because it contains many of the elements that describe not only how China’s auto industry has developed, but how China’s central and local governments have both cooperated and competed to develop the national champions of China’s most important industries.

The typical large industrial Chinese company is, like Chery, a local state-owned enterprise (or LSOE, as distinguished from a central state-owned enterprise or CSOE). It is wholly or majority-owned by a local government which appoints senior management and provides free or low-cost land and utilities, tax breaks, and, where possible, guarantees that locally made products will be favored by local government, consumers, and other businesses. In return, the enterprise provides the local state with a source of jobs for local workers, tax revenue, and dividends. Very often, the LSOE is also a source of local prestige and, depending on the product the LSOE makes, a source of free or inexpensive goods for local officials and bureaucrats.

But as this brief story about Chery will illustrate, the local government is but one player among several that have shaped and influenced the growth and development of China’s industrial giants. While China’s economy has become increasingly subject to market forces over the past three decades, these forces have been, and continue to be, directed by the wishes of the state. Throughout the reform era, China’s five-year plans, developed by the central government with input from various central ministries, industries, and local governments, have become increasingly sophisticated in terms of their demands on China’s most important industries. And despite the increasingly influential role of local governments over the past three decades, the central government still manages to get most of what it wants. At the same time, the central government has demonstrated a pragmatic flexibility in that it is willing to bend its own rules when it sees fit.

Chery: A State-Owned Startup

The idea for starting Chery was first promoted in 1992 by Zhan Xialai, an assistant to the mayor of Wuhu City in Anhui Province.2 Zhan was among those state officials known as a hongding shangren (, literally, a “red-hat businessman”), a term originating from the Qing dynasty and originally used to describe state officials who also engage in commerce. Contrary to commonly held beliefs, not only among some in the Western media, but also among many Chinese citizens, Chery is not, nor has it ever been, a private company. From its founding, Chery’s controlling shareholder has been the city of Wuhu, and its second largest shareholder is the Anhui Provincial Government.3 When asked why this point on Chery’s ownership is so confusing to so many, the typically knowledgeable Chinese auto industry insider answers that “Chery is entrepreneurial. It acts like a private company.”4

Zhan Xialai, who ultimately became the Communist Party secretary of Wuhu, was also Chery’s first chairman, but he was ultimately forced to choose between running the company and running the city.5 He chose to keep his Party title where, presumably, he could have an even greater influence over, not only the business, but the local environment in which it operates. Many of those interviewed for this project believe it was Zhan’s role in the founding of Chery that has influenced the entrepreneurial behavior of the company. Granted, all local governments wish to see their local companies succeed, but in the case of Chery, in which the local Party Secretary is also the company’s founder, there exists a personal connection between the business and the local state. In the opinion of one interviewee, “Zhan still thinks of Chery as his company.”

The involvement of the local government, however, did not mean that Chery’s founding went smoothly. At the time Chery was founded in the mid-1990s, the central government, concerned with an increasingly fragmented auto industry, had called for a moratorium on the establishment of new passenger car manufacturers. This meant that Chery had to get its start—with the help of local government—under the radar.

Zhan recruited Chery’s first chief engineer, Yin Tongyao, away from Volkswagen’s joint venture with a major state-owned enterprise (SOE), First Auto Works (FAW). Yin is now Chery’s chairman. The venture started out with a very low profile, making only engines on a used assembly line purchased from Ford in the United Kingdom. Eventually Chery’s engineers “designed” a complete car based on the Volkswagen Jetta from plans Yin Tongyao had obtained from a Spanish subsidiary of VW.6 With the help of a Taiwan-based molding company, Chery’s first car came off the line in 1999, but these cars could only be sold and driven locally as Chery had still not obtained permission from Beijing to manufacture cars.7 Without this permission (which required being listed in an official government catalogue), Chery cars could not be issued license plates. Chery’s cars could be given a pass by local authorities in Anhui, but without official plates, they could not be legally sold in other provinces.

Eventually, the central government became aware of what was going on in Wuhu and issued an order for Chery to stop manufacturing cars. But rather than punishing Chery’s leaders and dismantling the factory, the State Economic and Trade Commission (SETC) advised Chery to negotiate with one of China’s largest automakers, Shanghai Automotive Industry Corporation (SAIC). This connection between Chery and a reluctant SAIC was facilitated by Wu Bangguo, who was at the time a vice premier.8 Wu, who is originally from Chery’s home province of Anhui, had also previously served as Party secretary in Shanghai. His connections with both Anhui and Shanghai placed him in a position to bring Chery and SAIC together.

The two companies negotiated a 20 percent ownership stake in Chery by SAIC, which would eventually allow Chery to manufacture vehicles under the “Shanghai-Chery” brand name. Chery was able to resume assembly of autos, which, due to Chery’s new affiliation with SAIC, were legitimately listed in the official catalogue. During its time as part of SAIC, Chery was never under the direct management of SAIC and never paid dividends to SAIC.9 It only received the “investment” of SAIC, which, according to a veteran Chinese auto industry journalist, amounted to Chery simply giving SAIC shares in itself valued at 300 million yuan.

Within a few years, Chery’s arrangement with SAIC began to unravel after Chery was accused by General Motors (GM), a joint venture partner of SAIC, of having copied its Chevrolet Spark. The Spark had been based on the Matiz made by GM’s South Korean partner Daewoo. It was due to be sold in China toward the end of 2003, but Chery beat GM to the punch, releasing its QQ earlier in the year. How closely had the QQ been based on the Chevrolet Spark? GM’s general counsel in Shanghai revealed to author and journalist Peter Hessler photos demonstrating that the doors of the Chevy Spark and the Chery QQ were completely interchangeable.10 According to China auto consultant Michael Dunne, when GM asked its partner SAIC for advice in addressing Chery’s apparent violation of GM’s intellectual property, GM had not even been aware that SAIC was a 20 percent owner of Chery.11 GM attempted three times to sue Chery for its apparent violation, twice in China and once in Korea (from whence the plans for the Spark had originated), but in no case was it demonstrated that Chery had illegally obtained the plans for its QQ.12

Surprisingly (or probably not surprisingly to veteran China watchers), the episode ended up working in Chery’s favor anyway. Though Chery’s violation of intellectual property rights was never proved in court, there existed the suspicion that Chery had used its relationship with SAIC to access illegally the blueprints of SAIC’s partner, GM. Following this episode, SAIC washed its hands of Chery, leaving it as an independent, stand-alone company. By this time, Chery, having become one of China’s largest exporters of automobiles, had no difficulties getting its vehicles properly listed in the central government’s catalogue. SAIC had (albeit reluctantly) helped Chery to become a legal automaker in China, giving it the time it needed to demonstrate its importance to the central government.

Not only was Chery attracting notice because of its exports, but the company had also begun to catch the eye of the central government for another important reason. Because Chery did not have a foreign partner, the company had demonstrated its commitment (intellectual property issues notwithstanding) to developing its own, domestically branded cars.13 After China’s entry into the World Trade Organization (WTO) at the end of 2001, the development of domestic Chinese brands (or , zizhu pinpai) had become a top priority of the central government for the auto industry. China’s independent automakers, with Chery at the forefront, were leagues ahead of China’s lumbering SOEs in carrying out this directive.

By the end of the 2000s, China’s central government, having in the 1990s and early 2000s been practically antagonistic toward the independent automakers, had changed its tune—somewhat. These companies, particularly Chery, Geely, BYD, and Great Wall (the latter three of which are nominally private), began to receive encouragement from the central government, not only in the form of state leader visits, but also through access to state-owned bank funding.14 Without a foreign partner whose brands it could sell, Chery has no choice but to rely on development of its own brands—something the central government has been demanding of its automakers for years. But research and development (R&D) does not come cheaply: the development of a new car model can cost upward of a billion dollars.15 And herein lies the attractiveness of partnering with a foreign automaker: the foreign partner does all of the R&D heavy lifting.

What Chery Reveals About Chinese Industry

The story of Chery presents the recent development of Chinese industry in microcosm. Through this case we can see the important role that local governments play in the startup phase of industry—particularly when an enterprise must be formed out of the view of the central government. However, we can also see a central government that, despite its desire to see an auto industry shaped in a certain way, was nevertheless flexible enough to find a way to allow a job-creating, tax-generating enterprise to continue to operate within the rules. Furthermore, we see a central government that was able to learn and adapt, a central government that began to see the value that a smaller, independent automaker brought to the industry.

In Chery, we see a company that, like many Chinese businesses, got its start by “borrowing” foreign designs, but that has thus far had difficulty moving beyond this stage into one of real innovation. This raises the important question of whether China’s industrial giants will be able to move beyond cost competition to compete head-on with the foreign multinationals (MNCs) in advanced technology. And Chery’s difficulties in coming to an agreement with Malcolm Bricklin and subsequent lawsuit with GM are also illustrative of a Chinese auto industry (and a central government) with an ambivalent attitude toward foreigners. On the one hand, we see an industry still heavily reliant on foreign know-how, yet on the other hand, Chinese sources continue to lament what they see as a foreign “monopoly” over China’s auto industry.16

What this case, and this book as a whole, do not illustrate are the infallibility or invincibility of the Chinese government. Indeed, mistakes have been made, and most certainly will continue to be made. What this book does illustrate is a government that is still largely “crossing the river while groping for stepping stones”* as it tries to balance the competing priorities of economic growth, social stability, and the continued rule of the Communist Party. What it also illustrates is that China’s central government has a firm intention of dominating, not only its domestic markets, but as many of the world’s markets as it possibly can. The words and actions of China’s central government demonstrate its commitment to this goal, and this study of China’s automobile industry demonstrates just how determined China’s central government is to win.

While I offer no prognostication of China’s ultimate success in dominating the global auto industry, I do offer the reader a clear picture of how China has become the world’s largest auto market, and how it will very likely continue to pursue the growth of, and eventual dominance by, Chinese businesses throughout the world. But China’s dominance is still not a given; whether China ultimately wins also depends very much upon the innovative visions and strategic behavior of the world’s other automakers. Even if China’s automakers were never to develop the design capabilities of the foreign multinationals, the multinationals would in any case find staying ahead of China to be increasingly difficult: the Chinese are good at copying, and they’re getting better.

This story is, however, much larger than that of a single industry. It is a story about politics, a story about nationalism, and a story that seeks to answer some very important questions about business-government relations—questions that many economists thought they had already addressed, but that the Great Recession of the late 2000s has once again brought to the forefront.

Why China?

Writing over a year after China surpassed Japan to become the world’s second-largest economy, behind the United States, it may seem almost absurd to ask, “Why China?” This is a country that, since its opening in 1978, has turned in double-digit economic growth for over three decades while allowing only selective expansion of the personal freedoms of its citizens. China has opened up opportunities for its private sector to grow and develop while maintaining state control over the country’s largest and most important industries. The opportunities made available to Chinese citizens have led to an unprecedented generation of wealth, yet, while the industrial economy has grown, the country as a whole is still relatively poor in terms of its gross domestic product (GDP) per capita. And while there have been opportunities for some, there have not been opportunities for all. As some Chinese grow wealthier, the gap between rich and poor has grown wider.

Throughout the latter half of the twentieth century, many economists and political scientists studied the phenomenon of late development, asking why some late developers have chosen their respective paths of development, why some have succeeded, and why some have failed.17 As an even later developer, China poses another set of questions, not only about the paths it has chosen, but about what it may have learned from other late developers that came before it. And while China seems to exhibit traits similar to other late-developing countries, notably, China’s East Asian neighbors Japan, Korea, and Taiwan, the sheer magnitude of what China has accomplished, and is trying to accomplish, seems to place the country in a category all by itself in many respects.

Some scholars have even proposed a term to describe the uniqueness of China’s approach to development. Beijing Consensus describes a prescription for economic development that includes heavy state involvement in economic development through both allocation of resources and commitment to innovation and experimentation. It also includes authoritarian government and limited personal freedoms for citizens.18 It is contrasted with the Washington Consensus, a set of solutions many Western economists have recommended to late developers, which includes fiscal discipline, interest rate liberalization, privatization, deregulation, and free trade—accompanied by a democratic form of government.19

There are, of course, problems with both consensuses, and not all China watchers agree on how China has been able to achieve its success. According to Yasheng Huang, China’s best performance, in terms of raising the living standards of average Chinese, came during times of its more liberal, less state-centric period in the 1980s, not in the 1990s and 2000s as is commonly assumed.20 Furthermore, John Williamson, credited with coining the term Washington Consensus, points out that Beijing Consensus is not even used by the Chinese to describe their own system.21 And the Washington Consensus, as it turns out, was not actually followed in Washington as the United States developed prior to World War II. The U.S. development model looked, in some respects, similar to that of today’s China: heavy trade protectionism, fixed exchange rates, and government-controlled interest rates.22 Nevertheless, the so-called Beijing Consensus—or however one might label China’s model of state-led capitalism—may have a certain appeal for the leaders of other developing countries who have grown weary of Western lecturing about democracy, human rights and minimal state intervention in the economy in exchange for economic assistance. Aside from recognition of China’s interests with respect to its territorial integrity, China’s assistance tends to come with fewer strings attached.

Regardless of whether the term Beijing Consensus is taken seriously by economists or political scientists, it seems to touch upon a feeling common among Westerners that China’s approach of capitalism without democracy may somehow give that country an advantage.23 It raises the question of whether America’s formula of capitalism plus democracy, long thought to be the sine qua non of progress, is as durable—or as effective—as once believed.

Ian Bremmer, president of the Eurasia Group, uses a broader term, state capitalism, to describe the political economy of China and other countries with similar systems.24 State capitalism describes a “strategic long-term policy choice” that embraces markets as a tool of ruling elites to serve a country’s national interest.25 The rulers of a country that follows a form of state capitalism are typically motivated by a “fear of chaos” and, therefore, approach governance as an exercise in risk management. This engenders a type of micro-management in which the state attempts to use all of the tools at its disposal to minimize the inherent risks to power that arise from openness to market forces. Among the tools state capitalist countries use are state-owned corporations, sovereign wealth funds that invest abroad, “resource nationalism” (attempts to control stockpiles of, and access to, commodities and national resources), and development of state-backed “national champion” enterprises that can compete globally and that are not limited by concerns for democracy or human rights.

Bremmer quotes Chinese Premier Wen Jiabao, who gave a definition of China’s brand of state capitalism in an interview on CNN television in 2008:

The complete formulation of our economic policy is to give full play to the basic role of market forces in allocating resources under the macroeconomic guidance and regulation of the government. We have one important piece of experience of the past thirty years, that is to ensure that both the visible hand and invisible hand are given full play in regulating the market forces.26

What Wen Jiabao’s definition fails to capture, however, is the fact that, through its five-year economic plans, China’s government, not the markets, decides which industries will grow, which will receive resources, and which will be promoted. The market does have a role in state capitalism, but its role is limited primarily to acting on resources that have been allocated largely according to the state’s wishes.

Bremmer makes the case that the financial crisis of the late 2000s cemented in the minds of many of China’s leaders the determination to maintain a firm state hand in management of the economy. While they understand the vital role China’s private sector has played in growth, they have made a conscious decision to concentrate resources in state hands so as to protect China from the “natural excesses of free-market capitalism” that they believe to have caused the Great Recession among the developed economies.27

A Challenge to the West

In the West—particularly among countries following the more traditionally laissez-faire Anglo-American model—it is accepted, almost as a matter of faith, that government involvement in business is not a good thing. Americans need look no further than Amtrak and the U.S. Postal Service as examples of perpetually money-losing, state-owned enterprises that constantly return to Congress with their hands out for subsidies. When GM faced bankruptcy and possible liquidation in early 2009, many Americans were astounded that part of the solution included the U.S. government taking an initial 61 percent ownership stake in the ailing automaker. A Gallup poll indicated that 55 percent of Americans disapproved of the government takeover.28 Many Americans believed GM had failed for years to produce cars comparable in quality to those produced by their Japanese and German counterparts. If GM were unable to stand on its own, it should have been allowed to die. This is, in the minds of many Americans, how capitalism is supposed to work: those who cannot compete exit the market.

Regardless of how a majority of Americans may have arrived at their conclusions that state involvement in business is a bad thing, there also exists a body of economic literature that supports this position, both theoretically and empirically.29 Over the two decades prior to the Great Recession that began to surface in 2008, a consensus had developed among economists that private ownership of firms is, in general, superior to that of public ownership. In theory, the managers of state-owned enterprises (SOEs) are not subject to many of the disciplinary measures that lead to the superior efficiency, productivity, and profitability achieved by private enterprises. Hard budget constraints (i.e., the threat of bankruptcy), oversight by creditors, greater exposure to competition, the threat of hostile takeover, and pressures from owners whose interests are not conflicted by political and social objectives are but a few of the disciplinary measures to which private sector managers are subject. On these and other points, economic theory is supported by dozens of empirical studies and (until recently) challenged by very few (non-Marxist) dissenting voices.

As long as governments around the world continued during the 1990s to move toward privatization of their economies, and as long as those governments that did not privatize were punished with poor economic outcomes, then countries that adhered to these beliefs of minimal government involvement were comfortable in their chosen paths. But there were two major changes in the latter 2000s that challenged this logic and set Western minds to worrying. The first change was a gradual trend throughout the course of the 2000s toward increased state involvement in China’s economy—or, to be more precise, an apparent reversal of China’s late-1990s trend toward increased private sector involvement. The second change was the onset of the Great Recession during 2008, which called into question the viability of the Western economic model.

The first change was highlighted by increased usage of the term guo jin min tui (; “the state advances, the private sector retreats”) during the late 2000s. This was a clever reversal of a term with the exact opposite meaning, guo tui min jin (; “the state retreats, the private sector advances”), that emerged in the early 2000s to describe the trend of increased private sector involvement in the economy begun during the Premiership of Zhu Rongji. The reversal of private sector advancement began with the rollback of reforms in China’s financial sector in 2005 chronicled by Walter and Howie in Red Capitalism (2011).30 It became apparent in China’s industrial sector during 2008 and into 2009 as Chinese newspapers began reporting on an increased pace of nationalization and favoritism toward SOEs. One of the most commonly reported stories was of the forced nationalization of dozens of privately owned coal mines in Shanxi Province.31 There was also a vigorous debate about this phenomenon in the Chinese press among academics, economists, and government officials.32 Many observers credited the strengthening of the state-owned sector at the private sector’s expense with largesse heaped upon SOEs in the form of loans from local government financing vehicles as a result of the central government’s stimulus program in late 2008.33

The second change was that the developed world, the United States in particular, fell into a major economic recession largely of its own making. Though the recession had temporary repercussions for emerging markets as well, by the middle of 2009, it was clear that the extent of the damage had been limited primarily to the developed markets. Developing countries such as China took steps to stimulate their economies, but otherwise continued their trends of world-beating economic growth. As a result, economic observers the world over began to question the viability of the Western model—particularly the notion that governments should generally remain aloof from business, allowing the market and the private sector to make all of the decisions. Former U.S. trade representative Charlene Barshefsky put the change in thinking into perspective: “Our competition has gotten tougher during a period for the United States of profound economic weakness that magnifies any perceived threat . . . There is a significant and profound—almost theological—question about the rules as they exist.”34

Among the questions observers are asking are, what if a government not only refuses to relinquish control over important sectors of its economy, but also manages to achieve impressive economic outcomes? And what if those outcomes are superior to those achieved by any developed country in nearly half a century? Would that country’s processes, institutions, and outcomes not be worthy of further scrutiny? More specifically, what are the trade-offs that China has accepted in order to maintain heavy state involvement in the country’s most important businesses, and are any of these trade-offs possible, or even desirable, in free and democratic societies?

Why Autos?

In an attempt to answer some of these questions, I have chosen to conduct an in-depth analysis of China’s automobile industry. The reason for this choice is that the automobile sector serves as a nice microcosm of China’s industrial economy as a whole. Within this single industry, state-owned enterprises, private enterprises and Chinese-foreign joint ventures (JVs) compete for market share. The top three automakers, which together command nearly a 50 percent domestic market share, are all state-owned enterprises (SOEs) whose production comes primarily from joint ventures with foreign manufacturers. Among the top 12 automakers in China, three are privately held. The recent median five-year compound annual growth rate (CAGR) in unit sales among China’s top 12 manufacturers was 30 percent.35 The three private firms, BYD, Geely, and Great Wall, had five-year CAGRs of 116, 24, and 44 percent, respectively.36 The point here is that, while China’s auto industry is dominated by state-owned enterprises, there is room for private players to compete and grow—an empirical phenomenon that already calls into question economic theories that state-owned investment in an industry drives out private investment.37

It is not difficult for the impartial observer to view the recent success of China’s auto industry with a measure of admiration. Within the space of 30 years, China has gone from having practically no passenger car production to building more cars than any other country in the world. But how does China’s early growth stack up against that of other major players? Figure 1.1 charts the growth of auto production in four countries from 1900 until 2009. The statistic measured, thousands of passenger cars produced per dollar of individual wealth, is simply the number of passenger cars produced in each given year in thousands (both for domestic consumption and export) divided by GDP per capita.38 Using a common denominator, this measure describes how important each country’s respective auto industry is as a part of its national economy.

Figure 1.1 Relative Importance of Auto Industry in Selected Markets

Data Sources: Angus Maddison, China Automotive Industry Yearbooks, Japan Automobile Manufacturers Association, International Organization of Motor Vehicle Manufacturers.

The countries selected are the United States, Japan, South Korea, and China. As Figure 1.1 demonstrates, U.S. production, with the notable exceptions of some key interruptions such as the two world wars and the Great Depression, has experienced a clear rise and fall as the global leader, reaching its peak as Japan began production in the 1950s. Japan then also experienced a steep rise, which began to level off in the 1980s, around the time the United States forced it to accept “voluntary” export restraints of its cars. (The Japanese countered this resistance by building factories in the United States, but cars produced in these “transplant” factories show up in the U.S. figures.) Japan’s auto production then began to stagnate as its real estate and investment bubbles burst in the early 1990s. Like Japan, Korea also experienced a fairly steep initial rise which also leveled off quickly as its smaller land mass and population quickly reached saturation with automobiles.