The China Track 与中国接轨

New-energy vehicles: a failing strategic emerging industry

In 2009, China identified new-energy vehicles as one of seven "strategic emerging industries" (战略性新兴产业). At the time, there was a lot of excitement, as BYD was seen as a rising star. The Shenzhen-based private car maker was seen as having an excellent chance to turn its original strength in batteries into a successful electric car manufacturer. Warren Buffet invested a ton of dollars into BYD.

The results so far? The China Association of Automobile Manufacturers just released its 2011 figures. Total auto sales in China in 2011 reached 18.5 million units, up 5% over 2010. That's impressive for a country where a decade ago most people still rode their bicycles to work. But the story isn't pretty for new-energy vehicles. There were only 5,579 cars bought in China last year; hybrids faired even worse, with only 2,580 units driven away by Chinese consumers. That means new-energy vehicles accounted for 0.04% of total auto sales in China in 2011.

I guess that means there is a lot of room for growth in the industry. What will it take for the sector to take off? For one, the cost of new-energy vehicles has to come down a lot, and so far, existing subsidies for consumers aren't sufficient to make these vehicles compeititive. More importantly, there needs to be an infrastructure put in place for charging vehicles, and it needs to extend broadly across cities and regions. Drivers are not going to buy vehicles that they can only charge at home; most Chinese live in apartments, and it's not easy to find a place to plug in on the street.

How likely is either? Not likely soon. A back-of-the-envelope calucation suggests it would take subsidies of RMB 55.5 billion to make new-energy vehicles competitive enough so that they would account for 5% of vehicle sales in a single year. (That assumes a conservative 33% premium for electric or hybrid vehicles.) Building electric charging stations would be even more expensive. Much of the cost of both would have to be borne by the central and local governments, and considering the current economic climate, with slower growth and substantial debt, it's unlikely government budgets will put up these kinds of funds any time soon. 

Lovers of conventional cars can rest easy. The rest of us can continue to enjoy polluted air and growing traffic jams. The better option: ride the subway!

China now has famous brands

It's conventional wisdom that China is just the factory floor of the world, and that its companies operate in obscurity making, or rather, assembling stuff for their American, European and Japanese counterparts. That's still partly true, but in 2011 Chinese brands gained some traction. According to a recent article in Advertising Age, 83% of people outside China still cannot name a Chinese brand (if they can, they cite Lenovo or Tsingtao), but that hasn't stopped Chinese companies from becoming much more popular at home. The value of Chinese brand names is going up across a wide variety of sectors, including mobile phones, clothing, food, the Internet, airlines, insurance, and autos. In a variety of industries, the popular view of Chinese brands is surpassing that of their foreign counterparts. 

 

 

If one just looks at corporate behavior, you might conclude that this is simply the product of business competition, and naturally Chinese companies ought to be gaining in popularity. While definitely part of the story, it is also true that foreign firms face a variety of market access obstacles and that these regulatory barriers are providing space for local companies to move ahead. Would Baidu be so popular if Google wasn't so harrassed it had to move its search enginge portal to Hong Kong? If Singapore Airlines could fly between Shanghai and Guangzhou, don't you think that would bite into the market share and image of China Eastern Airlines as consumers could directly compare service? (Speaking of which, I'd love it if Singapore Air flew Indianapolis to DC.) Would ICBC be seen as a strong bank if it UBS, HSBC, and Citibank could really compete on a level playing field for domestic customers' RMB deposits and loans?

Of course, not. If so, shouldn't Chinese consumers be upset, not to mention the foreign companies? Well, I suppose so, at least in the short run. But if we look at things over time, if Chinese companies use this opportunity to actually improve the quality of their products and services, and not just get fat from eating from the hands of the Chinese government, then the sacrifice of Chinese consumers may be temporary and worth it. The trick is to provide just enough protection to encourage Chinese brandnames to develop traction, but not so much cover that local companies feel no need to genuinely improve. Most  economists and foreign industry would argue that this balance is so hard to achieve that policymakers ought to err on the side of more openness. I'm really not so sure.

Rather than brand rankings, I'd like to see more cross-national polling on company service, since I think that good customer service is the best proof of who company executives think are king -- customers or government officials. With no knowledge of this data, which I'm sure exists, my sense, based solely on my own personal experience, is that service among Chinese companies is gradually improving. My restaurant experience in China has gone up a kajillion percent over the last decade. It's probably no coincidence that the restaurant sector is relatively open, with tons of privately owned restaurants as well as a variety of foreign brands, not to mention the push given by the food service in 4- and 5-star foreign hotels, such as the Shangri-La and Westin.

Where's the truth in all this? Data. Let's go back a decade, and then wait another five years, and we'll be able to even better analyze the trends and what factors -- competition, protection, etc. -- shape them.

So when looking for that last present to place under the Christmas tree, perhaps you ought to consider something with a Chinese label.