Part II of this Link Up, Learn More interview explores sector cooperation between the US and China with insights from automotive industry expert, Bill Russo, who is also the Founder and President of Synergistics Limited, and Beijing Association of Automotive Manufacturers Chairman (and retired Chairman of Beijing Automotive Industrial Corporation) An Qingheng. In order to gain an informed understanding of the US-China relationship, it is imperative to seek perspectives from both sides of the globe. This interview with Chaiman An and Bill Russo aims to do just that. If you missed Part I, you can check it out here.

Auto industries in both China and the US are facing their own unique set of challenges. In what areas can both countries collaborate on solutions? Are cross-border partnerships being considered?
Chairman An: Both the Chinese and American auto industries have their own unique challenges, but facing the challenges, there can always be common answers. First, both sides need to achieve a breakthrough on new energy automobile development. We need advancement on both hybrid and fuel cell technology, and we need to find common solutions. Second, both local Chinese OEMs and American OEMs need to expand market share in China. American OEMs need to introduce their existing high tech products into the auto market, especially in China. Chinese OEMs not only need to develop their own new products, but also need to grow their market share. Therefore, it’s mutually beneficial to introduce some existing advanced products of American OEMs-with necessary localizations while developing self-owned new products of Chinese OEMs. Shanghai GM has been doing so since day one, and they have been very successful. Actually this IS the common answer of both Chinese and Americans to expand market share. It’s really a pity that Chrysler’s car models are not currently suitable for China’s market. Last but not least, compared with the development speed of complete vehicle OEMs, Chinese component OEMs are not fast enough. A lot of American component and part OEMs set up plants in China, or export to China because such OEMs – American and other developed countries’ control respective core technology. Chinese parts and components OEMs need to develop, upgrade, and support the R&D of complete vehicle OEMs. Likewise, if American parts and components OEMs can join into partnership with their Chinese partners on a broad basis including R&D, the common solution will be beneficial to both sides. Partners should work together to find a path to realize this.
In any cooperation, it’s very important to concentrate on common benefit and avoid differences. As long as the parties are serious about the cooperation, they can always find a lot of common solutions. Partnership is necessary. GM and Ford have had a very good cooperation with their Chinese partners, but Chrysler was too late to introduce new products. Here we can testify another Chinese saying: “All ten fingers are not of the same length.” It’s natural that some partnerships are more successful than others. We all know that the history won’t change only for human’s mind. But we can always draw lessons from the history. Why did Beijing kick off the international automotive cooperation in 1980’s by cooperating with Chrysler (formally AMC), but separated totally now? When we think about how to set up and develop the Sino-American partnership, both sides should study the history, which will benefit both sides in future cooperation. This task can’t be finalized here, today.

Bill Russo: The automotive industry historically has to deal with significant risks, threats and challenges. It’s a capital-intensive business that is very sensitive to economic developments. What has happened in this past year is that we have experienced a sudden and dramatic contraction of the global economy. The impact that it’s had on the auto industry is profound, particularly in the mature markets of Western Europe and the United States. The US auto market is down more than 40 percent, year over year. The resulting impact is that you have companies filing for bankruptcy protection, you have a lot of suppliers that are in the process of reorganizing, and you have a fundamental restructuring of the global automotive landscape. If you follow the trajectory of the past several years, you see the strength in the global auto industry shifting eastward to places like India and China. Most of the growth in the world’s auto industry is happening in the Asia-Pacific region, and more than half of that growth is forecasted to come from China over the next decade. The growing influence that China has is not just its ability to influence standards and direction, but also its ability to create opportunities through partnerships for organizations that are financially weakened. As a result of the developments in their core markets, automotive companies and their suppliers must strive to deepen their participation in the China market if they hope to remain viable. It only stands to reason that companies that have weakened positions in their domestic market would benefit by redistributing some of their focus to the growth markets and in particular, China. What’s unique about the way China’s automotive business works is that you are required when you do business here to partner. If you are an OEM, you have to have a partner in China. For suppliers, there are fewer rules, but in most cases it makes sense to have a local partner when you establish operations here. If you look at this in the macro sense, there’s a movement of the economic wealth to Asia and the consequence of that is that there needs to be a redistribution of assets in the automotive industry to Asia. This creates opportunities for cross-border partnerships between the established players in China and the companies that need to rethink their global footprint.

Reports have been circulating stating that introduction of Chinese cars into the US market is imminent- some experts predict 4 years, others 5 to 10. What do you believe is realistic and what challenges must be addressed for this to happen?
Chairman An: The American market is massive and free. It’s reasonable that Chinese OEMs would like to enter this market as soon as possible. It’s rather a question of whether this can be achieved after 4, 5 or 10 years. Rather than forecast when can we make the entry, I think that it’s more appropriate to talk about how to make this happen. Chinese always say that: “The practices of precedent are the lessons of descendent”. We have to carefully study Hyundai’s successful experiences if we want to enter the American market. From the failures in the 1980s to the successes following, Hyundai’s long journey was successful. Their experience is a good lesson for us. We shouldn’t be too aggressive when we enter the American market and we must acknowledge the difficulties of doing so. We can’t dream of an easy and massive entry of our products. According to my experience, before entering the American market, we should strengthen our understanding of American standards and market entry rules. We have to be familiar with the safety, emission standards, product authentication processes, etc. We should not rely on the simple introduction and commitment of some small American partner companies. Some OEMs have exported their non-road products into America, but this is not a real entry into the car market. The products have to achieve all of the standards of American automotive products before they can be exported. Anything less is not a true achievement. Consistently high quality of exported products is necessary. Otherwise, the cost of recall for quality issues is not easy to bear. Based on these understandings, I think that we should first optimize our own work, make sure that the products can reach all standards and the quality is good and steady. Then we should find the right products into the right market segment. The marketing work should focus on these questions.
You may question that if we can accomplish all these quickly, why should China wait for 4, 5 or 10 years? Everyone agrees that today, the American cars industrialized in China have reached a high quality standard, and a lot of parts and components have been exported to America. Therefore it shouldn’t be too difficult for Chinese OEMs to reach the standards set by the American government. Today we can even manufacture Mercedes-Benz in Beijing, with the same quality of those in Germany. So as long as Chinese and Americans can set up the real partnership, the final obstacle for Chinese automobiles into America is neither technology nor processes, but international trade, or strategy. Facing the global financial crisis, the American auto industry is restructuring. It’s very necessary that some strategic specialists should consider the market entry strategy of Chinese automobiles into America. Last year, Chrysler and Chery made investigations, but failed to come to a mutual agreement. However, it’s too early to say that this strategy is not right. The right strategy should benefit both China and America. I am very optimistic about the future of Chinese automobiles in the American market, because I am sure that this will benefit both sides.

Bill Russo: The timeframe that we’re talking about is dependent on the type of company that we’re focusing on. If we are referring to Chinese-branded products, then I think 5-10 years is a very aggressive estimate. From my personal experience and observation, I think that you can source and build good products in China, but there are differences in the level of capability between the companies that have some level of maturity in vehicle development and those that are fairly new to the game. International OEMs that have established operations here are building cars that probably today could be distributed to any market around the world. General Motors has hinted at the idea that they could export some of their China-built vehicles to other markets, including the United States. They could do that probably within the next 3 to 5 years. I think that is very possible. It’s not a question of vehicle development; the cars that are built in China have the level of quality and execution that make them saleable in other parts of the world. The question you are asking is “when will Chinese-branded vehicles make their way into the US market.” The answer to that question will be quite different. You have to think about the supply side and the demand side of the equation. On the supply side, there’s a level of capability that needs to be built into the system of developing a car, where today China has a competency gap. While Chinese firms have learned very quickly how to assemble cars and source parts, they are very inexperienced in the vehicle development and synthesis process. An automobile is a complex engineered system that requires advanced technology and know-how in testing and validation in order to achieve a world-class standard of performance, fuel economy, safety, and quality. You need to achieve a certain level of world-class benchmark targets in all of those areas. Quite frankly, a company that’s only built cars for maybe a little more than a decade probably lacks the skills to optimize the finished product. That is where I think it’s going to take more time. It doesn’t mean that it’s insurmountable, but it does require transferring more technical development capacity into the companies that are attempting to achieve this. On the demand side, China is big and growing, unlike Western Europe and the US. These markets have reached maturity and the brands in those markets are already well established. You are now talking about entering a mature market with Chinese-branded products that are not well known. Adding to this, the market perception of a “Made in China” car is probably not positive. China now has to overcome a lot of its own recent history of building low-priced and often poor quality products. In addition to building a brand and establishing it in a foreign market, you now have to prove to that market that what you have is indeed competitive with the alternatives that are already available to consumers. This is a very challenging, but it can be achieved. The Japanese and Korean brands have achieved this and China can certainly achieve this goal in the long run. But, it’s a different game now. Toyota entered the US market and did not gain market acceptance until the 1970’s oil embargo – when Americans sought more fuel-efficient cars. The Korean brands entered later and positioned themselves to capture consumers seeking lower-priced alternatives. Until recently, the Japanese and Korean brands have enjoyed a growing market with room for new market entrants. Coming late into a market that is not growing with brands that are unknown and have relatively weak reputational value will be a lot more difficult.

What are some of the more challenging aspects of cross-border negotiations between the US and China, overall?
Chairman An: I experienced a lot of international negotiations with American, Japanese, Korean, and German companies. In the last 20 years of my 40 year professional life, I never stopped negotiating with foreign partners. Among all such negotiations, it’s my special fortune that I led the cooperation negotiation between BAIC and Hyundai. We entered into the Strategic Cooperation Agreement of BAIC and Hyundai, and then set up the Beijing Hyundai Co. Ltd., which changed the fate of BAIC. At that time, some persons questioned whether this cooperation can be successful. After that, I led the negotiation with DaimlerChrysler and successfully signed the Framework Agreement of Strategic Cooperation between BAIC and DaimlerChrysler. Under this Agreement there are two lines: on one side we kicked off the heavy duty truck cooperation between Beiqi Foton and DaimlerChrysler; on the other side, through negotiation, we restructured Beijing Jeep, a long term loss-making company with unfavorable Sino-foreign cooperation into the brand new Beijing Benz DaimlerChrysler. Chrysler now draws attention of the world. It was forced to announce bankruptcy protection, which affected its partners. Luckily, when we had the negotiation 5 years ago about the restructuring of Beijing Jeep, we finally decided to keep only one foreign shareholder: DaimlerChrysler. Chrysler was no longer a shareholder of restructured Beijing Jeep. We defined that the cooperation with Chrysler only be restricted to licensed production. Of course, it’s understandable that later both sides even decided to cease cooperation on products. Anyhow, now the bankruptcy protection-at least from legal perspective-won’t affect our business. Someone might think that this is no more than a coincidence, but the decision to exclude Chrysler from our cooperation did show our strong commitment to restructure entirely the business base. The international negotiation is always very challenging.
On policy: To understand and deal with policies of the Chinese Government is also challenging. If you want to be successful in negotiation, you have to study carefully the government policy and take it as your guidance. In the past several years, you had to strictly abide by the Chinese Automotive Industry Policy if you were in an automotive project negotiation. In other words, the policy is the foundation of negotiation. With large scales of business in China, multi-national companies (MNC) usually engage a consulting firm to help them. But such consulting firms might not understand-or they understand but do not fully agree with the Chinese policy, although they won’t speak out publicly against it. Sometimes, for the benefit of the company, the MNC might request their Chinese partner to jointly apply for an adjustment of existing policy to the government. This is usually a problem for this Chinese partner. To the Chinese company, it’s inappropriate to join the MNC to apply for such an adjustment, and give pressure to the government, especially when they are clear that this is viewed unfavorably. But if the company simply refuses, the MNC might think that it is not the government, but the partner who does not support this application, and this in turn will endanger the relationship. Usually the Chinese company should, instead of simply say no, spend time to communicate with the MNC, let it understand the policy and sometimes, arrange even some informal meetings between the MNC and related government officials to strengthen the MNC’s understanding of the policy to reconcile the situation. The international cooperation negotiation process is also a process to let the foreign partner gradually understand, so they abide by the Chinese government policy.
The administration of companies is totally different here than in Western countries. In Western countries, the head of a company can make any decision as long as it doesn’t infringe on other citizen’s rights, but things are not that simple in China. The leaders of large Chinese companies or negotiation leaders are usually in the embarrassing situation that if they strictly abide by the policies according to their understanding, the foreign partner will think that they are using the government policy to achieve their personal benefit and it’s obviously not wise to challenge the policy. The foreign partner usually won’t blame the government and usually applies pressure to its Chinese partner- perhaps because they are still thinking in their Western way, not aware that they are in a totally different Eastern country. Therefore, the Chinese partner has to be patient and involve government officials to do the persuasion to reconcile any misunderstanding. While dealing with policies, the Chinese company has to be patient enough to teach their partner about the Government approval processes in China. A big project will pass through multiple approvals including: project proposal, feasibility study, joint venture approval, company registration, etc. Before feasibility study approval, the specialist appraisal meeting organized by China Consulting Company of NDRC, etc. Sometimes the foreign partner is not accustomed to these processes, which are necessary. So the local company has to give good introduction in advance to their foreign partner and cooperate to achieve the final approval.
On principle and compromise: Stick to the principle here means to strictly abide by the National Industrial Policy and other Chinese laws and regulations and don’t try to cut corners. Such principles including the share structure, sales strategy, R&D investment, localization requirement, employee benefits, etc. It’s very important to stick to the principle; you can’t make compromises in these respects according to your personal agenda. Of course, you can’t make deals freely with foreign partners and sign agreements that should not be signed. Detailed explanations are necessary when the foreign partner doesn’t understand the policy requirements.
Compromise exists in any negotiation; actually negotiation without compromise will end nowhere. For example, capital injection needs asset evaluation if the injection is not cash but assets. The foreign partner wants to price lower the asset of its Chinese partner while this partner wants to price higher, so compromise is necessary. Of course, with this compromise, the financial report will be negative. Therefore, the administrative government official or asset administration department will have some comments, which need the support of the Chinese partner. The technology compensation also needs some compromise. Normally, if the Chinese partner purchases the foreign partner’s technology, this foreign partner should be fully compensated in case of intellectual property violations, but the understanding of the foreign side and the international custom is that the joint venture should also bear some of the compensation. All such issues are not that easy to deal with.
In applicable law, the foreign partner naturally will request to use the law of its own country, but the Chinese partner will in turn request to use Chinese law. Again the negotiation will end nowhere if both sides insist. The only chance is to persuade the counterparty or use a third country law. Remuneration package of expats requires more compromises, because there is no absolute standard for this. Therefore, you have to take care of the benefits of both shareholders, of the shareholders and the joint venture, of the joint venture and the employees in the negotiation. Some foreign company asked for a high remuneration package and a huge amount for expats, which is not realistic and the joint venture can’t bear. You need to be patient and discuss with your foreign partner to find a reasonable solution.
China and foreign countries have different cultures. Therefore, when the negotiation arrives at a critical point, some compromise on wording might become necessary. For example, if the Chinese use the words “principally consent”, it really means “agreement,” but there might need to be further talks on minor issues; but the foreigner feels that the Chinese partner actually does not agree. So the understandings are totally different. We experienced failed negotiations only because of whether this “principally agree” can be added or not. Chinese language is so complicated that the foreigners usually try their best to be cautious. Chinese negotiators must try to understand this. Whatsoever, the core task is to fully understand the true thinking of your partner through negotiation and then put the agreement into mutually acceptable written languages. The understanding is more important than the final wording. Of course, there is always responsibility behind compromises, so, it’s easy to stick to principle, but it’s difficult to compromise.
On the market: Through negotiations and cooperation, the common target of both parties is to cooperate and make successful business, and, to make money together. If you want to make money, then you have to understand the Chinese market first. Arriving in China, the foreign partner is usually not familiar with Chinese local affairs and the market. In order to secure a successful cooperation, the Chinese partner has to take a big responsibility. The responsibility is that the Chinese partner has to know the market well; make decisions about business, scale, investment; and figure out how to fit the products into the market. In addition, they must decide which product to launch first and how to localize the products. These are all questions to be answered by the Chinese partner, who should make detailed investigations, analysis, and then provide a formal proposal for the reference of its foreign partner. In fact, the Chinese partner has the advantage of profound market awareness, which the foreign partner should make good use of in any cooperation. But Chinese and foreigners usually have quite different understanding concerning the Chinese auto market. Several years ago it was rather difficult for foreigners to understand why the Chinese auto market kept expanding by a two digit percentage for consecutive years, and it was also difficult for them to understand the tastes of Chinese customers towards automobiles. They also had to learn the importance the Chinese customer placed on car interior and styling, which is a much higher priority in China than for foreign customers. Some foreign OEMs had to learn that their big-displacement, higher cost products required modifications. Some OEMs concentrated on the absolute increase of its own sales volume and they didn’t take great measures to improve. The Chinese partner should take the responsibility to remind them. Several years ago, some foreign OEMs refused to modify their products into China only because of their successful experiences in other countries. Therefore, their products were far behind the requirement of Chinese customers concerning interior design, rear seat leg room, shock absorber strength, fuel consumption, material choice, and even exterior styling. You won’t have efficient actions if you can’t understand the market.
On cooperation: Sino-foreign cooperation is difficult, and such cooperation with giant MNCs is much harder. Some high level leaders of such MNCs are not very familiar with China, and they only want to duplicate their successful experiences from their home country, or some other countries. Such leaders usually stick to their own opinion concerning market, decision processes, product modification, HR, etc., and some even don’t take their Chinese partner seriously. Such an approach cannot be successful. With the development of the Chinese automotive industry and with continuous cooperation, things are going better. Everyone is more and more clear that: for any Sino-foreign cooperation, a concerted effort is always the prerequisite of success.

Bill Russo: I would only add to Chairman An’s very thorough response the point that cross-border partnerships are important for inbound as well as outbound market development. So far, the focus of Sino-foreign partnership has been on development of the China market. However, Chinese companies must also leverage foreign partnerships in order to realize their global ambitions. Right now, the partnership equation has been: foreign company comes to China to access the Chinese market. They find a Chinese partner because they are required to and frankly because it makes business sense – because the foreign company simply cannot understand the Chinese market in a way that the local partner does. The value proposition goes both ways. The Chinese company lacks technology and experience in the industry, and the foreign company lacks knowledge of the Chinese approach to business – specifically the way business, government and the marketplace are intertwined in China. The value proposition for a foreign company partnering with a Chinese company has benefits in both directions. Now take the world and turn it upside down, which is what has seemingly happened in this global financial crisis. You have wealth accumulating in China and distressed markets seemingly everywhere else in the world. The natural consequence of this is going to be more interest in Chinese companies to invest abroad. Chinese companies will reach out to partners to help them close technology gaps and other competency gaps. What will happen over the next several years is that those partnerships originally focused on the China domestic market may transform into partnerships to help China access the rest of the world. The most challenging aspect as it relates to cross-border alliances is to achieve a true understanding of the respective needs of each partner. This tends to get oversimplified in the sense that people assume that language and culture are the problems. I don’t believe that this is the central problem. Language and cultural misunderstanding creates “resistance” and added friction among the partners – which makes it difficult to develop a common understanding, but this is not the most fundamentally challenging issue. The most difficult issue is to understand what your partner really wants out of the relationship – and finding a way to work with that. Of course, both sides want to make money. The Chinese side also has other objectives, which are to build technological self-sufficiency and management competency. They also have a social agenda, which is to create jobs and to build and develop the local economy. The foreign companies that come here tend to be fairly more narrowly focused- they seek profits and longer-term stability in the world’s fastest-growing economy. Establishing a successful relationship with a foreign partner requires that the partner entering the market develop a deeper understanding of the objectives of their local partner. In the coming years there will be an increasing number of Chinese car companies investing abroad. It will be interesting to see how these Chinese companies take the partnership game and play it in reverse.

Many, many thanks to Bill Russo for participating in this interview follow-up and facilitating the component with Chairman An. To learn more about Mr. Russo’s expertise and Synergistics Limited, his international business development advisory firm, please visit the company website.

Interviews An Qingheng, automotive industry, BAIC, Bill Russo, china, Chrysler, cross-border partnership, U.S., US-China relations

Perhaps no other sector highlights today’s global economic environment more than the automotive industry. This Link Up, Learn More interview features insights from automotive industry expert, Bill Russo, who is also the Founder and President of Synergistics Limited, and Beijing Association of Automotive Manufacturers Chairman (and retired Chairman of Beijing Automotive Industrial Corporation) An Qingheng. In order to gain an informed understanding of the US-China relationship, it is imperative to seek perspectives from both sides of the globe. This interview with Chaiman An and Bill Russo aims to do just that. Read on for Part I of this two-part series:

Automotive consumer trends in the past year alone have shifted dramatically. While many Chinese buyers are looking to purchase fuel-efficient cars or foreign-brand luxury models, Americans seem uncertain about future vehicle purchases. What do these trends mean for the development of China’s auto industry?
Chairman An: Market Opportunity: I believe that the global market of luxury automobiles is not favorable. Most of the customers, especially those in China, would like to purchase compact vehicles with low consumption. The China automotive market has been switching to this direction for several years. Therefore, OEMs in China, including global giants and local brands, all expanded their compact and economy car business with advanced technology for the purpose of grabbing more market share. This market opportunity is advantageous to the development of automotive industry in China. The cooperation between BAIC and Hyundai met with some difficulties in the past two years. Later, Beijing Hyundai launched new compact car “Elantra Yuedong”, based on the original Elantra. This helped improve the business performance immediately with the help of this market opportunity. This year, in order to face the financial crisis, the Government launched the Automotive Industry Stimulus Plan, which increased the sales of Beijing Hyundai cars with 1.6L or lower engines to an astonishing 92,000 units in 1^st quarter, increased by 84.8% then same time last year. This fully revealed the power of policy and market.
Cooperation opportunity: Several years ago, some Multi-National Corporations (MNCs) developed the understanding that in the automotive cooperation, the foreign company exchanges their technology for market access while China partner exchange the market for technology. Therefore, without this understanding the cooperation with foreign companies can be difficult, and in fact not always fair. Now the condition is different, especially as a result of the dramatic market changes, global giants can’t simply ignore the market opportunity and must cooperate closely with their China partners. They have to make compromises, which makes the whole thing more reasonable. Now both Chinese and foreign parts in their cooperation should make good use of the opportunity, expand the cooperation to achieve mutual benefit. Of course, this win-win should be for both sides, not one side wins and the other loses.
Adjustment opportunity: In order to overcome the financial crisis, some global auto giants are restructuring and selling some assets and products, including some famous brands. I know that such assets and products are not out of date. They are doing this to raise cash, which is critical to maintain their business. Local auto companies can accelerate their development if they can selectively purchase such assets that fit their needs. In China there is a famous saying that “a hero is known in the time of misfortune.” In this turbulent auto market, some companies can surely realize extremely fast development. BYD seems to be at the front line now, to some specialists. Of course, BAIC also hopes to make good use of the opportunity and speed up their development.
Generally speaking, we should notice that China has been insistent on both independent R&D and foreign cooperation, through which advanced technology is successfully introduced and digested. Both sides achieved the outstanding development and developed China into an automotive manufacturing and sales giant. The development of China, the Chinese automotive industry and of the Chinese auto market provides an opportunity for further evolution of the automotive industry – both within China and abroad. In turn, the future development of the China automotive industry will affect the development of the world automotive industry. Therefore, we should all pay close attention to this.

Bill Russo: To this quite comprehensive view, I would only add that China cannot be described as a “uniform” market. You have different types of buyers in different categories. One very consistent pattern is that it tends to be a market that values displacement. There is definitely an awareness of and sensitivity to fuel economy and in particular, the size and power of the engine is fairly well known by the consumer. In China, the policymakers know how important it is to influence consumers to make fuel economy a higher priority. They place a tax on consumption and they do that by charging a percentage tax based on the engine displacement of the vehicle. So, it’s fairly well conditioned into the minds of the consumer that they must pay attention to fuel economy. It’s not a parameter that they can ignore in their buying decision. However, you have a market in China that is fairly diverse. Entry-level consumers tend to seek lower-priced vehicles and therefore total cost of ownership is very important to them. But, many Chinese consumers are shopping luxury products and they tend to look for foreign brand vehicles that will showcase their social status. Even for luxury consumers, fuel economy is much more important in China than it has historically been in the US and other markets.

Will the future of automobiles rely on clean-diesel technology, hybrid gas technology, or something else entirely? What will the role be of China’s government in the development of the next generation of automotive propulsion technology?
Chairman An: What will power future automobiles is still a difficult question. Will it rely on clean diesel, hybrid technologies or something totally different? Different specialists have different viewpoints. In fact, with traditional energy resources decreasing day by day, all parties have reached the same understanding: that new energy should be developed to power future automobiles. Concerning which technology should take the priority in different points of time, every solution has a reasonable rationale. History will tell us who is right.
In the real world, we still have to rely on traditional combustion engines and further improve it with new technologies to lower fuel consumption and emissions, which is necessary to save energy and meet the continuously more strict regulations. Among the several paths of new energy automobile development, to realize mass production of various hybrid power automobiles and thus decrease emission, lower fuel consumption becomes the practical plan. OEMs like Toyota are taking the lead. Simultaneously, the development of various electric powered automobiles is brought up to the agenda; electric cars including Volt of GM have become the hot topic. I believe that this will be the direction. Actually, many people expect that electric cars can replace traditional cars, but this is still no more than a good wish till now. I am not a specialist of electric cars, but I have spent some time on the future development of them. I am of the opinion that as long as the Chinese Government can stick to their strong support to the development of new energy cars, China will greatly influence the development of the next generation of car propulsion, and even play a major role in the “revolution” of automotive power technology.
China Central Government supports the One Thousand New Energy Cars in Ten Cities Plan. From central to local government, great support and financial aid are given to the development of new energy cars. All such actions will accelerate investment and technology development. I also agree that electric cars won’t replace at once the traditional cars, and the development of electric cars is not that optimistic, because a lot of technical issues and corresponding infrastructures and facilities need to be tackled – and this will take some time, and quite some effort. The market acceptance can only be decided thereafter.
In fact, no one can deny that China is not behind advanced countries on new energy automotive technology. However, with nationwide focus, manpower and capital investment, the technology is destined to develop even faster. If China can realize a breakthrough on battery manufactured technology (where cooperation with foreign countries is also possible), the evolution of automobile power technology is likely. The breakthrough of China in this respect will in turn benefit not only China, but also the world. We expect that.

Bill Russo: The Chinese automotive market is still very young, and in many cases the producers of vehicles that are sold in China are also fairly early in their development stage. What has happened over time is that, as the market has grown, more and more technology providers have taken note and looked at China as a place where they can localize their product. So, for technologies such as clean diesel, hybrid and electric vehicles – you will find that China does not lead the technological development. In fact, Chinese companies are not leaders in the development of any major new automotive technology. But that is the view from the supply side. The area where China has the opportunity to lead is on the demand side. On the demand side you have the largest vehicle market in the world; you have economies of scale that can accrue to those who provide relevant products to service that market; and you also have an industry that is highly regulated by a government that puts a very high premium on fuel economy. As an example, I mentioned earlier the focus on fuel consumption focus and engine displacement.
The role that China will play will grow larger as the size of this market expands. To some people who observe the industry, this may not seem intuitive. Most industry watchers believe you can only lead the development with supply side innovation, and China is not a place where you will find the most leading-edge innovation, especially for automobiles. Most developed countries rely on their industries to introduce new technological innovations and invest in those technologies. However, China intends to take the lead with infrastructure investment. Consider that about 45% of China’s $588 billion USD stimulus plan is to be invested in projects developing China’s infrastructure. Replacing internal combustion engines with other technologies- such as hybrid electric, full electric, hydrogen powered vehicles or clean diesel- requires collaboration between business and government to develop the infrastructure in tandem with development of the technology. One needs to support the other. The economics of the product itself and ultimate market acceptance is very much dependent on the availability of the infrastructure to recharge or replenish the fuel. It’s not realistic to expect a company to reinvent the technological underpinnings of the automobile unless there is a concurrent development and investment in the infrastructure to support that new technology vehicle. This is especially true in today’s weakened global economy. Consumers only accept a new technology product if it is superior in overall price and performance to the technology it replaces. Generally, new propulsion technologies are evaluated by the consumer in terms of their impact on the total cost of ownership associated with that product. Alternative propulsion technologies have also become very important to solving the problem of foreign energy dependence. Like the United States, China must rely on foreign sources of energy to satisfy their growing needs. Pollution is also a significant problem. Many of the most polluted cities in the world are in China. You have a government that is very sensitive to the needs in this area and is promoting through regulatory mandates new energy technologies a) to invest in them and b) to mandate their use over time. You are going to see more and more focus on this. You asked about the role of China’s government. The new Minister of Science and Technology, Mr. Wan Gang, is a former automotive development engineer for Audi who worked on alternative propulsion technologies and is the first head of a Chinese government Ministry who attained that position for his industrial (vs. political) experience. In his time as Minister of Science and Technology in China, he has put a very high emphasis on the development of electric vehicles. I think China is going to take a rather strong role in this area. You have a country that has a need for reduced foreign energy dependence and for reduction of environmental pollution created by an increasing number of automobiles. China has a real need to take the lead in driving change in this area.
The China government’s willingness to invest in the infrastructure to support alternative propulsion technology will help drive demand side market acceptance. This is where I believe China has the opportunity to lead, and that will drive investment in new technology on the supply side. I believe the infrastructure must come first and this will drive supply-side innovation. It takes a combination of business and government working together to make such a transformational change possible – and nowhere in the world is there a closer link between business and government than in China.

China auto sales hit a record 1.11 million in March, exceeding US sales for the third month in a row. Given that increases in spending over Chinese New Year have passed, what’s now driving this growth and will it continue?
Chairman An: Everyone involved in China’s automotive industry is happy to witness that the auto sales volume of China exceeded that of America for the 4^rd consecutive month. Of course, this trend might be temporary. But, there is one thing we can be sure of: The record volume of auto sales this year is not only driven by high purchase demand during Chinese New Year. Therefore we shouldn’t say that the peak is over. This year, the auto sales increase in China is mainly attributed to the macroeconomic policy of China to increase and expand the domestic market. First, the economic development of China brings a higher demand for cars. Second, the new Stimulus Plan established very recently is working. The sales increase in 1^st quarter mainly comes from passenger vehicles (PV)- the enthusiasm of citizens on cars doesn’t decrease in 2^nd quarter so the sales of PV will keep at its fast pace. The launch of major infrastructure projects will help increase commercial vehicle (CV) sales in 2^nd quarter. Of course, affected by global financial crisis, export is still on the decline, which is a very difficult fact. Also take into consideration the fluctuating oil price and the fear of the H1N1 flu, and we can never be too optimistic. No one can forecast the market, but I am of the opinion that the development trend of the China auto market is still positive and Chinese auto will have a banner year!

Bill Russo: There are several factors driving this growth today. As Chairman An states, China has enacted a very significant stimulus plan that is proving to be more effective than what has been enacted in other countries. When we spoke a few months ago for our first interview, I talked about how you really couldn’t judge a full calendar year on the basis of the first few months because in China you’ve got a high volume that typically occurs around New Year – which is normally the case. You typically see a spike up before Chinese New Year and then a slow down in the ensuing months. That didn’t happen this year. This year, the peak in January was really a ramp up, because China continued to enjoy strong sales through the first Quarter and into April. In fact, the April sales were 1.15 million units. For four consecutive months China has outsold the US; the US only sold 820,000 units in April. Another interesting statistic is that the sale of sub-1.6 liter engines has grown by 56.5 percent year-over-year. This clearly indicates that the government stimulus plan is working. China focused their stimulus plan on encouraging the market to buy lower displacement cars. They reduced the tax on the purchase of vehicles below 1.6 liters by 5 percent and they also incentivized first time buyers and farmers- rural consumers- to come into the market with subsidies. They’re trying to shift this economy from an export-based to a domestic consumer-based economy. Targeting stimulus actions on low-displacement has the secondary effect of creating demand from entry-level consumers who tend to seek lower-priced vehicles – and this tilts the playing field toward local brands. In 2008, foreign brands held a 66% share of the market. In 2009, the Chinese government is targeting 40 percent share of the market for Chinese-branded vehicles. China’s stimulus plan is clearly designed to help local-brand manufacturers grow their domestic market share.

Stay tuned for Part II of this two part interview with Chairman An and Bill Russo, which will be published on Monday, June 1st. Many, many thanks to Bill Russo for participating in this follow-up interview and facilitating the component with Chairman An. Bill Russo has contributed his insights on the automotive industry for Newsweek, Straits Times, China Radio International, and the CBS Evening News, among other media outlets. He was also featured in a Q&A on this blog in February, which you can check out here and here. To learn more about Mr. Russo’s expertise and Synergistics Limited, his international business development advisory firm, please visit the company website.

Interviews An Qingheng, automotive industry, BAIC, Bill Russo, china, Chrysler, clean technology, Link Up Learn More, OEMs