The Companies that Build the Chinese Auto Dreams

Although it was expected that China would become the next major competitor in the world auto market after Japan and South Korea, that day seems to be coming much earlier than anticipated, particularly with the implementation of clean technology. The State of California, America’s leader in enforcing environmental regulation, has recently selected a low-cost Chinese auto manufacturer to supply green technology for its public transportation system. According to The Financial Times, China’s BYD is going to build electric buses for California’s public projects by the end of 2011. Moreover, BYD’s hybrid electric cars will be running on the roads of the Golden State even sooner. On December 17, 2010, the Housing Authority of the City of Los Angeles announced that it would deploy a fleet of BYD’s F3DM (Dual Mode) cars at its office in downtown Los Angeles. These hybrid vehicles will be able to run on electricity for 40 to 60 miles after one charge, but may also switch to plug-in-hybrid electric mode for traveling more than 60 miles within a day.

BYD, whose initials stand for Build Your Dreams, is another example of China’s growing manufacturing capabilities. Founded in 1995 as a cellphone components producer, the company had its first success in China’s exploding domestic demand for cellphones in the late 1990s. By the early 2000s, BYD had already established itself as the world’s largest producer of handset batteries, supplying major cellphone vendors such as Motorola, Nokia, and later Apple’s iPhone. In 2003 the company entered car manufacturing one year after acquiring a bankrupted Chinese state-owned carmaker. It was said that in making this decision, Chuanfu Wang, BYD’s founder and CEO, had confronted fierce opposition from shareholders, some of whom even threatened to commit suicide. Yet Wang’s strategic vision soon justified his iron-fisted resolve. The fast expanding urban middle class of China in the late 2000s ignited the low-cost car market. While acclaiming the potential value of its capability in batteries for building electric cars, BYD heavily exploited the traditional compact car market by producing cheap cars priced for less than US$10,000. By the seventh year after its establishment, the carmaker had already built one million cars for Chinese consumers. This year, BYD’s annual sales are expected to increase from 400,000 in 2009 to somewhere between 600,000 and 800,000, making it China’s fastest-growing carmaker. In 2009, BYD launched its first all-electric vehicle, and one year later, it transferred its electric car technology into a new line of instantly marketable electric buses. By penetrating the US market with the low-cost green technology, Chuanfu Wang’s stated ambition for BYD to become the world’s largest car company by 2025 must be taken seriously.

The battery-turned-electric car company is among several innovative Chinese carmakers that have emerged within the last decade. Today, many of these companies, such as BYD, Chery, and Geely have already become international players. Starting as low-cost competitors in the domestic market, these indigenous companies, however, were not expected to lead the Chinese auto industry. China’s industrial policy from the 1990s was encouraging its giant state-owned carmakers to form joint ventures with leading multinationals, hoping to leverage their access to foreign technology. Yet most of the joint ventures became almost subsidiaries of the multinationals, relying on foreign partners to supply new models and brands so as to generate quick revenues and profits. While China’s mainstream media often criticized the new non-state-owned companies for producing inexpensive but low-quality cars and for infringing copyrights in their car designs, companies like BYD, Chery and Geely have been actually engaged in indigenous innovation. Chery, for example, is the first Chinese carmaker to implement Toyota’s lean production system. Rather than being captured by foreign technology partners, Geely is expected to leapfrog its technological capabilities through its acquisition of Sweden’s Volvo from Ford. After receiving a capital injection of US$231 million from Warren Buffet’s Berkshire Hathaway in 2008, BYD is pushing electric cars and new energy development in China with a rare vertically integrated model.

Why have these non-state-owned companies succeeded where giant national champions have failed? A report written by Feng Lu and Kaidong Feng of Peking University in the mid-2000s concluded that indigenous innovation is these carmakers’ source of growth. If these companies had only been interested in making quick money, as has been the case with many Chinese joint ventures, they would not have had the incentive to invest heavily in an R&D workforce. In setting their sights on generating higher-quality and lower-cost products, these new indigenous companies have built powerful learning organizations that have enabled them constantly to climb the technological ladder. In fact, as Lu and Feng observed, these new competitors have been able to assemble teams of high-quality engineers from state-owned enterprises that have eschewed an indigenous innovation strategy. Today, the divide between two types of companies, resulting from two different investment strategies, is increasingly obvious.

Chinese Five-Year Plans and Technology Policies

Planning is a key characteristic of China’s economic and social development. The Five-Year Plans of China aim to map strategies for future development, set targets, and arrange key national projects. The Plans are one of the few must-read documents for people studying China, including its technology policies.

In 1953, four years after the formation of the People’s Republic of China, the Communist Party of China (CPC) implemented its 1st five-year plan (1953-1957). By following the Soviet model and with aid from the Soviet Union, by the late 1950s China made substantial progress in fields such as electric power, steel production, basic chemicals, and machine tools, as well as in production of military equipment such as artillery, tanks, and jet aircraft.

The 2nd Five-Year Plan (1958-1962) aimed to expedite the country’s industrialization with an emphasis on heavy industry. The plan evolved with the Great Leap Forward (1958–60), which made aggressive efforts to reassign scientists to immediately useful projects, to involve the uneducated masses in research work, and to expand rapidly the ranks of scientific and technical personnel by lowering professional standards. The economic depression following the Great Leap Forward and the need to make up for the sudden withdrawal of Soviet technical personnel in 1960 brought a renewed but short-lived emphasis on expertise and professional standards in the early 1960s, and a period of economic adjustment between 1963 and 1965, which was not covered by any Five-Year Plan.

The 3rd and 4th Plans (1966 – 1975) covered the turbulent period of the Cultural Revolution. These two plans asked the nation to prioritize the defense industry in consideration of a possible major war, build the country’s economy on self-reliance, and speed up construction along the nation’s three most important frontlines (referring to national defense, science and technology, and industrial and transportation infrastructure). Although the country made historic achievements in nuclear weapons, missiles and satellites, the Cultural Revolution eradicated distinctions between scientists and other types of labor, denying an entire generation access to university and professional training.

The 5th Plan (1976-1980) was initially developed before Mao’s death. After Mao’s death, the CPC put forward new principles of readjustment, reform, rectification and improvement, and started the job of resuscitating the economy. The 6th Plan (1981-1985) continued to enforce those principles, and, led by Deng Xiaoping, implemented the policy of opening up to the outside world. The policy was exemplified in science and technology policies, such as participating in international conferences, cooperating in projects with foreign scientists, and sending Chinese graduate students and senior researchers to foreign universities. In 1985, the CPC called for sweeping reforms of the science and research system by changing the method of funding research institutes, encouraging the commercialization of technology and the development of technology markets, and increasing the rewards for individual scientists.

The 7th Plan (1986-1990), again, spared no effort to enhance technological improvement. China’s initiatives to commercialize scientific and technical knowledge expanded rapidly amid considerable confusion, ferment, and turmoil. In 1986, the “National Hi-tech Research and Development Program” (863 Program) was launched, setting 20 goals in biology, spaceflight, information technology, among others. In the same year, the National Natural Science Foundation was established, explicitly modeled after the United States National Science Foundation. In 1987, the State Council announced that the majority of the applied scientific research institutes were to be incorporated into large and medium-sized enterprises to coordinate research with the needs of production. In 1988, the Torch Program was implemented, establishing nationwide a series of 53 high-tech development zones paired with business incubators.

During the 8th and 9th Plans (1991-2000), China’s modernization reforms reached a new stage, with emphasis on speeding up the establishment of a modern enterprise system. As result of these reforms, most Chinese scientific institutions have been encouraged to commercialize their research, and an increasing number of Chinese scientists have begun to go into business.

During the 10th and 11th Plans (2001-2010), economic structural adjustments were emphasized to optimize and upgrade industrial structures, adopt best-practice to invigorate China through science and education, and strengthen the global competitiveness of Chinese firms. Establishing export bases for new and high-tech products in selected high-tech industrial development zones became an important part of the government’s plan. Many high-tech projects were planned in the period. In the 11th Plan, the CPC called for stepping up the development of manufacturing industry and leveraging new technologies to develop China’s indigenous brands with proprietary intellectual property rights. The CPC also issued the Sci-Tech Development Guidelines, which gave priority to technological development in 11 major sectors and encouraged innovation that would raise the country’s competitiveness across the entire range of industries. Moreover, the government adopted preferential banking policies for promoting innovation and business start-ups, and pushed forward the building of a secondary stock market to accelerate the commercialization of science and technology.

The 12th Five-Year Plan (2011-2015) will be approved in March 2011. For the first time in history, China invites international expertise to advise on goals and policies of its Five-Year Plan. In the proposed Plan, China will nurture and develop seven new strategic industries with favorable policies in the next five years, including new-generation information technology, energy-saving and environmental protection, new energy, biology, high-end equipment manufacturing, new materials and new-energy cars. In addition, the country will no longer target the growth rate as its top priority in its industrial development plan, focusing instead on the quality and the profitability of industrial growth. In particular, China will encourage the use of high technology in its industrial development.

As illustrated in the past Five-Year Plans, Chinese planners have been trying to unify technology policy and economic policy, import and assimilate foreign technology, and overcome the problems of the separation of science, technology, and industry since the early 1950s. The commitment to these goals have been increasingly seen by Chinese administrators as requiring reforms in the operation of the economy and technology management. These initiatives will continue to be at the top of China’s planning agenda.