Green cars? A lesson for Obama

Our president seems to think that he can create green jobs through subsidization. What he does not realize is that if the market will not support the company, then the only way it can survive is through never ending subsidies. The question then becomes whether the government is willing to continually throw funding at money losing enterprises. Here is a lesson on China by Gordon Chang in Forbes.com.

Gordon G. Chang, Contributor

8/21/2011
Warren Buffett Beware: Beijing Trashes Its "Garbage" Green Cars

Powerful Chinese bureaucrats are now fighting over the future of China’s green-car industry, with the National Development and Reform Commission and the Ministry of Industry and Information Technology squaring off in public. In July, the NDRC’s Li Gang referred to the “hopeless” prospects of the country’s “garbage technology” for electric cars. MIIT, replying through former official Hou Shiguo, argued that Beijing was not built in a day.
The fierce debate in the Chinese capital was further fueled by Wen Jiabao’s comments in last month’s issue of Qiushi, a leading Communist Party magazine. “It remains uncertain whether hybrid and electric cars, which are now the focus of much of the development, will be the winners in the end,” wrote China’s premier as he listed “problems with their technical path, problems with core technologies, problems with investment, problems with policy support.”

Beijing has bet big on electric vehicles. In fact, no government has devoted more effort and money than China’s, as official media likes to brag. Last year, for instance, Beijing announced plans to spend 100 billion yuan—about $15.6 billion—to put 20 million “green” cars on China’s roads by 2020. Now, just a little more than a year later, the country’s leaders are rethinking their decade-long commitment and have yet to release crucial details.
That looks like a setback for foreign investors, who have rushed into the green-car sector in the last few years. Take Warren Buffett. In September 2008, the “Oracle of Omaha” took a 10% stake in BYD, the Shenzhen-based battery and vehicle maker, for $200 million. The move landed him on the cover of Fortune in 2009, inside the company’s e6 model with the now-famous caption, “Warren Buffett hasn’t just seen the car of the future, he’s sitting in the driver’s seat.”
There’s no question the photo shows him smiling behind the wheel, but the rest of the caption is in dispute. BYD has sold a grand total of 53 e6s since March 2010. Think the story for Buffett couldn’t get worse? Almost all of the sales of the “car of the future” were to a taxi company in Shenzhen of which BYD owns 45%. BYD has done slightly better with its plug-in hybrid model F3DM. Since the car’s February 2009 launch, the company has sold 365 of them.
BYD’s woes mirror those of its home base. Now, Shenzhen has 1,107 electric or hybrid vehicles on its roads—50 taxis, 618 buses, and 439 private cars. The government’s goal for next year is to boost the total to 35,000, of which 25,000 will be privately owned autos.
That goal will undoubtedly be scaled back. A little over 10,000 electric and hybrid vehicles have been sold in all of China in the last two years. Less than a tenth of them went to private owners, with most of the rest going to governments and state enterprises for trials.
The prospect for coming years will be heavily dependent on central government decisions. Since June last year, electric-car sales to private citizens have been aided by government subsidies of as much as 120,000 yuan per vehicle in selected cities, but some inducements are scheduled to come to an end next year. According to the official China Daily, “future policy remains unclear.” Policy is important because surveys show that consumers will not buy electric cars priced far beyond gas-powered ones.
In China, where no sector is too small for large government incentives, it is inconceivable that the government will halt policy support for green vehicles. For one thing, sales growth in the world’s largest vehicle market is slowing fast, and the overcrowded “pillar” industry needs Beijing’s help.

That help will certainly be good news for BYD, “seen widely as the flagbearer for China’s drive into the green-vehicle market.” That also means the success or failure of Buffett’s investment is in the hands of central technocrats.
So what are the prospects for the green-car industry? China Daily says the “country’s developmental roadmap for new-energy vehicles over the next decade is expected to be formally released during the coming months,” but not all agree. Vehicle manufacturers are arguing about policy as are the government agencies involved.
Moreover, the seemingly intractable disputes are aggravated by the general infighting in the run up to the leadership changes to be announced at the Communist Party’s 18th Congress, slated for next fall. While officials jockey for position at the crucial gathering, the country’s policymaking will be generally put on hold.
Finally, central government spending is now constrained by economic factors. Beijing’s blowout stimulus programs since 2008 have resulted in diminished fiscal capacity, and any government expenditure will aggravate the number-one economic problem of the moment, runaway inflation. Officials will surely continue policy support for green vehicles, but to have an effect, they need to devote even more cash than they have in the past.
All these factors mean BYD will be held hostage to politics in the Chinese capital. Buffett once famously advised others not to invest in things they did not understand. At the moment, it’s hard for Buffett—or anyone else—to understand what will happen to electric vehicles in China over the next few years.