Five Questions for GE Anderson, author of Designated Drivers – How China Plans to Dominate the Global Auto Industry: Part II

The Conclusion of our interview with GE Anderson PhD, author of Designated Drivers – How China Plans to Dominate the Global Auto Industry –  answers 5 questions about the Chinese auto industry’s past, present and future.

I recently asked GE Anderson, author of Designated Drivers – How China Plans to Dominate the Global Auto Industry, five sets of questions about the present state and future course of Chinese-Western partnerships in the auto industry.

This installment covers the final questions dealing with strategy, gains & trade-offs, and competitive issues.

ChinaSolved: Question 4 –   FAW has been accused of stealing IP from Volkswagen – its long-time JV partner.   How common is IP theft from strategic partners?  What is Volkswagen’s response likely to be?  Do you consider IP theft to be uncommon, a cost of doing business or a barrier to entry for Western automakers considering new partnerships (or continuing existing relationships) in China? 

GE Anderson:    It is important for business people and policy makers to recognize that what many in the West refer to as “IP theft” is, to many Chinese, simply a smart way of doing business.  The Chinese are aware that, following the Industrial Revolution, Westerners copied each other for 200 years, and it hardly seems fair to the Chinese that, now that they have arrived on the world stage, such a practice is now determined to be illegal.

This is not to defend “IP theft” in China, but to explain that it is viewed through a very different lens.  And as long as Chinese companies think they can get away with copying, they, along with firms in other developing countries, will continue to do so.  This is a cost of doing business in these markets, and all foreign companies in every industry – including those with partners whom they believe they can trust – have a fiduciary duty to defend their intellectual property.

Volkswagen has said that it intends to defend its IP in China, but I do not believe VW will go as far to protect its IP in China as it would if, say, an American company copied its technology.  First, the legal infrastructure to protect IP in China is not as robust.  While China has a good set of laws, the judicial system still works for the Party, and a number of high-profile lawsuits filed by foreign automakers have demonstrated that it is difficult to win IP lawsuits in China.

Second, VW, while commanding a fairly large presence in China, is still there as a guest of the Chinese.  All approvals for everything done in China – to build a new factory, expand an existing factory, start a new JV, etc. – must go through Beijing, and VW’s leaders know as well as anyone else that their access can be curbed if they choose to flex their muscles too much over intellectual property.  Other foreign automakers would happily take over VW’s position with its Chinese partners if they had the chance.

ChinaSolved:Question 5 – What is the future of Western-Chinese auto industry partnerships? Will Western companies start to lose ground to their Chinese partners in China? Will Chinese leverage their existing partnerships to expand internationally with their own brands? If you were to re-release Designated Drivers in 2022 – what might the subtitle and one-sentence summary be?

GE Anderson: Western-Chinese auto industry partnerships that last for the long-term will be those based on working together not just in China, but globally. Most of the China-only JVs will, I believe, eventually fall by the wayside as the Chinese learn how to more efficiently copy foreign technology, and also as they learn how to more properly manage and develop their brand identities among Chinese consumers.

Certainly the SAIC-GM model appears to be one more likely to stand the test of time, and perhaps others will also begin to consider deeper ties that extend beyond China. Of those that do not, however, most will eventually dissolve, and the smaller foreign automakers with less financial muscle will ultimately find the cost of doing business in China to be greater than the benefit.

Several of China’s independent automakers are already doing well in their developing export markets, and they will continue to exploit these, but I believe that they will eventually solve their quality and safety issues and begin to compete in developed markets as well. This is a longer-term proposition, however. Great Wall and Chery, two Chinese automakers that have managed to gain a small foothold in Australia, recently suffered serious damage to their brands by exporting cars and parts containing asbestos. These kinds of slip-ups will have to stop, which means that these companies must become more serious about quality control. And I believe at least a few of them will.

The Designated Drivers of 2012 spends more time explaining how China got to where it is than on trying to predict the future. However, one prediction the reader will find is that, however successful the China model has been at building the world’s largest auto market from scratch, this model is not capable of making China into the innovator and industrial power that it aspires to be. The biggest weakness is China’s continued insistence on state dominance of not only the auto industry, but nearly all of the country’s most important industries.

As hard to believe as it may sound, the best ally the foreign automakers have in China right now is the Chinese government. Their state-centric approach, and their marginalization of the private sector, will continue to ensure that China’s dominant state-owned enterprises, which lack the proper incentives for innovation, are dependent on foreign technology.

In the absence of the necessary political reforms that would shift China toward a more private-sector dominated model, the 2022 version of Designated Drivers would be subtitled “Why China Still Cannot Dominate its Domestic Auto Industry.”

See Part 1 of GE Anderson

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