This is the original Shanghai-Volkswagen Santana, based on the German Santana, which was based on German Volkswagen Passat B2 and/or the Audi 80 B2. Production started in 1985. First engine was a 1.6 with 87hp. In 1987 Volkswagen added a 1.8 with 94hp. The 1.6 however continued all the way until 2006. Size: 4546/1690/1427mm, wheelbase is 2548mm.

The original Santana is still on the market today, powered by the 1.8. Its price starts around 50.000 yuan, or $8,000. Sales are still good, Shanghai-Volkswagen made some 70.000 in 2011. That indeed is 26 years of the Passat Santana sedan in China, but in the meantime a lot more Santana happened:

Production of the Santana Variant started in 1987 and was immediately popular with police and all other kinds of government services. The Variant was powered by the 1.8. The Santana sedan did also fine with the government, but the biggest buyers were taxi fleets.

Next up was the Shanghai-Volkswagen Santana 2000. Not based on the original Santana but on the Brazilian-build Volkswagen do Brasil Santana 2000(which again was….) Production started in 1995. The China-made Santana had a slightly longer wheelbase and longer rear-doors.

Power came from the 1.8 which now delivered 97hp. Size: 4680/1700/1423mm, wheelbase was 2656mm. The Santana 2000 was not a replacement for the Santana, it was an addition. The Santana 2000 was seen as a slightly bigger and more luxurious Santana. Price started around some 90.000 yuan.

The Shanghai-Volkswagen Santana 3000 arrived in 2004, succeeding the Santana 2000. The redesign was done not by Volkswagen in Germany but, for the first time, by the Shanghai-Volkswagen joint venture itself.

Lots of fake wood in the dash. Fake wood indeed was very much the fashion in those years, all China-made cars had forests of fake wood. Nowadays, the fake-wood has mostly been cleared. The Santana 2000 also received a new engine, a 2.0 with 107hp. The 1.8 continued.

The Santana 2000 proved to be short-lived because its replacement, the Santana Vista, arrived in 2008. Design was again done by the Shanghai-Volkswagen joint venture.

Power came from the 1.8, the 2.0 and… the original 1.6. Yes, Volkswagen brought is back from the museum to create the entry-level Santana 3000. The Santana Vista (Zhijun in Chinese) is still on the market today. Price starts at 58.900 yuan and ends at 79.800 yuan.

The dash was toned down a bit, now in 1990′s Wolfsburg lo-fi design.

Altogether some 3.5 million Santana, 2000, 3000 and Vista have been made in China since production started in 1985. Many of the early cars are still on the road. The Santana earned Volkswagen a strong reputation as a maker of reliable no-frills automobiles. The new Santana will be judged harshly by Chinese media and car buyers alike, let’s hope it is good enough the carry the Santana-badge. Debut likely at the 2013 Shanghai Auto Show.

Dutchman Tycho de Feyter runs Carnewschina.com, a blog about cars in China, from Beijing, China. He also collects die-cast models of Chinese cars.

Christmas resulted in a lot of toys under a lot of trees. That’s good. If they are Chinese, I will buy them a generation from now.  If you keep them in their original box, I will pay you more. I am a fanatic collector of Chinese tin toys. I will show you around in my collection. Today, part 1.

The Chinese tin toy industry started in the early 1970′s and continued until the early 1990′s. When China started making tin toys, they mostly copied Japanese tin toys, just like the Japanese tin toy industry had started with copying British and German tin toys. Later on however, Chinese factories designed their very own toys, mostly based on early Chinese cars, trucks and all kind of weaponry. In this first part, you will meet seven Chinese tin toy cars. Back to the first picture again

This beauty is based on the Hongqi CA770. I have a couple of these sedans (as toys.) One crowns the header of my blog, dedicated to Chinese cars. They look the same at first sight, but the wheels are very different. The version on this picture was a few yuan cheaper to make. Chinese factories made many variations of one model, with different wheels, different colors, different interiors and even different drive-trains! This makes everybody happy: The factory could max out its expensive mould. And the collector won’t rest before he has all variations and the series complete.

This is the real Hongqi CA770.

Tin toy manufacturing was concentrated in two cities: Shanghai and Beijing. Shanghai had at least five factories, Beijing had only one. The factories didn’t have names. They had numbers. This was typical for the communist era, when bourgeois names all but disappeared, Mao even had a plan to replace people’s names with numbers. That fortunately never happened, but the rest of the Chinese society soon sounded like the map of Manhattan.

Instead of “let me out at sixty-third and third,” you had the ‘Beijing number-1 department store’, the ‘Shenzhen number-5 middle school’, the ‘Jilin number-3 shoe factory’ and so it went on and on. Many of these names still exist today. The tin toy factories in Shanghai were called ‘Shanghai toy factory no-1′ up until ‘Shanghai toy factory no-5′.

It is almost impossible to know in which factory a certain tin toy was made. There are no markings, no logo’s, no years, no brand-names. The only thing that helps is again — a number. All China-made tin toys were numbered with combinations like: MF-777, ME-666, MS-555 and some more. Unfortunately, these numbers are not exactly connected to factories, but to the sort of toy. MF are mostly cars and trucks, ME military vehicles and MS all kind of figures and dolls.

Based on the Shanghai SH760A.

This is an extremely rare toy, highly valued by Chinese collectors, much rarer than the Hongqi on the first picture, mostly because much fewer were made. Exactly how many were made nobody knows for sure. This is the same for any of the China-made tin toys, and it keeps collecting interesting. Unlike the Hongqi-toy, the Shanghai-toy was never exported abroad. The Hongqi appears on eBay now and then, but the Shanghai never does. The only country in the world where you can find it is China. In seven years I managed to find five, mostly on local second-hand markets. The car on picture is the best I have…

 The perfectly restored SH760A by the Shanghai Auto Museum.

Normaly, the toys were painted in dual-tone, while the real cars were not. I guess this was an idea from the toy factories to make the cars more attractive for young buyers.

 BASED on the Dongfeng Golden Dragon CA71

This is an extremely rare tin toy. It is based on the Dongfeng Golden Dragon CA71 sedan. It is rare because this variant has a wind-up motor. There was also a ‘standard’ variant which looked exactly the same but came without the wind-up system. The standard variant was powered by a friction-system instead. The standard toy is very common and easy to get, it was exported as well and can be found relatively easily on eBay. This wind-up variant cannot. Even in China, it is very hard to get. I just have this lonely blue one, it was also available in green. I am still looking for that one…

 The real Golden Dragon

The real Dongfeng Golden Dragon CA71 sedan, known as China’s very first passenger car, based on the French Simca Vedette. Not many were made and as far as we know there is only one in existence today. Anyway and how, that is something for another story.

Based on the Shanghai SH760 ‘Phoenix’

Another Shanghai, this one based on the Shanghai SH760 ‘Phoenix’. It has a wired remote control. It can go forward, backward and make corners to the front-right and front-left. For some reasons, it cannot make corners to the back. Remote controlled Chinese tin toys are rare, but not extremely so. In the late ’70′s and early ’80′s, many were made. This toy itself is very rare, in all these years collecting I’ve only found this one example, it had somehow ended up in Russia where someone listed it on eBay. The same car was also available in grey.

The real SH760.

Whenever I tell people about my collection, their first question is: “How many you have?” About 400. Second question is: “What are they worth?” In general, Chinese tin toys are still worth less than Japanese, but more than South-Korean, Hongkongnese and Taiwanese.

Prices go up because more and more Chinese people start collecting tin toys, prices will likely continue to rise by some 10% a year. How much a toy is worth exactly depends as usually on condition, rarity and whether the box is available. Box makes a huge difference, tin toys with box are worth some 50% more.

Now some example’s: the Hongqi on the first picture, with box, is worth about 150 US dollars. The first red-white Shanghai, without box, is worth about 100 US dollars. The remote controlled Shanghai, with box, is worth north of 200 dollars.

Based on the Shanghai SH760A

This is one of the biggest Chinese tin toys ever made. It is some 35 centimeters long and is based on the pick-up truck based on the Shanghai SH760A. ‘Based’ is written with a very big B, because the toymaker took some liberties. The toy has round head-lights while the SH760A did have square lights. It has suicide doors which the SH760A didn’t have. Even worse, no pick-up truck will ever have suicide doors. The doors are there because this pick-up tin toy is based on a sedan-tin toy which I also have in my collection. The toy factory didn’t bother to remove the rear doors when they made the pick-up truck.

 The real Shanghai SH760A pick-up truck. A wonderful machine.

 Propaganda car

This is a very funny one, and with only 15 centimeters one of the smallest Chinese tin toys I have. It is based again on the Shanghai SH760A and it is, according to the text on the box, a ‘propaganda car’. See the speaker on the roof. When you push the car, the speaker will turn around in a circle. On both sides are beautiful drawings of panda’s eating bamboo. The roof-part is made of very hard plastic, this was common with smaller tin toy cars.

 Propaganda bus

Propaganda cars did indeed exist, mostly in the ’60′s and ’70′s and mostly in the countryside. They drove from village to village, blaring ‘Mao Thought‘ out of the speakers. They were mostly based on trucks and buses though, not on Shanghai sedans. On the picture is a propaganda-bus (see speakers on the roof), early 1960′s.

 Police Benz

This last car in today’s story is not based on any real vehicle, as far as I know. It is a brilliantly designed Benz-like police car with an imposing grille, bumper and headlights. It is one of my personal favorites and it is a very rare tin toy again. This is the only one I ever saw. I bought it at a small crap-market somewhere in Beijing. The Chinese tin toy industry made many more fantasy-based cars and other vehicles, I will show more in a later story.

Well, that’s it for today. Thank you for reading.

Dutchman Tycho de Feyter runs Carnewschina, a blog about cars in China, from Beijing, China. He also collects die-cast models of Chinese cars.

Soon, Volvos could sport yet another decal: “No animals will be harmed by this vehicle.” Volvo is working on a system that avoids roadkill. According to Bloomberg, the system

“uses a radar sensor and an infra-red camera to alert the driver to nearby critters and brake if a collision is unavoidable. That technology is due to be rolled out in a few years in cars like the XC90 sport-utility vehicle, priced at $38,400, after employees studied the movement of moose and deer in southern Sweden.”

Even David Cain, who runs the annual Roadkill Cook-off in Marlinton, West Virginia, does not see a conflict of interest:

“It’d be good because it’d allow the driver to avoid a lot of unnecessary animal killings. He could still choose to run over something that’s good for eating.”

According to Bloomberg, Volvo is not alone in its concern for our four-legged friends:

“BMW, the luxury-car leader, is also setting its sights on preventing roadkill. It showcased a system this year that shines a spot light on pedestrians or animals near the roadway at night by locating them with a heat-sensitive camera.”

Without the a propos sensitivity to this important issue, Bloomberg ends its report on the snide side:

“The winning dish at the 2011 event on Sept. 24 was Smeared Hog with Ground Hog Gravy a la Truck.”

Having been asked by a certain newspaper to review the new book “American Wheels, Chinese Roads: The Story of General Motors in China [more info on that review coming soon], I’ve been spending my quiet moments over the last week or so looking into GM’s Chinese operations. The book’s author, Michael Dunne, documents GM’s rise in the Middle Kingdom from the perspective of a well-informed outsider, revealing just how delicate one of GM’s best-performing global maneuvers really was. But after following the rise of GM in China, Dunne notes the December 2009 announcement that GM was selling a 1% stake in its Shanghai-GM (SGM) joint venture to its Chinese partner SAIC (for the paltry sum of $85m no less), arguing that GM had made a dangerous leap of necessity. This sale, implies Dunne, could well have been the tipping point that leads to GM being surpassed by its erstwhile junior (in size, technology and global reach) partner, SAIC. And, in the words of “one GM executive who used to work in China,” GM would need

good luck getting that back.

But, back in June, GM CEO Dan Akerson told GM’s shareholder meeting that he wants to do just that, saying

We have an option to buy that 1 percent. It’s our intention to exercise that.

With Akerson’s announcement, the mystery of GM’s “golden share” sale deepened. At first the question was simply “why would GM sell its 1%?” but now there’s another mystery: why would GM want it back? After some digging, it seems that we are now able to resolve the first mystery, and report why GM sold its one percent. But the whole deal is still surrounded by several layers of mystery which conceal whether GM will in fact be able to regain its 50-50 partnership in SGM, why it would want to and whether its gambit was ultimately worthwhile. And given how important China has been (and continues to be) to GM’s global business, this is definitely an issue that GM- and industry-watchers will want to better understand.

First of all, it’s important that we understand how the deal was announced, as it caused a good deal of head-scratching here at TTAC and around the auto industry. As the WSJ [sub] reported at the time, GM played down any major implications of its apparent surrender of an equal partnership in one of its most important markets:

“In actual fact we operate that way already, so that’s not a significant change,” said Nick Reilly, who stepped aside as head of GM’s international operations Friday to run its European business.

GM said the transfer was necessary to help SAIC consolidate earnings from the Shanghai GM joint venture, having been previously barred from doing so as a 50:50 partner under local financial regulations.

The NYT added

the 51 percent stake would give S.A.I.C. the right to approve the venture’s budget, future plans and senior management.

But, as Dunne and others have pointed out, no other Chinese joint ventures have made this move, suggesting that SAIC’s desire to consolidate earnings were not the only reason for the deal. Further confusing the situation was the tiny purchase price: by selling its controlling 1% for a mere $85m, it seemed as if GM were giving away the keys to the Middle Kingdom for chump change. And Akerson’s revelation that GM has an option to reclaim the 1% confused all of this even further: after all, with SAIC insisting that it retain its consolidated earnings in the case of a return to the 50-50 partnership, it would seem that the sale part was unnecessary to that goal, which could have been accomplished with a (relatively) simple contract. What, I’ve been wondering for days now, was really going on with this deal? How to square all of this seemingly contradictory information? Did GM make a worthwhile gamble, or did it foolishly fumble away a key market?

After much digging and many emails to GM, the situation is finally starting to make a little sense. And in the process we got our hands on some information that has yet to be published in the mainstream media (to the best of my knowledge). GM confirms that it does in fact have a call option for the controlling 1% stake, but refuses to give any details about how it might be exercised or what its terms are. The only specific information about the deal comes 196 pages into a 534-page 10-K filing [PDF here] covering calendar year 2010. That filing reveals that, although GM does have the option to buy back the 1% stake, it’s not in the driver’s seat to make that happen…

 We also received a call option to repurchase the 1% which is contingently exercisable based on events which we do not unilaterally control.

Of course GM won’t disclose what these events are (although Akerson does hint that SAIC’s restructuring is somehow an issue), but the admission that the company doesn’t “unilaterally control” the events required to buy it back keeps the shadow of doubt over Akerson’s stated “intention” to return to a 50-50 partnership. Still, with it’s back against the wall, it’s still possible that GM could have signed a deal that might still keep it a junior partner in SGM… had there been enough cash on the table. $85m was clearly not enough to make such a deal worthwhile, but according to the 10-K filing we’ve obtained, there was more in the deal for GM than that.

In February 2010 we sold a 1% ownership interest in SGM to SAIC-HK, reducing our ownership interest to 49%. The sale of the 1% ownership interest to SAIC was predicated on our ability to work with SAIC to obtain a $400 million line of credit from a commercial bank to us… As part of the loan arrangement SAIC provided a commitment whereby, in the event of default, SAIC will purchase the ownership interest in SGM that we pledged as collateral for the loan. We recorded an insignificant gain on this transaction in the year ended December 31, 2010.

So, the truth comes out! This arrangement has been hinted at before, but until we obtained the relevant 10-K, the exact amount had never before been reported. So, between the $85m price and the $400m loan, that 1% stake was worth closer to half a billion dollars than the $85m initially reported. That means that, on the one hand GM got a reasonably fair price for the controlling stake in SGM, but on the other hand, as Bertel noted

If Akerson wants it back for whatever unfathomable reason, then it will cost him.

Without knowing exactly what GM got for its 1%, Dunne argues that the deal was “the end of the beginning” for GM’s successful Chinese efforts. And though GM’s ability to regain a 50-50 partnership is still very much in question based on what little we know about the call option’s details, at least GM got significant short-term help for the gambit. And it’s probably no coincidence that GM was able to keep GM-Daewoo (GM-DAT) in the corporate fold when, just weeks before the SAIC share sale was announced, it injected$413m into its Korean subsidiary. At the time, the Korean Development Bank was trying to wrest control of GM-DAT, which would have left GM without its main source of low-cost, fuel-efficient car development. Presumably keeping Daewoo was worth whatever risk now stands between GM and its call option… just as keeping Opel’s development capacity was worth billions in restructuring costs (probably not coincidentally, GM insisted that the Daewoo bailout cash “came from overseas operations”).

In short, GM’s gambit was a far better business move than we initially thought… although it’s also clear that the reasoning it gave at the time was disingenuous at best. But, thanks to Akerson’s “intention” to exercise the option, we also know that GM is not as comfortable as the junior partner in SGM as it initially made it seem, and the RenCen is obviously anxious to reel the decision back in. But what will the buyback end up costing? What “events” need to happen to make the buyback possible? And, since reclaiming the 1% would neither help GM financially or give it more functional control over its JV (as far as we can tell), why is it so intent on buying back that one (presumably) extremely expensive share? As with so many examples in China-US business relations, solving one mystery tends to lead only to more mysteries…

Today, my phone rang repeatedly, and my email inbox quickly filled with questions. They all said: “Did you see this? Do you know these people?”

I knew the guy in the picture. I used to be married into a family that was in the Washington Green book. I lived in Virginia two driveways from Thomas Jefferson’s Monticello.  I was surrounded by gentleman farmers and politicos. Jeez, the late Ambassador Fritz Nolting drove into my pool on a riding mower with a cocktail in one hand and a cigar in the other. Talk about distracted driving.

The right man in the picture wanted to be Governor of Virginia. He still does. The left man wants to be a tycoon.

The man who leans over that sign somewhere in the godforsaken desert of Inner Mongolia, China, is Terence “Terry” McAuliffe. Yes, the very same Terry McAuliffe who was a Democratic National Committee head and a close Bill Clinton adviser who, according to a United States Senate document organized the famous coffees and sleepovers that saved Bill Clinton from electoral annihilation.

According to one source, “McAuliffe’s soft money strategy was responsible for President Clinton’s 1996 scandal concerning the Lincoln Bedroom sleepovers and the White House coffees, two tactics employed to solicit huge donations from wealthy friends and patrons of the Clintons.”

Putting the Lincoln Bedroom up for sale for $100,000 a night (on average) was only a minor scandal compared to what was called “Chinagate.”

Al Gore, friend and beneficiary of Buddhist monks, praised McAuliffe as ”the greatest fund-raiser in the history of the universe.” Coming from Gore, that’s the best endorsement one can get.

Yes, you are looking at THAT Terry McAuliffe.

Yes, it’s the same and he is back in China, and back in the fundraising business. This time, he promises to bring 300,000 cars to China. Made in America by Americans. Assembled in China. In that new factory which is going up behind the two gentlemen.

Wait, there is more. A lot more.

The company that will perform the economic miracle is GreenTech. The man to the left of McAuliffe is Charles Wang. Ring a bell?

Remember this story? Remember how Ed Niedermeyer wrote:

“Greentech Automotive is the hybrid vehicle firm founded by the former CEO of Brilliance with plans to build a plant in Mississippi with funds raised through the EB-5 visa program. Not to be confused with Hybrid Kinetic Motors, the hybrid vehicle firm founded by the former Chairman of Brilliance with plans to build a plant in Alabama with funds raised through the EB-5 visa program.”

Yes, one and the same.

This will get a bit complicated, so bear with me. Let me introduce you to a few people. You know, in China, connections are everything.

Meet Yang Rong, identified by Automotive News [sub] as “the ousted former CEO of Brilliance China Automotive Holdings Ltd., BMW AG’s partner in China.” Automotive News tells this story:

“In the early 1990s, Yang was one of the first entrepreneurs to strike it rich in China’s auto industry. He was hailed in China as part of a new generation of savvy businessmen and credited with catapulting Brilliance from making dreary buses into BMW’s partner in making BMW 3- and 5-series cars.”

“But in 2002, after feuding with a Chinese provincial governor over the location of a new factory, Yang found himself charged with unspecified economic crimes. He fled the country under a false passport for Los Angeles, where he joined his wife and four children. Most of his own personal wealth had to be abandoned in China.”

Automotive News missed the good part. The dispute was about more than a location of a plant. It was about who owns what of Brilliance, a company that became the first Chinese corporation listed at the NYSE after 50 years.  According to this account in the China Auto Review,  Yang “was forced out as chairman of Brilliance China and served a warrant for allegedly committing “economic crimes of embezzlement of state assets” in late 2002.” Here is one of the many lengthy court documents, in case you have the time.

To make it short, China would love to have Yang back, but he’s not coming.

Yang went on to found the Hybrid Kinetic Motors company, which we had chronicled in 2009 under the Farago regime. Hybrid Kinetic Motors promised to bring a huge car industry to the American equivalent to Inner Mongolia, a place called Northern Mississippi. Rong had explained to Automotive News [sub] that the plan was to “build a $6.5 billion auto plant in northern Mississippi, where he would hire 25,000 workers to eventually produce 1 million cars a year.” It will happen real soon now.

Then, there is another man. His name is Xiaolin Wang. According to a puff-piece in Wikipedia, written by an editor by the name of Beijingren (= Beijing Man) who had written nothing else than this article and had then vanished from Wikipedia, “Charles Xiaolin Wang is an experienced business entrepreneur, financier, and lawyer with an extensive background in capital markets financing and international business transactions. He currently serves as the President and Chief Executive Officer at GreenTech Automotive.” In the top picture, he is the man to the left of the greatest fund-raiser in the history of the universe, Terry McAuliffe.

Xiaolin Wang was Rong’s lawyer and business partner at Hybrid Kinetic. Yang Rong, no stranger to feuds, started a new feud with his lawyer. Says Automotive News:

“Yang’s project split in two after a falling out between him and the man he had appointed to manage it: his former attorney and Chinese entrepreneur Xiaolin Wang.”

“Yang — listed in court documents as Benjamin Yeung, the name he uses in the United States — sued Xiaolin Wang and three other project managers. Yang alleges that the other managers had been steering control of the venture away from Yang and had begun operating under a different but similar name.”

“Yang’s venture is called Hybrid Kinetic Automotive Holdings Ltd. Xiaolin Wang and the others had been operating as Hybrid Kinetic Automotive Corp.”

An out-of-court settlement had Xiaolin Wang change the name of his company. It was known as GreenTree Automotive, and was either later renamed to GreenTech, or Bill Brabec, the Jackson, Miss. attorney for Xiaolin Wang, had the name wrong. Or who knows.

Hybrid Kinetic, run by Yang or Yeung, and GreenTech, run by Xiaolin “Charles” Wang, went forth and operated in parallel.

Both attracted investors via the EB-5 visa program, a scheme which the Center for Immigration Studies along with many others call either “a scam” or “investor fraud.”

Allegedly, if someone invests $500,000 in an underprivileged part of America, green cards for the “investor” and the immediate family beckon. There are a lot of Chinese who paid much more to enter the U.S. illegally, so that’s considered a great deal. Some killjoys claim the investment must be “active” and the investor must be involved in managing the company. Minor detail.

Hybrid Kinetic (which sometimes calls itself “HK Motors” – something that in China can be easily confused with “Hong Kong Motors”), was incorporated in Delaware, is headquartered at Pasadena, California, and wants to open a plant in Baldwin County, Alabama. Governor Bill Riley confirmed to HK Motors that “HK Motors could apply for and receive all statutory incentives based on the company’s proposed $1.5 billion investment.” On HK Motor’s website it says that letter “officially confirmed that approximately $1 billion in incentives is available to HK Motors.” Edmund’s said:

“Pouring millions of state funds into an untried automaker headed by an entrepreneur with a question mark hanging over his head (he says he’s done nothing wrong, that the charges against him in China are politically motivated) is something that’s ought to require a heck of a lot of due diligence on the part of state officials.”

The fine State of Alamaba apparently does not subscribe to Edmunds or its ideas.

GreenTech Automotive (GTA)  “was founded in 2006 by accomplished entrepreneurs Terry McAuliffe and Charles Wang,” says its website.

Wang is CEO, McAuliffe is Chairman. According to some accounts, Xiaolin “Charles” Wang was still with Yang Rong a.k.a. Benjamin Yeung when Greentech was founded in 2006. According to the puff-piece Wikipedia article, the founding happened 2008,  and Hybrid Kinetic did never exist in Wang’s illustrious career.

And what about government money? In 2009, the Memphis Daily News said “because Wang and his team are seeking much of their capital in China, the financial particulars are murky at best. What confounds this project is the silence from local and state officials.” Last year, the same paper heard that Mississippi governor “Barbour was noticeably absent as Charles Wang talked of building 150,000 hybrid cars a year in a plan that is still awaiting financing.”

It’s not that Wang and McAuliffe don’t have any friends formerly in high places. Wang told the Memphis Daily News:

“Former President Bill Clinton also has been active in the project, traveling to Hong Kong and introducing company representatives to heads of state at his recent global initiative.”

He just doesn’t have any money to invest.

Still with me?  Amazing. TTAC loyalty knows no bounds.

Now we move on the really brilliant part: Xiaolin “Charles” Wang had wisely disassociated himself from Yang Rong a.k.a. Benjamin Yeung. The latter Yang Rong will never ever return to China, where he has been ronged. The former Wang however proudly appeared in Ordos, Inner Mongolia, otherwise famous for China’s Modern Ghost Town , where a city planned for a million stands empty. This will most likely change immediately with the arrival of Terry McAuliffe.

“Mr. McAuliffe fills a room” said the Washington Post. That’s an understatement. At the notorious May 2000 Clinton fundraiser, he filled the former MCI sports center in Washington, DC. $26.5 million were raised in three hours for the Democratic National Committee. As the New York Times remembers, “the donors, from those in black tie to those in blue jeans, were beckoned by the Midas of fund-raisers, Terry McAuliffe, who, in the end, squeezed 13,625 people into a space designed for 12,000.” Roomfilling above plan!

If McAuliffe can fill a stadium with people who want to be separated from their money, then producing “a full line of vehicles powered by U.S.-made high-efficiency combustion engines, hybrid powertrains and pure electrical drivetrain” in the middle of nowhere will be a cinch. As Greentech’s press release says:

“The product line will include subcompact, compact, midsize and sports vehicles, all to be designed specifically for and sold exclusively in China. Full production capacity will be 300,000 vehicles per year and the core components of these vehicles will be made at GTA factories in the United States.”

“And because our core components will be made in America, we will create 2,000 new American jobs when we reach full production capacity,” said McAuliffe.

The joint venture is called Ordos GreenTech Automotive Co., Ltd., and is a partnership between GTA and Shengyang ZhongRui Investment Co., Ltd., a Chinese investment holding company.

License from the Chinese government? Not mentioned. Does anyone need a license here to make cars? Feasibility study? Minor details for a McAuliffe. A few phone-calls, possibly from Bill’s wife, done.

Remember: When The Washington Post called him a “huckster,” McAuliffe corrected it to “hustler.”

Not only that, McAuliffe is an experienced investor. In the 1990s, McAuliffe invested $100,000 in a company later called Global Crossing. When the company went public seventeen months later, the stock’s value rose quickly and McAuliffe’s initial $100,000 investment was valued at nearly $18 million. Global Crossing filed for bankruptcy in 2002, after McAuliffe had smartly sold his stock.

With a man like this, could anything go wrong? Ordos will become China’s new Detroit. Gee, it already looks as deserted as Detroit. Liu Shufu of Geely will slap himself for paying $1.5 billion to get the 300,000 car Volvo. With a McAuliffe, he could have had the same for a few cups of coffee.

GM China and its joint ventures sold 173,398 vehicles in China during the month of July, “as Shanghai GM and GM’s Buick, Chevrolet and Cadillac brands all set sales records for the month,” GM’s press release says. Nonetheless, GM’s China sales in July were down 1.8 percent from the same month last year. Now how did that happen? Why should you care? Why should anybody care?

We at TTAC care about GM China for many reasons, one of them being that GM serves as TTAC’s Patent Pending Sales Oracle for China. As goes GM, as goes China. This used to be the case in the past. Lately, the oracle became a bit wobbly. Why? Because more than half of GM China’s sales used to be little delivery vans made by the SAIC-GM-Wuling joint venture. This segment has collapsed for various reasons.

There was a preferential tax treatment last year for cars below 1.6 liter. What’s more, there was a “cars to the countryside” subsidy program. These little delivery vans are as popular in the Chinese countryside as pickups are in Texas.  However, the popularity fades with the subsidy money gone. And that drags GM’s overall unit sales numbers down.

GM China, July 2011

Blue: TTAC calculation. Black: GM numbers.

Meanwhile, GM China’s passenger vehicle market is alive and well. Buick up 15.4 percent.

Chevrolet allegedly up 17.4 percent. When running the numbers, we get an even better number. 35,385 Chevys sold in July 2010 and 46,154 sold in July 2011 translate into an increase of 30.4 percent on my version of Excel. GM’s chief number honcho in Detroit is as stumped as I am. He kicked it back to Dayna Hart in Shanghai, where it is 10:30 pm on a Friday night ….

When Chinese new car sales will be announced next week on Wednesday, you probably will see a meek number. Don’t believe it. The Chinese car market is composed from two thirds of passenger vehicles, and one third of commercial vehicles. Passenger vehicle sales grow. Commercial vehicle sales are down.

Supporting indicator: Audi’s July sales in China were up 35.2 percent at 27,767 vehicles, accounting for more than a quarter of group sales, Reuters says.

Soon you’ll read all over Google that China has 217 million cars. Don’t believe it. It’s not true.

Motorvehicles China June 2011

(Blue: TTAC estimate. Source: Xinhua)

“The number of motor vehicles in China hit 217 million as of the end of June,” based on registration data issued by China’s Ministry of Public Security, as reported by state news agency Xinhua.

However, in China, anything that is propelled by an engine and needs a license plate counts as a “motor vehicle.” Motor cycles are about half of the 217 million total. 98 million of the motor vehicles on China’s roads are “automobiles”, leaving 16.54 million in the “other” category (tanks?).  So it’s 98 million cars? Not exactly.

Automobile Production China

Source: OICA

The “automobiles” again are divided down into passenger vehicles and commercial vehicles.  Currently, 76 percent of China’s production is passenger vehicles, 24 commercial. When I came to China first in 2004, the ratio was  47:53.  Totaling up the available data since 1998 gives a ratio of 64:36. (In China, “production” and “sales” can be used interchangeably on the macro level. Imports and exports don’t have much impact.) Using the average passenger-to-commercial ratio produces an estimated 64 million passenger vehicles on China’s roads, that compete with 35 million commercial vehicles for space on China’s clogged roads.

There are 73 “automobiles” per thousand people in China. There are approximately 47 passenger vehicles per thousand in China.  In the G7, that number is around 600, in the U.S.A., there are more than 800 automobiles  per thousand people.  China has many years of growth ahead. Private cars already account for more than 70 percent of the country’s total, says the ministry.

For years now the Chinese automakers have been the bête noir of the global car industry, inspiring equal parts fear and contempt in boardrooms and editorial meetings from Detroit to Stuttgart. In an industry built on scale, China’s huge population and rapid growth can not be ignored as one scans the horizon for dark horse competitors. And yet no Chinese automaker has yet been able to get even a firm toehold in the market China recently passed as the world’s largest: the United States.

Certainly many have tried, as the last decade is littered with companies who have tried to import Chinese vehicles, only to go out of business or radically rethink their strategy (think Zap for the former and Miles/CODA for the latter). Others, like BYD (or India’s Mahindra), have teased America endlessly with big promises of low costs and high efficiency, only to delay launch dates endlessly. In short, a huge gulf has emerged between overblown fears of developing world (particularly Chinese) auto imports and the ability of Chinese automakers to actually deliver anything. No wonder then, that we found what appears to be the first legitimate attempt at importing Chinese cars to the US quite by accident…

The internet is an amazing thing: on any given day you literally never know what you’re going to find. Typically when I find a story that shows promise as a TTAC post, I open a few tabs in a new window and search for words and phrases associated with that story in hopes of finding related reporting and greater context. And sometimes those searches lead to a story that’s infinitely more interesting than the original idea that lead to them.

A few days ago, for example, an Automotive News [sub] story about Wheego Electric Cars Inc caught my eye. The firm, which imports Shuanghuan Noble gliders and converts them to electric power using US suppliers, sold its first retail vehicle last Earth Day (April 22), but AN [sub]‘s piece was hardly the puff piece you might expect from such an opportunity. Instead, the industry paper reported that Wheego was out of money and had retained a VC outfit to raise cash, even quoting CEO Mike McQuary as saying

My constraint is primarily capital. We’ll be living hand-to-mouth as we try to get the first cars built. The next 200 will creep out as we raise money.

It’s the kind of story that appeals to TTAC’s occasionally vulture-like editorial instincts, as I know that more than a few of TTAC’s readers would probably get a schadenfreude-laden chuckle out of the struggles of a firm trying to sell an electrified Chinese Smart Car clone for “$33,995, including shipping” (before $7,500 federal tax credit). But after a little bit of digging through the search results for “Shuanghuan” (looking for mmore background on this Hebei Province-based automaker) I came across a website that I hadn’t expected to find: www.shuanghuanofdesmoines.com. Never having seen anything resembling a Chinese-branded dealership in the US, I clicked over.

There, I found a website titled “Shuanghuan Auto,” advertising two versions of the Noble and the SCEO (neé CEO) SUV… with an Iowa address. A glance at TTAC’s archives showed one incredulous write up from Bertel two years ago, and little else to explain this unexpected find. The Noble G4 was advertised as having gasoline (1.1 liter Suzuki design, made in China) or electric options. The SCEO was shown with a 2.4 liter Mitsubishi engine or a 2.5 liter “Yuchai” turbodiesel. I briefly checked the EPA website and, finding no signs of “Shuanghuan” or “Yuchai,” I dialed the number on the website and a day later I spoke with the owner of Shuanghuan Auto Des Moines.

Gene Gabus lives up to the finest Iowan standards of friendliness, instantly warming my expectation-free cold call with immediate candor. “I don’t know if you realize this,” he says, “but it takes a ton of work to get these cars up to American market standards.” As it so happens I had heard that it was tough to import cars to the US, and soon Gabus is explaining the extensive re-working that was needed to bring the Noble’s fuel system and rear-crashworthiness up to snuff. “We’re just working on the advanced airbag system now,” he says. Having seen a Noble crash test and been impressed by everything but the fact that there didn’t appear to be any airbag, this sounded promising. He describes extensive fuel tank modifications and says that dual-fuel figured heavily into US market plans. “You’ve heard of CNG cars?” he asks. I had. This was becoming even more interesting.

“Why have I barely heard of you guys?” I ask. “We’re used to hearing a lot of hype from importers of brands like Mahindra and BYD.” “Well,” he answers, “the feds don’t like a lot of talk before they approve a vehicle. Besides, we’ve watched the other guys talk a big game and fail to deliver. We want to avoid that.”

“And you are a former Chrysler dealer?” I ask. The address had been listed as Des Moines Chrysler on Google Maps. “Did you lose the franchise during the bailout?” There’s a brief pause. “I was robbed,” he growls. His profitable dealership had lost its franchise, while a pair of smaller local competitors had kept theirs. It’s clear that the wounds are still fresh, but they haven’t stopped Gabus from diving into a full-on attempt to homologate Chinese cars for the US. I press him with more questions. “Look,” he says, “let me give you Bob Smith’s number. He’ll be able to answer all of your questions.”

Sure enough, Mr Smith answers my first phone call, and in short order is answering my questions in a warm, Southern drawl. “I’ve done business in China since 1985,” he explains. “Computers, wheelchairs, that kind of thing.” And why cars? “I’ve seen how China is growing,” he explains. “I’ve seen their demand for gasoline grow and grow. Supply won’t keep up with their growing demand, and we’ve seen what happens when gas prices approach $5/gallon. People begin to seek out alternatives.”

Smith and Gabus plan on selling gasoline and electric-powered versions of the Noble, but the centerpiece of their plan involves dual-fuel version, which run on gasoline or Compressed Natural Gas (CNG). Like many people who have spent a lot of time around the car industry, Smith and Gabus are skeptical about all the hype surrounding electric vehicles, and given that most importers of Chinese vehicles focus on electric conversions, this puts them in a unique position relative to their competition. Smith waxes enthusiastic about the low prices and high supplies of natural gas in the US, and says the key to his business case is the relatively low cost of natural gas conversions.

“Look,” he says, “batteries often cost as much or more than the car itself.” The struggles at Wheego, which has split homologation costs with Smith and Gabus’s Shuanghuan importation outfit (Smith calls Wheego “good guys”), fill in all the necessary details. An electric Smart clone might appeal to hard-core greenies, but at $33k, their chances of mass-market acceptance are slim. Like Wheego, Smith is banking on help from the federal government in order to break into the market, but unlike the EV hawkers, his natural gas focus helps avoid the trap of having to sell a low-cost car at high prices.

“We expect the Pickens Plan to pass this summer,” explains Smith, referencing the natural gas subsidy bill that’s been championed for years by natural gas baron T. Boone Pickens, and was recently re-introduced and endorsed by the Obama Administration. “When that happens, people will be able to build home refueling stations which tap into their home heating natural gas lines and they’ll receive a $2,000 tax credit to install it.” But that’s just the beginning. Under the Pickens Plan bill, light duty vehicles (powered by natural gas or dual-fuel) would be eligible for a $7,500 consumer tax credit, the same amount currently available to plug-in vehicles.

It’s starting to add up. Not long ago, Edmunds CEO Jeremy Anwyl called for parity between EV and natural gas tax credits, and Honda has recently announced 50-state sales of its natural gas Civic GX. These guys are surfing a building trend. “So,” I ask, “what price point are you targeting post-tax credit?” His answer drops my jaw: “$4,000 to $5,000,” he says. I suddenly get it, and I’m floored by the idea. Low-cost, high-efficiency Chinese cars that sell at a price that’s less than half of the cheapest gasoline-powered cars on the marketplace. This is the kind of plan that has had the industry terrified, and yet has yet to be seriously pursued. And here are a couple of guys, flying under the radar, bringing a truly disruptive Chinese import to market… in Des Moine, Iowa. You can’t make this stuff up.

At this point, I stop thinking of Smith and Gabus as underdogs (or possible hucksters), and start thinking of them as a couple of shrewd operators. But, says Smith, the plan is still a huge gamble. They’ve already spent millions crashing some 32 Shuanghuan Nobles, and upgrading their bracing, fuel tanks, evaporative emissions control systems, advanced airbags and seatbelts. Having been working with the EPA and DOT for two years already, Smith confirms that he expects full DOT/EPA approval by the end of the second quarter of this year… within the next two months (Wheego has reportedly already received DOT crash-test approval). The SCEO SUV has not yet started testing, he says, and the process will take two years, so they’re starting with the Noble. Even with a crazily low targeted price point and high natural gas efficiency, there’s no guarantee that the Noble will take off. “But,” says Smith, “you have to take a chance and put some money on the table if you want to change anything.” And rather than trying to make the cover of every green magazine in the country, Smith and Gabus have started with the tough task of homologation… and now they’re almost done. Their huge bet is about to hit the table.

Before getting off the phone with Smith, I ask when he’ll next be in Des Moines. I explain that I want to meet him and Gabus at Shuanghuan Auto Des Moines, drive the Noble, and hear more about the origins of their import scheme, as well as their plans for the future. “Sure,”he says, “I’ll be there in June.” “In that case,” I reply, “so will I.” This story, which has flown below the media’s radar for two years now, is starting to take off… and TTAC will be there to cover it. By June, EPA and DOT approval should be rapidly approaching, and Smith and Gabus will be approaching the next challenge: pricing and selling these tiny Chinese cars. If the Pickens Plan passes and they’re able to hit their price points (both still “ifs,” the men admit), these industry outsiders could put Chinese cars –and Des Moines, Iowa– on the automotive map in this country. In an industry with seemingly infinite barriers to entrants, that’s a huge story… and one we’ll continue to cover.

George Orwell’s warning, that “the first victim of war is the truth,” apparently applies equally to trade wars. On Friday, Senators Carl Levin and Debbie Stabenow (both D-MI) wrote the United States Trade Representative to express their concern over “reported draft regulations” of China’s New Energy Vehicle plan, noting

We are concerned that these draft regulations continue China’s long history of breaking international trade rules.

Given that the ongoing low-level trade war between the US and China, this was a predictable bit of saber-rattling. But if Levin and Stabenow’s political motivations are easy to understand, the logic that leads them to believe China’s New Energy Vehicle plan is a violation of international trade rules is not. Meanwhile, neither the Senators nor the USTR appear not to have heard about another, more serious possible trade issue arising from China’s headlong dash towards electric vehicles. Sounds like a job for The Truth About Cars…

The Stabenow/Levin letter is long on button-pushing and short on facts, telling the USTR that

In its latest National Trade Estimate (NTE), your office highlighted a new Chinese trade barrier that is designed to prevent U.S. automakers from accessing the Chinese market. According to the NTE, China is in the process of drafting new regulations as part of its New Energy Vehicles (NEV) plan, which seeks to advance hybrid and battery electric vehicle production in China.

So, what does the 2011 NTE say about China’s automotive trade barriers? Precisely two paragraphs, as it turns out, only one of which deals directly with this alleged new barrier to EV business. Still, the entire passage is relevant to the dispute, so we have reproduced it below:

In May 2004, China issued a new automobile industrial policy, the Policy on Development of the Automotive Industry, and subsequently it issued implementing regulations that unfairly discriminated against imported automotive parts and discouraged automobile manufacturers in China from using imported automotive parts in the assembly of vehicles. In 2006, the United States, the EU and Canada initiated dispute settlement proceedings against China at the WTO. The WTO ultimately ruled in favor of the United States. In September 2009, China repealed the challenged measures.

Various U.S. industries are concerned about Chinese policies that may discriminate against foreign products. For example, the U.S. automotive industry is concerned that foreign-invested producers of New Energy Vehicles (NEVs) and NEV parts in China may begin to face discrimination. China is developing new regulations as part of its NEV plan, which encompasses hybrid and battery electric vehicles. Current drafts reportedly specify that automakers that intend to manufacture electric vehicles in China must demonstrate a “mastery” level of proficiency in key parts such as electric vehicle batteries, motors or control systems before receiving a license to produce and sell electric vehicles. In addition, according to reports on current drafts, the Chinese entity that manufacturers the vehicle, either a domestic manufacturer or joint venture operation, must demonstrate clear ownership of intellectual property rights to the technologies that enable the “mastery.” U.S. industry is concerned that China may implement these proposed requirements by requiring that production of key NEV parts take place in China. These proposed requirements also give rise to concerns that foreign manufacturers of NEVs and NEV parts will be compelled to contribute their intellectual property to their Chinese joint venture operations in order to fully participate in the NEV market.

This is the complete basis for the Stabenow/Levin letter, which in turn has already led to several highly misleading media reports. And no wonder: not only is the USTR’s analysis shockingly vague, but its sourcing also leaves much to be desired, referencing only “reports” of “current drafts” of China’s NEV plan. Moreover, its conclusions serve far better as a way to ratchet up anti-China rhetoric than as a way to reflect the reality of China’s proposed EV development plan.

Because the paragraphs quoted from the NTE above contain no direct reference to which “reports” of “current drafts” of the NEV it is concerned with, TTAC has had to dig around quite a bit for those “reports.” An initial survey of media reports uncovers stories like this one, from ChinaAutoReview, which cites First Financial Daily (a paper affiliated with several Chinese Communist party organizations) and quotes a multinational auto parts executive as saying

This policy may force a large group of foreign-invested companies in China to adjust their stake

But this is not the whole story, as the FFD has its (pro-party) biases and CAR (owned by China Business Update) has separate pro-Western business biases. The paper’s “About Us” section notes

Our clients include Fortune 500 OEMs and suppliers, investment banks, accounting firms, consulting firms, government agencies and trade associations. With our extensive networks in China and the world, we make sure that our clients get the best possible services available to help them tap into the Chinese automobile and components market.

Still, if all the sources on the matter agreed with CAR/FFD’s findings, we might agree that this draft legislation is troubling. However, a little more research turns up a month-old report from the law firm of Vinson & Elkins [PDF here] which both clarifies the proposed laws and (not coincidentally) provides a less worrying interpretation of it. The report notes

In 2010, the MIIT circulated two drafts of the New Energy Auto Industry Development Plan among the major automobile manufacturers in the PRC for comment. The plan seeks to meet the State Council’s Energy Savings and Emission Reduction requirements, as well as the State Council’s strategy for Strategic Development of New Industry. If promulgated, the plan will govern foreign investments in the electric vehicle industry. While the official version of this new plan has not been issued yet, comparison of the two released drafts yields an interesting change of language regarding equity participation under the New Energy Auto Industry Development Plan.

As provided in the first draft, the Chinese party to a joint venture must hold at least 51 percent of the shares, regardless of whether the joint venture is for the production of automobiles or for only the production of critical auto components. However, such language was deleted in the second draft issued on 9 September 2010, such that the 2007 Investment Catalogue becomes controlling for investments in the electric vehicle industry. Under the 2007 Investment Catalogue, only automobile final assembly requires the Chinese partner to hold a majority ownership interest, as noted above. The production of automotive parts is therefore not subject to a restriction on foreign majority ownership (although certain investments require either an equity joint venture or a cooperative joint venture of which the Chinese partner must own at least a non- controlling interest, as also noted). Moreover, pending the implementation of the New Energy Auto Industry Development Plan, the 2007 Investment Catalogue currently remains controlling over foreign investment in this area.

Here we find that an initial draft of the NEV plan did require that non-final-assembly producers of key NEV components be majority owned by a Chinese partner, but we also learn that this draft has since been superseded by language that maintains the law as it currently exists. In other words, the concerns of the USTR and Senators Stabenow and Levin were recognized and alleviated by the Chinese as early as September of last year. Somehow, the US concerns managed to be both premature (appearing before final approval of the plan) and woefully out-of-date (criticizing a draft that has since been superseded by language which does not change the basic realities of investing in China’s EV industry).

The Vinson &  Elkins report goes on to explain, in some detail, the finer points of China’s NEV investment policy, including the issue of “mastery” which so concerned both the USTR and Senators Stabenow and Levin. There are, it turns out, three categories of EV business qualifications: the “starting,” “developing,” and “mature” phases (one assumes this final category refers to the “mastery” requirement criticized by the American saber-rattlers). It is important to note that none of these phases require any technology transfers beyond requiring that products “not violate any third-party intellectual property rights.” Even if the earlier draft NEV plan were to pass, and manufacturers of key EV components were forced to create joint ventures, they would simply operate as all Chinese (and, it should be noted, Indian) joint ventures do: through the licensing of technology from the foreign partner. In fact, many Western “automotive experts” do not realize that much of the profit earned by foreign automakers with Chinese JVs comes from technology licensing rather than profits on sales, which are notoriously difficult to repatriate.

In short, through just a little research we’ve learned that the draft proposal which so frightened the USTR and Senators Stabenow and Levin has since been superseded by a version which does not appear to make the changes that drew such an angry response. Furthermore, the details provided in the V&E report indicate that, even if the initial draft were passed, it would not fundamentally change the rules of doing business in China, or coerce foreign firms to “sign over” technology or build components in China in an anticompetitive manner.

Of course, if that initial draft were passed, it could require suppliers to take on Chinese partners where they might not have otherwise. And though it seems that draft will not be approved, it’s worth understanding why that might be a natural development from the current JV system. One of the key issues in the shift from ICE vehicles to battery-powered vehicles is a concentration of value into the battery and associated systems. The since-rejected measure makes sense for any joint-venture-based market, as it prevents the final assembly partnership from being relegated to the smallest possible slice of the value chain. But since no new coercive technology transfer is called for in any of the drafts of the NEV plan, foreign partners will be able to replace any profit  they might have accrued by building the batteries as a wholly foreign-owned enterprise (WFOE) and selling them at a profit to the joint venture by licensing their battery technology to the joint venture instead.

Meanwhile, the USTR and its friends in the US Senate could learn a thing or two from the companies who are actually facing these possible (but again, unlikely) changes in Chinese policy. A Reuters piece filed from the Shanghai Auto Show quotes executives from several foreign supplier companies who are active in the NEV “key components” manufacturing business, and their response to the “proposed drafts” was the exact opposite of the American saber-rattlers. An analyst expresses concern at the proposal, but Robin Choi, director of commercial business development for the Asia-Pacific division of Johnson Controls is more pragmatic, telling Reuters

We are kind of surprised that they limited it at 50 percent. It’s a little bit of a concern for us. To be honest, we don’t know what the result will be, but we are continuing the dialogue with the government. It’s not official yet. If it is, we might have to follow the rules.

Hans-Peter Kunze, Valeo’s senior executive vice president of sales and business development adds

It’s still a draft and how many drafts have we seen in our lives?

Perhaps Herr Kunze has already read the V&E report? Finally Wolfgang Dangel, president of Schaeffler’s Asia-Pacific division strikes the note that seems to define the response of the suppliers who would be affected by any change to these laws, saying

We just have to be alert to watch very carefully about what will happen. No matter what the final outcome will be, we can contribute one way or the other. At the end of the day, we are still confident as we have enough technology and expertise on our hands.

Unless the Chinese government were actively eyeing ways to directly coerce that technology out of the hands of these suppliers, a perception that the USTR and Senators Stabenow and Levin are clearly anxious to fuel despite a total lack of evidence for it, these firms will be just fine. Sure they might have to set up JVs (again, this seems unlikely given the revisions noted in the V&E report) but as long as they can license their technology, they still have their major source of Chinese profits.

By now it should be fairly clear that the USTR and its allies in the US Senate are in a tizzy about something that might not happen, and wouldn’t bother the industry it directly affects much even if it did happen. I’m no WTO expert, but the idea that there are US-based producers of batteries and other key EV systems who are desperate to export them to China for CKD assembly rather than licensing technology for low-cost Chinese production isn’t wildly credible. After all, there’s only one “knock-down”-style EV currently in production… and that’s the CODA EV, which is “assembled” in the US by a US company, out of batteries and a sedan which are both built in China. Imagine that business model working in the opposite direction… not easy, is it?

And while US Senators and trade officials fret over a phantom menace, another real issue is emerging from China’s rush to push EV production and consumption that has completely escaped their notice. As Bertel has documented in considerable depth, a combination of municipal and Central Government subsidies will give Chinese consumers over $18,000 for every EV purchased… and according to rumors we’re hearing out of China (which we will, of course, confirm as soon as humanly possible), those credits are available only to buyers of Chinese-made vehicles made by Chinese brands. If true, this subsidy would certainly constitute an anti-competitive policy (imagine how the White House might have structured Cash-for-Clunkers, or how Japan might have structured its own efficiency-oriented subsidies).

Moreover, if Beijing’s decision to exempt EVs from its registration lottery and traffic restrictions similarly applies only to EVs made in China by Chinese brands, these two policies would create a powerful barrier to what is likely to become the first major Chinese EV market (which happens to be about the size of the Australian market). And since subsidies will be spreading to cities across China, the even more powerful registration lottery and traffic restrictions could too, potentially banning even joint ventures from China’s EV market. This, not an unlikely and ineffectual policy shift on the supplier side, is what America’s trade representatives and concerned Senators should be looking at. After all, if it’s enough to make Bertel Schmitt an EV believer…

It’s long form Saturday! Most of you probably thought you would never see the day Bertel writes a fiery manifesto for the Electric Car. Today is your day.

Yesterday, we were first to run with the story that Beijing most likely will become EV capital of the world. Not because Beijing scientists have developed the miracle battery. Not because Chinese EVs suddenly go 400 miles on a single charge. Physics did not change. Beijing changes. Months ago, new car buyers in Beijing stopped dreaming about buying a new car.That dream was shattered. Now suddenly, an EV has become the only car a new car buyer can buy and drive tomorrow. Or on Monday. If one would be on sale. Here is what happened:

In Beijing, the car market has completely collapsed.

That does not grab you? Then  what if the car market had come to a complete halt in Australia? Beijing has about the population of Australia and had car sales approaching those of Australia. Why did the Beijing market collapse? Because the city doesn’t want more cars on its roads. New car registrations are strictly rationed. More here.

On Thursday, we picked up rumors, and on Friday, we received confirmation that Beijingers will be able to buy a car again. If it is an EV. The media didn’t believe it or ignored it.

Foreign reporters hop off their bar-stool at Maggie’s and go into a tizzy when someone drops a white flower in front of a Beijing McDonald’s. Reporters end up taking pictures of each other, because nobody else is there. Now, they are asleep at the wheel when the EV the media supposedly adores so much does become law. (And if you ask me: People from Glen Beck to John Stewart are missing great material.)

On Friday, the news was in the Chinese press only, and not served on an ready-to eat, fork & knife English platter. Today, the English speaking papers have it. From CCTV to People’s Daily to Global Times, they all run the story that EVs in Beijing will not only be “enjoying the same level of preferential subsidies with Shenzhen”, but will also “have the sole privilege of license-plate-lottery-free, no traffic restrictions and tax-free exemptions (paid by the government).”

You need to live amongst the people of Beijing to understand how big that last one is.

Before we do that, let’s go back to Shenzhen and the subsidies. They are huge: 60,000 yuan from the city and 60,000 yuan from the central government to the buyer of a pure plug-in. That’s a total of 120,000 yuan, or $18,362.64 in today’s dollars. That would be a big amount of money stateside, and the purchase power proponents will agree, it is is even bigger in China.

In Shenzhen, however, the money remained in the government coffers. Nobody wanted it.

Why would a customer not buy the BYD E6 over the BYD F3 with such a munificent donation? First, because there is no BYD E6 commercially available. Second, because the conventional F3 costs $9,000 or so, maybe less with generous BYD-in-distress discounts. Whereas the E6, even assuming a low $30,000 MSRP, would still cost $11,638 after subsidies. They are Chinese, it makes a difference. With the F3, they can drive to Guangzhou and back, whereas with the E6 – do we really believe the 249 mile range? Anyway, moot matter, no E6 available.

In Beijing, the first time buyer does not have that choice. Whether F3 or A7, with a mei you (no have) license plate, any ICE powered car is for all intents and purposes out of reach. With an EV, the car can be driven on Monday. It can be driven on any day of the week (conventional cars must stay off the streets for one day, as per Beijing regs). No tax on top, to sweeten the deal until it drips and you need a napkin.

For a Beijinger, it can’t get any better. Even if Ed McMahon himself would knock on my door and hand me the keys to the BMW 7series I just won in the Chinese Family Publishers sweepstakes, I could not drive it – no tags. McMahon can’t hand me the tags, not transferable. No, you can’t even give a regular car away in Beijing.

Suddenly, $11,638 or even $20,000 or more for an EV are mere afterthoughts. Remember: In Shanghai, people pay more than $7,000 for the license plate.

The only problem: Which EV? I would not know which EV I could buy on Monday, as Ash Sutcliffe rightly comments over at Chinacartimes. We shall see miles of cable in a week at the Shanghai Auto Show, snaking into parking lots of electric cars, but none for sale. Mock-ups we have seen for years. What are they waiting for? A market.

This being Beijing, the press is full of mentions of Beijing’s carmakers Foton and of Beijing Auto. Both are owned by BAIC, which is controlled by the City of Beijing. Get the picture? No wonder the plan was waved-through so fast. Foton has an electric taxi out, the Foton Midi. I can’t buy it. It’s used as a trial in Yangqing, which still is in Beijing proper, but way out there. I’m told, if I would tell the driver to take me downtown, or to the airport, he’d say “bu yao” – no good. Too far from the charging station in Yangqing. Those taxis don’t stray farther from that charging station than little chickies from their mother hen.

Beijing Auto has electrified versions of the former Saab in development. BAIC has a number of other vehicles in development. The operative word is “development.” So nothing from there – yet.

Who else?

Well there would be Nissan with a Leaf, or Mitsubishi with an i-Miev. Both market ready.

The Leaf would be just what the doctor ordered for Beijing. Nissan has plans for a few hundred in Wuhan this year, says Reuters. Wuhan is the city Nissan’s joint venture partner Dongfeng calls home. According to the Reuters report, Nissan wants to “make the Leaf in China as soon as possible, but the key issue to the decision is the sales volume.” That according to Tsunehiko Nakagawa, vice president of Nissan China Investment.

Dozo, Beijing is wide open. Let’s bring the Japanese price of $44K down a bit (this is China), say to $40K, deduct 18,362.64, and you have $21,638 – not bad if it’s the only choice you have. Around 140,000 yuan, a nice price point. Tough sell anywhere else, Nakagawa is right when he worries about sales volumes. He won’t find it in Wuhan. But in Beijing? The Leaf could become more ubiquitous than the Made-in-Beijing Hyundai Elantra taxi.

Mitsu’s i-MiEV would be ready also, but we have no China plans on the RADAR.

Shipping them from Japan may not be such a good idea at the moment, it would eat up 25 percent in customs duty anyway, spoiling all the fun.

Being first in this cornered market is absolutely essential. Let’s not forget: If you sell EVs here, you will be selling to first time buyers. They have never driven a car they owned. They will grow up with an EV and will know nothing else than a car must be electric. A car filled with gasoline will be as alien to them as chopsticks to most of us. Here is the chance to sell to first-time affluent, worldly buyers, in the world’s second or third largest city (they are fighting it out with Shanghai), in the capital of the world’s largest auto market, with the world watching in awe. I bet Dongfeng would not mind at all.

If neither Nissan nor Mitsu will occupy every street-level wall socket in Beijing (all conveniently 220V, and rock-solid supply), someone else will:

A few days ago, Volkswagen had sent out a blurb about “becoming the friend of the National Museum in China.” I probably wasn’t the only one who immediately (electronically) spiked it.

Who cares whether VW donates a few cars to take people museum hopping in Beijing? Who cares whether “as part of this sponsorship, Volkswagen will launch its first electric vehicle fleet in Beijing?” We’ve heard that greenwashing before. Who cares whether “China plays an important role for Volkswagen´s goal to become the leader in the global electric vehicle market by 2018?” Hyperbola in green. Recycle bin.

In front of the new regulatory backdrop, (or “unter den geänderten Rahmenbedingungen” as they so much fancy to say in the Fatherland), the electric museum shuttles become a stroke of genius. Whoever had the sheer luck or inside information (being familiar with VW, my money is on sheer luck) just started the best timed promotion there is. Most likely he or she will get promoted. They run a fleet of Golf Blue-e-motion (to be launched in Germany in 2013, in the U.S. in 2014) and Touareg Hybrids (available). They are the only electric cars on Beijing’s streets, while everybody is absolutely dying to have one. They can keep the Touareg Hybrid, and should launch the Golf Blue-e-motion immediately in Beijing. It would sell like hotcakes while the rest of China scrambles to make their prototypes ready for market.

Volkswagen doesn’t honestly believe that the Golf Blue-e-motion will be a volume model anywhere else anyway. What did Volkswagen’s sales chief Christian Klingler say? “The electric car is not a request from the customer, the electric car is a request from the government.” Now he could say: “The electric car is a request from the customer, the electric car is a request from the government. We have a win-win!” They love win-wins in Wolfsburg.

Volkswagen’s joint venture partner FAW, maker of the Golf, would be delighted to produce the electrified version. Mei wen ti! (No problem.)

Volkswagen’s southern JV partner SAIC has more electric know-how, but FAW wouldn’t mind picking some up. And while they are at it, they could also update the English version of their website. It’s from 2009 and in the old CI that never went anywhere. Bu kequi.

No Volt. So sorry. Pure plug-in only. Them’s the rules. Try the lottery.

Do I sound excited? Yes, I am. As most around here know, I do not believe that the EV will be taking over the world anytime soon. I am a pragmatist. Most buyers are pragmatists when they get into the showroom. I have sat in too many focus groups, listened to how they lied about protecting the environment at all cost. In the store, they take the car that makes the most sense for their money. I never really cared what propels a car, as long as it’s fast and peppy. Drive-trains are not a religion.  I believe in cars that make sense.

In Beijing, the only car that makes sense for a first time buyer that did not win the lottery is an EV. It’s a market, ripe for the plugging.

This is the first in an infrequent series of pieces that take a step back from breathless blogging. They look at a phenomenon over the longer term, they have more in-depth research, they are hence a bit longer. We will run them on weekends, when some may have the time for 1,200 or more words.

Imagine, if you dare, you live in China’s capital, Beijing. It’s a nice place, actually. The population of Australia crammed into one sprawling city. Good food. Nice people. Great nightlife. As cities go, it covers a lot of space. Beijing proper is a bit less the size of Kuwait.

Now imagine you have your eyes set on a new car. Chery QQ, Chevy Escalade, whatever. What do you have to do to get behind the wheel? You have to win the lottery. Not to buy the car, a QQ goes for a few grand. You need to win the lottery for the same thing that keeps felons employed back home: A small piece of blue and white tin, a license plate.

Your chances of winning are rotten. Imagine you go to Vegas, you put a chip on a single number. If that number comes up on the first spin of the wheel, you may buy a car. If not: Better luck next month, ta-dah!

Next!

Those would be your odds in Beijing.

Truth be told, I exaggerated a bit. The odds to win a plate stood at 1 to 23 in March, that’s somewhere between a Split Zero and a Straight Up in roulette. The odds get increasingly worse as the year grinds on, as new applicants join the swelling ranks of previous losers, and as the payout remains the shape of a license plate: Flat.

See, Beijing drowns in cars. By the end of last year, there were 4.8 million vehicles on Beijing’s roads. In 2010 alone, 700,000 new cars were registered. Or 890,000 new cars, depending on which issue of China Daily you rely more. The smog is pretty much under control. It’s the roadways. The city is dying from acute congestion.

The city could have done the same Shanghai does. That beautiful city also has a population the size of Australia. Shanghai is divided by a river, and connected by tunnels that entrap the unwitting traveler. If your hotel is on the wrong side of the river, your flight from Hong Kong or Beijing to Shanghai can be quicker than the taxi trip to the hotel. That’s why Shanghai has two airports, one for each side of the river.

Years ago, Shanghai applied a typical Chinese method to the problem: Money. In Shanghai, a limited number of license plates is auctioned off once a month. They go to the highest bidder. You think that’s because China has just recently been poisoned by bourgeois ideas?  The plate auction is looking back at a 16 year tradition. This April, 8,000 tags will come under the (computerized) hammer, that’s about what Beijing used to issue in four days. A Shanghai plate sets you back more than a QQ: Last month, the average price for a plate was $7,053. Shanghai Daily [sub] reckons that this month, the price will reach new highs.

The $10,000 plate is not too far off (also helped by the tanking dollar and rising Chinese currency.)

Beijing did not want to stoop to the lows of that frivolous westernized port city. Beijing decided on a system that gives the same rotten chance to rich and poor: A lottery. On Christmas eve last year, the city handed the Beijingers a present: 240,000 new cars for the year, that’s it. Each month, the winner is drawn by (computerized) lottery.

The entrance to the lottery wants to be earned. First, you have to download an application from the Internet. Global Times says the address is bjhjyd.gov.cn, but they trick you. It’s somewhere else. Once you have found it, you need to fill in the form and send it in. Then the application gets checked. In the first round in January, 210,000 applications came in. Only 187,420 made it into the lottery. I don’t know what the 22,580 did wrong, but there must be a way to keep out the riff-raff. If your application is accepted, you get a number, and if your number comes up in the monthly lottery, you get a plate.

With 240,000 plates available for the year, 20,000 plates should be awarded each month. However, it is only 17,600 for each lucky draw, the balance is reserved for commercial drivers, businesses and government use.

The unlucky candidates are carried over into the next month’s lottery, where they meet the new qualifying applicants. In February, it was 292,000 candidates with a one in sixteen chance. In March, the number had swelled to 397,543 candidates with odds of one in 23. It will get worse every month. Maybe even every year, with plateless and luckless zombies pouring in in January. Speaking of worse:

Beijing’s desperate car dealers geared up to fight for 20,000 first time buyers each month. To their dismay, less than 10 percent of the winners actually bought a car. By the end of February, 3,400 out of 35,200 had their hard earned plate affixed to a new car. The holdouts have six months to get one, if they don’t, the plate goes back in the pot.

As expected, the system is being gamed. Beijingers immediately activated China’s most forceful weapon: The family. Yang Hongshan, deputy director of the department of urban planning at Renmin University is not surprised by the huge numbers of applicants. “Car buyers will mobilize their close relations, such as their family members, to take part in the drawing,” said the scholar. But the house has better odds. As the months wear on, you would need a family of 50 or more to stand a chance.

More sinister schemes were devised: Beijing’s courts were turned into accessories of fraud. Fake debts were created, with a car as “collateral”. The court awarded the car to the alleged “lender.” That was quickly stomped-upon. Now, the only way to get court-cashiered cars (without the need for a plate) is through public auction. On April 4, a picture of a man bidding for a car appeared in Global Times. The story is gone. The front-page was cached by Google. The link goes nowhere.

If in doubt, keep it simple: License plate theft is on the rise in China’s capital. This prompted Beijing’s finest to activate 2,600 video cameras to find purloined plates. Fines are relatively mild: A maximum of $275, and the loss of a license, if you have one. What good is a license anyway, if you can’t have a car?

The economy of Beijing pays a much higher price. Earlier in the year, Beijing’s Municipal Commission calculated that Beijing’s car dealers (in some of which the city itself is heavily invested) will have lost more than $9 billion of sales this year. Wang Shuxia of the commission based his calculation on an estimated 580,000 cars sold. His estimate is based on 240,000 replaced cars (which do not need a new plate) and 240,000 cars for first time buyers (which do.)

This projection may not pan out. Replacing a car assumes getting rid of the old one. China’s new car dealers have yet to learn the art of the trade-in. Now, as much as they are dying to sell you a new one, what would they do with the old? The used car market is dead in Beijing. Buyers of used cars need a plate, and the plate does not transfer. Before you find a farmer in the countryside as a willing buyer, you rather drive the old one a year longer. Also, if the trend of winning a plate and not buying a car continues, there will not be 240,000 new cars. Car buying used to account for 26 percent of retail transactions in Beijing. That number will most likely be revised.

Criticism of the system is on the rise. More so than elsewhere in the world, you aren’t a successful car dealer in Beijing without guanxi – connections. The booming car trade attracted some well connected billionaires.

The tone of the reporting by state media (China Daily is owned by the Central Government through Xinhua, Global Times is owned by the party through People’s Daily) is getting more strident with each new round of lot drawing.

Chen Jianguo, deputy head of the industrial coordination department of the powerful National Development & Reform Commission (NDRC), warned in February that purchase restrictions are not only insufficient to deal with the congestion problem, but could harm consumers and the industry overall. Just about each province in China, plus the Central Government, has their hands in one or more car companies. Chen recommended something familiar: Usage taxes.

The decision of Beijing’s municipal Commission of Economy and Information Technology to accept a proposal to exempt pure EVs from the lottery can be seen as a shrewd deflection of the mounting criticism. Others can view it as a chance to turn Beijing into a true green city. Others again may think it is the culmination of a long hatched plan to pry the car away from its driver. Whatever it is, it will be interesting to watch.

From RenCen to Wolfsburg, all eyes are on China. Ok, so this year China will build and buy 18 million cars or thereabouts. But what about next year? Carmakers in Europe, Japan, and the U.S. are dependent on the Chinese growth machine. So what will it be? Boom or bust?

Already rattled by Beijing’s curb on new cars, stocks of German carmakers from BMW to Volkswagen took a nose-dive two days ago when the Chinese government announced that there will be no more tax incentives for new cars as of January 1, 2011. Well, not everybody at the German stock exchanges reads TTAC. If they would, the tax story would have not surprised them. The GM share (of a company with by far the most exposure to China) powered ahead. We have many readers at GM.

Well, the next day, the market realized that German automakers will be unhurt, and stocks recovered. Duh: If the tax hike hurts anybody, then it’s the (quasi) independents, such as Geely, Chery, or BYD. Why? The raised tax applies to cars of 1.6 liter and less. That’s not the playground of the big joint ventures.

And in any case: In 2009, the tax on cars 1.6 liters and less had been halved to 5 percent. January 1, 2010, the tax was raised to 7.5 percent. There were warnings of falling skies. China’s CAAM prognosticated moderate growth of 10 percent. Even TTAC was too conservative when we predicted 12 months ago that “China should close out 2010 with 15m, 16m, or more cars sold.”

And what did Chinese do? They listened neither to the CAAM, nor did they read TTAC, and they bought more cars in 2010 than any country on the globe, ever. So now the tax goes up from 7.5 percent to 10 percent. What’s 2.5 percent on a $5,000 car? $125. Big deal.

The Chinese government certainly didn’t suffer from the reduced taxes. While car sales rose some 30 percent this year “tax revenues from newly purchased autos jumped 53.3 percent from one year earlier to 156.92 billion yuan (23.77 billion U.S. dollars) in the first 11 months of 2010,” says Xinhua. Looks like more appetite for bigger cars anyway.

All eyes are on China, but not all see the same. The New York Times found a lawyer in Guangzhou who had plunked down $7,500 as a down payment on a $72,000 (incl. taxes) and who’s still waiting for his car, because Audi can’t keep up with the demand. Or because dealers sell the hot import at a premium over MSRP for immediate delivery.

There are others, such as USA Today, that see the Chinese market implode, “and that could eventually mean a flood of Chinese car imports into the U.S.” The yellow hordes, led by the Chevy Sail, no doubt. Don’t hold your breath.

Chinese automakers, from General Motors to Geely, think that “growing demand for cars in China will outweigh the impact from the end of tax incentives that boosted sales,” says Bloomberg. Pretty much all industry insiders in China agree with GM China’s Kevin Wale who expects the Chinese market to rise by 10 to 15 percent in the new year. Yesterday, Bloomberg called GM China and asked whether Wale had changed his mind. The answer was no.

Geely, maker of the QQ midgetmobile, is likewise optimistic. Lawrence Ang, Geely’s executive director, told Bloomberg that there is a loophole in the tax code. Fuel efficient cars still are sponsored by a 3,000 yuan ($450) subsidy, and “after some modifications, most small cars in China should be able to qualify.”

My take? A very simple one: There are anywhere between 1.3 billion and 1.5 billion (nobody really knows) people in China. Only 6 percent own a car. The rest wants one. Combine that with rising incomes, even for the lowly farmhand, and there are enough car buyers for decades to come. Sure, there will be the inevitable ups and downs, but the long term trend is up. (If there ever is a serious market tremor in China, it could bring GM down. Ford and Chrysler – if still alive- would gain.)

And to save you the typing of “housing bubble” – sure, there is one. Has been here for years. Is getting bigger by the day. Vacancy rates ginormous (nobody has real numbers.) However, in China you have to put down 30 percent for the mortgage on your first home. 50 percent for the second. All cash from here on out. There is no securitization of mortgages. A lot of the empty homes and mansions are paid for in full. If the real estate bubble pops (and it will,) there will be a giant redistribution of wealth. Isn’t that what communism is all about? (Recommended reading here.)

Today, Bloomberg delights its readers with the news that “General Motors Co.’s passenger-car venture in China sold its millionth unit this year, becoming the first carmaker to reach that sales level in the world’s largest auto market.” Spinmeistery at maximum revolutions.

Just a few days ago, the same Bloomberg had this story:

“Volkswagen AG, Europe’s largest carmaker, said annual deliveries in 2010 will exceed 7 million for the first time as sales in China surge.  VW’s 11-month deliveries in the world’s largest car market advanced 38 percent to 1.82 million vehicles, accounting for 28 percent of global sales, the Wolfsburg, Germany-based company said in a statement today.”

Of course, technically, both stories are correct. “GM’s passenger car venture in China” is one joint venture (with SAIC), while Volkswagen’s passenger car operations in China span joint ventures with two companies, SAIC  and FAW. And truth be told, Volkswagen’s numbers also include Audi and Skoda (but not to material effects – and anyway, that “GM passenger car venture in China” consists of Buick and Chevrolet, so there.)

The common reader is not interested in new math or technicalities, he or she wants (if at all) to know who is more successful than the other. And Volkswagen vastly outsells GM in passenger vehicles in China.

And what ever happened with staying on topic? Wasn’t GM’s line that they are China’s biggest, with more than 2.3 million expected sales, including Wuling minivans? Now suddenly, it’s down to a million – passenger vehicles. Don’t confuse a reader with the attention span of young puppies. They’ll start shaking their heads and might sue for whiplash.

GM China, our recently no longer so reliable oracle for the Chinese market, raised its November sales by 11 percent, compared to an absolutely batty November 2009. 11 percent are not the same growth as the 109.5 percent GM China had recorded in last year’s November, but how much battier do you expect them to get? The more meaningful number is that for the first 11 months of 2010:  From January through November, GM’s China sales jumped 33 percent to a mind-blowing 2.17 million units. GM China will most likely close out the year in the 2.35 to 2.4m area – this is higher than the total sales of some of Europe’s larger countries, and definitely a whole lot more than GM sells back  home. Better get used to it.

In November, GM’s Chinese joint ventures moved 196,990 units. Not much change compared to the 199,641 units they sold last month. Back home, GM sold 168,670 units in a very good November.

GM’s passenger-car JV with SAIC, which keeps China supplied with Buicks and Chevrolets, brought in more impressive numbers. Sales are up 33 percent here, setting the stage for news of a very strong overall November market in the Middle Kingdom.

What rained on GM’s parade was Wuling. The econobox maker that helped inflate GM’s Chinese numbers by about a million a year continues to disappoint. Wuling reported only 84,879 mini vehicles in China for November, “without providing a comparison,” as Bloomberg complains.

Lazy, lazy Bloomberg. TTAC can provide the missing comparison. SAIC-GM-Wuling had sold 89,636 mini-vehicles in China in November 2009. We call that a 5 percent decrease. Woolly Wuling hasn’t kept up with the pace of the market lately. They deliver volume and bragging rights to GM, but no growth, and most likely very little profit. And they ruin the percentages everybody is so in love with.

Lazy journos will kvetch that (duh) 11 percent in November is less than 19.6 percent in October. Compared to what, gentlemen? Keep in mind that November 2009 was absolutely nutty in China.  Buick sales had risen 118 percent, Chevrolet sales had exploded by 281 percent. Honestly, I had expected overall Chinese sales to fall compared to that absolutely outrageous November 2009 sales orgy. That they did not fall and that they keep on climbing attests to the vigor of this still largely untapped market.

Did I say “largely untapped?” There are a paltry 63 cars per thousand people on China’s roads. In the U.S., there are 800 per thousand. The G7 average stands at around 600 per thousand. China passed Japan as the world’s second largest economy, with a still largely unmotorized population. They all want what we want: A car.

Looking ahead, growth in 2011 will most likely be more subdued in percentages, especially in the first quarter. The government will most likely do away with the tax incentives (who needs incentives  in that kind of a market?)  People lock them in in November and December. There will be pull-forward.

Still, market observers expect even more growth for 2011. J.D. Power thinks China’s auto market “will grow at a somewhat lower rate than in 2009 and 2010.” GM China’s Kevin Wale prognosticates growth of 10-15 percent more next year.  Don’t let those percentages fool you. 10 to 15 percent of 18 million will be 1.8 to 2.7 million more. Or the total sales of a good sized European country.

Bubble? There is none in sight. In the past ten years, China had years close to 5 percent growth and years close to 50 percent growth. On average, China’s car market grew 24 percent per year, and it still has only 63 cars per thousand.  Sure, there will be ups and downs, but the general direction of this market is due north. Like any other market, China will start slowing down when it reaches 500 cars per thousand, which I believe to happen some time after 2030. That needs around 750 million cars on the road, or about three times the U.S. number. Scary? Yes. Inevitable? Unless the sky falls, yes.

You think I’m crazy? You thought I was crazy when I started writing for TTAC two years ago, and I haven’t changed.

After President Obama paid his outstanding union dues and slapped a 35 percent punitive tariff on Chinese car and light truck tires exported to the USA, we predicted two outcomes:

1.)    It will start a trade war, and China will drag the U.S.A. in front of the WTO. Sure did. The WTO accepted China’s complaint, and the trade war turned into a major conflagration.
2.)    We said that not a single new job will be created in the U.S.A., and “what the boneheaded decision does is simply shift tire production from China to other low cost producing countries.” Sure does.

The Nikkei [sub] reports that Thailand is becoming the country of choice for low cost tire production. Not a single job moved back to the U.S.A. Jobs simply move from China south to the Land of Smiles.

According to the Nikkei, Bridgestone, Sumitomo and Yokohama Rubber “are rapidly expanding their Thai factories for passenger car tires, defining the Southeast Asian nation as their key export base.” All three are ratcheting up their Thai production as if there’s no tomorrow.

Bridgestone’s Thai facility will become the group’s second-largest passenger car tire factory in the world. In the job department, Bridgestone has shut down plants in Australia and New Zealand. Sumitomo Rubber is expanding their plant in Thailand’s Rayong Province, with the aim of making the Thai factory one of the largest in the world. Yokohama Rubber plans to raise its annual production capacity in Thailand by 50 percent.  Goodyear, Michelin and other have tire plants in Thailand. Others will follow.

The financial crisis had caused global tire demand to plunge. Now, driven by red hot car sales in China and Southeast Asia, companies can’t make tires fast enough. As far as WTO rules go, there is no special safeguard clause between the U.S.A. and Thailand.

Actually, tires imported from Thailand to the U.S.A. used to be duty free. The U.S. government said “ooops” and dropped the duty free status on July 1. (While they were at it, the duty free status of wood flooring from Brazil, and gold rope necklaces from India was also eliminated, what’s fair is fair.)  The new Thai tire tariff? The 4 percent harmonized tariff allowed by the WTO. The same tariff the U.S.A. had charged on Chinese tires before the additional 35 percent were slapped on.

So where did this get us? Instead of cheap tires from China, we now get cheap tires from that epitome of political and financial stability, called Thailand.

If you associate Thailand with other uses of rubbers, it’s time to rearrange your associations. Not what you think, silly.  Burning tires is a Thai tradition when battling the police – we recycle!

If you are hoping that the Chinese bubble will burst in no time, putting China back on bicycles, then this story is not for you. If you are worried about little people in Asia using up all the precious hydrocarbons we use for our bigger cars, then we must warn you that reading further could be hazardous to your circulatory system. You have been warned.

The golden period of China’s auto industry will likely last 20 more years. Yearly demand for passenger vehicles in China will reach over 35.2 million units in 2030. These are the conclusions of a report co-issued by the State Council, the Society of Automotive Engineers and Volkswagen China. None of them are known for their irrational exuberance.

“The number of passenger vehicles in use in China may rise to 200 million in 2020, which means that each Chinese person may own one-seventh of a vehicle on average by then, a figure barely reaching the current world average level,” said Zhang Xiaoyu, executive vice-president of the China Machinery Industry Federation. “There is still a long way to go to achieve the moderate level of developed countries.”

From what I privately hear is that they are all lowballing. Long before 2030, the annual demand in China will be approximately 50 million cars per year. Where does this number come from? From a golden rule in emerging markets that never fails: Use the current demand for motorcycles, tricycles etc. Once people have the money, they will buy cars instead.

Jack Perkowski, China visionary and author of the book Managing the Dragon,  came to the same conclusion many months ago: “China’s auto industry will continue to show rapid rates of growth for many years because China’s total demand for transportation is already much bigger than most people think. I would argue that China’s transportation industry is actually 50 million vehicles per year.”

You think the poor exploited Chinese peasants will never ever be able to afford a car? In 1980, more than 50 percent of China lived below the poverty line. In 2000, it was less than 10 percent. Now, the percentage of Chinese people living in poverty is estimated at 2.8. Source? The CIA Factbook. In the U.S.A.? 12 percent. Same source.

200m cars on the road by 2020 would be 75 cars per thousand people. In the US, we have 800 cars per thousand. The G7 average is around 600. Even Poland now has close to 500 cars per thousand. Even at a rate of 50m cars per year, and assuming no scrapping, China would need 15 years to reach the level of Poland. When I look around here, the country definitely looks way more prosperous than Poland.

And just to put it into perspective: Last year, the worldwide output of passenger vehicles in all countries was 47 million.

Anyway, the lowballing report predicts that China’s passenger car sales will reach nearly 15 million units in 2010 and approximately 22.6 million units in 2015. The yearly demand for passenger cars in China is estimated to reach more than 25.8 million units in 2020, more than 29.2 million units in 2025 and more than 35.2 million units in 2030. Again, the estimates are conservative. Due to the byzantine way China defines “passenger cars,” the total count will be much higher. Let’s just say this: If GM China would have to rely on passenger cars alone, more than 1 million Wuling trucks and vans would be missing in their statistics.

Feng Fei, chief editor of the report and director of the Industrial Economy Research Department under the State Council, predicts that “thanks to the mature hybrid power technology, China will likely produce 100,000 hybrid vehicles, 30,000 pure electric vehicles, and 10,000 fuel cell-powered vehicles in 2010.”

According to the report,  sales of the alternative energy vehicles will reach 500,000, 150,000, and 15,000, respectively, in 2013, and 1 million, 300,000, and 20,000, respectively, in 2015.

What could hold possibly hold up the development? China is a bit behind on electronics. Most of the designs come from abroad. Fu Yuwu, standing director-general of the Society of Automotive Engineers, exhorted the industry to attach more importance to automotive electronics research and development, says People’s Daily.

Chinese dually. Picture courtesy transportfool.com

I spent an interesting Saturday with two old friends of mine. They had never met before. One, American, CFO of an insurance company, had been in the finance and banking business all his professional life. The other, born Chinese, naturalized American. Was one of the top mortgage writers in the Silicon Valley before the dotcom crash. Came back to China and heads a Chinese/American bank. The two got along splendidly.

Of course, we talked about money and cars. Recently, there was a discussion on TTAC on how the bursting of the Chinese real estate bubble would destroy the car market just like it had in the USA. I eagerly set out to pick their brains.

Quite oddly, the first one to throw water on the bubble theory was my friend, the staid CFO of the staid insurance company. He thoroughly debunked the myth that the American car bubble of 2000 was created by people who had come into money by flipping homes instead of burgers. He had one number right off the top of his head. “Each year, about a million homes change hands. Sometimes more, sometimes less. Even assuming they were all flippers, they didn’t buy 17 cars per home and year.” Instead, he said, it was easy credit that had driven up the sales of cars before it drove up prices of homes.

Need some cars to go with it? Picture courtesy newhomessection.com

Did the wealth effect, the feeling that you suddenly sat on a three  million home that you had bought for $500,000 (with $100,000 down,) did that urge you to fill up that three car garage to its limit? No, said my friend, the staid CFO. Housing prices were relatively flat through the 90s while car sales increased. Car sales peaked in 2000, just when home sales started to skyrocket. Real estate taxes rose right with it, and those three cars turned into a liability. Car sales eased.

“Easy credit did cause the car and housing bubble. The credit crunch burst both bubbles. But the housing bubble was not the cause of the car bubble,” said my bean counting friend. If you look at the charts which I linked in this paragraph, you see that while doing it off the top of his head, he was right. The car boom in the U.S. preceded the real estate boom. Both crashed when the easy money was gone, or, as my beancounting friend put it, “when the hedge funds said to sell everything that’s not listed on the NYSE.”

He then went into a long monolog about high yield asset-backed-securities and credit derivatives that were en vogue with hedge funds. He did that much to the fascination of my Chinese friend, but I lost him.

About 60 skyscrapers in Beijing are vacant. Picture courtesy springcreekacq.com

When the discussion came to the Chinese real estate bubble, my Chinese banker friend emphatically acknowledged that China is in a huge one. Mostly in the tier one cities, but getting into the tier 2 cities also. He said that it is an absolute insanity. People buy homes and apartments, and keep them empty. Vacancy rates in tier one cities are sometimes higher than 30 percent. About 60 skyscrapers in Beijing are vacant. He congratulated me on my choice of renting, and suggested I should move, because rents are actually coming down. Caused by the oversupply of unsold properties, held for speculative purposes.

When they are poor, they take the bus or the train... Picture courtesy concierge.com

Coming to cars, my Chinese banker friend emphatically denied that easy money has anything to do with the skyrocketing car purchases in China. “That’s an American fantasy. Chinese don’t finance their cars. They pay with cash.” He told me how forays of his bank into the automotive financing field had failed, to the utter disbelief of his American partners.

The official party line is that “less than 20 percent of Chinese car purchases are financed.” My Chinese banker friend figures it might be less than 10 percent. “The number of financed cars is actually going down. Chinese don’t borrow to buy a car. When they are poor, they take the bus or the train. When they earn more, they buy a car.” He said that that Chinese increasingly earn more. About 25 percent of China’s 1.3b to 1.5b people are considered “middle class.”

… when they earn more, they buy a car. Picture courtesy popsci.com

Then, my Chinese fried mentioned the high savings rate of the Chinese, and that many of them don’t know where to stash their money. That got the fascination of my bean counting friend. They both bemoaned the lack of high yielding safe investments. When they started discussing yield curves, instead of the curves I am interested in, I lost them again.

We went for dinner, all three of us agreeing that in China, the boom in cars has nothing to do with the boom in real estate, that the two are much more disconnected than they ever were in the U.S., that the Chinese real estate market will go boom unless the government will intervene (very likely, as it is often state owned enterprises that are driving the prices up and are building the empty towers,) and that the car boom in China will last until the motorization has reached Western standards. In a country where cars aren’t financed, tight or easy money has little impact on car buying.

A level of motorization according to Western standards  is about 600m cars away. So even if the Chinese would – horrors of horrors – buy 50m cars a year, instead of the 15-17m this year, China would have 12 years until the beginnings of a market saturation.

I asked both whether I should buy oil futures. They both shrugged, and we had the best Beijing duck in town.

Reilly became GM group vice president and president of GM Asia Pacific in 2006, In 2009, Nick Reilly was appointed President of GM International Operations based in Shanghai, China. GM is an old China hand. They came to China in 1997 and started the second large joint venture with China’s SAIC in 1997. Buick is still alive only because it is an important brand in China.

In an interview with London’s Telegraph, Reilly warned to stop joking about the Chinese car industry. He urges everybody to acknowledge the Chinese as a very serious competitor:

“The general political climate is that these guys must be cheating and we need to get more protectionist, rather than actually admitting what is happening. Generally I think there is a complacency or a refusal to accept the huge economic shift there has been.”

Geely “signed a binding deal Sunday to buy Ford Motor Co.’s Volvo Cars unit for $1.8 billion, allowing the independent Chinese automaker to expand its foothold in Europe,” as the Wall Street Journal reports. The agreement was signed by Geely’s chairman, Li Shufu and Ford Chief Financial Officer Lewis Booth, and witnessed by Li Yizhong, the Chinese minister of industry and information technology, as well as Swedish Minister for Enterprise and Energy Maud Olofsson.

Geely, or any of the Chinese car companies don’t need to buy Western companies to get access to vaunted intellectual property or secret technology. China had this access for more than 20 years, ever since the first joint venture plants were set up. Many Chinese plants are more modern than U.S. plants, where modernization clashes with unions. Reilly agrees:

“Their rate of progress in terms of technology, innovation and quality improvements is really remarkable, and we are totally underestimating the technological advances they are making. The gap has completely shrunk. It is a tenth of what it was and a quarter of what we expected it to be. I think everybody thought we had 10 or 15 years before China became competitive, and that is just not true.”

Of course, Reilly said that to extract more money from the U.K. government by creating an automotive version of the missile gap. But nevertheless, the threat is real. Geely’s purchase of Volvo may just be the key to unlock the Chinese export might.

China has “the largest market in the world now,” said Reilly. “So adding 10 percent in order to export isn’t huge to them but is huge in terms of the number of exports.”

According to the Telegraph, “China has held its manufacturers back from an offensive on Europe to meet its massive home market.” The Telegraph is dreaming. Or they listened to closely to Reilly who whispered off the record that it’s all a big conspiracy, and that all the Chinese government needs to do is to flip the switch and unleash its car companies on unwitting export markets. The opposite is true.

For more than two years, we have reported that the Chinese government is unhappy with China’s car exports. Measures enacted in 2008 to prop-up exports fizzled. By the end of 2009, the Chinese government issued strong marching orders to its car industry to step up exports. There is reason for alarm: China is the world’s largest auto market with 13.6m units sold in 2009, and some 15 to 16m to be sold in China this year. Chinese car exports however are a disaster. China’s already anemic auto exports dropped another 46 percent in 2009. The value of car imports beat exports 3:1.

Why?

The Chinese government is not holding its manufacturers back. Western manufacturers do. Joint venture agreements with Western or Japanese automakers forbid the exportation without the say-so by the joint venture partner. Which they are loath to give, except in tightly controlled small scale trials. Cars made in China under joint venture agreements according to Western or Japanese standards, using Western or Japanese technology, and Western or Japanese production methods are as good as or sometimes better than their Western or Japanese counterparts, and could be exported tomorrow. They would be indistinguishable in the market. Especially in a market, where locally produced cars are already full with China sourced parts.

Imagine what would happen if China would export cars made by their joint ventures, and you will understand the importance of the Geely/Volvo deal.

The only cars that were attempted to be exported were cars made by private manufacturers who, more often than not, had previously made refrigerators. To the delight of Western or Japanese manufacturers, these cars fail crash tests, videos of which go viral through Youtube and stop any export attempts dead. Manufacturers are not giving up. They quietly seek ECE Whole Vehicle Type Approval for their cars – and are increasingly successful.

Nevertheless, there are other barriers to overcome. If you had a choice between a Great Wall Florid, Coolbear, Hover 5, or Wingle 4, and, say, a brand new Volvo S60, which one would you take?

Exactly.

What Geely buys is an accepted brand, a brand that is associated with safety and reliability. What Geely buys is a range of already homologated cars, and a cadre of engineers that already is working on cars to be launched 5 years from now. Other than in the case of Rover and Saab, where old tooling was trucked off to China, Geely buys a fully functioning car company. They will leave manufacture and engineering in Europe. They will build new manufacture in China. Ford, and Ford’s Visteon, which already has a large footprint in China, will be more than happy to sell parts and technology to Geely, as long and as many as they desire.

It was much easier for Ford to shed a Volvo to a Chinese company, than for GM to sell a Saab or even a Hummer. Ford is a relative nobody as far as Chinese joint ventures go. Their three-way JV with Mazda and Chang’an just fell apart. They’ll most likely make more money supplying Geely with technology. Speaking of which, keeping an eye on the current Volvo joint venture with government-owned Chang’an should be interesting.

Just  like the Volvo deal opens the doors to markets which are all but closed to other Chinese makers, Volvo gives Geely a trusted and respected brand it can successfully market in China. Geely is planning to open a 300,000 unit plant in China, which would double Volvo’s current worldwide output. That plant could have a very important customer:

Much to the chagrin of government-owned Chinese car manufacturers, who are in bed with foreign joint venture partners, a Volvo owned by Geely may profit big from a possible edict by the Chinese government. The plan is that at least 50 percent of government cars must be home grown. If passed, this would hamper sales of the ubiquitous Audi A6, which has become the unofficial Chinese state car, and take a big bite out of the sales of joint ventures. Cars are the biggest item on China’s government shopping list, accounting for 20 percent of the year’s government procurement in 2008.

Government owned companies like FAW, SAIC, Dongfeng, or BAIC will watch closely how privately owned Geely will digest the Volvo purchase. If successful, western car companies will be on their shopping list again. It is no coincidence that China’s SAIC is flexing its muscles in the SAIC/GM joint venture, which it already officially controls. As we said in the beginning, if anyone understands the true capabilities of the Chinese Auto industry, then it’s GM’s Reilly.

Yesterday, we reported that China wants to be a market of 20m cars in 2012. We didn’t predict that, just reporting the news, ma’am.

A hue and cry ensued:  “Can’t be!”

Commentator ohsnapback, who’s forte is lawyering, a much more complex field than economics, prognosticated an immediate burst of the Chinese bubble, with a mega tonnage of more than 100 times of our housing bubble.  The argument was promptly defused. After all, China doesn’t borrow money. They lend it. Mostly to the U.S.

Then, commentator ra_pro rolled out the really big ordnance: “As I said many times previously: Demography is Chinese destiny as it is Japan’s.” If people would only stop prattling on about demographics, and would check their data first.

Kindly compare age distribution Japan 2020 with age distribution China 2020.

For a real shock, compare age distribution Japan 2050 with age distribution China 2050.

For added spice, factor in that the last Chinese census (it was taken in 2000 and never really finished) is considered as deeply flawed.

Conservative estimates say that around 200m people are living off the books in China, more than the whole population of Japan.

A huge chunk of children have not been reported at all, wrote Daniel M. Goodkind of the U.S. Census Bureau. A correct count of births is the lifeblood of demographic projections. If you miss more than a quarter of the children born in any given year, your projections will be off by 25 percent for generations to come.

Not to worry: If China has something in abundance, then it’s people.

The population bomb turning out as a dud, the sustainability squadron was launched: “There isn’t enough space, water, air or oil to sustain Chinese expansion of 20 million cars per year for a very long time,” quoth ra_pro.

Funny, when Americans bought 17m cars a year, where were the people who said “there isn’t enough space, water, air or oil to sustain expansion of 17 million cars per year for a very long time?” Actually, that number still is a wet dream in Detroit and DC. Our own Ed Niedermeyer pointed out in the New York Times: only if the “salad days of 2000″ are bested, the tax payer will ever have a chance to get his or her money back from GM. Dream on.

Now, for the really scary part. There are more than 800 cars per thousand people in the U.S., more cars than people with drivers’ licenses. In China, there are only some 76 cars per thousand in China. In most developed countries, the number is between 500 and 600 per thousand.

“They’ll never get there,” I hear someone say. “The poor farmers will ride bicycles and oxcarts forever.”

Not so fast.

In Poland 20 years ago, a car was something for the powerful party elite. Today (actually, by end of 2008) there are 420 cars per thousand in Poland.

So for when will we grant China the same standard of living (or at least driving) as the people in Poland? Many Chinese would object at this point. I have to go to Poland on occasion – not that I’m looking forward to it – and last time I was there, the mayor of a good sized town complained that they didn’t have the money to light the Christmas tree on central square. The local KTV in any Chinese village is an orgy of neon all year round.

420 cars per thousand, in China that comes out to a total of 550m cars on the road, if the 1.3b population is correct. Or 630m cars, if the more likely 1.5b population is right. Let’s stick with 1.3b pop and 550m cars, in order to avoid even more anxiety.

How many cars do Chinese have to buy to get to the level of Poland in a reasonable amount of time? Let’s ignore popular wisdom that Chinese cars fall apart the minute you drive them off the lot, and let’s assume a really low scrapping rate. To make calculation easy, let’s call it 500m more cars needed.

(Don’t hyperventilate. That’s only twice the number of cars on the road than in the U.S. and the U.S. has only 1/5th or so of the population of China.)

So how much time do we give China to reach the same standard of living (or driving) as Poland in 2008? 10 years? (Many Chinese would loudly object.) That’s 50m cars per year. Yes, 50,000,000.

You think that’s impossible? Ok, then let’s give the Chinese 20 years to catch up with Poland. (Many Chinese would take to the streets at this point, something the Chinese government really would not appreciate.) That’s 25m cars per year.

Still impossible?

Hint 1: Beijing, a city of 17m people, already has 4m cars. 240 cars per thousand. Poland had 265 cars per thousand in 2000. Shanghai has so many cars that the city has to limit growth by auctioning off license plates. People want to drive so badly, that they pay more for a plate in Shanghai than for some new cars. By the way: The population of Beijing and Shanghai, added together, roughly equals the population of Poland.

Hint 2: A gallon of gas of dubious quality costs $4.45 in Beijing. Using the ever so popular purchasing power conversion, it would feel more like $8. (The junior secretary, who gave me the 8 RMB/liter rate, makes $300 a month – I’m no slave driver, it’s the going rate.) And nevertheless, they are buying cars like there is no tomorrow. An unsaturated market does that.

But what about the gasoline? Ecogeek.com, a publication definitely beyond suspicion of promoting worldwide wastage, recently pointed out: “The president of China’s Innovation Center for Energy and Transportation has said that Chinese officials are drafting new mileage standards that would require an 18 percent improvement in fuel economy by 2015. New cars in China already average about 35.8 mpg and under the new rules, would be required to get 42.2 mpg by 2015. The new U.S. standards require an average mgp of 35.5 by 2016.”

Representatives Kevin Brady (R-Texas) and Dan Boren (D- Oklahoma) are tired of Obama’s punitive tariff on Chinese tires. They called for a government report on the economy-wide effects of the measure, Reuters reports.

“I am concerned that the administration’s tire tax will cost us jobs in the United States and raise prices for tires for hardworking Americans,” Brady said.

http://www.thetruthaboutcars.com/?p=338142

News that GM is selling a control-shifting single share in GM Shanghai to its Chinese partner SAIC was the toads-from-heaven flourish at the end of an epic week for the RenCen. The day after the last of GM’s lifer CEOs left the building, Opel’s CFO followed suit. One management re-organization and a rough LA Auto Show later, came this symbolic surrender of GM’s largest market for a measly $85m. Accompanied by news that The General would buy out Suzuki’s stake in CAMI for an estimated $46.5m, no less. Oh yeah, and something about India. Freshly-minted CEO and notorious rattlesnake killer Ed Whitacre isn’t about be accused of not trying to shake things up. The only question is where will everything land?

The true impact of GM’s loss of control over Shanghai GM will take time to asses, in part because Shanghai’s role on GM’s balance sheet is not clear. And no, not just because bloggers are lazy. GM’s Asian financial results were notoriously opaque way even when they were GAAP-compliant. Moreover, GM’s claim that the sale will not functionally change the partnership’s “cooperative spirit,” further clouds the situation. In any case, neither of these unknown quantities will prove to be net positives: the only question is how much GM will suffer by becoming a junior partner in Shanghai GM.

But as apocalyptic as the symbolic handover in China might seem, the India-market gambit was by far the more significant late-week maneuver. SAIC will become the first Chinese firm to establish itself in India, a prospect that Tata, Bajaj and the gold-rushing multinationals have likely been dreading. This alone is no mean feat, considering the deep suspicions between China and India. In essence, it gets to piggyback on GM’s existing GM India infrastructure of dealers and, less helpfully, factories. In return, it will invest some $350m into the venture in hopes of improving on GM’s 65,702 unit sales in 2008.

Ironically, the firm that GM parted ways with on Friday is also the reason for GM’s gambit. Suzuki’s Indian JV, Maruti, sold 711,818 units in India in 2008, and with strong market growth and SAIC investment, GM imagines it can make major inroads on that number. Indeed, GM’s India sales will have to double on the strength of SAIC’s investment to make the deal worthwhile. As a global player, GM has made a momentous decision to share half of its future in one of the world’s most untapped markets. Why then, if GM was willing to walk away from half of India’s future growth, did it not get more free cash (as opposed to Indian-market investment) out of SAIC?

The short answer is that India is seen as the next China: an underdeveloped, underserved market of vast potential. It goes without saying that GM doesn’t have the cash to match Indian offensives by Ford,  Renault, Honda, Hyundai, and Toyota, but GM does have a relatively strong position to start from (#5 in sales in 2008). Early entry into China was key to GM’s success in that market, and it surely sees India through the same lens. This influx of foreign competitors has created a gold rush environment that has GM trading in its long-term strategic position for a short-term boost. Unlike those competitors though, GM has more to worry about than merely falling behind in the Indian market.

GM’s global woes, specifically cash influx needed to right its struggling Opel and Daewoo units, are a far bigger threat than mere also-ran status in India. After all, these two divisions are responsible for developing GM’s most successful global products, and should it lose them GM’s status as a global power would become little more than a fading dream. After all, the Buicks that Shanghai GM builds and sells with great success in the Chinese market were developed by Opel. The Cruze, Aveo and Matiz Creative (Spark) that form the backbone of GM’s developing-market (i.e. India) strategy were developed (and in many cases, built) by Daewoo. Without these products and their successors, GM and SAIC’s cooperation will be for naught. So why didn’t this latest flurry of wrangling result in a solution to these crucial divisions’ troubles?

Probably because, even if SAIC’s $350m came as free cash, it wouldn’t even make a dent in the problem. Daewoo lost $2b last year on foreign exchange hedges, and out of credit, it’s staying alive on $413m that GM injected into the firm a few months ago. Opel, meanwhile, needs about $5b for its restructuring, some 20 percent of which GM has said it will contribute to the cause. But the rest of that money will have to come from European governments, an unlikely prospect considering how unloved GM is on the Continent. If the Europeans don’t come through with restructuring aid, GM will have to burn through a good quarter of its government-supplied cash pile in hopes of keeping a division it has admitted it can’t survive as a global player without. And that’s not counting the real amount needed to keep Daewoo developing new products, which could easily be in the billions.

There’s no doubt that GM needed to make faustian bargains to remain a global player, post-bankruptcy. Fritz Henderson’s approach saw Opel as the most expensive and expendable dillema on GM’s plate, and his deal to sell the German division would have represented a major setback to GM’s ambitions. But in calling back the Opel deal, new CEO Ed Whitacre sent the message that Opel’s development capability was too valuable to give up. And so Whitacre made a faustian bargain of his own, in which GM gave up control in China and half of its future in India. Though this deal hurts less in the short-term than seeing Opel become independent, the long-term strategic implications are just as worrying, and more importantly, it does nothing to resolve GM’s underlying global challenges. Fritz’s deal with the devil was an act of necessity, Whitacre’s has the air of a desperate gamble.

Having survived on international profits for decades, it’s ironic that GM’s post-bankruptcy era is  being defined by trouble abroad. Moreover, it’s troubling that GM is ceding leadership in the growth markets that have sustained it to its Chinese partners, especially since the deals haven’t created any more certainty or security for The General on the global development front. On the other hand, if GM is stepping back, sustaining its overseas presence by bringing in its Chinese partner, perhaps that same strategy will save the day when GM finally deals with its crumbling cornerstones in Germany and Korea. SAIC was mentioned as a possible partner in the Daewoo rescue, and since its future is so closely tied to GM  maybe the cash-rich Chinese firms will take stakes in Opel and Daewoo.

This week’s news is as much the story of SAIC’s rise as GM’s continued decline. With the Chinese government pushing for consolidation in the auto industry, SAIC may see GM as a dying host from which to springboard into international prominence. With half of GM’s mega-market efforts, GM’s Chinese tail need only take stakes in Opel and Daewoo to truly begin wagging the dog. After all, GM’s alternatives to more cooperation with SAIC are expensive, messy and will most likely involve sending taxpayer money overseas. But with pressure for an IPO looming, GM has to get its international house in order. Though this week’s manuevering hasn’t secured GM’s position, it may just point the way towards The General’s Chinese-led future.

It’s been year since we blogged Chinese press reports that China’s SAIC might buy GM. It turned out to be one of many Chinese rumors that followed. We became the target of hate mongering—some idiots even accused us of driving down GM’s and Chrysler’s stock price. Duh, buyout rumors usually drive prices up. At the time, the GM stock was worth at least a little money: the market cap of GM was less than Mattel.  Months later, the stock was worthless. GM and Chrysler went bankrupt. Instead of the Chinese owning GM and Chrysler, the American taxpayer ended up holding the barf bag.

It took a year and six days to dawn on CNN Money that a Chinese-owned GM might not be such an outlandish idea after all. “A Chinese-owned GM, it could happen,” headlines CNN Money today.

“GM could one day be Chinese owned. A shocking concept for the ultimate all-American company, but one some auto industry experts say isn’t too far-fetched.”

To prove their point, CNN trots out the notorious David Cole, who they identify as the chairman of the Center for Automotive Research, “a Michigan think tank.” Cole reveals to an aghast audience: “I can tell you right now the Chinese are shopping heavily in the U.S. auto sector.”

Two items of note:

One, Cole must have been under a rock. Since I’ve been writing for TTAC, the Chinese have been shopping in the U.S. auto sector more eagerly than Euro-trash at Macy’s. However, as amply chronicled by TTAC, nothing has come out of it. The China card has been played in every transaction, from Opel to Volvo, and nothing, nada, mei shen mo has happened. Even the Tengzhong-Hummer deal is still up in the air. In the meantime, the Chinese are packing up and leaving Mexico.

Two, TTAC readers know better than CNN. That “Michigan think tank” is nothing else than an industry and union funded organization, with the sole intent to separate the tax payers from their hard-earned money and to funnel it into bailouts. David Cole has been unmasked again and again as a mouthpiece of the UAW and GM, his analysis has been characterized by the dearly departed Robert Farago as “wildly exaggerated predictions of plague, pestilence and famine.” Apparently, this went right over the heads of CNN.

According to CNN, “Cole said such a deal isn’t imminent and wouldn’t happen until GM starts selling shares to the public, likely a year or more from now. But he says buying GM would be a major opportunity for the nascent Chinese auto industry.”

Let’s set aside the notion that Fitch just said that GM won’t be ready to sell shares to the public anytime soon. In its current financial state, GM would be delisted even from the pink sheets.

What is Cole up to? Is he talking up a stock that may be listed or not, God knows when? Or is he simply using the Chinese boogiemen to shake loose some additional taxpayers’ money for the supporters of his Michigan think tank? Which appears to have the depth of a puddle.

To make the slant-eyed boogiemen even scarier, CNN found Kim Korth, president of the auto consultancy IRN. She’s one of the few who thinks that GM’s dismal results “deserve to be applauded.”  As far as the Chinese buying GM goes, Corth fears “there would be a national outcry in that regard.”

We beg to differ. If anyone, Chinese or Martian, would buy GM at a price that gets the taxpayers’ money back, there would be a tickertape parade for the unlucky buyer.

Never mind. It’s not going to happen. Clueless Cole says “the Chinese have a lot of our money and they’re looking to invest it.” Wrong. The US has more than a trillion $ of  China’s money, already invested in US government debt. China is worried about the falling dollar and the creditworthiness of its debtor. They don’t need shakier investments.

Be on the lookout for more of these announcements. And watch your wallets.

If right-wingnut Glenn Beck needs a China hater on the tube, he usually calls Gordon G. Chang. Chang is always good for talking bad about China. In 2001, Gordon Chang published a book titled. “The Coming Collapse of China.” In it, he predicted that China would implode by 2006, if not earlier, due to the mass of non-performing loans in Chinese state banks. Much to the chagrin of Chang, China is still standing. It must give Chang heart palpitations that the Chinese economy grew more than three times since he penned his doomsday book. To add injury to irony, instead of a China syndrome caused by the meltdown of  Chinese banks, a non-performing global financing firm called Lehman Brothers started a chain reaction in 2008 that brought the world financial system to the brink of nuclear winter.

China ranks as the world’s third largest economy since it passed by Germany in 2007. China is likely to overtake Japan to become the world’s second largest economy, either this year or by 2010. In the world of Gordon Chang, all this growth must be as real as a Gucci bag at China’s notorious fake markets.

Today, Chang wrote a piece in Forbes, titled “China’s 8.9 Percent Growth? No Way.” In it, Chang puts Chinese growth statistics to task. A country that should have collapsed by 2006, if not earlier, simply is not entitled to 8.9 percent GDP growth, Chang decides.  And so, “it is unlikely that 3Q expansion was anywhere near the claimed 8.9 percent.” Chang thinks the number doesn’t jibe with other numbers. As a China expert, he should know that Chinese numbers never jibe, China simply can’t keep up with its 1.3b people, which most likely are 1.5b anyway. Chang could have simply claimed that the growth number is made up. But this would have made for a short column. And so Chang asks:” How can a country have robust consumer sales, nagging deflation and rapid monetary expansion all at the same time?” Chang comes to a simple, however unproven and unsourced explanation: “Vast quantities of consumer goods are now sitting in warehouses.”

And wait until Chang gets to car sales: “While optimistic analysts point to astounding car sales–up 70.5 percent in July, 94.7% in August and 83.6 percent in September,” Chang hears “yet unconfirmed” stories that “central government officials have ordered state enterprises to buy fleets of vehicles and that these businesses are storing them in parking lots across the country.” He can’t come up with proof for this assertion either. However, here is the smoking gun, Gordon Chang style: Gasoline sales are “up only 6.4% in August, for instance.” Chang is baffled: How can car sales go up 94.7 percent in August, when gasoline sales go only up by 6.4 percent?

We aren’t expecting Chang to come up with better numbers than the Chinese government. However, we can expect at least a baseline precision from the Forbes-brand capitalist tool.

China had some 168m motor vehicle registrations (all kinds that use gasoline) by the end of September of 2008. For the first nine months of the year, China’s vehicle sales increased 34.2 percent from some 7.2m sold in the first nine months of 2008 to 9.66m sold in the first nine months of this year. 9.66m additional cars on China’s streets, if we ignore the scrapping rate. China added 5.4 percent more cars to its car park. If gasoline consumption rose by “only 6.4 percent in August,” then that’s in line with the growth. I just got home from being stuck for two hours in murderous Beijing traffic. I can attest and certify that they do drive around a lot more than last year in a lot more cars than last year.

If his basic math skills are as bad as above, no wonder that Chang’s predictions never pan out. North Korea hasn’t attacked Japan either with nuclear rockets as predicted in Chang’s book “Nuclear Showdown.” And that’s a much simpler calculation than tracking cars.

A year ago, the 21st Century Business Herald reported that SAIC might buy GM and Dongfeng might buy Chrysler. TTAC was the first to break the story in the USA. As a result, our servers melted down, and we were accused of driving down GM’s and Chrysler’s stock price. Usually, buyout rumors drive prices up. But GM and Chrysler had only one way to go: Down. Months later, GM and Chrysler went bankrupt. They became a ward of the US government. Chrysler was given away to Fiat. GM was trimmed down to the barest minimum and is still owned by the US government. And the China story turned out to be a myth.

Following this, stories of Chinese car companies buying US car companies became a regular staple. Up to now, it is mostly talk and little action.

Several Chinese companies were rumored to be buying Ford’s Volvo. Geely was rumored for a long time to be a serious suitor for the Swedish brand. Things became quiet regarding Geely and Volvo recently, so quiet, that an American group known as the Crown consortium, led by Ford director Michael Dingman and former Ford and Chrysler executive Shamel Rushwin, were reported to be making a play for the Swedish marque., for less that the $2.5b Geely was supposedly ready to pay. According to the Wall Street Journal, SAIC was also interested in buying Volvo. Nothing materialized.

Whenever a Western car company was up for sale, a Chinese car company was supposedly interested. BAIC was reported to be a contender for Opel. BAIC’s offer was supposedly the best of all offers made for Opel. But nothing ever came of it. (BAIC and other Chinese companies may still have a chance to bid for Opel. The deal with Magna hasn’t been signed yet, is delayed again and again. Now, the EU Commission is making noises that the bidding process should be re-opened.)

Saab was rumored to be coveted by Geely and Dongfeng. Nothing materialized. Saab was finally bought by a small boutique car company in Sweden, Koenigsegg. Finally, a Chinese company came close to the deal: BAIC signed a letter of intent to become a non-controlling minority shareholder in the Koenigsegg-Saab venture. Even that deal is not closed yet. The European Investment Bank will decide next week on a €400m ($598m) loan request from Saab  that is key to the transaction. Sweden’s government must agree to guarantee the credit, and the European Commission must also rule that the loan doesn’t hinder competition by constituting improper state support. The EU Commission is very critical of government support, see the story above about Opel. TTAC’s man in Sweden says, the Saab-Koenigsegg-BAIC deal may be slipping away.

What’s left? Ah, yes, the old standby, Tengzhong and Hummer. Not necessarily an earthshaking deal as far as car companies go. Even that deal is not closed yet. In the beginning, China was up in arms about a Chinese company owning the manufacturer of a gas-guzzling gubernator-mobile. Slowly, they warmed up to the idea, and even its sharpest critics now recommend that the deal should be approved. The trouble is, China’s commerce ministry has not yet received an application. “We know no details about Tengzhong’s overseas purchase agreement,” said a ministry spokesman last week. No application, no approval.

Does the only real buying of foreign automotive assets by Chinese car companies come down to the purchase of a down-and-out British delivery van company, that hasn’t built any delivery vans for 10 months? Come to think of it, LDV doesn’t go to a car company, but an engineering firm, Eco Concepts. Supposedly with the backing of SAIC. Supposedly.

Why so much talk and so little action? Instead of invading foreign markets, the Chinese withdraw. China’s FAW just shelved plans to build a factory in Mexcio. Those damn Mexicans require any company with plans to sell its vehicles in the country to invest at least U.S. $100m in a plant to produce at least 50,000 units annually. FAW thought that’s way too ambitious, packed up, and left.

There are people who claim that the alleged bids are big PR maneuvers, aimed to get the names of Chinese car companies into the press. If that’s true, then it was successful. But somehow, I doubt that the Chinese, obsessed with saving face, have yet progressed to the “any news is good news” stage.

Others say, these rumors are the product of investment bankers who want to drum up interest for distressed car assets. There may be some truth in that. A Chinese suitor helps in shaking loose some government credits to keep the jobs at home and to save the intellectual property of cars nobody wants from moving to China.

Then there are others, yours truly included, that say that Chinese car companies better get with the program and start seriously buying while prices are low and sellers are getting increasingly desperate.

China has a booming car market, the biggest of the world. China will sell more than twelve million vehicles this year – at home. China’s car exports on the other hand, of which the world is dead afraid, are a joke: China exported a trifling 190,000 vehicles in the first seven months of this year, down 58 percent from 2008. Adding insult to ingrained rivalry, India out-exported China in the first half of 2009.

Let’s face it: The world isn’t necessarily clamoring to buy Chinese branded cars. Even in China, foreign brands such as Volkswagen or Buick are much more popular than homegrowns. Building a new car brand takes time and money, building a car brand in the saturated markets of the West takes a lot of time and a lot of money. Just ask Toyota or Hyundai how long it took them to gain respect and market share abroad. Buying an already established western brand while it is cheap or practically given away is a much more cost-efficient, time-saving, and politically expedient approach.

The other alternative is for the Chinese to focus on the two growth markets, namely China at home and possibly neighboring India. There is a lot to be said for this strategy. After all, these markets are growing, while the Western markets are saturated and contracting. Why should China focus on Europe or America in a time when China buys nearly twice as many GM’s than the Americans?

That reminds me of when I was working for Volkswagen. There was a time when Volkswagen’s sales in the USA were at an all-time low, their customer satisfaction ratings were at the bottom of the scale. Volkswagen seriously contemplated exiting the US market and to focus on growth markets. Volkswagen did not retreat. Why? They knew that if they can’t compete in the world’s most demanding and most complicated car market, they eventually will not be able to compete in the world. They knew that to keep up with the demands for safety, emissions and driver comfort, they needed to be competitive in the USA. They stayed. Volkswagen still doesn’t play a big role in the USA. But Volkswagen grew to be the second largest car company in the world.

President Obama paid his outstanding union dues and slapped a 35 percent punitive tariff on Chinese car and light truck tires exported to the USA. The new duty will take effect on September 26 and comes in addition to an existing 4 percent duty, Reuters reports. Everybody, except for the United Steelworkers, agrees that this is one of the most boneheaded decisions of the new administration.

No American tire manufacturer supported the case. Cooper Tire even publicly opposed it. No wonder: US tire companies are the biggest offenders (in the eyes of the United Steelworkers), having moved most if not all of their budget segment tire production to low labor cost overseas sites. Chinese tires are not in the USA because China wants to rape and pillage the market. Chinese tires are here, because US tire companies set up joint ventures in China to make what the market demands: Tires for less.

China is not the only exporter of budget tires to the USA. According to the Wall Street Journal, 43 percent of the tires sold in the USA are imported. Only 11 percent are imported from China. The far larger share is imported from low labor cost countries such as Malaysia, India, or Central Europe. What the boneheaded decision does is simply shift tire production from China to other low cost producing countries. These countries can take advantage of 11 percent of the tires effectively removed from the US market. The low cost producers can raise their prices until the market settles. The American consumer will bear the cost. Not a single new job is created in US tire companies. Jobs will be lost at tire distributors and dealers. This decision achieves nothing for America except higher prices and troubles with China.

The American Consuming Industries Trade Action Coalition wrote in a letter to the US Trade Representative John Kirk: “The absence of tires from China in the market will raise costs to downstream consuming industries, including automobile manufacturers, will limit consumer choices and affect most seriously those with the fewest resources. Thus, these tariffs will be the most regressive of taxes.”

“Those with the fewest resources” (i.e., the poor) are easiest sold on buying the import-restriction Kool-Aid. They drink it in big gulps: Imports bad for jobs. When they find out that fewer low cost imports mean higher prices, that they still have no jobs, and that their welfare check buys much less, then it’s too late.

The complaint by the US Steelworkers does not allege unfair trade practices. No longer needed. In US law, there is a special anti-China provision, called section 421. The Hong Kong Trade Development Council explains the complicated law in the most succinct way: “Under Section 421, the USITC determines whether a specific product from the mainland is being imported into the U.S. in such increased quantities, or under such conditions, as to cause or threaten to cause market disruption. ‘Market disruption’ is defined as rapidly increasing imports, either absolutely or relatively, so as to cause or threaten to cause material injury to a U.S. domestic industry. If the USITC makes an affirmative determination it proposes a remedy, which the president may or may not implement.”

The USITC is the United States International Trade Commission, “an independent, quasi-judicial federal agency that provides trade policy advice to both the legislative and executive branches of government.” The USITC is often called the International Trade Commission to give it a fake supranational flair. It’s pure US government.

“Market disruption” is a vague concept. If anyone feels disrupted by Chinese imports, they can petition the USITC. If the USITC accepts it and takes it to the president, and if he signs it, no more Chinese imports. Under Bush, for all his failings, every section 421 petition that reached his desk was rejected: He had to decide on strategically important goods such as wire hangers, steel pipe, brake drums and rotors and “pedestal actuators,” a component used in scooters for the disabled. All voted down.

Obama approved the first 421 petition that was put before him. China and US companies are rightly afraid that this will trigger a flurry of section 421 cases. “Multinational companies such as Caterpillar Inc., Citigroup Inc. and Microsoft Corp. have urged Obama to refrain from curbing imports, saying it could lead to a “downward protectionist spiral,” writes Bloomberg.

The United Steelworkers based their complaint on the allegation that Chinese tires had cost a paltry 5,000 union jobs over a number of years. Which of course is bunk. The jobs were lost because US consumers increasingly refuse to buy the high priced tires, and because US tire companies have reacted to consumer demand and moved their production elsewhere. Only one fourth of the tire imports comes from China.

Understandably, the Chinese are deeply upset. China’s state-run news agency, Xinhua, writes, “This ruling came at a time when the U.S. economy is at an uncertain turning point from the worst recession since World War II.” Officially, China exercises restraint. “Observers said that the president needs his people to help make domestic reform smoother,” is as low as Xinhua wants to publicly stoop.

The verbiage from China’s Ministry of Commerce is stronger: “China expressed strong dissatisfaction and is resolutely opposed to this,” said China’s Ministry of Commerce (MOC) spokesman Yao Jian. “This does not comply with WTO agreements on subsidies. The U.S. used an incorrect method to define and calculate the subsidies, which has resulted in an artificially high subsidy rate, hurting Chinese firms’ interests.”

What China is likely to do is threefold:

One, China will drag the USA in front of the WTO. China will have the tacit or open support from other low-cost countries, including the EU (many low cost countries, such as Poland or Romania are EU members.) The world will also love to slap around a country that demanded free trade as long as free trade was good for America. Note that China mentioned “subsidies.” The bail-outs will come on the table also. WTO proceedings can drag on forever.

Two, China will take some tit-for-tat measures. On the table is a hefty tariff on US auto imports to China. During the first half of the year, China imported more than $1 billion worth of automobiles from the US. China could buy fewer Boeings and more Airbusses. If things get really bad, China could put a dent in the Chinese growth of the automotive ward of the state, GM. Europe will love it all.

Three, Chinese President Hu Jintao will give Obama a tongue-lashing when they meet in Pittsburgh at the G-20 Summit September 24-25. Obama will be gently or not so gently reminded that America’s largest creditor deserves a little better treatment, or the money could be moved elsewhere. Timothy Geithner will also be reminded that his announcement in June that “Chinese assets are very safe” is bunk. The greenback is on its way down. A EURO bought $1.46 today and it’s heading toward $1.50. Come to think of it, a falling dollar is the best protection against cheap imports from all corners of the world: The lower the dollar, the more expensive the imports. A truly free market needs no section 421.

Forbes writes: “The current round of disputes will undoubtedly end up in a trade war, and China, a country extraordinarily dependent on exports, will surely be the biggest loser.”

Don’t bet on it.

America is already involved in two shooting wars which it couldn’t afford would China not buy its bonds. America cannot afford two shooting wars and a trade war with its largest creditor.