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Published on October 12th, 2016 | Total Views: | by Thomas Murphey

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Navigating Chinese Roads: Three Questions with Michael Dunne

The UC San Diego School of Global Policy and Strategy and the 21st Century China Program are host to some of the world’s leading China watchers. In this column, we sit down with Michael Dunne, an entrepreneur, author, and strategic adviser on the Chinese car industry, and ask him three questions about his area of expertise. 

dunne2Michael Dunne first went to China in 1986 for one year as a student at the University of Chongqing. After graduating from the University of Michigan with an MA in Chinese History and an MBA, he returned to China in 1990 and founded his first company, Automotive Resources Asia Ltd. (ARA). That market research and advisory company was acquired by JD Power in 2006. He ran the JD Power China business until 2010, based in Shanghai. In 2011, John Wiley & Sons published his book, “American Wheels, Chinese Roads: The Story of General Motors in China”, and in 2013, Dunne was appointed President of GM Indonesia, a position he held until 2015. His new company, Dunne Automotive, advises investors on coming trends in the automotive arena: electrics, autonomous vehicles, and ride-sharing. He also contributes regular commentaries to Forbes. Currently, Dunne divides his time between Asia and California, where he lives with his wife and three children.

Question 1: How has the Chinese car industry evolved over the course of your career?

It’s baseball season so allow me to use a baseball analogy. When it comes to cars, China’s gone from the scrumpy ranks of a neighborhood sandlot league to the top echelon of the major leagues.

Between 1990 and 2015, China rocketed up from 100,000 car sales a year to 25 million this year, easily surpassing the US which is topping out at 17 million. And it’s not a market for cheap, old cars. China is now the world’s number one electric vehicle market. And by 2020, it will lead the world in demand for luxury vehicles, too. Volkswagen and Audi, to name just two, make billions in profit from China every year.  Go to Shanghai or Beijing and you’ll see Mercedes, BMW, Porsches and Audis at every street light.

It’s hard to believe that when I first arrived in Chengdu, China in 1986, there were no private buyers. China produced less than 25,000 cars a year. Being from Detroit, I thought I’d check out the cars. But to my shock, I got there and there were no cars! Instead, it was all bikes- thousands of bikes, swarms of schools of fish coming down the street, one after another. You’d see an occasional First Auto Works or Second Auto Works Truck, and once in a blue moon you’d see a black sedan, which was always an official from the government. As for private ownership- forget about it. Not a single individual had hopes of owning a car, it was out of the question. I remember my first year in China in Chongqing, at the end of the school year we had a half day off to welcome the university’s first ever car. They had bought a car from Shanghai called the Shanghai Santana, and it was a huge deal. Half a day, streets lined, people cheering, and here comes a car that was driven from Shanghai, because you didn’t have dealerships. Two guys would take a train, pick up the car and drive it back. I remember asking the university President whose car that was. He replied “all of ours”; in those days, the Danwei work groups were still prevalent, and everything was viewed as shared.

Deng said: China needs an auto industry. But China’s broke, has no technology, no skilled labor, no infrastructure, and no history of cars- how is China going to build an auto industry?

China jumped from the basement to the penthouse in such a short amount of time thanks to ambitious goals set early on by Mao’s successor Deng Xiaoping. He traveled to Japan and the US in the early 1980’s and saw a connection between wealth and car manufacturing. He instructed his lieutenants to get into the joint-ventures game. Deng said: China needs an auto industry. But China’s broke, has no technology, no skilled labor, no infrastructure, and no history of cars- how is China going to build an auto industry? So they formed a plan to build joint ventures with foreign companies. The idea would be 50-50 foreign-Chinese ownership, and over time, the Chinese partners would absorb that technology, build their own brands, and become the next Japan or Korea.

Of course, this hasn’t quite come to pass in China. In Japan and Korea you had private companies with government backing, but in China’s case they have government companies with government backing. The incentive structures are different. Managers in these government companies aren’t owners, and they’ll eventually move on. They don’t have the same incentive to wrest this technology and build their own car. They’d rather build Buicks and Volkswagens, make money, employ people, and increase the tax base. So I think the incentive structure so far has worked against China in securing new technology and building their own brands.

There have been some interesting private companies with potential, but they’re not favored sons of the policy planners in Beijing. It’s hard for them to compete for financing and political support. Deng was a pragmatist, so if he was still with us today, he’d probably view things as a partial success- they kind of built their own auto industry, but there are still a lot of foreign cars on the road. Now the good news is, the trends are in China’s favor, and Chinese brands are gaining some acceptance.  And at the same time, China’s best and brightest in the internet space are developing some super cool globally competitive cars at home and in California in the Tesla space (Faraday Future, Karma, NextEV, Atieva, and BYD).

Question 2: Let’s talk about some of these joint ventures- specifically, Shanghai-General Motors, which was the subject of your book. What were the dynamics of this partnership, and what made it successful? Do you see more opportunities for foreign joint ventures with Chinese cities in the future?

dunne-book

Three things made Shanghai-GM a tremendous success: Partner, timing, and rapport. The Shanghai Automotive Industry Corporation (SAIC) – owned by the City of Shanghai – has been pivotal to GM’s success in China. Inside China it’s widely accepted that the most clever business minds are concentrated in Shanghai. Zhejiang people may be bolder. But Shanghai people know how to make money. Like New Yorkers.

To produce in the Chinese market, a foreign car company must partner with a city. Back in the 1990’s, which is when GM secured its partnership, the Shanghai clique had enormous financial and political power. Jiang Zemin, Zhu Rongji, they all had roots in the Shanghai faction, so when GM married Shanghai, it was marrying the most powerful, influential, and business-minded state owned company.

China played its hand really well in its negotiations with General Motors. Remember, China had no money, no technology, no skilled labor, nothing. And then they brought the global automakers to the table and made them line up and bid against each other for a slice of a huge potential market. It’s amazing that they were able to do that, given how badly they needed the foreign automakers. But they did it, and in General Motors’ case, they extracted maximum value from them by playing off their rivalry with Ford. GM’s initial investment into the Chinese market was almost $1 billion, and other car companies bought in later for much less. But GM was fine throwing in a billion as long as they beat Ford. The Chinese understood this and capitalized on it.

The City of Shanghai and the culture of Shanghai deserve a lot of credit for Shanghai-GM’s comparative success. Beijing at that time was exceptionally bureaucratic, didn’t care about money, and was used to having its own way; quite simply, the incentives weren’t there. Things have changed since then, of course. But it helps explain why other joint ventures, such as Beijing Jeep (the failed joint venture between Chrysler and Beijing) were less successful.

The second key factor was timing. Chrysler (Jeep) came in at a time (1984) when there was no private market.  GM launched the Buick Regal in 1998 when the private market was just beginning to take off. They were able to benefit from Buick sales to the government and sales to the private sector.

Third, understanding China and the Chinese market also had a lot do with Shanghai-GM’s success. Phil Murtaugh, the CEO of Shanghai-GM, always said that the secret to success with their partner was to work very hard to make the Chinese feel in control. Right or wrong, good or bad, at least on the surface, GM took the stance that they were guests in China. Murtaugh generated tremendous goodwill and respect, and the Chinese came to trust whatever he said. Beijing Jeep on the other hand was nothing but conflict; every day was a fight.

Question 2B: Is the future still bright for foreign automakers in China?

The market landscape is a lot different now. Through the 1990s and 2000s Chinese buyers insisted on buying foreign brands. You bought a Chery or a Geely only if you couldn’t afford a Buick or Volkswagen or a Honda.

So realistically, if I’m a global automaker today, my goal has to be to compete in the luxury car segment. Within the next five years, that’s probably the only safe area to compete.

Today Chinese brands are much improved in terms of quality and brand image. I was at the last Beijing Auto Show, and I could sense a tipping point: Chinese people are beginning to embrace Chinese branded cars. So realistically, if I’m a global automaker today, my goal has to be to compete in the luxury car segment. Within the next five years, that’s probably the only safe area to compete. Of course, price has a factor in it (the Chinese brands are cheaper), but once they start accepting Chinese brands, things are going to roll. The only cars that are safe from that coming trend are the luxury cars: Mercedes, BMW, Audi, maybe Buick. Already we’re seeing Hyundai, Kia, Chevy, Mitsubishi, those middling brands, losing market share. It’s a wake-up call for global automakers. Foreign brands had a great run and made a lot of money, but this may be the end of the beginning. The Chinese are coming up – fast.

Secondly, China will move quickly to a car as a service as opposed to a car as something you own. That’s different than in the United States. For 70 or 80 years, car culture has been engrained deep in the mindset and psyche of Americans. Especially for people over 35 years old- we can’t imagine life without owning a car, it’s part of our identity and culture. In China, however, the ramp up from no cars to the biggest car market in the world came so quickly that the roots of a car culture haven’t really taken.

Question 3: That’s a good segue into another topic- Uber’s competition with Chinese ride-sharing company Didi Chuxing, and their recent decision to withdraw from the Chinese market. Do you think Uber made strategic mistakes, or was the deck stacked against them from the beginning?

Uber’s capitulation definitely came as a surprise. The company had indicated total commitment to winning in China. And customers reportedly were happy with the Uber service. So, what went wrong?

First, Uber was losing a billion dollars a year in China, as it subsidized rides to stay competitive with Didi. But China’s a market of massive potential and Uber has bundles of cash, so the billion dollar burn alone does not explain the outcome. More likely, Uber stepped back and took inventory of prevailing winds in China. And those winds are increasingly anti-foreign when it comes to businesses driven by internet technologies. Look at the setbacks, reversals, and U-turns suffered by Google, Facebook, Twitter, and Youtube. They’re all blocked from competing in the world’s largest internet market. China also happens to be in the process of developing more specific regulations for the ride-hailing service business. One stroke of the pen and Uber could get written out of the picture. Just like that. Just ask Google, which got its license revoked several years ago for non-compliance.

I don’t think there were people in Beijing saying “Let’s get Uber out”. But China can make things very uncomfortable for foreigners.

Uber did have a powerful partner in Baidu (an internet giant similar to Google), but Baidu has hit a rough patch over the past couple years and is out of favor with a lot of influential people at the top. So if Uber was relying on Baidu as a go-between, and Baidu was under a cloud, Uber was probably looking around wondering who their friends were. Did they have any friends at all? I don’t think there were people in Beijing saying “Let’s get Uber out”. But China can make things very uncomfortable for foreigners, and foreign companies in general have really been feeling unwelcome lately.

Question 3B: If you’re Uber, do you take that deal?

I take it. I take it with the wink-wink unspoken understanding that we’ll carve the world up into two kingdoms; Uber will dominate the United States, Didi will dominate China, and we’ll compete everywhere else.

Didi also agreed to put a billion into Uber in the United States, and Uber got a 17.7% stake in Didi. I’ll take that deal and use my resources to fortify my business in the U.S.

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About the Author

was Editor in Chief of China Focus from 2016-2017. As a student at GPS, Thomas studied management and economics with the goal of better understanding the future of business, economics, and politics in the Asia-Pacific. Thomas has written on topics such as Chinese state-owned enterprises, special economic zones, and labor markets.



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