Warren Buffett was ahead of the curve when Berkshire bought 10% of BYD, one of the leading Chinese battery companies, last September. Ironically, that was at the same time his Colbert-titled op-ed piece, “Buy American. I Am.,” appeared in the New York Times. Today, the Times had a front page article on China’s plan to become one of the leading producers of hybrid and all-electric vehicles within three years, and very quickly becoming the world leader in electric cars and buses soon thereafter. The article states the case very well, http://www.nytimes.com/2009/04/02/business/global/02electric.html?hp.
I don’t need to repeat it here.
China has the advantage of not having to replace a fleet—there are maybe 30 million vehicles on the road there—but selling into a first-time car-buyer market as its per capita income rises. If China follows the rest of the world in automobile penetration vs. GDP per capita, that 30 million, or 21 cars per 1000 people, becomes 80 cars per 1000, or 123 million by 2020 and possibly 250 million by 2030. At that point the penetration is still only about 150 cars per 1000. The US is about 860 cars per 1000 today. As I have been saying for a number of years, heaven help us if most of those vehicles are powered by internal combustion engines. It will be bad enough that the electricity to charge these cars still will come primarily from coal-fired plants. But my guess is that China will be ahead of us, as well, when it comes to clean coal production and alternative energy sources.
This raises the stakes on what will be the structure of the US auto industry after we come out of this economic downturn. In my view, a bankruptcy of GM, in particular, would 1) extend the economic downturn and 2) set back the US auto industry’s participation in the new world of non-fossil-fueled vehicles. It may come to that if the UAW and the bondholders don’t blink. A blink by the UAW is likely even though it will be painful for real people. I am not so sure about the bondholders, many of whom are traders who have bought these positions on a speculation that there won’t be a bankruptcy, probably hedged against the possibility of one, and won’t blink until the very last minute, if at all. The real bond investors would likely go along with any agreement that avoids bankruptcy since they are running other portfolios that would suffer dramatically from an extension of the downturn and the re-pricing of corporate fixed income paper reflecting the willingness of the administration to use bankruptcy as a part of its bag of tricks.
China’s plan is a wake-up call, but not just on the urgency of an aggressive plan for the auto industry. It is a loud alarm bell, showing China’s recognition that both energy independence and reduced emissions are important to political stability and economic growth. In addition, developing and owning the technology that goes along with a ContraCarbon world will enhance its economic and geopolitical future.