China and Electric Cars: The Stakes Have Been Raised

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.

This entry was posted in Automobile Industry, China by Jack Rivkin. Bookmark the permalink.

About Jack Rivkin

Jack Rivkin retired in 2008 as EVP, CIO, Head of Private Asset Management of Neuberger Berman(NB) and from NB's Executive Management Committee. He was also on the Lehman(LB) Council on Climate Change(CC) and the NB CC Fund Advisory Board. He has been engaged with the United Nations and other entities on policy issues related to Private Capital and CC. He is an Associate Fellow of the Asia Society. He has continued on the NB Mutual Fund Board and with his CC responsibilities. He began his investment career in 68 as an analyst at Mitchell Hutchins(MH), and became Director of Research(DOR) there. After Paine Webber(PW) acquired MH, he served as DOR; CFO of PW; CEO of PWMH-the equity trading and investment arm of PW; Chmn of MH Asset Management and President of PW Capital. 87-92 he was DOR and, subsequently, Head of the Worldwide Equities Division of LB. 93-95, he served as a Vice Chairman and DOR at Smith Barney (now Citigroup). He was an EVP with Citigroup Investments 94-01, responsible for private equity investments. He was also an adjunct professor at Columbia University teaching a course in Security Analysis. He joined NB in 2002. He is the co-author of “Risk & Reward—Venture Capital and the Making of America’s Great Industries,” Random House, 1987. He is a regular guest on various media. He is the principal subject in a series of Harvard Business School cases describing his experience as DOR and Equity Head at LB. He has served as a director of a number of private companies and the NYSSA. He is currently a director of Idealab, Dale Carnegie, Operative, World Policy Institute and other private companies. He is a member of the Economic Club of NY, the Anglers Club, Theodore Gordon Fly Fishers, and a lifetime member of Trout Unlimited. He continues to be an active private equity investor when he isn’t fly fishing. Mr. Rivkin earned his Professional Engineering degree from the Colorado School of Mines and his MBA from the Harvard Business School

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