BYD Co., China’s fastest-growing major automaker, will be a test case for whether the government values corn and wheat over cars.

BYD, maker of China’s best-selling F3 compact, unlawfully built seven factories on 112 acres of farmland it agreed to buy in Xi’an from a local economic development agency, the nation’s Ministry of Land and Resources said July 15. The government said it will decide by Sept. 30 whether to punish the Warren Buffett- backed company. (Businessweek)

I suppose this could go either way, depending on current political exigencies, but I’ll be damn surprised if the government is going to smack down an automobile manufacturer in order to send a message about illegal land use. That isn’t to say that land use problems are not widespread or that the government would be perfectly justified in making an example of BYD. There are competing interests here, though.

On one side you have a very powerful company in a key, showcase industry that will be pumping out major exports someday. The auto industry is already extremely powerful, exerting quite an influence on China’s government. On the other side you have an opportunity to show everyone in the country that rule of law is important and that illegal land transactions will not be tolerated.

Seems like the auto company wins that battle every time. If I’m the government, I don’t want to mess with successful factories in key industries, and although land transactions are a huge issue, it is not so important to use this specific incident to send a message. Why not wait for another company, perhaps one in a less important industry, with a land use issue and crack down on that one?

I’m not sure that I buy into this sort of overreaction:

“A lot of companies are watching the case closely, and it will set an example,” said Zhang Xin, an auto analyst with Guotai Junan Securities Co. in Beijing. “If the government lets BYD off the hook easily, the illegal usage of land won’t be effectively controlled going forward.”

Maybe, or perhaps most people will shrug and say, of course, that company is too powerful to be punished seriously. Will letting BYD off with a slap on the wrist send the message that the government doesn’t care about illegal land transactions? I don’t think so, although it will be a missed opportunity. Let’s keep in mind that this is only one incident, albeit a high profile one.

It also bears mentioning that foreign invested enterprises, perhaps even more than domestic firms, with land use irregularities are now, more than ever, squarely in the sights of approval and inspection authorities. For all of you who set up that JV or WFOE with some land ownership defects, probably after being promised that those problems would be fixed later on, now would be a good time to do another check of the land status. If you still have that problem, you might want to start thinking of a mitigation strategy before the shit hits the fan. The government will be happy to use your company to send that message to the masses about the rule of law.