Transnational Corporations in the Chinese Car Industry

6.2 Transnational Corporations in the Chinese Car Industry

When first coming to China, the transnational corporations perceived their the opportunities as the result of the price-distorting environment created by policy paradigm of the central government. Between the early 1980s and the mid-1990s, the Chinese automobile market remained underdeveloped. The output of passenger cars accounted for 2.4% of China’s total automobile production in 1980 and only increased to 22.4% in 1995 (China Auto News 2005). Private demand for cars was very limited and most consumption came from institutional users such as government agencies and enterprises. Also, car prices were not determined by supply and demand in the market because the central government tightly controlled the pricing procedure through a series of bureaucratic measures. As a result, what was more attractive in such a market to these incoming foreign automakers was not the size of the potential consumer base, but the high profit margins that resulted from the lack of competition (Huang 2002). Under the policy of import substitution, trade barriers had indirectly raised the prices of domestically produced automobiles to an extraordinarily high level in comparison with international standards; the state policy of industrial concentration helped to create and maintain a few oligopolies with which incoming foreign automakers would compete or interact. Additionally, investments from the state in the form of joint ventures actually decreased the risks for foreign corporations.

Since the late 1990s, the Chinese automobile market has grown quickly, leading to “a mature stage for FDI” in the Chinese automobile industry (McKinsey 2005). The late 1990s witnessed a significant increase in automobile demand from private individuals, which mostly consisted of passenger cars. Price regulations were loosened as well, and automobile manufacturers gained more autonomy in determining the prices of their products. A more crucial change was China’s entry to the WTO in 2001 (Harwit 2001; Noble et al. 2005). According to China’s WTO concessions in the automobile industry, all import quotas and licenses were scheduled to end in 2005 and tariffs would be reduced to 25 percent by July 2006. Responding to this new environment, most of the international automakers came to believe that the optimal time for doing business in China had finally come (Table 14). Not only did the first incoming companies, such as VW, PSA, and DC increase their stakes in China, investments from Japanese and Korean automakers also poured in, represented by Hyundai, Kia, Nissan, Honda, and Toyota.

Table 14: Assembler Projects of the Incoming Transnational Corporations in China

Source: China Auto News 2005.

Although it was always the central government that held the approval rights for any joint venture proposals, foreign corporations could still decide when to get in and with whom to cooperate. Three representative cases, Volkswagen, General Motors and Toyota, illustrate the different strategies of these transnational corporations in setting up joint ventures in China (Table 15).

Table 15: VW, GM and Toyota in China

Among the three cases, VW entered earliest, signing its first joint venture agreement in 1983. Volkswagen used its quota from the central government, which required that one transnational corporation could have no more than two Chinese partners, to partner with Shanghai-VW, often called “South Volkswagen,” and FAW-VW, “North Volkswagen.” In terms of performance in the Chinese market, Volkswagen is definitely a champion. Because of its status as the earliest incomer, its two joint ventures occupied over half of the domestic market until 2002.

GM came to China in 1992. In contrast with VW, GM only has one domestic partner, Shanghai Automobile. When GM became interested in other partners, it incorporated the target enterprises within the Shanghai-GM framework, called the “Chinese-Chinese-Foreign” model. In this manner, GM built effective cooperation with several other Chinese partners. Although not the first adventurer in the Chinese market, GM is indeed the fastest growing, and it is also the automobile transnational corporation most aggressive in the transfer of R&D activities to China. For instance, GM has built a very large joint R&D institution in Shanghai with Shanghai Automobile, the Pan Asia Technical Automotive Center.

Across these three cases, Toyota was the most conservative initially. In the 1980s, Toyota mainly exported cars to China and did not consider joint venture projects. However when the Chinese market became more lucrative in late 1990s, it soon adjusted by setting up its own footholds in the Chinese market. At first glance, Toyota acted like GM. When starting “a wide scope of joint activities” with FAW (FAW website 2006), it asked FAW to integrate its previous partners in China, Tianjin Auto and Sichuan Toyota Automobile Corporation. On the other hand, Toyota was also similar to VW in that it later chose GAIG as a second Chinese partner for joint venture. Beyond this, Toyota also took advantage of Daihatsu and Hino, affiliated corporations, to establish additional joint ventures in China.