New Trends in the Chinese Automobile Industry

6.3 New Trends in the Chinese Automobile Industry

The recent shift of the policy paradigms in the Chinese automobile industry could be summarized in three dimensions. First, the Chinese government adjusted its policy with regard to technological acquisition, from one that obtained production technology through joint-ventures to one that promotes self-reliant research and development (R&D) and national brands, beginning in the late 1990s. In the Industrial Policy of the Chinese Automobile Industry announced in 2004 (State Council of China 2004), the state urged domestic automakers “to strengthen the capacities of R&D and technological innovation,” “to actively develop products with independent intellectual property rights,” and “to implement the strategies to promote national brands.” Second, state strategy with respect to foreign trade also changed significantly, from import substitution to export promotion. Since the late 1990s, the state enthusiastically promoted auto exports. Its support for domestic automobile exporters was unprecedented. For instance, Chery Auto, one of the most outstanding car exporters in China, was awarded a large loan of five billion yuan from the Export-Import Bank of China in 2005. The government soon expanded its list of supported entities through official recognitions of the so-called “export bases” and “export enterprises;” 8 cities, 44 assemblers, and 116 auto-part producers were entitled. Third, management of industrial structure moved from strict regulation of new entrants toward reliance on market mechanisms. The usual policy instruments implemented in the 1980s and 1990s, such as directory management, the monitoring and approval procedure, and production permits gradually came to an end in the late 1990s. The product directory and the strict regulations on investment were both relaxed. Rather than officially sanctioning certain automakers, the state claims reliance on market competition to decide winners (State Council of China 2004).

Behind these three transformations is a nation-wide social construction process. Foreign corporations, previously not deterministic in the local car projects, served as a major structural trigger in the development of this change. With the Chinese car market growing rapidly since the late 1990s, the global automakers came to dominate the domestic market via established joint ventures. According to Table 2 in the introduction chapter, among car makers with sales of over 50,000 units in China, ten out of fourteen were joint ventures.

This dominance of foreign automakers was definitely unexpected by the central policymakers, thus the previous policy paradigm received serious challenges. Some officials began to admit that the Chinese automobile industry was “large,” but “far from being strong” (Zhang 2003). That is, it was too weak in terms of self-reliant R&D capacity and national brands, despite the fact that outputs of automobiles was high. Public opinion also started to blame the industrial policies in part for domination by transnational corporations. It was even claimed that this situation may threaten the national security of the economy (Zhang et al. 2001).

The strategy of technology acquisition through joint venture was the first policy instrument to be broadly questioned. One particular problem had consistently touched the public’s nerves toward joint ventures. According to the government’s expectations, the Chinese big three automakers were supposed to be the major players in the development of independent R&D capacity and national brands, and this was a prime rationale for government support of joint ventures. Nevertheless, most of the automakers that had engaged in the development of national cars were small automakers, such as Chery and Geely. It appeared ridiculous that these companies had been the targets of discrimination by the central government for a long time. This contradiction between the policy goal and reality drew much public sympathy toward small automakers such as Chery and Geely and created strong political pressures directed against the joint venture builders. The public voices criticized current policy on the basis that joint ventures would not contribute to the mission of developing national brands because the introduction of foreign technologies apparently did not automatically turn into independent R&D capacity among Chinese automakers (Lu and Feng 2004). To fix the problem, opponents of the current policy paradigm stressed that the state should emphasize the implementation of self-reliant development of this capacity among these large joint venture automakers and also relocate state support to the small but innovative automakers.

With respect to import substitution, foreign trade regulations were blamed for the ability of foreign corporation to conduct rent-seeking behavior due to the distorted domestic prices that resulted from import restriction. On the other hand, China’s new membership in the WTO essentially nullified existing import regulations. In the post-WTO period, import substitution was considered outdated and problematic, whereas the promotion of automobile exports became highly valued. A very influential “third way strategy” was then proposed (Chen and Lu 2002a, 2002b), which stated that China should promote exports of automobiles via domestic production of foreign models. Advocates of this direction believe that, as a large country with abundant cheap labor, China could gradually turn these comparative advantages into technical competitiveness because in the long term, after global automakers move assembly lines to China, they could gradually move R&D functions as well. This “third way strategy” was meant to be distinguished from both the Korean model and Brazilian model. In the former, the state supported national automakers by limiting the entry of foreign automakers, while in the latter, foreign automakers overwhelmed the domestic automobile industry due to the absence of regulation of foreign entry.

The old practice of industry structure management was also criticized as improper. A major complaint was that state regulations limiting market entry had not effectively prevented active investments from either local governments or private capital. More importantly, it was argued that the practice of providing a few giant automakers with strong government support had depressed normal competition in the market (Zhang 2002). Hence the pursuit of industrial concentration was accused of creating oligopoly positions for joint ventures and discriminating against innovative domestic automakers. In the new post-WTO environment, the previous worries of policymakers about “repeated” investments in car production largely vanished and the market mechanism was highly revered (Qin 2001).

This round of social construction was driven by many actors, such as scholars, public media, state bureaucrats and even the top national leaders.

Former state bureaucrats in charge of China’s automobile industry were one of the most influential and determined groups to advocate the policy shift. With an ingrained ideal to pursue a national industry that was imprinted during the era of planned economy, retired bureaucrats and managers in the automobile industry were very upset about the predominant foreign automakers in the Chinese market. To these people, the industry had lost its track toward self-reliant development and the government should adjust industry policy as soon as possible. As the previously significant figures in the automobile industry, their voices often reached the top policymakers and were well-received (e.g. Li 2001; Gen 2004; Jiang 2006).

Some scholars specialized in studies of industrial development also contributed greatly to the policy shift. Lu and Feng’s well-known research on Chinese national automakers in 2004 was a momentous empirical study of the issue of innovation capacity in the Chinese automobile industry. They painted an impressive picture in which some small automakers in China worked hard to develop independent brands while weathering discrimination from state policy. In contrast, the big three automakers in China enjoyed profits through their oligopoly positions, but made no efforts to develop national brands. Their report generated strong public criticism against the large domestic automakers, and this outrage created great political pressure on the state to change the existing automobile policy at the time.

The social construction also reflected a mixture of various bureaucratic positions and the political forces they represented. The Ministry of Science and Technology was well known as an active sponsor of the promotion of self-reliant development in the Chinese automobile industry. It actually funded Lu and Feng’s study mentioned above. It also encouraged many other policy researchers to investigate this issue in many other industries. On the other hand, The Ministry of Commerce was less keen on self-reliant development, but it showed a strong interest in promoting export-oriented policies. Its ambitious goal was to increase automotive exports to $70 billion by 2010, about thirty times the value in 2000. DRCSC, an important think tank of the central government, made the famous third-way proposal (Chen and Lu 2002a, 2002b), and it also participated in the appeals directed toward ending state intervention in industry structure management (Qin 2001).

On the other side, large domestic automakers, as the major target of criticism, experienced a hard time in this social construction process. In the early stage of the debate, these automakers that represented the joint ventures tried to defend themselves. They claimed that the state and the general public should have more patience because the current small scale of production in China did not justify any meaningful self-reliant R&D initiatives, and any effort to pursue this goal would turn out to be a great waste of capital (Lu and Feng 2004). Under surging political pressure, however, they soon gave in. After all, either the at central or local level, these major domestic makers were all state-owned. When the state was determined to go toward this new direction, these domestic automakers quickly shifted away from the introduction of foreign models and toward the development of national brands. For instance, SAIC recently announced that its production of national brand cars would reach 200,000 units in 2010, while FAW promised to reach 800,000 units by the mid-2010s (Tong 2006).

Appendix I: Chinese Enterprises in the Planned Economy Era

In the planned economy ear, enterprises in China barely shared any autonomy out of the national planning system. For the workers and leaders in these enterprises, neither did they have the ownership of the organization they worked for, nor did they hold any substantial decision right in management. The state built the infrastructure, introduced the technologies and equipment, trained the labor, appointed the leader, made the production plans, supplied the raw materials, and took the output and profit, while there were nothing more left for these enterprises themselves except following the bureaucratic commands from above and accomplishing the production assignments. These state-owned enterprises generally held a common internal governance structure, FDRS under the lead of the party committee. In this scheme, the top bureaucracy was the party committee. The factory director under the party committee was in charge of the specific management. Below these directors were the section leaders and associated directors in charge of various functions. The production was carried out in workshops, which were often consisted of multiple production teams.



Figure 19: Chinese Enterprises in Planned Economy Era

Source: Based on Ma and Liu 2000

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