New Orientations of the National Car Industry

2.2.1 Promotion of Domestic Automobile Production

With these officials strenuously lobbing the government upon the value of a strong automobile industry, the top national planners were finally persuaded to pay special attentions to the automobile production. The two ambitious goals set up by the central government for the automobile industry since 1980s: First of all, the automobile industry should be “modern”. That is, this sector would have to catch up with the latest technological developments in the world. More specifically, by the 1990s the Chinese automobile industry should be capable to “produce a generation of products equivalent to the international level of the 1980s” (Rao 1984: xi-xiii); Second, the automobile industry should become a “pillar industry” for the national economy, serving and stimulating the development of associated industries. Firstly stated in the seventh five-year plan (1986-1990) and then reconfirmed at the 14^th National Congress of the CPC in 1992, this goal ensured a special position for the automobile sector in the national economy.

Source: China Auto News 2005

The production cars may not be a serious economic issue in the previous time when the social demands was very small; nevertheless it indeed became headaches of the central policymaker since 1980s. As can seen clearly from Figure 2.3, the car production had been long overlooked in the Chinese automobile industry. The output of cars in the Chinese automobile industry was so small from 1955 to 1981 that it could almost be neglected in the overall production. Nevertheless, since 1980s, with the demands increased quickly, the car import became unstoppable floods (Figure 8): China imported about 20,000 cars in 1980 with only importing 667 units in 1979, while the import amount soon jumped as high as 105,775 in 1985, though the central government had consecutively issued regulations to depress (ECHCAI 1996). There came another wave of car import boom since early 1990s. This time, the wave of import was more significant, as posed an even greater challenge to the domestic production.

As a result, the car industry came to gain great attentions among the national policymakers as early as 1980s. For the top CPC leaders, the flooding-in cars presented not only an economic threat to the infant domestic industry, but also a political one that would hurt national dignity (Li 1998). In August of 1984, the central government organized a discussion in Beidaihe, which was considered as a milestone meeting for the Chinese car industry. In this meeting, the central government clearly decided that the car production should be encouraged in order to meet the domestic demands surging with the economic development; In 1985, officials in the Chinese automobile industry came to lobby Hu Yaobang as one of the top political leaders at that time. Hu finally agreed that the development of the car industry should be included into the national seventh five-year plan; In 1986, The central government issued an policy report to confirm such a decision, which was approved by Zhao Ziyang as the prime minister by then.

Figure 8 China’s Car Import, 1980s and 1990s

Source: China Auto News 2005

In face of the unstoppable car import, the import substitution was advocated to be the most necessary policy instrument since 1980s. In the era of planned economy, building and maintaining a self-sufficient automobile industry was once taken for granted, so bureaucrats naturally kept a very hostile attitude towards the increase of car import at that time. They had developed very strong positions in defending their stance: as claimed by Rao Bin as the top director of the Chinese automobile industry in 1980s, the country’s expenditure for the imports of automobiles from the 1950s had been twelve times more than the cost of building the FAW, China’s biggest automobile factory (Rao 1983). Against such considerations, the policy of import substitutions was soon adopted with two major measures: high tariffs were applied as weapons to block the imports so that cars became one of the commodities charged with the highest tariff during this period; the promotion of domestic car production turned out to be another important step. In 1987, the state decided to rely on the established automobile enterprises for the car production, including FAW, SAW and the Shanghai Automobile.

Then there came the next problem, namely how these enterprises chosen by the state could possibly get the needed technology for the car production. Under the direction by the central government, to introduce foreign corporations and build up joint ventures became the major solution. The idea of setting up joint venture was not originally meant to solve the import substitution problem, as would be fully discussed in the next chapter about Shanghai Automobile, which built up the first joint venture with Volkswagen in 1985. The trial in Shanghai was considered as a big success: the advanced car model was introduced and more importantly, the requirement of domestic contents was gradually met, as suggested that the joint venture could effectively serve as a way of encouraging the domestic production in retaliation towards imported cars. Thus establishment of joint ventures came to a necessary method for the central administrators in encouraging the domestic car production. To bring these joint ventures in line, the requirement of domestic contents was always accompanying in the approval of the central government for any joint venture projects.

In these new blue prints designed for the Chinese automobile industry, FAW as the largest and oldest automaker in China was taken by the central government as a major protocol to fulfill these national wills. For the central government, FAW was the one of the best carriers practicing the national industry policy. Therefore, all these ideas developed for the national automobile industry were also rationale for the central government to direct the development of FAW. Application of these ideas into FAW by the central government had two basic implications: first, in the reform of the state-enterprise relationship, the ownership of FAW in the market transition was supposed to assure the effective influence from above. Thus it became a necessary solution for FAW to be constantly held by the central government in the reform; second, for the technological upgrading for the car production, according to the designs of the central administrator, FAW should choose the official-approved route to go, namely setting up a joint venture to introduce the needed technology.

2.2.2 FAW, A Loyal Follower

These new directions proposed by the central government were greatly welcomed by the management board of FAW, which considered these new ideas from the central government to be a good match of its interests. The reason was twofold:

Table 4: Comparisons between Toyota and FAW in 1980s

Source: Based on Chen 1998

First of all, the interests of FAW and the central government were closely associated with each other. The ownership directly held by the central government made sure that FAW was counted as a privileged enterprise, which was supposed to enjoy special policy treatment from the central administrators. These treatments may make up the essential competitive advantages of the enterprise in the emerging market. More important, when the central government missed certain needs of FAW, the enterprise could often participate into the decision making process and argue for its own sake. A good illustration would be the meeting in 1987where the car production task was to be assigned (FAW 2003b): the central administration originally proposed to build a brand new enterprise to produce cars, excluding the already-established factories. Such a plan obviously disadvantaged the enterprises such as FAW, which had been struggling hard to catch such a golden chance for developing its own car assemblies. The FAW leaders expressed that the Chinese car industry should be mainly depended on the large enterprises, which were advantageous in terms of capacities and experiences in the automobile R&D and production. As a result, the central government dropped the original plan and agreed to build car projects at the already-established enterprises.

Secondly, the technological upgrading via the joint ventures indeed offered a quick access for FAW to acquire advanced technologies, which was badly needed by this technologically-outdated enterprise at the beginning of the reform. As the most advanced Chinese automobile factory in 1980s, FAW was seriously criticized as “manufacturing one model for thirty years”⁴ without any significant technical renovations. Table 4 was a summery done by engineers of FAW after a visit to the Japanese automobile industry in the 1980s. Their major feeling was the comprehensive and complete lag-off of FAW compared with the Japanese automakers and the urgency to catch up with the international advanced technological standard.

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