The Puzzle of Differing Developmental Models

1.1 The Puzzle of Differing Developmental Models

Among the myriad, interesting phenomenon appearing during the market transition and globalization of the Chinese car industry, the current project concentrates on interpreting four major developmental models currently employed by the Chinese car assemblers.

In recent years, four development models among the Chinese car makers emerged, which could be delineated via two major dimensions. The first is the nature of ownership of the automaker. In the context of the Chinese economy, ownership, as a fundamental organization feature, is both critical for an explanation of behavior and performance and may vary due to the timing of reorientation toward a market economy. There are three types of ownership: ownership by the central government, ownership by local governments, and private ownership. The second dimension is the technological strategy implemented by the company, which is defined as whether the automaker sets up joint ventures and introduces foreign models or practices self-reliant R&D to produce indigenous models. This is a fundamental upgrading decision for any Chinese automaker in the context of globalization.

The implementation of this typology reveals some interesting patterns (Figure 2). Enterprises owned by the central government all cluster within the joint venture category, while privately owned corporations all making national cars. With regard to enterprises owned by local governments, the technological strategy implemented may be either the joint venture builder or the national car maker. Thus, four developmental models across the major Chinese car makers emerge: ownership by the central government coupled with the establishment of joint ventures as the major technological strategy, enterprises owned by local governments and the establishment of joint ventures, enterprises owned by local governments but producing national cars without joint ventures, and privately owned enterprises producing national cars.

Note: Densities in the figure show the relative sale scale of these car makers. The highest to the lowest densities respectively indicate the sale range (unit: vehicles) at 500 thousand and above, 200 thousand to 500 thousand, 100 thousand to 200 thousand, and 50 thousand to 100 thousand.

Figure 3: Geographic Distribution of the Chinese Major Car Makers

The model classification presented above needs to be qualified. First, this classification excludes the numerous small car makers in China that produce less than 500 thousand vehicles annually. Many of them have the potential to be listed in the near future, but these small enterprises are omitted in order to focus on the major configurations of the largest car makers in China. Second, the ownership classification in the figure is only meant to indicate major ownership features. That is, FAW is not wholly-owned by the central government or Geely Auto completely private, but these represent the majority positions for these companies. The ownership structure of modern corporations is generally complicated, and to simplify ownership classification may bear certain hazards. However, such simplification straightforwardly contrasts the types of ownership structures present among these enterprises. Third, the categories of technological strategy also require further discussion. When attributing a firm to the joint venture, foreign model category, I do not deny the possibility that the firm conducts in-house R&D aimed at production of national models. However, as with ownership structure, the classification represents the majority of the firm’s business. For instance, although it mainly uses foreign models to competedomestically, FAW manufactures Hongqi, the most famous national brand. As a national car maker, Brilliance Auto also produces a car model introduced by Toyota and operates a joint venture with BMW. Another case is HAG, which has indeed devoted substantial efforts to make national cars. The reason for its apparent contrary classification is twofold: HAG’s production concentrates on the mini-car, which requires relatively less R&D input; but more importantly, HAG signed a joint-venture memo with PSA and will produce via joint venture in the near future.

This study is meant to decode the above puzzle of why developmental varieties among Chinese car makers exist. Specifically, I explore why enterprises owned by the central government pursue technological advancement or upgrading in the form of joint ventures with global companies, why privately owned enterprises all produce national models born out of indigenous research and development efforts, and why enterprises owned by local governments individually pursue either strategy Why are foreign models not produced by privately owned enterprises, or national models by firms owned by the central government, and both produced by enterprises owned by the local governments?

The classification presented above is born from careful investigation of a rather simple inquiry about the Chinese automobile industry, who makes cars in China and how? To answer such a question, a straightforward consultation of a sale-ranking table of the Chinese car market provides a starting point. Table 2 lists all domestic car makers with sales over 50,000 units in 2003. At first glance, these car producers could be dichotomized: Shanghai-VW, FAW-VW, and Shanghai-GM are China’s “Big Three”, together responsible for about 40% of domestic sales; the next eleven car makers responsible for another 40%. However, further observation reveals that each of the big three is a joint venture producing foreign models, as are seven of the next eleven. Thus, as a preliminary response to the “who and how” inquiry, joint ventures are the modal form of production in the Chinese market and foreign models dominant in domestic sales.

Table 2: Car Makers in China with a Sale over 50,000 in 2003

Source: CATRC and CNAIC 2004

However, if attention is constrained to the domestic automakers, the image becomes much more complicated. In the above sale-ranking list, largest, Shanghai-VW, and the third largest, Shanghai-GM, both belong to a single corporation, SAIC Group, which is now the largest car manufacturer in China. Likewise, FAW-VW, Tianjin FAW Xiali, FAW Hainan Mazda, and FAW Car are either wholly-owned subsidiaries or majority controlled companies of FAW, the oldest Chinese automobile enterprise. To compare these two giants standing behind the listed car-making firms illustrates some interesting results. First of all, both are state-owned corporations, however FAW is directly owned by the central government, which I refer to as a “central enterprise”, while the SAIC Group is a local government owned corporation belonging to the Shanghai municipal government. Second, as evidenced by Table 2, SAIC Group utilizes the introduction of foreign models via joint ventures as its major technological upgrading strategy. Although three of the four FAW’s affiliates seem not to use joint ventures, the technological upgrading method of FAW indeed has a lot in common with SAIC Group. FAW’s largest car corporation, FAW-VW is a typical joint venture between FAW and Volkswagen. FAW Car and FAW Hainan Mazda, two other affiliates, are actually joint ventures in the making between FAW and Mazda. The last, Tianjin FAW Xiali, formerly Tianjin Xiali, is a special case. As early as the mid-1980s, based on a technological transfer agreement, it started to produce a mini-car model provided by Daihatsu, a Japanese car maker currently affiliated with Toyota. In 2002, this enterprise was incorporated into the comprehensive joint venture project between FAW and Toyota.

SAIC group and FAW are indeed very representative among the other listed corporations, not because they together hold about 60% of total market share, but because their ownership nature and technological strategy are prevalent across other listed corporations. Similar to the relationship between Shanghai-VW, Shanghai-GM, and SAIC Group, the joint venture of Guangzhou-Honda is affiliated with GAIG as a locally state-owned corporation of Guangzhou city; Beijing-Hyundai is a joint venture established by BAIC, which is owned by the Beijing municipal government. On the other hand, FAW also has corporations for which it is representative. DMC is a central enterprise standing behind the joint ventures Dongfeng Peugeot Citroën, Dongfeng-Nissan, and Dongfeng Yueda Kia. Chana-Suzuki is a joint venture established by Chana Auto as a central enterprise. Finally, there remain two critical outliers among the top fourteen auto producers, Chery Auto and Geely Auto. Chery Auto is a newly-emerged Chinese car maker, directly owned by the local government of Anhui Province. The uniqueness of Chery relies on the fact that Chery is not a joint venture and only produces national cars for the market. The other outlier, Geely, is a national car manufacturer as well, but unlike the state-owned Chery, it is a private-owned corporation.

Is the pattern in 2003 only a temporal phenomenon? The answer is a big no. Throughout the early years of the new century, the market sale hierarchy shown by the year of 2003 was not special, but rather representative. From 2003 to 2007, most of these auto companies consistently remain in the list of producers with annual sales of over 50,000 vehicles annually. A few minor changes are present: a few car makers have formed agreements with new foreign partners, for example, the joint ventures between DMC and Honda, GAIG and Honda, and Chana and Ford; there are a few new incomers joining this group, such as HAG, JCA, Brilliance Auto, BYD Auto and Great Wall. Therefore, a stable list of major corporations exists for this industry, which provides the study with a solid basis for the classification map present above.