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2 The Automobile Industry in China
“GM predicted that (…) by 2025, China will surpass the US to become the largest automobile market.”
Writes Lin Gan already in his 2001 working paper on the Globalization of the automobile industry in China (Gan, 2001). This prediction became true more than a decade earlier than expected and in 2009 China’s sales volume of cars was higher that the sales volume in the US (Economist, 2009).
In 2013, China produced 25.3 percent of all automobiles worldwide (Zhang, 2014, p.1) and in 2015, China sold 21.15 million passenger vehicles and 3.45 million commercial vehicles, whilst in the US merely 7.8 million automobiles have been sold. Considering that until 1985 China’s automobile industry was practically non-existent, the pace of the development and expansion of the Chinese automobile industry is even more extreme.
2.1 Development
Eric Thun writes in his 2006 book “Changing Lanes in China”:
“The automobile industry has an enduring appeal for developing countries because the broad supply network creates extensive linkages and because it is often seen as a symbol of a modern industrialized country.” (Thun, 2006, p. 83)
From this, one can already see the importance of the automobile industry to the Chinese government.
Its development can be divided into four parts. The first one ranges from 1953 – 1965. During this period, only about 60000 vehicles were produced in China. The Chinese government then worked closely together with the Soviet Union and as the Chinese lacked technology and management skills, these were imported and mainly shaped by the Soviets. The Chinese automobile industry was completely isolated from international business, with the Soviet Union as its only outside contact. In 1960, the automobile production at the regional level became profitable; there were only 16 automakers and 28 assembly companies existing in China by then (Gan, 2001).
The second phase ranges from 1966 to 1980. In order to shield its automobile industry, from 1965 on the Chinese government invested into the automobile production capacity development in the western regions, which were further away from its borders, less strategically important and therefore more secure from outside attacks. However, the seclusion of these plants did not only provide security, but also brought along a lack of infrastructure, energy supply and materials, as these regions, namely Sichuan, Shanxi and Hubei were not very developed. This disadvantage greatly impaired the industry.
Having previously mostly concentrated on heavy military vehicles, by the early 1970s, the demand
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for passenger cars rose above supply. The government decided to decentralize the production, which led to a peak in capacity development in different regions. By 1980, the number of automakers had risen to 58 and the number of assembly companies had risen to 192. In order to meet the demand, the state invested 5.1 billion Yuan to increase production to 160,000 vehicles. However, due to the decentralized production, economies of scale and cost reduction could not be reached.
The third phase, one of “adjustment and high speed development” (Gan, 2001, p. 4) was from 1981 to 1998. In 1978 Deng Xiaoping announced the new Chinese policy, which was an open door policy.
As Mark Beeson wrote in his 2013 article:
China’s re-emergence as a regional and world power was the result of a series of internal reforms driven primarily by Deng Xiaoping. The process of ‘opening up’ the Chinese economy has been extensively detailed, as have its remarkable consequences (Beeson, 2013, p.238).
China opened its doors to foreign business in order to modernize China and get Foreign Direct Investment (FDI). In 1980, the first Special Economic Zones (SEZs) were set up. These were special zones, through which Chinese politicians hoped to attract FDI by offering favorable and market oriented policies. As said before, the demand for automobiles greatly exceeded the supply and this can also be seen in the fact that passenger transportation increased by 7.4 times during 1978 to 1998 (Gan, 2001, p.3).
Having decentralized production, it then was easy for the provincial governments to step in and invest further. In the two years from 1983 to 1985 the number of automakers doubled from 65 to 114 and market competition intensified greatly. From the 1980s onward, encouraged by the new policy and the huge potential of the Chinese market, foreign automakers started to establish themselves in China, which led to a change in the structure of the industry. As Lin Gan writes in his paper 2001 paper
“Globalization in China”:
“The industrial development was characterized by an increase in joint ventures, which led to the establishment of seven major corporations. Together, these corporations accounted for more than 60% of the market share in products in this period. By 1998, total investment amounted to 120 billion yuan and production output accounted for 262 billion yuan, or equivalent to 0.8% of the GDP.“ (Gan, 2001, p.4)
From 1995 on, the Chinese government subsidized the automobile industry heavily (total investment:
58.8 billion yuan from 1995 to 2000). Most of this investment was going into the major 13 state-
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owned companies (Gan, 2001, p.5). As a result, output increased immensely from 8.84 million yuan value in 1980 to 298.76 million yuan in 1998:
Year Enterprise Employee Output Value Fixed Assets Equipment (million) (million yuan) (million yuan) (1000)
1980 2379 0.91 8.84 5.36 201.1
1985 2904 1.41 23.53 9.62 318.7
1990 2596 1.57 46.81 17.99 394.8
1995 2479 1.95 204.27 64.54 541.5
1998 2426 1.96 298.76 141.88 636.9
Figure 1 Automobile Industry Development in China (1980 – 1998) (Source: Gan, 2001, p.5) The fourth phase of automobile industry development started in 1999. Two main points are influencing the development. First of all, the Chinese government started in 1998 to promote the private ownership of cars, by for example offering low interest rates (Gan, 2001). However many of those promotions were also regionally driven, with each province implementing specific regulations to promote their regional automotive industry, meaning the companies producing in their region. This could easily be done be implementing for example tax exemptions or tax reliefs for specific brands or models.
The second driver in the automobile industry is the increased concern for environmental impacts.
Therefore the Chinese government started to promote fuel efficiency and sustainable urban transportation.
Another outside driver for the development of the Chinese automobile industry was its accession to the World Trade Organization (WTO) in 2001. After joining the WTO, many more opportunities opened up for the Chinese economy. Mark Beeson describes China’s accession to the WTO (quoting Susan Shirk) as:
‘The best thing that ever happened to China’s regional relations’, and it is not hard to see why: not only did this have the effect of further accelerating the process of economic expansion and integration, but it did so in a way that indicated Chinese leaders were going to play by the rules established under the auspices of US hegemony. (Beeson, 2013, p. 238) To sum it up, the Chinese government was very much involved in the promotion and development of the Chinese industry. However, the industry started to really take off only when foreign companies got involved.
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2.2 Overview: The Chinese Automobile Industry today
Having taken a look at the early development of the automobile industry in China, the paper will now focus on its more recent development.
In 1998, China was ranked as number 10 car manufacturing country and after merely 10 years, in 2008, it finally won the race of the leading car manufacturing country. However, since the winning of the race, another 8 years have gone by and we need to take a look at the Chinese automobile industry today. Nowadays China has 90 automotive brands, three times as much as the US, but it is still heavily subsidized by the government. About 30% of these companies’ profits are actually financial subsidies. (Putre, 2015).
Receiving such huge subsidies, gives companies little incentive to increase efficiency and in addition to that, the fragmentation which is due to the decentralization, led to every province promoting their own company and extending its production capability above the demand. This is also due to the fact that the automotive industry is often source of “pride and pillar of the local economy” (Putre, 2015).
Instead of trying to build a strong and combined Chinese automobile industry together, the provinces stand in rivalry to each other and try to only promote their local cars, whilst discriminating against the cars produced in other provinces.
Still, the Chinese Market held what it promised and was growing with an annual rate of 15% between 1978 and 2008. The China Yearbook reported in 2008 an output of four trillion yuan of all the industries linked to the auto sector, such a steel, plastic, aluminum, glass and rubber (Yu & Yang, 2011, p.18).
95% of the cars sold in China, are also produced there, leading to about 60 car brands being produced in China (in 2014). There are more brands produced in China than in any other market in the world.
Next to many domestic brands, such a Geely, Chery, Great Wall, Brilliance and BYD, there are many international brands from Germany, France, the US, Korea, Japan and Italy (Khizhnyakova, 2014, p.4&5). Competition is fierce and in 2009 alone, there were 80 new car models introduced to the Chinese market (Yu & Yang, 2011, pp. 19-20). However, the global economic crisis helped the Chinese automakers in recent years to strengthen their stand against international car companies, which suffered under the international financial crisis (Yu & Yang, 2011, p. 20).
Having to operate in the very restrictive environment of the Chinese market is not always easy for international companies and the Chinese government is well aware of this. In 2009, Vice premier Wang Qishan’s response to complaining EU business executives was: “I know you have complains…
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but the charm of the Chinese market is irresistible” (Khizhnyakova, 2014, p.17), meaning that due to its huge potential and promising development, the Chinese government just expects foreign investors to adhere to the rules and restrictions it sets them.
Concluding on the current state of the Chinese Automobile industry one can say that the Wang Qishan was right in his assessment of the situation. Foreign firms have no other choice then to accept the regulations the Chinese government sets if they want to have their piece of the cake.
In the next step, we will take a look at the environment and the conditions in and under which international companies have to operate in China.
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