Conditions

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manufacturers had technical knowledge and skills. This meant that foreign investors as well as Chinese authorities came to agree over very specific entry modes.

3.3 Problems

From the previous chapters, one can see that the intentions of the two sides were different. That this would lead to future difficulties is not hard to foresee and so the relationship between the two sides not only held difficulties due to cultural differences, but also and mainly due to different goals. Whilst the foreign investors aimed to sell their products in a new market and make huge profits with this, the Chinese did not really care for the foreign products but were eager to acquire knowledge about the technology of these products in order to develop their own domestic market (Abrami et al., 2014, p.

150). One of the problems that occurred from this difference in mindset was that the Chinese Government effectively stimulated vehicle consumption and made it “very easy for money to come in, and very difficult for you to move it back out”, as one experienced attorney in Shanghai put it (Khizhnyakova, 2009, p.9). One of the most famous cases where mainly the repatriation of profits lead to serious problems and in the end to a disastrous result, is the JV between the American Motors Corporations (AMC) and Beijing Jeep. Both companies partnered up during an episode of struggle and later on disagreed about basically everything: product, customer and strategy (Abrami et al., 2014, p. 150). To further understand the problems arising out of the different mindsets and approaches, the next section will take a look at the conditions under which the Joint Ventures were and are formed.

3.4 Conditions

As said before, the Chinese Central Government made sure that it kept the foreign companies under close observation and very closely regulated (Khizhnyakova, 2009, p.4). When China allowed foreign auto manufacturers access to its market in 1983, this access was and is still tied to several conditions.

The most important will be introduced in the following.

First of all, foreign company cannot choose with which Chinese partner to cooperate, but get a company assigned by the Chinese government. Until 2001, only state owned enterprises (SOEs) were allowed as Chinese partners (Chu, 2011, p. 76; Chin, 2010, p. 117). The reason for this was, that having SOEs partnered up with the foreigners ensured that the state had a say in the JV (Chin, 2010, p. 116).

In addition to that, to ensure a long-term control over the JVs, in the JV contracts a review of the JV agreement is predetermined every two to three decades (Wang, 2013, p.2).

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In 1994, China decided over a new set of guidelines called the AIP (automotive industrial Policy), which determined the dealings with foreign entrants. The following are rules either introduced or confirmed in the 1994 AIP.

The arguably most known of the rules is, that operations in China have to be undertaken on a JV basis together with a Chinese firm. Within this JV agreement, the non-Chinese firm was not allowed to claim more than a 50 percent ownership. However, at the same time, the Chinese ownership could not be less than 50 percent, so basically the Chinese government strictly determined a 50/50 percent ownership. The reasons for this strict requirement are quite simple: the Chinese government on the one hand wanted to prevent the foreign partner from gaining too much control and wanted to be able to meaningfully influence the JV, which would not be possible with the Chinese side holding less than 50 percent of the JV. As the Chinese stated:

“The Chinese government will not allow foreign investors to control and carve up this big cake at their will. The leadership realizes that this sector is key for China’s future growth. We cannot allow foreign capital to control us.” (Chin, 2010, p. 116).

On the other hand, the Chinese were well aware of the fact that the involvement and interest of the foreign partner in the JV would decrease with decreasing ownership and therefore the anticipated benefits of the Chinese would decrease (Chin, 2010, p. 116). Therefore the 50/50 arrangement seemed to be the best solution for both sides.

Another regulation intended to prevent foreign partners from taking over the Chinese market, was the exclusion of foreign participants in the field of distribution and sales. This part was to be strictly left to the Chinese partner, who was therefore responsible for selling the products inside China and realize returns on investment (Chin, 2010, p. 116).

Moreover, a rule intended to keep the foreign partner in check and maximize the learning of the Chinese partner, was the strategy of partnering up only extremely larger Chinese corporations with the foreign companies. As the foreign partners were larger international automakers, the Chinese felt that it was necessary to use large-scale Chinese state automakers as partners to prevent the foreigners from having too much influence by the sheer comparative size of their company (Chin, 2010, p. 117).

Additionally, the foreign side also had to meet certain requirements in order to be admitted to the Chinese market. Those requirements essentially ensured that only world-leading automakers were allowed.

1. The foreign partner must basically be “a famous brand”.

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2. The foreign partner must have its own world leading and export ready technical expertise.

3. The foreign partner must have a global and export ready sales network.

4. The foreign partner must be financially strong and have the capacity to raise further financing (G.T. Chin, 2010, p. 118).

The reasons behind the Chinese government requiring its foreign partners to have strong financial capacities and be export ready, was that they had had bad experiences (Beijing Jeep and Guangzhou Peugeot), where the Chinese subsidiaries had been used as “foreign exchange cash cows” with short term returns on minimal investment. Also the financial stability of the foreign partner should ensure the possibility of project expansion and further investments.

Also, in order to ensure a long term engagement, the Chinese government set a yearly output minimum in the 1994 AIP: 150 000 for passenger cars with an engine capacity below 1600cc, 100 000 for light trucks, 50 000 for vans, 10 000 for heavy trucks and 200 000 for motorcycles with an engine capacity below 150 cc. (Chin, 2010, p. 118).

As mentioned before, one of the goals of the Chinese government was to acquire knowledge and skills to be able to produce their own cars. However, many of the foreign companies were reluctant to give away the knowledge about their world-class technology so the Chinese partner and so the Chinese government decided in the 1994 Autosector Industry Policy (AIP) to demand the JVs to fulfill the following conditions in the R&D part:

1. A technological R&D center, which is not only able to develop designs for product changes but also able to design new products, must be established within the new company.

2. The JV must be able to make products equivalent to the then current technology standards (1994).

3. The JV must intend to export products and achieve foreign currency balance.

4. Chinese parts producers have to be considered equally when the JV is choosing its part suppliers (Chin, 2010, p. 124).

One more thing the Chinese government decided to change in the 1994 AIP was that it defined the amount of localization they then required from the foreign partner. Before, localization was expected, but no real number had been mentioned, in the 1994 AIP then, 40 percent localization was demanded (Chin, 2010, p. 123).

In 2001, China decided to once more update their official policies and therefore implemented further requirements: the initial investment must be greater than RMB$2 billion and an R&D center with a

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minimum initial investment of RMB$ 0.5 billion must be set up and engines must be produced by the JV itself. This is due to the fact that the Chinese now try to mostly promote their own brand and therefore wants to increase the requirements for foreigners to actually enter their market.

Having understood the general rules under which the JVs had to operate, in the following, the case of Shanghai Volkswagen (SVW) will be closely investigated.

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