turers lack a strong vehicle development capability, in part because of limited investment in research and development—less than 1 percent of revenue, which is much lower than that of most international manufacturers.

  1. Underdeveloped supply industry. Despite the gains just noted, China’s auto supply industry is fragmented and uncompetitive compared with international norms, with little economy of scale.

  2. Duplicate construction and serious fragmentation. Local protective high tariffs and market restrictions have led local governments to launch new independent automobile assembly projects.

The plan also describes the effects of impending WTO membership in three areas:

  1. Tariff reduction and abolition of quota and import licenses. Imports will place new pressures on domestic manufacturers, especially imports of passenger cars, advanced engines, drive axles and key parts assemblies, and high-end heavy-duty trucks.

  2. Opening up of the automobile service trade. The arrival of foreign companies providing sales and distribution, franchise dealerships, shipping and transportation, financing, and car rental and leasing will further open channels for imports at the expense of locally produced vehicles.

  3. Abolition of the “localization policy.” The disappearance of China’s present policy of preference for local enterprises will have a negative effect on foreign investment, technology transfer, and new product development in the Chinese automotive sector.

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