3
Structure and Capability of China’s Automotive Industry

The Chinese government is seeking to develop an automotive in dustry that is fully competitive with the world’s leading original equipment manufacturers (OEMs)—an ambitious goal, with many implications for society and for the Chinese economy. This chapter identifies the challenges and barriers that must be overcome if the Chinese automotive industry is to achieve this goal and the level of independence from foreign technology called for in the most recent five-year plan for the automotive industry (2001–2005). In doing so, the chapter draws on the experience of automotive companies throughout the world and looks at how the governments of a variety of countries have helped their automotive industries.

EVOLUTION OF THE CHINESE AUTOMOTIVE INDUSTRY

China began to develop a domestic motor vehicle industry in the 1950s. By pooling together investment and imported technology, primarily from the Soviet Union, the government was able to undertake establishment of the First Auto Works (FAW) in Changchun in 1953. On July 15, 1956, the first Chinese-made vehicle was produced—a 4-ton truck.

By 1958 many local governments were investing in the automotive industry, with the result that more than 200 factories began to produce motor vehicles. Yet only a small number of these factories survived and went on to become the backbone of today’s automotive industry. Those that did were in Beijing, Nanjing, Shanghai, Shenyang, and Jinan. One product of these plants was the Red Flag sedan, the limousine used by



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Personal Cars and China 3 Structure and Capability of China’s Automotive Industry The Chinese government is seeking to develop an automotive in dustry that is fully competitive with the world’s leading original equipment manufacturers (OEMs)—an ambitious goal, with many implications for society and for the Chinese economy. This chapter identifies the challenges and barriers that must be overcome if the Chinese automotive industry is to achieve this goal and the level of independence from foreign technology called for in the most recent five-year plan for the automotive industry (2001–2005). In doing so, the chapter draws on the experience of automotive companies throughout the world and looks at how the governments of a variety of countries have helped their automotive industries. EVOLUTION OF THE CHINESE AUTOMOTIVE INDUSTRY China began to develop a domestic motor vehicle industry in the 1950s. By pooling together investment and imported technology, primarily from the Soviet Union, the government was able to undertake establishment of the First Auto Works (FAW) in Changchun in 1953. On July 15, 1956, the first Chinese-made vehicle was produced—a 4-ton truck. By 1958 many local governments were investing in the automotive industry, with the result that more than 200 factories began to produce motor vehicles. Yet only a small number of these factories survived and went on to become the backbone of today’s automotive industry. Those that did were in Beijing, Nanjing, Shanghai, Shenyang, and Jinan. One product of these plants was the Red Flag sedan, the limousine used by

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Personal Cars and China high-ranking leaders in China. By 1960 the annual output of motor vehicles exceeded 22,000, but the industry then went into a decline, producing less than 4,000 vehicles in 1961, and the original production scale was not resumed until 1963. In the late 1960s China began to build the Second Auto Works, which later became the Dongfeng Motor Corporation (DMC). It was located in a valley in northwestern Hubei Province, a mountainous region. The Second Auto Works reached its designed production capability in 1986 and began to produce 5-ton trucks. Other heavy-duty truck manufacturers, such as the Sichuan Auto Plant and the Shannxi Auto Plant, also appeared during this period. They too were built in mountainous areas, which impeded production and further development. In 1971, after a decade of development, the total output of China’s automotive industry exceeded 100,000 units. Growth remained slow, however, with the total annual output still under 150,000 seven years later. In the 1970s the total number of motor vehicle manufacturing facilities increased to over 50, but most of them were small and had low production. Earlier, in the 1960s, the Chinese government had attempted to implement a highly centralized management system for the automotive industry, but for many years the industry developed in a scattered and disorderly fashion. With economic reform in the 1980s, the highly centralized control of motor vehicle production under the planned economy was gradually replaced by a market-oriented approach. The product mix was adjusted, and the production of heavy-duty and light-duty vehicles1 was expanded to eliminate the shortage of these vehicles. China also stepped up its cooperation with automotive industries in other countries, importing technology and establishing joint ventures. In May 1983 Beijing Jeep Corporation, the first joint venture for manufacturing complete vehicles, was established. Later, Shanghai-Volkswagen, FAW-Volkswagen, Dongfeng-Citroën Company, and other joint ventures came into being. Adjustments also were made in the structure of the industry, and a group production and management system was gradually created. During the 1980s annual motor vehicle output increased rapidly, from slightly more than 200,000 in 1980 to almost 600,000 in 1989. During the 1990s China’s automotive industry further adjusted its strategy, placing much higher priority on the development of the passenger car industry. Before the 1980s China did not allow private citizens to purchase motor vehicles for personal use and therefore did not develop passenger car production. In the mid-1980s, when the control on private pur- 1   According to the National Standard of the Peoples Republic of China GB 3730.1-88, a medium-duty truck weighs between 6 and 14 tons. Light-duty trucks are lighter, and heavy-duty trucks heavier.

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Personal Cars and China chase was lifted, the number of personal-use automobiles began to grow. By 1985, 3,500 cars a year were being imported. Thus the development of car production to meet a growing demand became a government priority, and between 1990 and 2000 annual car production grew from less than 50,000 to over 600,000 at plants in Shanghai, Beijing, Tianjin, Guangzhou, Chongqing, and Guizhou, including those of the FAW Group and DMC. After lagging behind that of the industrialized world for many years, China’s automotive industry, and especially the personal-use automobile sector, is advancing rapidly. Over the past decade the personal automobile fleet has been growing by over 20 percent a year.2 Five factors suggest that future growth will continue at a high rate: (1) continued improvements in the Chinese economy; (2) the government’s decision to make personal cars a pillar industry; (3) population growth and urbanization; (4) China’s entry into the World Trade Organization (WTO); and (5) improvement and expansion of the transport infrastructure. Currently, domestic production accounts for more than 95 percent of the total motor vehicle market share. Domestically produced trucks basically meet market demand in terms of variety and quantity. The previous high disparity between supply and demand in the passenger car sector has been largely relieved. China also has become the world’s leading country in motorcycle manufacturing, boasting several internationally competitive motorcycle enterprises. Motorcycle output and product variety meet current domestic market needs. The quality of vehicles produced in China is improving rapidly because of the tremendous growth in the production of vehicles by the joint venture companies, which provide their proprietary product design and modern factories. Chinese performance regulations are forcing the use of more advanced technologies. The competition introduced by China’s entry into the WTO is expected to accelerate this technological and quality improvement. CHINA’S AUTOMOTIVE INDUSTRY TODAY By the end of 1999 China had 2,391 automotive enterprises: 118 OEMs, 546 motor vehicle remanufacturers, 136 motorcycle assemblers, 51 engine makers, and 1,540 motor vehicle/motorcycle parts and components companies (China State Economic and Trade Commission, 2001). China’s automotive sector employed a total of 1.8 million people, of whom 169,000 were engineers and technicians. The automotive sector’s total assets were 2   Based on a presentation by Prof. Guo Konghui, Jilin University, Changchun, China, in Washington, D.C., May 2001.

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Personal Cars and China TABLE 3-1 Motor Vehicle Production, China, 2000   Production Vehicle Type Volume (unit) Percent Growth Rate Vehicle total 2,069,069 13.07 Truck 764,005 1.03 Heavy 81,950 74.37 Medium 153,761 −16.82 Light 390,543 0.99 Mini 137,751 0.07 Bus 700,387 37.77 Large 7,953 3.06 Medium 35,938 22.13 Light 248,178 34.87 Mini 408,318 42.16 Car 604,677 6.95 2.5–4.0 liters 46,459 48.44 1.6–2.5 liters 367,554 2.97 1.0–1.6 liters 62,988 52.19 Less than 1 liter 127,676 –5.93   SOURCE: CAC-China Auto Consulting and CCPIT (2002). RMB508.7 billion ($61.3 billion), and its total output value was RMB341.1 billion ($41.1 billion). In 2000 total vehicle sales reached RMB391.1 billion ($47.1 billion), up by 80 percent from 1995, with profits of RMB17.4 billion ($2.1 billion), up by 107 percent from 1995. And in 2000 China produced 2.07 million motor vehicles (a 43 percent increase from 1995), 605,000 of which were passenger cars (an 86 percent increase over 1995), and 11.53 million motorcycles, or 44 percent of the world’s total production (an increase of 45 percent over 1995). Overall, the automotive sector had a total export value of RMB20.7 billion ($2.5 billion) and an import value of RMB29.8 billion ($3.6 billion)—see Table 3-1 for a summary of 2000 production. Finally, the annual production capacity for complete vehicles in China is about 2.6 million, including 1 million trucks, 700,000 buses, and 900,000 cars. The leading automotive manufacturing enterprises in China are listed in Appendix 3-A to this chapter. THE CURRENT STATE OF VEHICLE TECHNOLOGY Heavy-duty trucks. The Steyr series trucks, produced by imported technology, has reached the level of technology used by most international

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Personal Cars and China OEMs of the 1980s. Today’s Benz series trucks meet the 1990s technology standards. Vehicles produced by the Dongfeng Motor Corporation are meeting the international technology level of the late 1980s.3 Medium-size trucks. The medium-size trucks being developed and produced by domestic automobile manufacturing enterprises are relatively advanced in technology. Light-duty trucks. Imported models of light-duty trucks include the Isuzu series and Iveco series, which have reached the international technology level of the late 1980s. The cabs of independently developed trucks, such as the Small Dongfeng and New Yuejin series, now meet the international level of the early 1990s. Some models developed in the 1960s and 1970s are still in production after modest improvements. Minibuses and trucks. Most of these products were introduced from abroad in the mid-1980s, and there is a big gap in their technology compared with the advanced level reached internationally. Large and medium-size buses. Imported series such as Kassbohrer, Volvo, Benz, and Neoplan are at the international technology level of the early 1990s. Light-duty buses. The Iveco and Golden Cup series (Toyota Hiace), which have a large market share, have reached the international technology level of the mid-1980s. The newly imported Delica-Transit and Traffic series are at the level of the late 1980s. Passenger cars. The Audi A6, Passat B5, and Bola models meet current international technology standards, as do the newly imported Buick Century and Honda Accord models. Fukang, New Jetta, and Audi are at the international level of the early 1990s. Alto and Cherokee are at the international level of the mid-1980s. The Santana series belongs to the products of an earlier period, but it has undergone major modifications. Agricultural vehicles. Agricultural vehicles, which are low-speed and powered by diesel engines, carry both goods and passengers in rural areas.4 The vehicles use very simple technology. In the late 1990s the annual production of such vehicles in China was about 3 million, most of which were three-wheelers. Prices vary from RMB4,100 ($490) to RMB28,700 ($3,460) per vehicle. Four-wheelers are capable of maximum speeds of about 50 kilometers per hour (kph) and payloads of up to about 1.5 tons, and three-wheelers have maximum speeds of up to 40 kph and payloads of up to 0.5 ton. Agricultural vehicles receive some tax advantages over conventional vehicles, but they are banned from most large cities because of their low speed and high pollution levels. Moreover, three-wheelers 3   This section is based on CAC (2001). 4   This section is based on Asian Strategic Investments Corporation (2000).

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Personal Cars and China may be prone to overturning. At present China has about 15 million agricultural vehicles, produced by over 200 manufacturers. Virtually all companies are indigenous, using indigenous technology. STRATEGIES PURSUED BY OTHER COUNTRIES TO DEVELOP THEIR AUTOMOTIVE INDUSTRIES The U.S. and European automotive industries developed over many years, well before the global marketplace became a reality. In Europe many companies received direct government support from time to time, and most countries protected domestic producers at critical times. Geographically isolated, the U.S. industry developed with very little foreign competition until it was mature and very strong financially. In the meantime, several research organizations were being established in Europe and the United States—for example, Ricardo (Shoreham by the Sea, Sussex, England), AVL (Graz, Austria), Southwest Research Institute (San Antonio, Texas, United States)—and today they provide both the smaller and the financially weaker companies, as well as the large, mature OEMs, with the help they need to develop technology. The annual budget of each of these research organizations is about $300 million (RMB2.5 billion). Another firm, entirely dedicated to automotive technology, is FEV of Aachen, Germany, with a laboratory in Detroit. Its sales in 2000 were $1.6 million (RMB13.2 million). Many universities have developed strong programs that have produced high-quality engineers and scientists in large numbers each year, effectively feeding the research programs both in industry and at independent laboratories. Since World War II, Brazil, Korea, and Japan also have established large, internationally competitive automotive industries. Brazil has the twelfth largest automotive industry in the world. It produces 1.7 million vehicles a year, largely for the domestic market. Fiat, Volkswagen (VW), Ford, General Motors (GM), and Toyota each have freestanding, wholly owned subsidiaries in Brazil, which account for the production of the vast majority of vehicles. Each of these subsidiaries maintain some research and development (R&D) capability; in fact, the capability of VW’s subsidiary is considered second only to that of the facility in Europe. Little intellectual property is transferred, but these enterprises provide jobs for Brazilians and contribute significantly to the country’s gross domestic product (GDP). Although few strong university or independent automotive research centers exist in Brazil, some vehicles have been designed and developed largely by Brazilian researchers and engineers, including earlier versions of the Volkswagens now being manufactured and sold in China. Japan and Korea, by contrast, have developed their own indigenous automotive industries—Japan beginning in the 1950s and Korea in the

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Personal Cars and China 1970s. In the early days in both countries, vehicles were built by large industrial companies with far-reaching industrial expertise and extensive resources. The Japanese and Korean governments provided R&D support, but the principal benefit they offered was protection from foreign suppliers. And to this day, Korean and Japanese companies account for over 90 percent of domestic vehicle sales in their respective countries. In both countries the early companies were export-oriented and able to establish a significant international presence within about 10 years of launching domestic models. Furthermore, both of these countries provided significant protection against foreign imports while their industries were developing, an option that is not available to China after its entry into the WTO. The Japanese industry also benefited greatly from having small, high-quality cars available when the market for small cars suddenly expanded. By contrast, there is no obvious technological capability in China from which Chinese industry might gain a major advantage that does not exist in foreign OEMs. In Japan, one important exception to the industrial development just described is the Honda Motor Company. In the early years of the nation’s automotive industry (1965), the Japanese Ministry of International Trade and Industry (MITI) decided that Japan should support only two or three automotive companies, and it developed its industrial policy accordingly (Johnson, 1982). Not one of the selected companies, Honda focused first on building its motorcycle products. Then, building on its expertise with motorcycle engines and technology, the company expanded in the 1960s to small cars. The company’s first exports, in the late 1960s, were of poor quality and did not sell well. The next car it exported to the United States was the Honda Civic, with the innovative low-emitting, stratified charge CVCC (compound vortext-controlled combustion) engine. The timing was fortuitous because the United States was just implementing its first set of stringent emissions standards. Although other companies claimed that the standards were unreasonable and even unattainable, Honda disagreed and introduced its car to great acclaim. For several years, until the next series of more stringent nitrogen oxide (NOx) standards were introduced, its CVCC engine was one of the few engines to meet U.S. standards without needing a catalytic converter. (About 15 percent of production in 1975 consisted of cars without converters, which included some produced by manufacturers other than Honda.) The Japanese industry also benefited greatly from an unusual market circumstance in the 1970s and early 1980s. With the introduction of the oil embargo by members of the Organization of Petroleum Exporting Countries (OPEC), the demand for small cars with high fuel economy increased in the U.S. market. The Japanese imports were well suited to fulfill this demand, and U.S. domestic manufacturers offered essentially no compe-

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Personal Cars and China tition for several years. During this time the Japanese companies captured a significant market share, one that they have continued to build on over the years. Although several international companies have announced intentions to produce vehicles in China for export, because China does not now make or export a unique vehicle, an indigenous Chinese industry is unlikely to enjoy similar export expansion. THE FUTURE DEVELOPMENT OF CHINA’S AUTOMOTIVE INDUSTRY Two important features of the 2001–2005 plan for the automotive industry are: Two or three large automobile groups will be retained, with sales, distribution, and after-sales service systems commensurate with international standards. Their output will supply more than 70 percent of the domestic vehicle market and will include some exports. The government will nurture the formation of 5–10 large supplier groups, which will compete in the international market. The largest three companies should enjoy a 70 percent share of the domestic market. These guidelines represent a significant restructuring of the industry, from one that is heavily dependent on technology from outside sources— primarily from the world’s leading OEMs that are partners in joint ventures—to one that is closer to being self-standing and capable of developing and introducing the latest technologies into Chinese products. In contrast with the once centralized control of the automotive industry, the more independent motorcycle and farm equipment industries have developed a fully stand-alone, indigenous capability that is able to compete successfully in the world marketplace. In considering the implications of different industry structures, the committee identified various organizational forms and components that can be expected to be part of the total automotive industrial complex. Although it is not possible to predict accurately the size or complexity of any one of these elements, the overall structure of the industry will likely mirror the structure of the world industry. In a real sense, competition from successful overseas OEMs will encourage, perhaps even force, the Chinese industry to adopt many of their practices if it is to compete effectively in world markets. The elements of this future structure can be expected to include some or all of the following forms: stand-alone indigenous OEMs Chinese enterprises in partnership with a single distinct joint venture

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Personal Cars and China Chinese enterprises, each in partnership with several joint ventures, including some overlap of joint venture members among the various Chinese enterprises, as is common today motorcycle or farm equipment companies capable of developing a small car wholly owned subsidiaries of foreign companies with the capability to manufacture new vehicles small or modest-size domestic entrepreneurial companies able to provide engineering support to all of the various enterprises in China. Although the first of the alternatives—stand-alone indigenous enterprises—has been assigned a definite role in the five-year plan, it is unlikely that current stand-alone companies will be able to achieve the level of capability needed without drastic restructuring. State-owned enterprises exist throughout China, but the committee was presented with no information that suggested that these have the organizational structure, the personnel, or the level of technological sophistication necessary to create world-class enterprises in the short term. Furthermore, state-owned enterprises are required to adhere to practices that increase their costs and make them less competitive, such as providing housing, schools, and facilities for their employees. Dramatic changes will have to be implemented in these enterprises if they are to provide a long-term basis for a truly competitive indigenous industry. Several small entrepreneurial and locally owned enterprises appear to be emerging in the Chinese auto market. Although their cost structure seems to be competitive with the larger companies, the long-term viability of these enterprises remains unclear. Anyone considering alternatives 2 and 3, both of which involve some form of a joint venture, must recognize that the technology contained in the world-class cars and trucks currently manufactured in China has been provided largely by joint ventures without the transfer of the intellectual property that would allow Chinese members of the joint ventures to develop their own capabilities. Intellectual property includes not only patents, but also a range of proprietary information such as trade secrets, special manufacturing techniques, design processes, and systems engineering. This type of knowledge is essential to the development of a competitive indigenous industry in China. In addition, as noted earlier, several of the vehicles produced by the joint ventures do not possess the latest technologies. It seems very unlikely that a competitive stand-alone capability can be achieved in the near term through the existing joint ventures without a drastic restructuring of these enterprises to ensure that the Chinese partner will gain the experience and know-how to design and develop world-class vehicles. This observation has been reported and reiterated in con-

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Personal Cars and China versations with representatives of the major Chinese automobile companies and observed in the assembly plants. The second form in the list—Chinese enterprises, each with a single joint venture—would have the benefit of fostering the kind of close working relationship between the joint venture partners that could allow the transfer of knowledge to and the building of a technical capability in the Chinese partner. With a single partner, intellectual property could be more easily protected, and the partnership could provide the structure that would allow the Chinese to achieve the long-term objective of developing an indigenous industry capable of competing in the world marketplace. Of course, if the joint venture partner is to be comfortable with creating that capability in its Chinese partner, it will want assurance that its Chinese partner will not become a competitor. The arrangement between the Chinese partner and the joint venture partner would, then, probably have to be a long-term one. But such a relationship is likely to be attractive to potential joint venture partners only if they foresee large markets for the products being developed by the enterprise or significant investment in the enterprise by the Chinese partners. The third form—Chinese enterprises, each with several joint venture partners, some of which overlap with other enterprises—is the most common one at present, but it introduces a further complication. As noted earlier, the Chinese members of these enterprises have not benefited from the transfer of intellectual property from the foreign OEMs. Past business arrangements apparently did not require such transfers, and it is unlikely that joint venture partners would be willing to agree to such a structure in the future. Because each of the overseas members of the joint venture would want assurance that any proprietary information transferred to the joint venture would be kept confidential from other overseas members, who are likely to be competitors in other markets, the Chinese partner is likely to find it very difficult to receive and use this information to develop its own intellectual capabilities. Furthermore, this arrangement tends to reduce the incentive for the overseas partners to transfer the most sensitive proprietary information, which is precisely what the Chinese partners need to move toward a fully competitive independent industry that can design and develop a world-class vehicle. The fourth form—the entry of either the motorcycle or the farm equipment manufacturers into the small car market—represents an interesting alternative for China. Many of these companies are freestanding, successful developers of products for their markets. Although there has been some indication that the motorcycle industry is interested in developing a small car, it appears that this vehicle is smaller than that contemplated for the “China car” described in the five-year plan. Because of limited information, the committee was able to conclude only that enterprises in these

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Personal Cars and China two industries represent a resource that could form an important part of the new automotive industry. With China’s entry into the WTO, the fifth form—wholly owned foreign subsidiaries in China—is likely to appear for the first time in modern history. Even some companies that are presently joint venture partners of Chinese firms may find that this is a more advantageous way to participate in the growing Chinese market. Already some major overseas component manufacturers—for example, Robert Bosch, Corning, and Engelhard—have wholly owned subsidiaries in China. Similarly, some overseas OEMs may choose to withdraw from joint ventures with a multitude of partners as a way of protecting their intellectual property. Such OEMs are more likely to participate in the market through wholly owned subsidiaries that will have access to the technologies of their overseas owners and can offer continuing competition to Chinese companies. The sixth form of the industrial complex is the small or modest-size indigenous entrepreneurial company able to provide engineering support to all of the various Chinese enterprises. These independent engineering companies can provide important consulting and development capabilities. Large OEMs are increasingly turning to such resources in the West as they attempt to reduce their in-house costs. There is no reason why Western research companies would not be interested in supporting Chinese OEMs as well. As mentioned earlier, several of these companies have significant capabilities. The principal difficulties that must be confronted by the Chinese companies attempting to develop the capabilities to design and develop an indigenous automobile can be summarized as follows: The Chinese industry must compete with strong, mature industries in Japan, Korea, Europe, and the United States. As a member of the WTO, China will find it difficult to protect its domestic industry as it enters the period when high growth in the domestic car market is about to accelerate. State-owned enterprises are not currently competitive with the major foreign OEMs. The enterprise structure that China has put in place through joint ventures with foreign OEMs, which brings several international companies together under one roof with domestic partners, will likely continue to discourage the transfer of knowledge to the Chinese because of fear that the knowledge will fall into the hands of competitors. The critical issue the Chinese industry must face is how to develop a relationship with world-class OEMs that will encourage the transfer of the knowledge needed to build a long-term, independent, indigenous in-

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Personal Cars and China GM products.”6 In 2000, GM spent 4.1 percent of its revenue of $161 billion (RMB1,300 billion) on research and development. The comparable figure for Ford was 4.8 percent. Product engineering and development consume the vast majority of R&D funds. (One of the Chinese enterprises informed the committee that it is currently investing 2 percent of sales in research and development, and that it is seeking to raise that figure to 2.5 percent. A second enterprise claimed to be aiming for an R&D expenditure of 3 percent of sales.) To compete with world-class manufacturers, China’s automotive industry must be prepared to invest significant funds on a recurring basis. A critical mass of research and development may be required to effectively restructure the automotive industry. And during the time in which capability is being created, the funding will need to be significantly larger. Two other critical issues also must be carefully considered. The first is the content of any planned R&D program. A wide spectrum of technologies is described in Chapter 4, some of short-term importance and some with long-term possibilities. Careful balance of the technologies to be explored in the R&D portfolio is essential. The industry cannot achieve the desired independence by concentrating exclusively on long-term or exclusively on short-term technologies. Thanks to the sizeable investments made by members of the automotive industry worldwide, technology is continuing to evolve and new products are appearing almost daily. To remain competitive with these developments, the Chinese industry must possess the capability to contribute to current technological developments and to utilize them. Acquiring such a capability will require significant investments in both facilities and personnel. At the same time, the long-term technological opportunities cannot be ignored. China has undertaken steps to support some of the long-term technological research through its newly announced RMB880 million (over $100 million), five-year program for the support of research on fuel cells, hybrid vehicles, and electric vehicles. Although this investment is large by Chinese standards, it is only a fraction of what is being spent by overseas manufacturers to find solutions to the same technical problems. The challenge is to maintain a proper balance among the various technological opportunities. A second critical issue, but one hard to quantify, is the availability in China of engineers trained in the various aspects of automotive engineering. Many new engineers with capabilities in the relevant fields are needed 6   Form 10-K, as filed with the U.S. Securities and Exchange Commission, for the fiscal year ending December 31, 2000.

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Personal Cars and China to join those already employed in industry. In addition, Chinese universities will probably have to increase their output of automotive engineers— only 178 masters degrees and 36 doctorates were awarded in automotive engineering in 2000—and some of the engineers receiving training abroad in this field should be encouraged to return.7 But skills in product design and development are not acquired solely in school; industrial experience is essential. Engineers should be sent to as many international conferences, meetings, and short courses as possible to stay up to date on technological progress. The joint ventures should be encouraged to provide these opportunities, and state-owned enterprises and private companies with laboratories should participate in the training of students. Overall, the Chinese government and the country’s automotive industry will each have important roles in restructuring the industry to achieve its objectives. CONCLUSION The Chinese automotive industry is faced with a variety of structural problems. The state-owned industries must be made more efficient and all responsibilities not directly essential to automobile production should be removed and placed with other agencies. The joint ventures, while generally profitable, have been structured in ways that do not result in the transfer of technology to the enterprises. Re-creating a relationship with one or more joint venture partners in order to encourage the transfer of knowledge will be a challenge that may require restructuring some agreements among the joint venture partners. Independent entrepreneurial companies that can provide assistance to the industry are beginning to emerge as a source of technical expertise. The engineering consulting firms that have successfully supported the U.S. and European Union members of the industry represent a resource that can be utilized by the Chinese enterprises as well. Achieving the necessary restructuring while at the same time facing the likely competition from foreign imports (and possibly some freestanding subsidiaries of overseas OEMs) presents an enormous challenge to both the industry and the government. One thing is certain: creating a successful indigenous industry will require a long-term commitment of funding, substantial facilities, and the availability of highly trained engineers and scientists. A careful assessment of the resources likely to be available over time should be carried out before a particular path is chosen for the members of the industry. 7   Information provided by Prof. Guo Konghui.

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Personal Cars and China APPENDIX 3-A: THE MAJOR AUTOMOTIVE ENTERPRISES IN CHINA FAW Group Corporation FAW Group, the first large-scale motor vehicle production base in China, is now one of China’s top ten industrial enterprises. Its headquarters is in Changchun, and its production capacity is 700,000 vehicles a year. In 2000 the total motor vehicle output of the FAW Group was 423,000, the highest in China’s automotive industry. The FAW Group also produces mini- and light-duty buses and trucks, medium-size and heavy trucks, cars, and other series. Its Jiefang series buses and trucks constitute a large share of the market, and its Red Flag limousines are quite well known. The FAW Group also has entered into a joint venture with Volkswagen to produce Jetta and Audi sedans. Over the next five years the FAW Group is seeking to achieve a production capacity of 1 million vehicles, with a total sales volume of RMB820 billion ($10 billion). On June 14, 2002, the FAW Group and Tianjin Automotive Industry Group Corporation (TAIC) jointly announced a merger agreement in which FAW will own 50.98 percent of Xiali Auto (CBU-AutoEnews, 2002a). TAIC also will transfer to FAW its 75 percent equity shares in the Tianjin Huali Automobile Company Ltd., a minivehicle manufacturer. With the acquisition of Xiali and Huali, FAW gains the only segment it missed—low-end, subcompact economy cars. As China’s leading minicar and minivehicle manufacturers, Xiali and Huali bring to FAW not only two domestic brands, but also their national sales and distribution network. Moreover, the acquisition of Xiali gives FAW all the tangible and intangible assets needed to enter the economy car segment with the least capital, time, and risks. Over the past few years the FAW Group has expressed its intention to produce cars with an engine displacement of about 1.3 liters priced at about RMB80,000 ($9,600). In August 2002 Toyota and FAW announced that they would join forces to produce luxury sedans, sport-utility vehicles, and minivehicles for the Chinese market—400,000 vehicles a year by 2010. Such a move will place the two automakers in direct contention with the Dongfeng and Shanghai groups and their international partners (Zaun and Leggett, 2002). Dongfeng Motor Corporation (DMC) Originally named the Second Auto Works, DMC has its headquarters in Shiyan City, Hubei Province. At present, DMC has three major production bases—Shiyan, Xiangfan, and Wuhan—which form the Hubei auto-

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Personal Cars and China motive industry corridor. In 1998 DMC produced 190,000 vehicles, mainly heavy-duty trucks, medium-size trucks, and light-duty trucks. Under a joint arrangement with the Citroën Corporation of France, it also will produce Fukang sedans. DMC is playing the leading role in achieving Hubei Province’s goal of “building up a one million vehicle production base.” Beyond its role in Hubei Province, DMC has joined with Honda and Denway Motors in a venture to produce Honda cars in Guangzhou for export (Wall Street Journal, 2002). It also is negotiating a joint venture with Renault-Nissan (CBU-AutoEnews, 2002a). Shanghai Automotive Industry Corporation (SAIC) Shanghai began to manufacture cars in the 1960s, but on a very modest scale. In the 1980s it entered into a joint venture with Volkswagen of Germany to produce Santana sedans. By 2000 its production capacity had reached 400,000 vehicles and accounted for 45 percent of China’s car market, with its profit exceeding the sum of that of all other automakers combined. As a result of a joint venture with General Motors, Buick Century sedans began coming off the assembly line at the end of 1998. The Shanghai Group also plans to develop its production of heavy-duty trucks, large buses, and light-duty vehicles. As of 2002 the Shanghai Group had established 44 joint ventures with global automotive companies. China National Heavy-duty Truck Group (NHDTG) NHDTG, the largest heavy-duty truck production group, mainly produces Steyr 91 series complete trucks, bus chassis, and engines for Germany’s Mann Corporation, as well as transmissions, axles, and other products. In 1998 the group’s total output was almost 9,000 trucks, and the company has set a production goal of 25,000 vehicles. In 2001 the group signed an agreement with Sweden’s Volvo Corporation to commence production of heavy-duty vehicles. Joint Venture Partners Over the past few years, foreign companies have increased their participation in China’s automobile industry. The current status of each joint venture partner is summarized in this section.8 8   This section is based on a three-part series of articles entitled “World Automobile Giants’ China Strategies in 21st Century” that appeared in January 2001 in the online version of China’s People’s Daily (2001).

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Personal Cars and China Volkswagen Shanghai-Volkswagen was established in 1985 and FAW-Volkswagen in 1991. Since then, the two ventures have sold more than 300,000 vehicles a year, maintaining their market share of over 50 percent. Volkswagen is trying to gradually stagger the products of its two ventures. The First Automobile Works (FAW, Changchun) put out the Audi A6 (C class) in 1999 and the Bora (A class) in 2001; it expects to produce minicars (A class) in 2004. Similarly, Shanghai produced the Passat (B class) in 2000, and family cars (A Class) were launched in 2002. The models retained their competitiveness with comparable products being offered elsewhere in the world. All these models almost keep pace with the international market, and, when completed, the Volkswagen joint ventures will manufacture the top five models, based on overall production, in China. In addition, Volkswagen is studying the possibility of developing a new model to be sold in both China and overseas markets, and it may choose China as the base for export production. In fact, Volkswagen intends to introduce its most advanced manufacturing techniques and product technologies into China and bring its two Chinese ventures, as well as accessory systems, into its global orbit of purchasing, product research and development, and marketing. Volkswagen remains the strongest producer of cars in China with total production of 412,127 in 2001 (Wall Street Journal, 2002). Shanghai Automotive Industry Corporation signed an agreement on April 12, 2002, with Volkswagen AG to extend their joint venture, Shanghai–VW Automobile Company, for another 20 years to 2030, according to a recent report (CBU-AutoEnews, 2002b). The total registered capital of the joint venture will increase to RMB6.3 billion ($760 million) from the current RMB4.6 billion ($550 million). General Motors Corporation Since 1989, General Motors, the world’s largest automobile manufacturer, has invested about $2 billion in China to set up three vehicle joint ventures—Shanghai GM, Shenyang Gold Cup GM, and Liuzhou Wuling Motor Company—and one solely funded accessory sales center. General Motors has successfully brought a series of its products into China, including the Buick sedan, the Buick GL8 for business, the Sail family car, Chevrolets, and pickup vehicles. Because it plans to turn Shanghai GM into its production base in Asia, General Motors has provided the Pan Asia Technical Automotive Center in Shanghai with major support. GM’s overall production of the Buick Century, Buick GL8, and the Sail climbed to 59,729 in 2001(Wall Street Journal, 2002).

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Personal Cars and China Ford Motor Company Ford, which was the first American automobile manufacturer to enter the Chinese market, in June 1978, currently has in China more than 10 sales agencies, over 40 service facilities, and 2 global accessory sales agencies, as well as a technology training center. Its Transit vehicle, codeveloped with Jiangling of China, is now in production. Currently, Ford-brand vehicles control 0.5 percent of the Chinese auto market share, according to the company (Xinhua News Agency, June 18, 2002). Chang’an Ford is Ford’s first passenger car joint venture with Chang’an Motor Corporation based in Chongqing in southwest China. Ford will introduce a family-size sedan, which is based on its Fiesta platform developed in Europe, into the 50/50 joint venture. The $98 million (RMB810 million) joint venture was approved by the Chinese government during the first half of 2001. In preparation for selling both vehicles that it will produce in China and imported Ford-brand autos, the joint venture has selected 25 franchise dealers in China. Ford said earlier that it also plans to set up an auto financing branch to serve local consumers before the first product launch of the joint venture. DaimlerChrysler Sales of DaimlerChrysler’s Chinese product, the Beijing Jeep, declined throughout the 1990s, revealing the need for urgent technological improvements. On September 27, 2000, together with Beijing Automotive Industry Group, DaimlerChrysler declared that it would invest an additional $226 million (RMB1.9 billion) to strengthen and expand production in China. DaimlerChrysler also has joined hands with Yaxing-Benz (Yangzhou) in bus production, obtained approval to manufacture trucks in Baotou, Inner Mongolia, and signed a technology transfer agreement with Ankai Auto (Anhui) to produce a luxury car. It continues to produce the Jeep Cherokee in Beijing with total production in 2001 of only 4,258 (Wall Street Journal, 2002). PSA Peugeot-Citroën Group PSA began to enter the Chinese market in the late 1980s. For various reasons, its sedan project in Guangzhou produced only 100,000 cars in 10 years. Then PSA withdrew its funds, resulting in the total collapse of the project, which was taken over by Honda (see section on Honda). PSA’s Shenlong-Citroën joint venture with Dongfeng Motor Corporation also experienced many setbacks, including the 10 full years required to commence operations. In September 2001 Shenlong added RMB3.41 billion

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Personal Cars and China ($411 million) to its registered capital via a RMB2.34 billion ($282 million) debt-to-equity transfer, bringing total capital to RMB6 billion ($720 million). Meanwhile, the French shareholders of Citroën added an amount that kept its share at 30 percent, and Dongfeng’s share declined to 31 percent. In 2001 Citroën’s Fukang (ZX) and Picasso models led the company to being the third largest car producer with 53,680 units (Wall Street Journal, 2002). Renault Renault and the Sanjiang Group in Hubei Province joined forces in 1993 to assemble a light bus, Trafic. But production was suspended because of poor sales after the venture sold only 4,906 Trafic vans in seven years. Renault also has talks under way with Beijing Automotive Industry Group about producing the “Scenic” sedan and with Dongfeng Motor Corporation on trucks. As noted earlier, DFC is reportedly in the final stages of negotiating a joint venture with Renault-Nissan (CBU-AutoEnews, 2002a). Toyota Japan’s biggest auto corporation, Toyota, had plans to produce automobiles in Tianjin in 2002. Its Xiali, coproduced by the Daihatsu Motor Corporation and Toyota’s partner, the Tianjin Automotive Industry Group Corporation, had dominated China’s taxi market. However, in the three years from 1999 to 2001 TAIC’s car market share in the country fell drastically, from 18.5 percent to below 10 percent. Xiali had been steadily losing its market share with taxi fleets because large and medium-size cities were choosing larger taxi models. The availability of other subcompact cars such as the Yueda-Kia Pride, the Nanya Eagle, and the SAIC-Qirui Chery also drew customers away from the older Xiali model. At the higher end, the successful promotional activities of the Buick Sail, even though launched six months later than TAIC’s new Xiali 2000, overshadowed the latter’s launch. In 2001 the Xiali 2000 sold only 10,000 units compared with the 28,000 units sold of the Sail. As noted earlier, Toyota and FAW announced in August 2002 that they would jointly produce 300,000–400,000 luxury sedans, sport-utility vehicles, and minivehicles a year by 2010. (Zaun and Leggett, 2002). Honda Honda’s well-known motorcycle engine technology has earned it an important position in China’s motorbike market. Its other success is Guangzhou Honda, which will produce a new model each year, includ-

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Personal Cars and China ing a new minicar. Guangzhou Honda had stated its intention to raise its annual production of Accords from 30,000 to 50,000 units by 2002, but was already exceeding that level in 2001, producing 51,116 Accords. More recently, Honda also announced that it plans to build a factory in China where it will make cars exclusively for export to markets in Asia and Europe (Wall Street Journal, 2002). The new plant will be located in Guangzhou and will be operated in partnership with two Chinese auto makers—Guangzhou Auto Group Corporation, owned by Hong Kong-listed Denway Motors Limited, and Dongfeng Motor Corporation. In the same announcement, Honda said that it plans to increase annual capacity at its existing plant to 120,000 vehicles by March 2003. The Honda Odyssey, a multipurpose vehicle (MPV) model made by Guangzhou Honda, rolled off the production line on April 10, 2002. The retail price of the Odyssey is RMB298,000, or $36,000 (CBU-AutoEnews, 2002b). Nissan Nissan joined Zhengzhou Light Vehicle Factory in 1994 in manufacturing pickup trucks, but output remains low. It also joined with Yulon Motor Company and Dongfeng Motor Corporation to produce the Fengshen Bluebird in Shenzhen. Finally, Nissan has entered into a partnership with Renault for sedan manufacture in China. Specific models and investment partners have yet to be announced. Hyundai Corporation Early in 2000 Hyundai Corporation signed a letter of intent to expand cooperation with the Jiangsu Yueda Group, and in September 2000 it formally signed an agreement on transferring stock rights and making additional investments to set up a joint venture with equal shares by both sides. In 2001, 7,715 Hyundai-Kia Pride vehicles were produced in China (Wall Street Journal, 2002). According to the state press, China has picked a car made jointly with Hyundai as its preferred vehicle to replace Beijing’s vast and often dilapi-dated taxi fleet in preparation for the 2008 Summer Olympics (Xinhua News Agency, July 24, 2002). The vehicle, the midsize Sonata Saloon, will be produced by a 50/50 joint venture of Hyundai and Beijing Automotive Industry Corporation. Daewoo To qualify for sedan manufacture, Daewoo established two large ventures in China in the mid-1990s: FAW-Daewoo Automotive Engines and

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Personal Cars and China Shandong-Daewoo Auto Parts and Components Company. Daewoo’s bankruptcy in 2000 adversely affected the two projects, as well as a bus project in Guilin. The Shandong project, which still lacks central government approval to assemble vehicles, is at a standstill. APPENDIX 3-B:CHINA’S FIVE-YEAR PLAN FOR THE AUTOMOTIVE INDUSTRY—GOALS AND STRATEGIES China’s five-year plan for the automotive industry identifies concrete goals and strategies for use in stimulating the rapid growth of the industry. The specific goals that affect the automotive industry are listed below: Total annual vehicle production of 16.2 million units is sought, of which passenger cars will be 1.1 million units and motorcycles 13.0 million units. Two to three large automobile groups will be formed, with a sales, distribution, and after-sales service system commensurate with international standards. Their output will supply more than 70 percent of the domestic car market and will include some exports. The government will nurture the formation of 5–10 large supplier groups, which will compete in the international market; the largest three companies should enjoy a 70 percent share of the domestic market. The country also will form three or four large motorcycle group corporations, which will be highly competitive in the international market. The number of diesel-powered trucks and buses will increase, with all medium-size vehicles powered by diesel engines. The production of diesel-powered cars and minivehicles also will be initiated. Output of diesel vehicles will increase from 29.7 percent to over 35 percent. Output of alternative fuel buses and taxis also should increase, to about 2 percent of total output. Cars equipped with carburetors and using CFC-12 (chlorofluorocarbon) as a refrigerant will be discontinued. Safety features will significantly improve, with antilock braking systems (ABS) applied to large and medium-size buses and heavy-duty trucks. More passenger cars will be equipped with ABS and air bags, and new cars and light and minibuses will satisfy side-impact requirements. New cars, light and minivehicles, large and medium-size buses, and heavy-duty and medium trucks should meet European Emission Standard II (Euro II) emissions standards. Mid- to high-level cars and luxury large and medium-size coaches should meet Euro III emissions

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Personal Cars and China standards. New types of four-wheeled farm vehicles powered by multicylinder engines should meet Euro I standards. China is aiming to achieve international emissions standards by the year 2010. Average fuel consumption rate of new cars and light vehicles will be reduced during the plan period by 5–10 percent and that of heavy-duty and medium-size trucks by 10–15 percent. For passenger cars, emphasis will be on developing economy models that have engine displacement of 1.3 liters and that are smaller and priced around RMB80,000 ($9,600). Such economy models should meet national safety, fuel efficiency, and emissions standards and the demand of individual consumers. For taxi models, environmentally friendly cars should be developed and used. Balanced development is needed for passenger car diesel engines, single-fuel compressed natural gas (CNG) and liquefied petroleum gas (LPG) engines, and hybrid power systems that meet Euro II and Euro III emissions standards. For trucks, emphasis will be put on heavy-duty vehicles with engine displacement of 9 liters or more and horsepower of 300 and up for use on expressways. These include large horsepower tractor trailers, heavy-duty special-purpose vehicles, and chassis and diesel engines with 300 and higher horsepower that meet Euro II and III emissions standards. On the basis of current manufacturing conditions and facilities, light and minivehicles for use in the countryside will be developed. Emphasis will be placed on the development of environmentally friendly city buses. The focus on new motorcycle development will be on environmentally friendly motorcycles (such as fuel injection and electric models), engines that meet new emissions standards, and key parts and components. In the meantime, the industry should develop new, reliable, inexpensive models that are easy to repair and that suit rural road and loading conditions. The government will continue to support motorcycle exports. The proportion of electronic products in a motor vehicle and the use of high-performance, lightweight, energy-saving, and environmentally friendly materials will be expanded. Research and development related to electric and hybrid vehicles will be increased. Research and development related to the use of recycling materials for environmental protection will be expanded. Additional enterprises will be supported in their efforts to set up modern sales and distribution systems that combine sales, parts supply, service, and repair and information feedback using the Internet.

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Personal Cars and China Guidelines and principles for fair competition, opening to the outside world, and fostering independent development capability while seeking international cooperation will be developed. A unified national policy to expand the domestic automobile market will be created. National standards will be developed for car purchase and use by eliminating excessive fees; simplifying the procedure for car purchase, registration, and use; and increasing the availability of car purchase loans. For nationwide fuel economy and promotion of economical cars, a comprehensive fuel tax system will be implemented. The official used vehicle supply system will be reformed. Economic and technical cooperation with international partners will be encouraged. Fuel quality will be improved. Local governments will be responsible for roads, parking, and other infrastructure. They also will have authority to improve traffic management and road capacity. REFERENCES Asian Strategic Investments Corporation. 2000. China’s Agricultural Vehicle Industry: A Market Survey. Beijing, June. CBU-AutoEnews (China Business Update). 2002a. 8(June 27). ———. 2002b. 3(April 18). China National Automotive Industry Consulting and Developing Corporation (CAC). 2001. China’s Automotive Industry: Its Past, Present and Future. Online. Available at www.cacauto.com.report-en/report8.htm. Accessed October 10, 2002. China National Automotive Industry Consulting and Developing Corporation (CAC-China Auto Consulting) and Economic Information Department, China Council for the Promotion of International Trade (CCPIT). 2002. Production and sales of motor vehicles in January–December 2000. Online. Available at www.cacauto.com/databank/prsa00121.htm. Accessed August 28, 2002. China State Economic and Trade Commission. 2001. China’s 10th Five-Year Plan for the Development of the Automotive Industry (2001–2005). Translation made available by Volkswagen Corp. June. Johnson, C. 1982. MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925– 1975. Stanford: Stanford University Press. People’s Daily. 2001. World automobile giants’ China strategies in 21st century. Online. Available at http://english.peopledaily.com.cn/200101/12/eng20010112_60306.html; http://english.peopledaily.com.cn/200101/15/eng20010115_60493.html; http://english.peopledaily.com.cn/200101/16/eng20010116_60600.html. Accessed May 13, 2002. Wall Street Journal. 2002. Honda aims to export cars from China. July 11. Zaun, T., and K. Leggett. 2002. Toyota plans to produce luxury vehicles in China. Wall Street Journal. August 30.