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1 Introduction T he impact of the automotive industry on society is unlike that of any other industry. The automobile is not just a technology or mode of transportation; it is a fundamental determinant of the entire economy. In the United States, one of every six workers deals in some way with automobiles and trucksâmaking them, repairing them, driving them professionally, insuring them, licensing them, and building and maintaining highways for them. As for fuel, a steep rise in the price of gasoline seriously affects the entire U.S. economy, even causing a reces- sion. Moreover, those nations that must import large quantities of oil find that their dependence has a telling effect on their balance of payments and creates potentially problematic relationships with the countries that produce oil, to the extent that dependence on foreign oil is an element of national security. Any nationâs effort to build an automotive industry is, then, about far more than manufacturing cars and providing people with greater mobility. It is about changing the entire economic and employ- ment structure of the nation. China has one of the fastest-growing fleet of automobiles in the world. In 2001 its motor vehicles totaled 18 million, including 5 million cars, of which 600,000 were produced in 2000.1 If Chinaâs number of motor ve- 1 In this report the term motor vehicles excludes two-wheeled vehicles unless otherwise indicated. It does include cars, trucks, buses, and commercial vehicles. The 2001 figure for motor vehicles was obtained from the China Statistical Abstract, published by the China State Statistical Bureau in May 2002. The 2001 figure for cars is a projection based on 1998 data from the State Commission of Economy and Trade. 7
8 PERSONAL CARS AND CHINA hicles per capita were comparable to the world average, its fleet would have to number 160 million, with 10 million new and replacement ve- hicles acquired each year. But, as revealed in Chapter 2, vehicle owner- ship is strongly correlated with a countryâs per capita gross domestic product (GDP) and average personal income. This suggests that a reason- able estimate for the number of vehicles in China in 2005 is about 25 mil- lion, a number in agreement with the general expectations of government planning. CHINAâS FIVE-YEAR PLAN In its eighth national five-year plan (1991â1995), the Chinese govern- ment designated the automotive industry as a âpillar industryâ of the economy.2 In its most recent five-year plan for the automotive industry (2001â2005), the government proposes specific actions to restructure and strengthen the industry, which is now primarily engaged in truck manu- facture and in joint ventures with foreign manufacturers for automobile assembly, and to produce a Chinese family car at a price that would en- courage mass ownership (for specifics of the five-year plan for the auto- motive industry, see the appendix to this chapter and Chapter 3). The plan emphasizes advanced technology and the production of vehicles that will be competitive in the international market, and gives priority to in- vestments in highways and oil and gas pipelines. More specifically, the plan suggests that only two or three of the 118 existing automotive manu- facturing companies will still be active in 2005, and it indicates which technologies will be used in manufacture and which will be incorporated into Chinese cars. Government planners anticipate that the new automo- biles can be produced by independent Chinese companies, but they ac- knowledge that Chinese accession to the World Trade Organization (WTO) will complicate that prospect. From the perspective of the Chinese automotive industry, the five- year plan represents short- and long-term opportunities and challenges. In the short term, the industry will receive government support to assist in consolidation and aid in expanding the domestic market. At present, nearly all the cars manufactured in China are produced by joint ventures, but the central government has indicated a desire to promote a Chinese- designed car, and additional resources may be made available for that effort. In the medium to long term, the automotive industry must adjust to the effects of Chinaâs membership in the WTO, which will open the 2 The five-year plan is a national economic plan prepared by the central government of China. It is intended to provide guidance to both government and industry.
INTRODUCTION 9 domestic market to a higher volume of imports that will challenge even the joint ventures in the growing Chinese market. In the longer term, Chi- nese companies will have to expand their capability in research and de- velopment (R&D), product design, and advanced manufacturing tech- niques in order to compete internationally in the car market. Such expansion will require major investments in research and development, which among successful international vehicle manufacturers is usually about 4â5 percent of revenues per year. To achieve that level of invest- ment and support a high-quality research program, the China automotive industry would have to capture a significant share of the domestic mar- ket, in competition with joint ventures and imported vehicles, and at the same time conform to emissions and efficiency standards that will require the use of advanced technologies and high-quality fuels. There are, how- ever, other kinds of vehicles, such as the agricultural vehicles and motor- cycles in which China has a greater advantage and experience, that might be used to establish niches in the international market or to serve as a springboard to successful automobile manufacture and marketing, as they did for Honda (see Chapter 3). Although implementation of the five-year plan will certainly bring about several improvements in the domestic motor vehicle industry and in the quality of products sold in the Chinese market, it is still not clear whether the Chinese industry will be able to nourish and sustain an R&D effort sufficient to develop an internationally competitive, indigenous ve- hicle. Success stories abound among Chinaâs neighbors in Asia, but China faces a difficulty they did not have. In addition to its need to compete with strong, mature industries in Japan, Europe, and the United States that are already well established in the region and in China itself, the Chi- nese government, as a member of the WTO, will find it difficult to protect its domestic industry as it enters the period of high growth. Indeed, the Chinese industry will face many challenges in seeking the capability to produce independently an internationally competitive product. Among other things, indigenous Chinese companies will have to expand their R&D capabilities, including in new product design and advanced manu- facturing techniques, and they will have to invest heavily in manufactur- ing facilities so they can accommodate all new vehicle designs. In any event, the growing automobile fleet, whether produced by in- digenous Chinese industry, joint ventures, or imports, will present the Chinese people with both potential benefits and potential liabilities. In the short term, a more mobile population will have greater freedom of choice in housing location, employment, and leisure. But in urban areas, in the absence of government intervention, air quality will worsen, the number of automobile accidents will increase, and congestion will take a toll on the quality of life. In rural areas, increased motorization will likely
10 PERSONAL CARS AND CHINA produce less distressing effects and will bring new lifestyles and economic benefits without the immediate impact of congestion and pollution. In the longer term, the form of the cities will change, as they have nearly every- where else in the world, and the population will move outward, leaving the city centers largely to the very wealthy and to the poorer people with- out automobiles. Although these effects can be mitigated, as they have been in some cities of the world, a new approach to government manage- ment and regulation will be required. Nationwide, the costs of car owner- ship will increase as national performance standards on emissions, effi- ciency, fuel quality, and safety are applied. Of great concern is the expectation that energy consumption will rise, and China will become more dependent on imported petroleum. Many other countries have gone through a similar motorization pro- cess, though few in so short a time. Some countries provide models for coping with the economic, environmental, and societal effects of rapid motorization; others serve as successful examples of the rapid develop- ment of a viable, independent automotive industry. Singapore, Hong Kong (China), Curitiba (Brazil), and Houston (United States) provide dif- ferent approaches for controlling congestion in cities, though they were not simultaneously trying to develop a local automotive industry. The United States and Europe have different approaches to controlling emis- sions. The United States, Europe, and Japan have active policies for limit- ing fuel consumption, but each has a different strategy. Japan, Korea, and Brazil have had varied experiences in the rapid development of an indig- enous automotive industry, and the Partnership for a New Generation of Vehicles (PNGV) program in the United States has served as an example of a government-industry partnership to develop advanced technology. Each of these experiences, some more successful than others, offers a dif- ferent lesson. None of these countriesâ experiences is closely reproducible in the present situation in China, but a careful examination of them will be helpful to Chinese planners. INTERACADEMY COLLABORATION In August 1999 a delegation from the Chinese Academy of Engineer- ing (CAE) visited Washington, D.C., to enlist the collaboration of the U.S. National Academies in a joint study of the issues described in this chap- ter. When representatives of the National Academies visited Shanghai in October 1999, the institutions signed a memorandum of understanding and agreed on a plan to carry out a joint study (see Appendix A of this report). The National Academies have a nearly 140-year history of providing the U.S. government and other governments and organizations with sci-
INTRODUCTION 11 entific and technological advice. Generally, this advice is tendered in the form of consensus study reports by balanced panels of experts, who are not paid for their contributions. The Chinese Academy of Engineering also is developing a program of reports and conferences that offer techni- cal advice to the government. For this study, the Chinese and U.S. academies formed a single com- mittee of experts, half nominated by the CAE and half by the U.S. Na- tional Academies (the full list of committee members appears in the front matter). The committee was cochaired by Guo Konghui, a member of the Chinese Academy of Engineering, and W. Dale Compton, a member of the U.S. National Academy of Engineering. The committee met five timesâin Beijing, Shanghai, and Changchun, China; Washington, D.C.; and Davis, California. The purpose of the study was to: â¢ achieve an understanding of the benefits and costs of developing personal-use vehicles in China â¢ propose options for solving the problems of congestion, pollution, increased energy consumption, and changes in the urban structure â¢ suggest strategies for developing a Chinese national car, as de- scribed in the five-year plan, while taking into account Chinaâs social de- velopment, the available technologies, opportunities for international co- operation, the possibility of cooperation between government and industry, the role of such a car in the national transportation system, and the impact of a large increase in the number of private cars on sustainable development. These issues are discussed in the chapters that follow. Chapter 2 de- scribes the global patterns of motorization and compares Chinaâs present situation with that of other countries. Chapter 3 summarizes the present status of the Chinese automotive industry and describes some alternative future development paths. Conventional and advanced developments in automotive technologies that may be available in the near or long term to Chinese industry are described in Chapter 4. The status of the fuel and energy industries that will play a crucial role in the development of an environmentally and economically sustainable auto industry is reported in Chapter 5. Chapter 6 describes the probable societal effects of rapid motorization, including urban congestion, physical expansion of cities, and, at the same time, new lifestyle benefits for vehicle owners. The haz- ards associated with the atmospheric pollution caused by automobiles and the steps the Chinese government is taking to control emissions are described in Chapter 7. Chapter 8 is devoted to the prospects for govern- ment-industry cooperation for automotive research and development, and
12 PERSONAL CARS AND CHINA the last chapter presents the findings and recommendations of the joint study committee. The report also includes a case study of the effects of motorization on Shanghai (see Appendix B). It describes some of the municipalityâs innovative responses to congestion problems. APPENDIX: CHINAâS FIVE-YEAR PLAN FOR THE AUTOMOTIVE INDUSTRYâACHIEVEMENTS AND PROBLEMS Chinaâs five-year plan for the automotive industry (2001â2005) iden- tifies concrete goals and strategies for stimulating the rapid growth of the industry. (These goals and strategies are described in an appendix to Chapter 3.) Some of the achievements of the automotive industry and some of its remaining major problems also are listed in the plan. The achievements are: â¢ High production advantages. Eighty percent of the stateâs investment in the automotive sector is now concentrated in the 13 leading manufac- turers. â¢ Progress in product structure. Cars as a proportion of total vehicle production rose from 8.3 percent in 1990 to 20.2 percent in 2000, and many of the new cars had electronic fuel injection systems. â¢ Higher exports of parts and components. Local suppliers provide up to 80 percent of the content of domestically produced vehicles, and they have been exporting 30 percent more parts and components each year. â¢ Greater product development capability. China has shifted from im- porting all manufacturing technology to developing some technology. New vehicle products have been developed jointly with foreign partners. â¢ Significant progress in foreign economic and technology cooperation. More than 600 automotive enterprises have been established in China with foreign participation. Foreign investment in the automotive sector has reached $21 billion (RMB174 billion).3 Four areas are listed as major problems: 1. Uncultivated consumer market for automobiles. The automotive sector has not developed a consumer-oriented policyâthat is, the product line, marketing, and pricing of manufacturers are not tailored to meet consum- ersâ needs. Moreover, some local governments impose fees and complex registration procedures or ban imports from other regions. 2. Weak product development capability. Chinese automobile manufac- 3 Currency conversions are based on an exchange rate of U.S.$1 = RMB8.3.
INTRODUCTION 13 turers lack a strong vehicle development capability, in part because of limited investment in research and developmentâless than 1 percent of revenue, which is much lower than that of most international manufac- turers. 3. Underdeveloped supply industry. Despite the gains just noted, Chinaâs auto supply industry is fragmented and uncompetitive compared with international norms, with little economy of scale. 4. 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 com- panies 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 âlocalization policy.â The disappearance of Chinaâs present policy of preference for local enterprises will have a negative ef- fect on foreign investment, technology transfer, and new product devel- opment in the Chinese automotive sector.