COMPARATIVE ANALYSIS ON ST&I

Paper: How the Chinese government promoted a global automobile industry

Author: Wan-Wen Chu

Research Center for Humanities and Social Sciences, Academia Sinica, Taipei,

Taiwan

Prepared by Nicolaus Shombe (PHD14407)

December, 2014

OUTLINE

• Introduction

• Questions

• Automotive industry development in China

• Industrial Policy Formulation and Implementation

in China

• Evolution of Industrial Policy

• Implementation of Joint venture Policy

• Conclusion

• Lesson learned

Introduction

The claim by experts that:

• The Chinese state lacks the capability to practice pro-active industrial policy.

• China’s phenomenal growth has been caused by economic liberalization and

not by industrial policies,

• Government’s automotive industrial policy especially that of relying upon

foreign joint ventures, were deemed ineffective to promote development.

• This article argues that the Chinese state has practiced pro-active industrial

policies effectively in the automobile industry.

Questions1. Does the Chinese state have the capability to promote

industries successfully?

2. Has it relied upon industrial policies to achieve fast growth

since reform began in 1978?

3. Or instead, have industries grown merely from the

liberalization of markets and the opening up to foreign direct

investment (FDI) as presumed by many free market

economists?

4. Has economic decentralization led to self-seeking local

governments which rendered the central state powerless to

practice industrial policies?

5. Has FDI played a leading role in China’s development? Or

has the government had effective control over the FDI?

Automotive industry development in China

• In the early 1950s, China set up the first auto plant, the first auto

works (FAW), in Manchuria, and transferred Russian technology

to produce trucks not passenger cars.

• In the late 1960s, China established the second auto works (SAW)

in the mountains near Wuhan in central China.

• After 1978, Joint Venture became a policy

• From 2001 onward, on top of the existing joint ventures,

indigenous automobile firms started to appear in China, including

the state-owned Hafei and Chery, and the privately owned Geely

and BYD.

Evolution of Industrial PolicyUnder central planning (1949 -1978):-

• China did not have an industrial policy as defined in a market economy.

• It set a goal of rapid catch up and made developing heavy industry a top

priority,

• Central planning determined the pattern of industrial development in China.

PRC since 1978:-

• The term “industrial policy” 1st appeared in the 5-year plan of the 7th five-

year plan of 1986, though referring mainly to industrial structure

adjustment.

• In 1988, the government established the Bureau of Industrial Policy.

• In 1994, it issued an industrial policy framework to set goals for industrial

structure adjustment and upgrading, organization, technology, and

allocation.

• The automobile industry was not even included in the sixth five-year plan

(1981–1985), while at the same time auto imports and smuggling were

clearly on the rise.

• Thus, the auto industry was added as a pillar industry in 1986.

Evolution of Auto Industry Policy

• China chose the JV route and began to seek out foreign partners as a way of foreign technology transfer.

• In 1988, strategy of supporting “3 majors and 3 minors”—with FAW, SAW, and SAIC named as the three majors, and Beijing, Tianjin, and Guangzhou firms as the three minors

• Limit the total number of firms, and providing a high degree of protection.

• In 1992, FAW–VW was established, and SAW and Citroen also set up the joint venture Shenlong.

• The policy goal of this period focused on market concentration ratios and economies of scale.

• In 1987, SVW was ordered to increase its domestic content rate to 40% within 3 years. It achieved 60% in 1990, and 90% in 1997.

Under the protection of high tariffs and entry restrictions, these joint venture companies and enjoyed high profit rates without introducing new technology.

Evolution of Auto Industry Policy• The Automotive Industry Policy issued in 1994 formalized the import substitution

policy

• In 1997, in order to prepare for the entry into the WTO it allowed in more foreign investors and demanded they bring in the latest technology, including Shanghai-GM and Guangzhou-Honda.

• In 2000, revised the foreign business law, lifted the domestic content requirement, and relaxed the entry restriction.

• Emergence of indigenous firms - Chery Automobile of Wuhu, Anhui Province, and Geely Automobile of Taizhou, Zhejiang Province.

• In 2001, the state granted car assembly permit to 4 indigenous firms: Chery, Geely, Hafei, and Brilliance.

• In 2004 the new policy began to emphasize indigenous technology development and nurturing of national brands.

• In the 11th five-year plan (2006–2010) policy objectives for the automobile industry included the usual structural targets, and the authority also continued to push consolidation. In 2007, SAIC acquired Nanjing Auto, and NDRC announced at the signing ceremony that this be the model of “groupization.”

Implementation of Joint venture Policy

• In late 1978, General Motors and other foreign auto companies was

invited to China to discuss cooperation.

• SAIC signed a JV pact with VW, the one which showed most

interest, in 1984

• In 1997, SAIC and GM signed JV agreement , with GM agreeing to

inject a large sum of capital, introduce frontier technology, and

establish the Pan-Asia Technical Automotive Center.

1998 2000 2001 2002 2002 2002

Guangzhou-

Honda

Tianjin-

Faw-Toyota

Changan-

Ford

Beijing-

Hyundai

Brilliance-

BMW

Dongfeng-

Nissan

• The automotive industry in China has been the largest in the world measured by automobile unit production since 2008.

• Of the automobiles produced, 44.3% were local brands (including BYD, Dongfeng Motor, FAW Group, SAIC Motor, Lifan, Chang'an (Chana), Geely, Chery, Hafei, Jianghuai (JAC), Great Wall and Roewe), and the rest were produced by joint ventures with foreign car makers such as Volkswagen, General Motors, Hyundai, Nissan, Honda, Toyota, Mitsubishi etc.

• China still have advantage of population and economic growth. The current 2014 estimate is 1,393,783,836, this does not include Taiwan, Hong Kong and Macau.

Automotive industry Production

Automobile production in China (1955 – 2005)

0

1,000,000

2,000,000

3,000,000

4,000,000

55 60 65 70 75 80 85 90 95 00 05

Commercial vehiclesPassenger Cars

TRUCKS

YEAR

Industrial Policy Formulation and Implementation in China

Central Government

Local Government

SOEs SOEs

Ministries

SOEsSOEs

Private

catching-up consensus

13

• China is a multilayered one, and has to be considered as a

whole.

• Decentralization, however, allows room for policy

experiments by the local governments,

• The strong social consensus to catch up with the West

propels the central state to continue to improve its policy

toward this goal.

Conclusion

Lesson learned • Establishment of indigenous enterprises is

important in order to control the direction of technology and economic development.

• Support indigenous is important to have national Champion.

• Policy formulation is not static phenomena is dynamic depend on the existing circumstances.

• The process of policy making is a learning process.

• For developing countries to have national goal is very important like China had catch up west

ありがとう

“Chinese model of industrial policy propelled by the catch-up consensus has successfully promoted a

global automobile industry despite earlier mistakes”.