THE PAST_ PRESENT AND FUTURE OF CHINA'S AUTOMOTIVE
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THE PAST, PRESENT AND FUTURE OF CHINA’S AUTOMOTIVE INDUSTRY:
A VALUE CHAIN PERSPECTIVE
Matthias Holweg1♦, Jianxi Luo2 and Nick Oliver1
1
Judge Business School, University of Cambridge, UK
2
Engineering Systems Division, Massachusetts Institute of Technology, USA
Working Paper – Comments welcome!
Paper in preparation for submission to UNIDO’s Global Value Chain Project.
Version 1.1, August 2005
♦
Corresponding author:
Dr Matthias Holweg
Judge Business School
University of Cambridge
Trumpington Street
Cambridge CB2 1AG, UK
Tel: +44 1223 760 583
Email: m.holweg@jbs.cam.ac.uk
INDEX
ABSTRACT................................................................................................................................................... 5
1 INTRODUCTION................................................................................................................................ 6
2 THE PAST – AN OVERVIEW OF THE DEVELOPMENT OF CHINA’S AUTO INDUSTRY .. 9
2.1 THE CENTRAL CONTROL AND PLANNING ERA (1949-1979)........................................................... 9
2.2 THE PROLIFERATION PHASE (1978-1994) .................................................................................... 11
2.3 THE CONCENTRATION PHASE (1994-2004) .................................................................................. 12
2.4 ANALYSIS OF THE CURRENT AUTOMOTIVE POLICY (SINCE 2004)................................................. 15
3 THE PRESENT – KEY ISSUES IN THE VALUE CHAIN ........................................................... 17
3.1 THE AUTOMOTIVE VALUE CHAIN IN CONTEXT ............................................................................ 17
3.2 VEHICLE MANUFACTURERS ......................................................................................................... 19
3.2.1 Production .............................................................................................................................. 19
3.2.2 The Vehicle Manufacturer Landscape..................................................................................... 21
3.2.3 Joint Ventures.......................................................................................................................... 23
3.2.4 Industry Clusters..................................................................................................................... 27
3.2.5 Capacity Utilization................................................................................................................ 29
3.2.6 Sales and Financial Performance........................................................................................... 33
3.3 COMPONENT SUPPLIERS ............................................................................................................... 35
3.3.1 Supplier Landscape................................................................................................................. 36
3.3.2 Content of Sourcing ................................................................................................................ 37
3.3.3 The Competitiveness of Chinese Suppliers ............................................................................. 39
3.3.4 Suppliers – Geographical Distribution................................................................................... 41
3.4 TECHNOLOGICAL CAPABILITIES OF THE CHINESE AUTO INDUSTRY .............................................. 42
3.4.1 Historical Shortage of R&D Capabilities ............................................................................... 42
3.4.2 Intellectual Property Issues .................................................................................................... 45
3.5 SALES AND DISTRIBUTION NETWORKS ........................................................................................ 48
3.5.1 Market Structure ..................................................................................................................... 48
3.5.2 The Purchasing Power of Chinese Consumers ....................................................................... 50
3.5.3 Auto Financing and Leasing................................................................................................... 51
3.5.4 The Dealer and Service Networks........................................................................................... 52
3.5.5 Export of Motor Vehicles and Components............................................................................. 54
2
4 THE FUTURE – DETERMINANTS OF SUSTAINABLE GROWTH ........................................ 56
4.1 SUMMARY OF KEY CONCLUSIONS ................................................................................................ 56
4.2 POLICY IMPLICATIONS OF MASS MOTORIZATION IN CHINA .......................................................... 60
4.3 OUTLOOK ..................................................................................................................................... 63
BIBLIOGRAPHY ....................................................................................................................................... 64
APPENDICES ............................................................................................................................................. 67
APPENDIX A: SUMMARY OF THE AUTOMOTIVE INDUSTRY POLICY 1994.................................................... 67
APPENDIX B: SUMMARY OF THE AUTOMOTIVE INDUSTRY POLICY 2004.................................................... 68
APPENDIX C: OPERATIONS OF SELECTED INTERNATIONAL COMPONENT SUPPLIERS IN CHINA .................. 70
APPENDIX D: MAJOR VEHICLE ASSEMBLY PLANTS IN CHINA - 2005......................................................... 72
APPENDIX E: PROFILES OF KEY DOMESTIC AUTOMAKERS ........................................................................ 75
3
LIST OF TABLES
Table 1: The Evolution of Global Automobile Manufacturing........................................................ 8
Table 2: Tariffs, Pre- and Post-WTO Membership ........................................................................ 13
Table 3: Stages of the 1994 Automotive Industry Policy .............................................................. 14
Table 4: Vehicle Production, Registrations, Imports and Ownership in China, 1960-2001 .......... 18
Table 5: Private Car Ownership in 11 Major Cities in China, 2002 and 2003 .............................. 19
Table 6: Joint Ventures in the Chinese Passenger Car Market....................................................... 24
Table 7: Installed Capacity and Capacity Utilisation, 2003 and 2004 ........................................... 30
Table 8: Revenue of Major Vehicle Manufacturers, 2004 ............................................................. 33
Table 9: Profit Range and Growth, 2003, Selected Manufacturers ............................................... 34
Table 10: The Sales of Major Chinese Automotive Groups .......................................................... 35
Table 11: Comparative Supplier Performance in Key Regions ..................................................... 40
Table 12: Passenger Car Sales by Manufacturer ........................................................................... 49
Table 13: Distribution Network and Sales Outlets, Major Vehicle Manufacturers........................ 54
Table 14: Vehicle Ownership in Selected Developing Countries, 2002 ........................................ 57
LIST OF FIGURES
Figure 1: Evolution of Car Production in Selected Newly Industrialised Countries and Regions,
1971-2003 ............................................................................................................................... 7
Figure 2: Production Volumes of Cars, Trucks, and Vehicles in China (1950-2002) ..................... 20
Figure 3: Growth of Vehicle Assemblers in China, 1955-1995 ...................................................... 21
Figure 4: Structure of Joint Ventures in the Chinese Auto Industry ............................................... 26
Figure 5: Location of Vehicle Manufacturers in China .................................................................. 27
Figure 6: Estimates of Supplier Cost Structure in China ................................................................ 38
Figure 7: Distribution of Automotive Component Production ....................................................... 42
Figure 8: Chery QQ Minicar (left) and GM Chevrolet Spark/ Daewoo Matiz (right).................... 47
Figure 9: Sales Price of Motor Vehicles in China........................................................................... 50
Figure 10: Price Trends by Segment............................................................................................... 58
Figure 11: China’s Oil Consumption 1996-2015 (forecast)............................................................ 61
4
THE PAST, PRESENT AND FUTURE OF CHINA’S AUTOMOTIVE INDUSTRY:
A VALUE CHAIN PERSPECTIVE
Abstract
Economic growth and industrial development in China over the last decade has been of great
interest to industrialists, academics and policy-makers alike. In case of the Chinese automotive
industry, studies have noted the complex structure of the industry, dominated by a range of joint
ventures between domestic and foreign manufacturers; the potential of future demand has attracted
particular attention. This article extends this analysis by examining key features and challenges in the
Chinese auto sector for vehicle assemblers, suppliers and distributors. Reviewing the government
policies that have underpinned the industry’s development since 1950 we assess the sustainability of
the industry’s growth. We conclude that the domestic auto market is likely continue to grow, albeit at a
lower rate, and highlight the challenges imposed by a growing overcapacity and the continued
dependence of foreign technology and product design. We argue that the sustainable growth of China’s
motor industry is determined not only by the wider economic situation, but also by factors such as
government policies, the generation of wealth outside the metropolitan areas, and the stability of the
currency. Finally, we provide an outlook over the energy and environmental implications of mass
motorisation in China.
5
1 Introduction
With near-stagnant main markets in the US, Western Europe and Japan, the attention of the global
automotive industry has turned towards China, where the fast growing economy – coupled with
considerable potential in domestic and export markets – is attracting much attention. This paper
focuses on the automotive industry in China, and assesses the factors which have shaped its
development historically and the development policies currently being pursued by the Chinese State.
The development of the industries has been dramatic. Until about 1975, there had been virtually no
passenger car production in China. Cars were the prerogative of a relatively small number of
high-ranking officials, and most vehicle production comprised trucks, and to a lesser extent,
motorcycles. Yet by 2004, China, with domestic passenger car sales of 2.3 million units, rivalled
Germany for the accolade of the third-largest market in the world, only superseded by the size of the
US and Japanese markets.
The recent growth in China follows a long-term trend in the motor industry, whereby
industrialising countries increasingly feature local production capabilities, as opposed to importing
vehicles from the developed world (Hong and Holweg, 2005). As in many other sectors, China, India
and Latin America are seen as major market opportunities in an otherwise stagnant industry. With
growing domestic demand, the establishment of manufacturing facilities in these countries is part of
the global manufacturing presence of the vehicle manufacturers. Some manufacturers have had
operations in China for many years. Volkswagen, for example, has been present in China since 1985
and has topped the rankings as one of the leading 50 foreign firms in China for 19 consecutive years.
Volkswagen plans to invest a further US$ 1.7 billion in the Asia-Pacific region by 2010, the majority
of which will be in China (Zhang, 2001).
Figure 1 shows the development of auto production in selected newly industrializing countries
and regions. This shows a stark contrast to the stagnant or declining markets in the established regions
of North America, Europe and Japan. Figure 1 clearly shows the distinct phases of manufacturing
capacity expansion in South Korea from 1985 onwards, in South America, and to a lesser extent, in
India from 1990 onwards, and in China from 2000 onwards.
6
3,500,000
3,000,000
2,500,000
2,000,000
Units
1,500,000
1,000,000
500,000
0
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
South America Korea China India South Africa
Figure 1: Evolution of Car Production in Selected Newly Industrialised Countries and
Regions, 1971-2003
Source: World Motor Vehicle Data, various years
Table 1 further elaborates on the relative growth of the manufacturing base in
newly-industrialised countries (NICs)1, compared to the industrialised countries (ICs)2. As can be seen,
the slow market growth in Europe, North America and Japan contrasts with the much more rapid
growth elsewhere. While the global car production increased considerably over the last three decades,
more than half of this growth is accounted for by NIC production, which has increased by a factor of
seven between 1970 and 2003.
1
We define Newly Industrialised Countries (NICs) as Argentina, Australia, Brazil, China, India, Mexico, South
Africa, South Korea, Malaysia, and Taiwan.
2
Industrialised Countries (ICs) include Western Europe, USA, Canada and Japan.
7
Table 1: The Evolution of Global Automobile Manufacturing
1971 1980 1990 1995 1997 2000 2001 2002 2003
World Car Production
26.45 28.61 36.27 36.07 38.45 41.23 39.97 41.22 41.78
[in million units]
% of World Car
90.9% 89.9% 87.8% 82.0% 73.4% 74.9% 75.3% 72.3% 70.1%
Production
Industrialised % of Growth
Countries (based on
--- 7.0% 23.9% -7.2% -4.5% 9.3% -4.3% 0.8% -1.6%
previous
period)
% of World Car
5.1% 7.7% 8.7% 15.1% 17.3% 17.2% 18.0% 21.4% 23.5%
Production
Newly
% of Growth
Industrialised
(based on
Countries --- 61.0% 43.4% 72.9% 22.6% 6.2% -0.1% 24.6% 11.3%
previous
period)
Source: Hong and Holweg (2005)
The trend towards globally distributed manufacturing is a long-term trend in the auto industry,
as Table 1 demonstrates. The majority of vehicles produced in newly industrialised countries serve
local rather than export demand3, a conclusion also supported by Sturgeon and Florida (2000).
Clearly, the growth experienced in China (albeit from a very low base) raises many questions.
What factors are fuelling it? How are indigenous enterprises responding to the challenges posed by
rapidly increasing volumes? What problems and opportunities await both Chinese and non-Chinese
enterprises attempting to take advantage of the developing automotive market in China? How
sustainable is this growth, and what are the implications of such rapid growth?
3
The only noticeable exceptions to date are Mexico, which largely produces vehicles for export to the United
States and to some extent for Europe (VW Puebla), and South Africa, which produces right-hand drive versions
of the Mercedes C-Class, BMW 3-series and VW Golf for export to the UK, Japan and Australasia. From Brazil,
the Volkswagen Fox has been exported to Europe since 2005, alongside engines for the BMW Mini. From India,
Tata had exported the City Rover to Europe, and Honda is exporting the Jazz model from China to Europe. In
comparison to the exports from Japan, South Korea, and to a lesser extent Malaysia (Proton and Perodua), the
exports from Asia and South America to Europe and the USA are insignificant.
8
This paper falls into three parts. First, the history of Chinese industrial organization since 1949 is
briefly reviewed. Second, we analyse the current state of the automotive value chain in China, and
more specifically, explore the key issues at the levels of vehicle assembly, component production and
distribution in the automotive value chain in China. Taking the perspective of the whole value chain is
crucial, as much analysis to date has focussed on industrial policy or concentrated on vehicle assembly
operations only; vehicle assembly is only one part of a much larger and complex set of operations in
the production and distribution of autos. Third, we outline some future trajectories for the Chinese auto
industry, investigating in particular the factors that determine the future development and sustainability
of the Chinese auto industry, and comment on the policy options to address the energy and
environmental issues raised by mass motorisation in China.
2 The Past – An Overview of the Development of China’s Auto Industry
The development of the automotive industry in China has clearly been shaped by the
circumstances of China’s wider political economy. To understand (and appreciate) its growth, it is
important to understand its evolution in the wider context of China’s industrialisation – which,
unsurprisingly, has been centrally driven and shaped under very distinct industrial policies, which we
will review in this section. In this section, the history of the automotive industry is considered in terms
of four key phases of development: the central control and planning era of 1949-1979; the
proliferation phase (1979-1994), the phase of concentration (1994-2004), and the most recent phase,
since 2004.
2.1 The Central Control and Planning Era (1949-1979)
Before the Communist Party came to power in 1949 there had been eight years of war against
Japan and three years of civil war between the Communists and the Guomindang. There was virtually
no automotive industry to speak of at that time. In the early years of Communist control China’s main
alliance was with the USSR, who provided assistance with many large projects during 1950-1960.
One such project was the First Automobile Works (FAW).
The FAW was founded in 1953, in the northern city of Changchun, Jinglin Province. Production
9
of Jiefang (Liberation) trucks began in 1956, when 1,600 units were assembled. This product was
produced unchanged for about 30 years. In 1958, the Hongqi (Red Flag) limousine began production
at the FAW. This was a high specification vehicle, used by senior Chinese officials. In 1991, the FAW
entered into a joint venture with Volkswagen to initially produce the Santana (a sedan version of the
Passat Mk II), and later also the Audi 100, the Jetta, and the Golf.
When he visited the plant in the 1980s, Lee Iaccoca (ex-CEO of Chrysler) described it as
following the ‘Rouge Pattern’, due to its high degree of vertical integration, with most of the
production of components taking place within the assembly plant itself. This is not surprising, as
engineers from the USSR had visited Ford’s Rouge Plant in Detroit during the 1930s, and transferred
the Rouge model to the USSR. This model was subsequently transferred to China when the USSR
helped China set up the First Auto Works.
In 1958 there was the ‘Great Leap Forward’. The economy had developed quite successfully
between 1950-1957, and China aspired to catch up with Western economies in key industrial products
such as steel, metallurgy equipment, power generators and machine tools within a period of 15 years.
One of the criteria used to assess progress towards this goal was the output of iron and steel. In 1957,
the output of steel in China stood at 5,350,000 tons. The Central Committee aimed to double the
output of steel to 10,700,000 tons in 1958 (Xie and Oliver, 1996). Many units - including even schools
- joined the process of iron and steel and steel production, and some technical schools were actually
turned into factories.
During the 1960s, international circumstances changed greatly. The relationship between China
and Soviet Union deteriorated and in August 1960, the USSR withdrew 1,390 experts, terminated
3,343 contracts, ended their assistance and asked China to pay back all debts. At the Second People’s
Representative Conference in 1963, the Chinese government decided to fully pay back the debt of
USSR before 1965, and to pursue a policy of self-development. Over 30 years later, these ambitions
were still reflected in the Automotive Industry Policy of 1994 in form of ambitious local content and
product development targets4.
There were frequent border conflicts between China and USSR during the 1960s, and a border
4
The Industrial Policies of 1994 and 2004 are summarized in Appendices A and B, respectively.
10
war between India and China in 1962. In 1965, China became involved in the Vietnam war, supporting
North Vietnam against USA. As part of the war effort, China set up a series of heavy and medium
truck plants. These new plants were located in the mountain areas (away from the borders) and
included the Second Automobile Works (more commonly known as ‘Dongfeng’5), the Sichuan Auto
Works, and the Shaanxi Auto Works.
As the relationship between China and USSR worsened, China had to rely on her own resources
for these developments. Consequently, all new automotive plants were designed, constructed and
operated by personnel from existing auto plants. For example, personnel from the First Automobile
Works were involved in setting up the Second Automobile Works (Dongfeng). Ironically, Dongfeng
became a competitor of the FAW in the early of 1980s, and now has joint ventures with
Peugeot-Citroen, Nissan, Honda and Kia.
Dongfeng was located in the mountain area, Hubei Province, and about 500 machine tool
suppliers (many of them non-Chinese) supplied equipment to the SAW. However, such was the
suspicion of outsiders that all equipment from foreign suppliers was installed by the Chinese
themselves. Indeed, foreign suppliers did not even know where their equipment was located until
China opened its doors in 1978.
2.2 The Proliferation Phase (1978-1994)
In the 1970s, international circumstances changed again. President Nixon visited China in 1972,
and China-US relations were normalised in 1978. China re-joined the United Nations in 1971 and the
fear of war began to subside. Chairman Mao died in 1976, and at the Third Plenum of the 11th
Chinese Communist Central Committee in 1978, Deng Xiaoping was endorsed as de facto leader.
China began to open up to the rest of the world, and as it did so the focus moved from political to
economic issues. ‘Developing Productive Power’ rather than ‘Class Struggle’ became the predominant
concern.
5
The name ‘Dongfeng’ literally translates as ‘east wind’, which relates to Mao’s famous saying of the ‘east
wind overwhelming the west wind’, which he made in Moscow in 1957. The name ‘east wind’ has also a
mythological meaning, as during the Han Dynasty, when China comprised of three countries that were frequently
at war, an easterly wind helped defeat an invading army, and is considered to bring good fortune ever since.
11
Most crucially, at this point the transition from a planned economy to the market economy began.
Provincial and municipal governments and ministries now had more autonomy to make decisions
without the fear of being accused of ‘going down the capitalist road’. Many chose the auto industry as
a means of developing their regions or departments, and the automotive industry entered what might
be termed a ‘proliferation’ stage. This proliferation occurred along two dimensions: an increase in the
volume of output, and an increase in the range of products.
During the central planning stage, volumes and variety were centrally planned, rather than
controlled by the market. Most vehicles were trucks and the production of passenger cars was very
limited. Saloons were only available for senior officials and there were strict regulations concerning
which officials could use which vehicles. With a relaxation of planning, there were many more
customers and the market for saloons and other vehicles increased greatly. For example, there were no
taxis at all during the central planning period, so as restrictions were relaxed, saloons and mini vans
were produced to supply the taxi market.
Existing facilities offered neither the quality nor the diversity of products to satisfy this growing
market. The FAW and Dongfeng, controlled directly by the central government, possessed scale
advantages, but lacked flexibility. Many small automotive factories began to develop under the
direction of both Provincial and Municipal governments. Some machinery factories under the control
of the Ministries of the Weapons Industry and the Aviation Industry also began production of vehicles
such as light trucks, mini vans and large passenger cars. The number of automobile factories increased
from 55 in 1979, to 114 in 1985.
2.3 The Concentration Phase (1994-2004)
The Chinese market for automobiles was, and continues to be, protected by high tariffs – a
situation that was only eased very recently by China’s accession to the World Trade Organisation
(WTO). Table 2 gives an overview of the tariffs, pre- and post-WTO accession in 2002. A legacy of
central planning was that the government decided the price of automobiles; this absence of a market
mechanism to mediate between demand and supply enabled small-scale auto factories to survive.
However, these small-scale, scattered, manufacturing operations spread capital and other resources
thinly, thereby hindering the development of large-scale automobile plants capable of competing with
12
foreign automakers.
Although the ministries and local governments have considerable autonomy, the central
government continues to be influential with local governments, and by the 1990s two powerful forces
were at work. On one hand, the pressure of the rapidly developing market and the growing presence of
foreign companies put pressure on China to develop several large-scale, competitive automobile plants.
After China started negotiations to join the WTO, there was only a limited period of tariff protection
before Chinese enterprises were to be exposed to foreign competitors (see Table 2). On the other hand,
local governments were supporting the development of local manufacturers to boost the
industrialisation in their respective region, which lead to a range of smaller vehicle manufacturers
owned by municipal governments, such as Nanjing Automotive for example. Nanjiing was originally a
small-scale truck manufacturer, yet under distinct pressure from the provincial government entered car
production and later became Fiat’s joint venture partner in China.
Table 2: Tariffs, Pre- and Post-WTO Membership
Before entry into WTO After entry in WTO
Tariffs 200% in 1980s 25% by 2006
80-100% in 1990s
Import quotas 30,000 vehicles a year allowed Quota increased by 20% a year,
from foreign carmakers phased out by 2006
Local content requirements 40% in first year of production, No local content ratio requirement
increasing to 60% and 80% in
second and third years, respectively
Auto financing for Chinese Foreign, nonblank financial Foreign, nonblank financing
domestic costumers institutions prohibited from permitted in selected cities prior to
providing financing gradual national rollout
Foreign participation in sales and Limited to wholesaling through Will by 2006 be allowed to own
distribution joint ventures; prohibited from vehicle wholesale, retail
consolidating sales organizations of organizations, integrated sales
imports, joint ventures organizations.
Source: Gao (2002)
In 1994, the Chinese government designated a number of industries as ‘Pillar Industries’,
intended to drive the national economy, and the automotive industry was been chosen as one of these
pillar industries. The reasons for this choice are not difficult to see - an automobile is composed of
13
more than 10,000 parts and components; the automotive industry is related to many other industries
such as metallurgy, petroleum, chemistry, coal, light industry, electronics, and textiles, and it was
reasoned that the development of an automotive industry would encourage Chinese enterprises in
many sectors to specialise and better co-ordinate their efforts.
These conditions were the background for the Chinese government to formulate its Automotive
Industry Policy. This was submitted by the State Planning Commission, the State Economy, the Trade
Commission and the Ministry of Machinery Industry in February 1994, was approved by the State
Council in March that year, and published in July 1994. The Policy had four key objectives: (1) to
establish large-scale groups of saloon and light truck producers (to replace the small-scale, scattered
manufacturers); (2) to improve the components industry; (3) to create automotive product
development capabilities; and (4) to encourage individual car ownership.
The policy addressed the four objectives listed above, and also issues such as local content
requirements, pollution and environmental considerations, conditions for the approval of foreign
investment and so on. The policy contained an aggressive schedule for the development of the
Chinese automotive industry, as outlined in Table 3, and was further amended only in 2004.
Table 3: Stages of the 1994 Automotive Industry Policy
Stage Description
1994 - 1996 ‘Foundation’ Stage: Approved projects of light weight vehicles and saloons to commence
production; the development of the components industry; vehicles to have a local content of
60-80%.
1997 - 2000 ‘Attacking Difficulties’ Stage: The target output for 2000 was 2.7 million vehicles, of which
1.35 million were to comprise saloons. The intention was for there to be two or three large-
scale automobile groups and six or seven ‘backbone’ automobile enterprises. Basic R&D
capabilities were to be established.
2000 - 2010 ‘Rapidly Developing’ Stage: The target output for 2010 was 6.0 million per year, of which 4.0
million were to be saloons. The industry was to be self sufficient for product development
and competitive by international standards
14
2.4 Analysis of the Current Automotive Policy (since 2004)
China joined the WTO in 2002 and from this followed a number of steps to open up the market,
including tariff reductions and eliminating local content requirements. These actions rapidly advanced
the growth of China’s automotive market. The government continues to look to the automotive
industry to drive growth throughout the entire economy, including driving a variety of basic and
service-related sectors such as machinery, rubber, petrochemicals, electronics, textiles, auto financing,
aftermarket distribution channels, and automotive repair services.
After China’s entrance into the WTO the automotive industry began to grow faster than ever.
Overall production increased by 38.8% and 36.7% in 2002 and 2003 respectively, making China the
fourth largest auto producer and third largest auto market in the world.
The growth in the automotive industry, in particular in 2002 and 2003, attracted considerable
foreign investment, including manufacturers who already had operations in China and were seeking to
expand their local capacity and production, as well as manufacturers who had not previously
established operations in China. A secondary effect of this was that the capacity that was installed
superseded demand; this overcapacity increased competition considerably. To address this from the
beginning of 2004 the government started to implement selected economic ‘cooling-down’ policies,
including discouraging bank lending and slowing approval for investments. In addition to these macro
adjustments, consequent lower lending from the banks and frequent price cuts reduced demand, with
many price-sensitive Chinese consumers delaying buying cars as prices continued to fall. Despite
these conditions, total auto output still climbed by 14.1% year-on-year, to 5.071 million units.
To adapt to changes in the Chinese automotive industry, to China’s economic boom since the late
1990s, and to face the challenges emerging in the automotive industry after China’s entry to WTO, the
National Development and Reform Commission released the ‘New Automotive Industry Policy’ in
2004. The new policy had a several new objectives above and beyond the 1994 policy.6 These
included (1) to promote the harmonious development of the automotive and associated industries; (2)
to drive industrial structural adjustment; (3) to encourage self-reliant product development and local
brand development, with a view to building up a few famous brands and globally competitive (top 500)
6
The content of the 2004 Industrial Policy is summarized in Appendix B.
15
automotive groups by 2010; (4) to encourage independent research and development and production
on a large scale for key components and parts, and to foster the local suppliers and their international
operations, and (5) to promote light duty vehicles and new energy-efficient vehicles.
The 2004 industry policy significantly differs from the 1994 policy by offering encouragement
and strategic direction, rather than regulation. This indicates a significant change in the role of the
Chinese government in economic matters, as the government is now committed to using market forces
to influence the industry’s future, rather than government-prescriptive policies. For example, instead of
previous regulations about local content rates imposed on suppliers and vehicle manufacturers, the
new policy markedly encourages global platforms, with an expectation that global components would
then be built in China not only for the Chinese market, but also for export to North America, Europe
and Japan.
Historically, the government had imposed high tariffs to protect local firms. Now, in line with the
WTO agreements, the historical auto import quota has been cancelled, and the tariff rate for imported
complete cars decreased to 30% on January 1st, 2005, dropping to 25% by July 1st, 2006. The tariff
for imported auto parts has been lowered to 10%. The key changes that took place in 2004 are
summarized as follows. First, the government reformed the automotive industry policy and loosened
its control over this industry. Second, the government encouraged and supported private auto
consumption – this helped to expand the passenger car market. Third, the increase of foreign
investments and the entrance of more private capital into the auto industry has meant that overall
production capacity (and economies of scale) have been growing fast. With falls in vehicle prices,
private car ownership has grown (despite some would-be buyers delaying their purchases in
anticipation of further price reductions), and private buyers are now the major market; the parts
industry has grown along with automobile-related services such as auto finance, repair, maintenance,
and insurance. In addition, the state is speeding up the construction of transportation infrastructure to
support the growth of automobile ownership.
In 2005, after the substantial growth of 2002 to 2004, the Chinese auto industry has been
temporarily ‘cooling down’. It is expected that demand will be more stable in the future, as we will
elaborate below. However, although productive capacity has moved ahead of demand, we believe that
the Chinese auto market is far from being saturated in relation to its ultimate economic size. However,
16
there is significant uncertainty with currency issues, with increasing congestion and pollution in the
urban areas, and China’s long-term energy supply. We will discuss these issues in Section 4.
3 The Present – Key Issues in the Value Chain
3.1 The Automotive Value Chain in Context
The automotive value chain in China is in transition. The industry has been through a number of
different phases since 1950, as we outlined above, and will face further developments. The Chinese
auto industry has grown from an entirely closed market before 1980, to a market with selected
joint-ventures (such as Volkswagen-FAW) that brought some mainstream passenger car production to
China, to one of the largest markets globally – with a presence of all major manufacturers, as well as a
large number of domestic manufacturers. From the start, entire designs as well as all of the key
components were imported, yet with growing local production, the imports of finished vehicles have
decreased considerably. While designs are still imported, over time the amount of locally sourced
content has been growing, with a range of contracts awarded to Chinese, or joint ventures between
foreign and Chinese, suppliers. All top-ten global first tier7 suppliers have set up operations in China,
and have engaged in multiple joint ventures with local suppliers.
Yet challenges remain: while suppliers have gained competitiveness in terms of unit costs, largely
derived from low wages, they still lack product development capabilities. Equally, at the vehicle
manufacturer level, product development capabilities are not local but are bought-in, and even those
Chinese firms that do not have foreign joint venture partners are buying (often outdated) designs from
abroad. The pressure to acquire product designs is considerable, as is illustrated in the case of the UK’s
MG Rover. Rover had initially contemplated a joint venture with Brilliance in 2002, then sold the
intellectual property of two models and several engines to SAIC in 2004 in the hope of a full merger
which subsequently did not happen. The remaining assets were sold to Nanjing after Rover’s financial
collapse in April 2005. While ‘full mergers’ and ‘continued car production in the UK’ were part of the
7
‘First-tier’ refers to those suppliers that directly supply parts and components into the vehicle assembly plants.
‘Second-tier’ would be those that supply the subcomponents and materials into the first-tier suppliers, and so on.
A typical automotive supply chain consists of three to four tiers, whereby the third and fourth tier suppliers are
generally the raw material suppliers, such as steel or glass works.
17
rhetoric in each of these cases, it seems doubtful that any of the bidders had any interest in Rover other
than for its technology and manufacturing equipment. Honda, Rover’s technological partner from
1979-1994, subsequently withdrew design pauses and equipment in 2005, in fear of losing its IPR
embedded in the joint Rover-Honda products (Civic Mk I and Mk II, Concerto, Ballade, Accord Mk I,
Legend Mk I).
Furthermore, along with the developments in the component supply and vehicle assembly tiers,
the distribution channels have drastically changed. Although the private ownership of passenger cars
was never forbidden in China, the cost was prohibitive. As Tables 3 and 4 show, the number of private
cars prior to 1990 was virtually negligible. Today, an estimated 30% of all households in Beijing own
a vehicle. The distribution channels had to be built from scratch, and are largely based on private
entrepreneurs selling and servicing vehicles.
Table 4: Vehicle Production, Registrations, Imports and Ownership in China, 1960-2001
Production Registrations Imports Vehicle Park
Passenger Commercial Passenger Commercial Passenger Commercial Passenger Commercial
cars vehicles cars vehicles cars vehicles cars vehicles
1960 98 22,476 - - 76 22 - -
1970 196 86,970 - - - - 133,000 480,000
1980 5,148 216,870 60,000 238,131 1,459 25,087 60,000 900,000
1992 161,745 904,997 160,000 837,000 106,000 30,700 1,839,303 5,177,378
1993 229,745 1,081,800 223,000 948,000 199,765 111,944 2,859,800 5,316,000
1994 247,631 1,090,000 248,000 1,073,000 178,210 102,865 N/A N/A
1997 481,611 1,096,287 481,611 1,096,287 33,305 15,162 5,319,074 6,871,828
1998 465,139 1,142,572 418,917 1,064,863 24,331 14,933 6,548,324 6,644,710
1999 570,000 1,234,500 570,410 1,181,184 19,953 15,239 7,402,307 7,127,106
2000 604,677 1,464,392 721,463 1,476,205 N/A N/A N/A 11,817,900
2001 717,790 1,641,352 701,602 1,629,581 N/A N/A N/A N/A
Source: Shimokawa (2004)
This distribution however is not uniform. As the industrial development is centred around several
distinct economic areas along the coast line, as well as Beijing, car ownership is concentrated in the
areas of highest economic growth. Table 5 shows the car ownership by region in 2002/2003, set in the
context of the respective economic power of each region. On a national scale, this meant that the total
18
vehicle park grew from 9.42 million vehicles (of which 2.05 million were privately owned) in 1994, to
16.08 million (6.25 million private cars) in 2000, to 27.42 million (13.65 million private cars) in 2004.
Table 5: Private Car Ownership in 11 Major Cities in China, 2002 and 2003
Year Private Population Cars per GDP GDP per Disposable Cars per
2002/2003 Car (millions) 1,000 (billion Capita Income Disposable
Ownership Population RMB) (RMB) per Capita Income
(millions)
National 6.69 1,284 8
11 Cities, 3.58 71.04 50 2,180 30,570 10,157 4.96
Average
1. Beijing 1.07 10.67 100 312 29,283 12,464 8.05
2. Guangzhou 0.29 5.84 50 273 47,053 13,380 3.71
3. Chengdu 0.28 4.40 64 101 23,477 8,232 7.73
4. Tianjin 0.27 7.52 36 182 24,260 9,338 3.84
5. Shenzhen 0.22 1.39 158 226 46,388 21,914 7.20
6. Shanghai 0.15 12.70 12 535 42,089 13,250 0.89
7. Nanjing 0.15 4.80 31 120 24,706 9,157 3.41
8. Chongqing 0.10 9.99 10 105 10,550 7,238 1.38
9. Shenyang 0.85 4.89 174 120 24,545 7,050 24.67
10. Hangzhou 0.11 3.87 28 137 35,664 11,778 2.41
11. Xi’an 0.09 4.97 18 75 15,155 1,784 10.14
Source: Shipper and Ng (2004)
In the following sections, we will analyse the issues facing the vehicle manufacturers, component
suppliers, and vehicle distribution chain in detail. The majority of previous studies have focused on the
evolution of the vehicle manufacturer tier in the value chain, so in this study we expand our scope to
the entire value chain, and to highlight the key issues and trends at component supply and
distribution/retail level, or - in other words - to adopt an holistic, value-chain perspective.
3.2 Vehicle Manufacturers
3.2.1 Production
As outlined in Table 3, vehicle production in China has risen considerably over the last quarter of
a century. Initially, the rise in production was driven by commercial and military needs. From the
1950s to the 1980s, automobile production in China was largely craft-based, while the mass, and later
19
lean production techniques that had emerged in Japan during this period and became prevalent in the
Western world were less applicable in China due to the low volumes – even if the Chinese auto
industry had had easy access to these techniques, which it did not. Only with the economic reforms
under Deng Xiaoping and the subsequent entry of the first wave of international automakers – initially
Volkswagen, and then Chrysler and Peugeot-Citroen – was advanced automotive production
knowledge applied in China. In the 1990s, the development of the industry started to accelerate in
parallel with overall economic trends, the increase in disposable income in the metropolitan areas, and
the establishment of an affluent middle class. In general, China’s auto production and sales have
grown about 15% on average every year from 1994 to 2002, and increased further and dramatically
with China’s entry to WTO. In 2002 and 2003, overall production climbed by 38.8% and 36.7%,
respectively, and passenger car production grew by 55.2% and 85.0% respectively. The
‘cooling-down’ policies of 2004 resulted in a slowing-down of this trend, yet the total auto output in
2004 still climbed by 14.1% to 5.07 million units, including 2.32 million cars, 1.51 million trucks and
1.24 million buses. The domestic auto market is anticipated to exceed 10 million units annually by
2010, and 16 million units by 2020 (according to the China Automotive Engineering Association),
3,500,000
3,000,000 Output of Cars
2,500,000
Output of Trucks
2,000,000
Total Output of Vehicles
1,500,000
1,000,000
500,000
0
50
55
58
62
66
70
74
78
82
86
90
94
98
02
19
19
19
19
19
19
19
19
19
19
19
19
19
20
which roughly equals the current size of the US market, the largest globally.
Figure 2: Production Volumes of Cars, Trucks, and Vehicles in China (1950-2002)
Source: updated from Xie and Oliver (1996)
20
3.2.2 The Vehicle Manufacturer Landscape
In 2005, despite dynamic new entrants (commonly labelled ‘the young tigers’ in the press), the
vehicle manufacturers are still dominated by the three types of manufacturer: first, joint ventures
between local Chinese vehicle manufacturers and multinational foreign companies, that in 2004
accounted for about 90% of total sales of passenger vehicles. Second, there are five large domestic
groups that, either in addition to their joint ventures with foreign firms or independently, manufacture
and sell cars (e.g. FAW and Changan). Third, China also has a substantial base of small manufacturers
(e.g. Chery and Geely), which largely produce economy vehicles for the low-end market. Figure 3
shows the evolution of the number of vehicle manufacturing companies in China from 1955 to 1995.
140
120
Number of Vehicle Assemblers
100
80
60
40
20
0
1955 1960 1965 1970 1975 1980 1985 1990 1995
Figure 3: Growth of Vehicle Assemblers in China, 1955-1995
Source: Xie and Oliver (1996)
To some extent this evolution mirrors the development of the automotive industry in the West in
the 1920s. From a large base of craft manufacturers at the turn of the century, by 1920 the US auto
industry comprised 120 independent manufacturers. In 1950, the industry had consolidated to 10
players, whereby 86% of the production volume was attributed to the ‘Big Three’ (GM, Ford and
Chrysler). By 1970, the industry had consolidated into these three large players only, with independent
manufacturers like American Motors, Packard, Kaiser and Studebaker either being absorbed, or exiting
21
vehicle manufacturing altogether. Given this pattern, one would expect a major consolidation of the
Chinese manufacturing base also. Nonetheless, whereas market forces largely formed the US
manufacturer landscape via consolidation and economies of scale, a key difference in China is the
active intervention by central and local government.
The growth in the number of manufacturers in China is closely linked to the stages in the history
of the Chinese automotive industry, which were outlined in Section 2. From 1953 onwards, when First
Auto Works was established, the first five-year plan period saw a few municipal
government-supported auto plants, such as Shanghai Auto Works and Beijing Auto Works. Increased
military demand led to a second wave of state-owned auto plants, including the Dongfeng, Sichuan
Auto Works, Shanxi Auto Works and so on. Those plants were created mainly to produce trucks, and
were located in the mountains of central China for security. The third step came in the mid-1980s with
economic reform. The government officially set the automotive industry as one of the pillar industries
in 1986, yet as capital and technology were both extremely scarce in all the industries, and the Chinese
automakers lacked experience outside of truck production, there was almost no knowledge of car
development and production. The very few indigenous car brands with a small amount of craft
production, including ‘Red Flag’, ‘Shanghai’ and ‘Jin Gang Shan’, could not meet the government
objective of developing the passenger car industry as ‘High Jumping-off Point, Mass Capacity and
Professionalism’. Thus, a policy to support joint ventures and use these as a means of technology
transfer was implemented. With the 1994 auto industry policy, entry to the industry was limited in
order to foster economies of scale, and to centralize resources. The government prohibited passenger
car projects other than in the supported state-owned enterprises (SOE), which included the so-called
‘Big Three, Small Three & Mini Two’8 policy that clearly set out which manufacturers were to be
sustained. By the end of 1990s, government regulation gradually loosened with the process of China’s
marketisation, and then more international automakers and local firms entered this industry to capture
the fast growing demand for automobiles in China.
While international joint ventures became the backbone of the Chinese auto industry, as will be
8
The ‘Big Three’ were First Automotive Works, Shanghai Automotive Industrial Corporation and Dongfeng Motor
Company, the ‘Small Three’ were Beijing Automotive Industrial Corporation, Tianjin Automotive Industrial Corporation and
Guangzhou Automotive Industrial Corporation, and the ‘Mini Two’ were Changan and Ghizou Aviation (see Xia, 2002).
22
discussed in the following section, the large auto enterprises have in parallel been forming
trans-departmental and trans-regional enterprise groups via merger, acquisition and cross share
holdings. FAW, for example, acquired Tianjin Automotive Industry Company (TAIC) in 2002 (and
thus strengthened the cooperation with Toyota through this acquisition, as TAIC was the largest
partner of Toyota in China). SAIC in turn controls local companies in Shangdong Yantan, Qingdao and
Guangxi Liuzhou. SAIC has also actively pursued a strategy of acquiring shares in foreign assemblers.
It holds a 10% share of Daewoo, and 49% of Ssangyong in Korea, was involved in bidding for MG
Rover and bought some of Rover’s IPR in 2004 – a contentious point with Nanjing, who bought the
remaining assets of MG Rover in July 2005. Changan (also known as ‘Chana’), based in Chongqing
(the economic centre of western China) has advanced as third-largest manufacturer in China in 2004
through acquiring local companies, as well as expanding through collaboration with Ford and Suzuki.
Despite similar consolidation trends, a key difference between the auto industries of China and
the U.S. is that the Chinese central government was dedicated to regulating auto production in big auto
groups from the beginning in 1953, although this has only being partially successful due to the
ambitions of strong local governments, many of whom have sought to develop their own local
champions. As regulation was gradually given up in favour of marketisation, only now can we see how
the forces of the market are shaping the automotive industry, with enterprises regrouping and
consolidating in order to establish viable economies of scale.
3.2.3 Joint Ventures
Joint ventures were a favoured government instrument to achieve technology transfer and rapid
growth of the industry. Thus, the establishment of joint ventures was initially a strict requirement by
the central government for foreign companies to operate in China, forcing vehicle manufacturers to
establish their operations as joint ventures with state-owned enterprises. The major joint ventures are
summarized in Table 6.
23
Table 6: Joint Ventures in the Chinese Passenger Car Market
Western 2004 2004 2004
Enterprise Chinese Partner
Partner Capacity Production Sales
Shanghai Volkswagen Shanghai Automotive Industry Corp. Volkswagen 450,000 346,338 353,649
FAW-Volkswagen First Auto Works Volkswagen 400,000 287,117 300,117
Shanghai GM Shanghai Automotive Industry Corp. General Motors 200,000 253,000 252,000
Guangzhou Honda Guangzhou Automotive Industry Group Honda 240,000 202,312 202,066
Beijing Hyundai Beijing Automotive Industry Corp. Hyundai 150,000 150,158 144,090
Changan-Suzuki Changan Automobile Group Suzuki (Japan) 100,000 107,337 110,052
Shenglong (Dongfeng-PSA) Dongfeng Motor Corp. PSA 150,000 88,034 89,129
FAW-Toyota First Auto Works Toyota 120,000 83,437 77,739
Dongfeng Yueda Kia Dongfeng Motor Corp. Kia 100,000 63,267 62,506
Fengshen (Dongfeng-Nissan) Dongfeng Motor Corp. Nissan 150,000 64,197 60,784
Changan-Ford Changan Automobile Group Ford 150,000 50,000 47,119
Source: Automotive News Europe (2005)
The joint ventures are concentrated in the passenger car segment in China, partly due to the
strategic significance of the sector and the fact that knowledge of truck production was already
relatively advanced.
The first joint venture was Beijing Jeep Co. of Beijing Automotive Industry Co. (BAIC) and
American Motors Co. (which was subsequently taken over by Chrysler) in 1983. Chrysler (by then
DaimlerChrysler) and BAIC extended and expanded their cooperation for another 30 years in
September 2000. The second joint venture was Shanghai Volkswagen, involving Shanghai Automotive
Industry Company and Volkswagen AG., and was established in 1985. It is still the largest international
joint venture in China with an annual capacity of 450,000 units, a size comparable to Volkswagen’s
main plant in Wolfsburg, Germany. Volkswagen based its long time market dominance in China on
this early-mover advantage, and in 2005 still produces the Santana model (albeit a face-lifted version).
This dominance was only lost in 2005, when Shanghai GM took first place in the league table of
production volumes.
Another forerunner of joint ventures was Guangzhou Peugeot, established in 1985. The joint
venture company went bankrupt in 1997 because of the conflicts between the partners and
Guangzhou’s lack of manufacturing experience and access to qualified suppliers at that time. A further
24
issue was Peugeot’s reluctance to build modern (technologically advanced) vehicles in China, which
angered the government, and led to the closure of the operations. PSA’s issue with the joint venture,
the loss of IPR, is still a major concern for foreign automakers in China, and has only slightly
improved since the WTO accession, as we will discuss below.
As of the late 1980s, the state-owned First Auto Works and Dongfeng also embarked on a series
of joint ventures. FAW’s first joint venture was FAW-Volkswagen in 1992, which had started with a
technology tie-up with Audi before that. Now besides Volkswagen, FAW has joint ventures with
Toyota, and license-agreements from Mazda for several models. Dongfeng set up its first joint venture
with Peugeot in 1992. For a long time, three car models dominated the Chinese auto market – the
Santana by Shanghai Volkswagen, the Jetta by FAW-Volkswagen, and the Fukang by
Dongfeng-Peugeot, highlighting the dominance of the Chinese ‘Big Three’ and Volkswagen during
those (still heavily regulated) years.
Furthermore, in the small car segment, a range of local enterprises engaged in license agreement
and technology tie-ups with international automakers. In late 1980s, Suzuki mini car technologies
were brought in and shared by a few small local companies, including Changan, Changhe, Hafei and
Liuzhou Wuling. Tianjin Automotive Industry Co. licensed the Xiali (Charade) from Daihatsu and
Toyota, which was also a popular model and came back as a sales champion in the first half of year
2005. Changan set up a joint venture with Suzuki in 1993 to produce Alto and then Gazelle and Swift,
and also produced several Changan-badged minivans, with licensed technologies from Suzuki. The
other of the ‘Mini Two’, Guizhou Aviation, licensed Subaru mini car models in 1994, and then also
established a small joint venture with Subaru in 1998.
In conclusion, in analysing the evolution of joint ventures during the 1980s and 1990s, two key
features can be identified. First, the government has eagerly and successfully promoted joint ventures,
but prohibited auto plants from being fully owned by foreign carmakers in order to achieve the desired
technology transfer. Second, almost all international partnerships that were centrally supported were
with the ‘Big Three, Small Three & Mini Two’ companies, while some locally or regionally supported
small enterprises also engaged in licence agreements with international automakers. Small enterprises
generally rely on international automakers, as they lack know-how for product development and
sophisticated production management, and commonly produce old Western and Japanese designs
25
under their own brands. These account for small volumes only, however, as the large joint ventures
accounted for 90% of the passenger car market in 2004.
After China’s entry into the WTO in 2002, almost all remaining global automakers entered China,
and although no longer a requirement, almost all teamed up with a local partner. A key difference
post-2002 is the free choice of partners. BMW, for example, did not choose the state-owned enterprise
suggested by the government, but instead teamed up with Brilliance, as it did not yet have a foreign
partner, reducing BMW’s fear that its technology might leak to its international competitors via a
shared joint venture partner.
Other International
Chinese
Joint Ventures and
Joint Ventures
Collaborations
FAW General Motors
SAIC Toyota
Dongfeng Ford
Changan DaimlerChrysler
Guangzhou AIC Volkswagen
PSA
Beijing AIC
(Peugeot-Citroen)
Nanjing AIC Hyundai
Brilliance Honda
Chery Renault-Nissan
Geely Fiat
Great Wall Mazda
Independent
Zhongxing Local BMW
Vehicle
Manufacturers
Jianghuai Suzuki
Hafei Kia
Figure 4: Structure of Joint Ventures in the Chinese Auto Industry
As a result, a complex partnership structure between locals and internationals has developed, as
shown in Figure 4. This is not without its problems. While this structure helped the transfer of
manufacturing know-how and experience to Chinese manufacturers, drove the initial development of
26
local state-owned enterprises, and fostered the growth of local suppliers, the transfer of product
development capabilities to the local firms did not occur – largely due to the fact that there was almost
no product development activity within these joint ventures. Furthermore, the complexity of the
cross-holding partnerships also means considerable difficulty in managing operations. One problem is
that some companies have several joint venture partners, and also have started JVs with foreign
companies who are direct competitors. Honda, for example, has two JV partners, one in Ghuanzhou
(Ghuanzhou Automobile Industry Group), and one in Wuhan (Dongfeng). Both JV partners are
competing for new products, but Honda has a limited product range for the Chinese market, and thus
there is potentially unhealthy competition between the two Chinese operations. Also, manufacturers
like FAW and Dongfeng have independent operations that are in direct competition with their own
joint-venture operations.
3.2.4 Industry Clusters
The automotive industry in China is grouped in several distinct clusters, which group around the
key regional industrial centres - Shanghai, Beijing, Changhun, Hubei, Chongqing and Guangzhou. The
consolidated location layout brings advantages in terms of logistics (of both components and finished
vehicles, as the industrial areas are also where demand is strong), but also problems, such as labour
shortages. Volkswagen, for example, complained in our interviews that wage levels in Shanghai are
reaching European levels for qualified managers due to the shortage of candidates.
Beijing
Beijing
Changchun
Changchun
Hubei
Hubei
Shanghai
Shanghai
Chongqing
Chongqing
Guangzhou
Guangzhou
Figure 5: Location of Vehicle Manufacturers in China
27
The Changchun region was chosen for First Auto Works in 1950 because it is close to the Soviet
Union, from where assistance was initially drawn, and the North of China was also a historical
industrial base. Shanghai, on the other hand, has become one of the automotive production centres
because of its long industrial history. Shanghai Auto Works was established in the 1950s in the first
round of state-owned automotive plant construction. Volkswagen then chose Shanghai Auto Works as
partner because of the convenient geographical set-up, which allowed for efficient deep-sea logistics
to import to, and more recently, export from, China. Since then, entrepreneurial young local
independent automakers (e.g. Geely and Chery) have set up plants in the same area.
Beijing, as the capital, was also chosen as one of the first four cities to develop local automotive
plants. Early in 1983, the region’s first joint venture - Beijing Jeep Co., was established with American
Motors Co. in Beijing. Today, Beijing is the largest regional personal car market in China (Shanghai is
the largest economic city in China, but the personal car purchasing is choked in Shanghai by a local
policy of control on the number of vehicle registrations, which aims to mitigate traffic congestion).
Mercedes Benz’s new joint venture will build C- and E-Class sedans in Beijing to feed the demand of
governmental officials in China’s capital.
The Hubei Province is listed as one of the centres because Dongfeng (Second Auto Works) is
located there. Dongfeng was founded in Shiyan in the central mountains of Hubei in the Cold War era
for security and military reasons, in order to serve as a backup for First Auto Works, which was near
the border to the Soviet Union. From a logistics perspective, Hubei has considerable disadvantages,
and this is one of the reasons for the relatively slow development of Dongfeng.
Guangzhou’s automotive industry started to develop after the economic reforms of the mid 1980s.
Peugeot’s venture in Guangzhou, which started in 1985, was among the first JVs, but closed in 1997.
The arrival of Honda, Toyota and Nissan put Guangzhou at the forefront of China’s auto industry, and
Dongfeng is increasingly moving its business to sites around Guangzhou. The development of
Guangzhou’s auto industry has been accelerated by its proximity to southern China’s economic centres,
important international trading ports, and especially Hong Kong.
Relatively few automotive manufacturers and suppliers are based in Chongqing, such as Changan
with its partners Ford and Suzuki, Chongqing Isuzu, Hongyan Heavy Truck Co. and Sichuan Heavy
28
Truck Co.. Changan nonetheless surpassed Dongfeng in sales in 2004, and became the third largest
local automobile manufacturers in China through its multiple joint ventures. Chongqing is the fourth
city to achieve the status of municipality (after Beijing, Tianjin, and Shanghai), and is the economic
and industrial centre of western China. Chongqing was the capital of China in World War II because it
is located far inside Chinese territory and thus has considerable military production bases.
Approximately one third of all motorcycles made in China are produced in Chongqing.
3.2.5 Capacity Utilization
The auto industry is a highly capital-intensive industry; the utilisation of production capacity is a
vital performance measure (Holweg and Pil, 2004). The present low profitability of the global auto
industry can be partly attributed to the global overcapacity of 20,000,000 units (compared to a global
annual production of 58,000,000 units), which roughly equals the installed capacity in Western Europe.
The average capacity utilisation of vehicle assembly plants in the Western world is around 80%, and
companies’ financial results are very sensitive to under-utilisation; an illustrative example is Ford, who
announced plants closures in the US in early 2005, as overall capacity utilisation had fallen below
75%.
In China, the capacity utilization situation is much worse than in the West. This is largely a
consequence of the investment after the boom years since 2000, which yielded considerable profits for
the foreign vehicle manufacturers. For example, in 2004, China accounted for 6.25% of GM’s sales,
but 10.8% of GM’s global profits. Overall China has become the second largest market for GM, after
the US. As a result of the strong earnings in China, almost all the international automakers, including
GM, Ford, Volkswagen, Toyota, DaimlerChrysler etc., have been expanding their capacity in China.
Volkswagen plans to add an investment of €6 billion and to double its annual production capacity to
1.6 million cars in China by 2008. GM also plans to spend over US$ 3 billion to more than double its
annual production capacity to 1.3 million vehicles by 2007. Overcapacity in China is frequently
discussed in the trade press, although it seems like a very unlikely feature in the most dynamically
expanding market in the world.
Table 7 shows the capacity utilisation of the assembly plants in China, calculated for the main
groups, for the years 2003 and 2004.
29
Table 7: Installed Capacity and Capacity Utilisation, 2003 and 2004
Production Capacity Capacity Utilisation Utilisation
Production
Automaker 2003 2004 2003 2004 2003
2004 [units]
[units] [units] [units] [units] [units]
Brilliance China Automotive Holdings Ltd.
D Shengyang Brilliance Jinbei Automotive Co. 11,806 26,841 120,000 100,000 9.8% 26.8%
G BMW Brilliance Automotive Co. 15,138 7,500 30,000 30,000 50.5% 25.0%
Beijing Automotive Industry Holdings Co.
G Beijing Hyundai Motor Co. 150,158 55,113 150,000 50,000 100.1% 110.2%
G Beijing Benz-DaimlerChrysler Automotive Ltd. 33,679 19,441 100,000 80,000 33.7% 24.3%
Changan Automotive Co.
G Chongqing Changan Suzuki Automobile Co. 107,337 102,083 100,000 100,000 107.3% 102.1%
G Changan Ford Automobile Co. 50,000 18,535 150,000 50,000 33.3% 37.1%
Dongfeng Motor Corp.
G Dongfeng Peugeot Citroen Automobile Co. 88,034 105,475 150,000 150,000 58.7% 70.3%
G Dongfeng Yueda Kia Automobile Co. 63,267 52,017 100,000 100,000 63.3% 52.0%
G Dongfeng Motor Co. (Nissan) 64,197 66,134 150,000 100,000 42.8% 66.1%
D Dongfeng Liuzhou Motor Co. 16,486 10,302 50,000 50,000 33.0% 20.6%
First Auto Works Group
G FAW-Volkswagen Automotive Co. 287,117 302,346 400,000 300,000 71.8% 100.8%
D Tianjin FAW Xiali Automobile Co. 130,506 117,186 180,000 180,000 72.5% 65.1%
G Tianjin FAW Toyota Motor Co. 83,437 49,535 120,000 50,000 69.5% 99.1%
D FAW Haima Automotive Co. 66,954 54,824 150,000 75,000 44.6% 73.1%
D FAW Car Co. 50,066 48,219 100,000 90,000 50.1% 53.6%
D FAW Huali (Tianjin) Motor Co. 9,127 742 60,000 50,000 15.2% 1.5%
D Changchun FAW Fengyue Auto Co. 4,207 666 10,000 10,000 42.1% 6.7%
G Sichuan Toyota Motor Co. 3,110 397 10,000 10,000 31.1% 4.0%
Guangzhou Automotive Group
G Guangzhou Honda Automobile Co. 202,312 117,178 240,000 120,000 84.3% 97.6%
Shanghai Automotive Industry Corp. (SAIC)
G Shanghai Volkswagen Automotive Co. 346,338 405,252 450,000 450,000 77.0% 90.1%
G Shanghai General Motors Corp. 253,000 206,964 200,000 200,000 126.5% 103.5%
G SAIC GM Wuling Automobile Co. 228,839 180,188 * 200,000 180,000 114.4% 100.1%
G Shanghai GM Norsom Motors Co. 737 3,559 50,000 30,000 1.5% 11.9%
D Anhui Jianghuai Automobile Co. 17,245 14,746 40,000 40,000 * 43.1% 36.9%
D BYD Auto Co. 17,245 20,100 60,000 50,000 28.7% 40.2%
D Chery Automobile Co. 79,565 91,223 350,000 120,000 * 22.7% 76.0%
D Geely Automobile Holding Co. 91,744 81,285 360,000 300,000 25.5% 27.1%
D Great Wall Automobile Holding Co. 27,540 28,067 170,000 45,000 16.2% 62.4%
D Guizhou Skylark Automobile Co. 165 1,180 50,000 50,000 0.3% 2.4%
D Hafei Motor Co. 28,599 32,387 300,000 150,000 9.5% 21.6%
D Hebei Zhongxing Automobile Co. 16,192 28,500 100,000 100,000 16.2% 28.5%
30
G Hunan Changfeng Motor Co. 24,986 29,230 80,000 50,000 31.2% 58.5%
G Jiangling Motor Corp. 74,715 * 60,276 100,000 100,000 74.7% 60.3%
G Jiangxi Changhe Suzuki Co. 19,354 37,333 100,000 100,000 19.4% 37.3%
D Jiangxi Changhe Automobile Co. 7,402 2,711 60,000 60,000 12.3% 4.5%
G Nanjing Fiat Co. 26,598 37,418 100,000 100,000 26.6% 37.4%
D Rongcheng Huatai Automobile Co. 11,000 4,787* 30,000 30,000 36.7% 16.0%
D Soueast (Fujian) Motor Corp. 41,468 83,535 150,000 120,000 27.6% 69.6%
G Zhengzhou Nissan Automobile Co. 9,383 10,056 60,000 60,000 15.6% 16.8%
Global JV Plants 2,131,736 1,866,030 3,040,000 2,410,000 70.1% 77.4%
Domestic Plants 627,317 647,301 2,340,000 1,620,000 26.8% 40.0%
Plants of Independent Domestic OEMs 327,504 395,507 1,620,000 985,000 20.2% 40.2%
Independent Plants of Top 5 SOEs 277,346 231,939 550,000 455,000 50.4% 51.0%
TOTAL 2,759,053 2,513,331 5,380,000 4,030,000 51.3% 62.4%
Calculations based on Automotive News ‘Guide to China’s Auto Market’, 2005. Several plants
with incomplete data are excluded. D= domestic automaker; G=global joint venture; * = Other
sources.
The results clearly show that only five plants (Beijing Hyundai, Changan Suzuki, Guangzhou
Honda, Shanghai GM and GM Wuling) among the sample of 39 achieved a capacity utilisation of 80%
or more in 2004, which would be comparable to the Western standard. In 2003, only two further plants
(FAW Tianjing Toyota and Shanghai Volkswagen) showed capacity utilisation higher than this level. In
general, the capacity utilisation of this industry is around 50-60%, far below the utilization in the
Western auto industry. While this can be explained by the fact that China is still an emerging and
expanding market, and assemblers need to prepare extra capacity for predicted increases in demand,
this development nonetheless gives rise to considerable concern. Not only will this development
accelerate the exit of independent domestic makers, with all the negative regional economic
consequences, but it may also start a spiral of overproduction and sales discounts. This push-based
mass production approach may have been appropriate in the early days of the industry, but in the
current market with increasing emphasis on customisation and model variety, it is a very short-sighted
route. From a cynical point of view, one could even argue that the Chinese market has managed to
perfectly replicate the ills that the Western automotive industry is currently suffering from (Holweg
and Pil, 2004).
Another factor that caused the decreasing capacity utilisation from 2003 to 2004 was
over-optimistic forecasts as passenger car sales jumped 87% from 2002 to 2003, so most plants
expanded their capacity in order to capture their ‘share of the cake’. By 2004 the market had cooled
down by government intervention, and most of the plants were operating way below their capacity.
31
Another interesting phenomenon is that the global JVs are faring better than the domestic plants,
and that big state-owned enterprises’ independent divisions are better than independent small domestic
assemblers in terms of capacity utilisation. Nonetheless, even the global joint-venture companies are
far below Western levels of capacity utilisation – a situation that is very likely to remain for the
foreseeable future. Domestic demand in China and the possibility of exporting vehicles are still seen as
promising, so vehicle manufacturers are increasing their capacity – regardless of the current low
utilisation. Ford, for example, who came late and now has little voice in China, is trying to catch up.
Ford assembles the Fiesta subcompact and Mondeo full-sized sedan in the Southwest of China at its
joint venture with Changan. The Chongqing plant is boosting capacity to 200,000 units, although last
year it assembled just 50,000 cars. Ford, with Changan and Mazda, is constructing a second annual
160,000-unit assembly plant to make Ford- and Mazda-badged cars, and another Ford engine plant
with a capacity of 350,000 engines is also under construction in Nanjing.
GM is planning to invest US$ 3 billion to more than double its annual production to 1.3 million
vehicles by 2007. In the first half of 2005, GM’s sales reached 308,722 units, an 18.9% increase over
the same time period of last year, and for the first time took over Volkswagen’s position as sales
champion. Excited by the success in China, GM is continuing its expansion in China. With its new
plant in Shanghai Jinqiao and its acquisition of Qingdao Auto Industry Park (via SAIC-GM Wuling)
GM now has a total capacity of 850,000 autos per annum in China.
Volkswagen, which posted losses in China from the beginning of 2005, recently finished the
construction of the second FAW-Volkswagen plant in Changchun giving FAW-Volkswagen a capacity
of 660,000 units per year. Another FAW-Volkswagen joint venture plant is to be constructed in
Sichuan Province in the western China, which will bring Volkswagen’s annual production capacity to
1.6 million cars in China by 2008, if Shanghai-Volkswagen’s capacity of 450,000 units is included.
Thus, despite the obvious overcapacity that already exists in the Chinese market, which expresses
itself in (costly) low utilisation, most manufacturers are still increasing their presence in China. It
seems that in their view, the prospects of continued growth is outweighing the short-term adverse
financial implications of an overcapacity. We, however, consider this approach to be risky, as – despite
widespread optimism – we are not convinced that these growth projections are realistic, a point on
which we shall elaborate in Section 4.
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3.2.6 Sales and Financial Performance
The continued growth of the domestic car market has not equally benefited all manufacturers, and
considerable differences can be seen in their long-term trajectories. In this section, we will discuss the
market presence and financial performance of the various manufacturers by considering both the
growth of sales and (reported) profitability for 2003 and 2004.
Table 8 shows the 2004 revenues of the leading Chinese automotive groups. In terms of sales
revenue, SAIC surpassed FAW in 2003, yet in 2004 FAW regained first place. Overall, the traditional
Chinese ‘Big Three’ - FAW, SAIC and Dongfeng - still dominate the ranking. The sales revenue
ranking is also mitigated by the segments in which the manufacturers operate: Changan’s revenue, for
example, ranked at No. 6, even though in terms of sales (in units) it ranked third. This is due to
Changan’s dominance in the economic mini car segment, which shows lower revenue and profit per
unit.
Table 8: Revenue of Major Vehicle Manufacturers, 2004
Companies 2004 Revenue (billion Yuan)
1 First Automobile Works 135.64
2 Shanghai Automotive Industry Corp. 119.53
3 Dongfeng Motor Corp. 96.07
4 Beijing Automotive Industry Holding Co. 46.90
5 Guangzhou Automotive Industry Group 40.14
6 Changan Automobile Group 38.43
7 China Heavy Automobile Group 23.38
8 Brilliance Automotive Holding Co. 22.65
9 Anhui Jianghuai Automobile Group 10.78
10 Hafei Automotive Holding Co. 6.10
11 Zhengzhou Yutong Co. 5.94
12 Southeast Automotive Industry Co. 5.46
13 Chery Automobile Co. 5.11
14 Shanxi Automobile Group 5.01
15 Chongqing Isuzu Automobile Co. 3.62
16 Geely Automobile Holding Co. 3.42
17 Chongqing Hongyan Automobile Co. 3.40
18 Hunan Changfeng Automobile Co. 2.92
19 Dandong Shuguang Automobile Co. 2.86
20 Baoding Greatwall Automobile Co. 2.69
Source: Company reports
33
In terms of profits, the Ministry of Commerce reported that the total profit of China’s 5,857
vehicle assemblers and parts suppliers fell 6% in 2004 to 72 billion Yuan (China’s currency), or US$
8.7 billion. The number of unprofitable companies grew by 17.4% to 1,020, and their combined losses
amounted to US$ 785 million. In 2004, big enterprises still performed a little better than the industry
average, which is largely because the big enterprises kept expanding both scale and product line-up.
The average profit margin for the industry was 6.59% while big firms showed 6.80%. The top 30 firms
had revenues of 551.4 billion Yuan in 2003, and 638.2 billion Yuan in 2004, a growth of 15.75%,
while profits increased from 29.9 billion Yuan to 43.4 billion, by 45.1% (China Automotive
Association of Manufacturers, 2005). More specifically, the individual profits and profit growth rates
of assemblers are shown in Table 9. Dongfeng in particular is a poor performer, which is related to its
remote location in the Hubei province, as well as competition with the joint ventures of its
international partners (Honda in particular).
Table 9: Profit Range and Growth, 2003, Selected Manufacturers
Profit Range
Enterprises Profit Growth
(Billion Yuan)
Shanghai General Motors 142.5%
>5 Shanghai Volkswagen 53.4%
FAW - Volkswagen 14.1%
Guangzhou Honda 47.6%
Guangzhou Fengsheng 145.2%
1-5 First Auto Works 72.2%
Beijing Hyundai N/A
Dongfeng Motors Co. - 54.6%
Chongqing Changan 47.4%
Tianjing FAW Toyota N/A
0.5-1 Southeast Automobile Co. 105.6%
Jiangling Automobile Co. 37.7%
Source: Chinese Automotive Industry Association (2004)
In terms of sales, the market structure began to change in 2004. Changan surpassed Dongfeng in
terms of sales numbers, as the demand for economy cars increased while other segments were
shrinking. BAIC and Guangzhou Auto Industry Corporation started to accelerate, fuelled by the strong
34
sales of its Hyundai and Honda models, respectively. The market is dominated by a cluster of the six
largest automotive groups. Few of the small independent automakers fared well during the growth
period. Only Geely managed to increased its sales, while the other young tigers’ sales dropped (Chery,
Brilliance, Great Wall, Zhongxing). Table 10 shows the sales of the major Chinese automotive groups.
Table 10: The Sales of Major Chinese Automotive Groups
Total Sales (units) Passenger Car Sales (units)
Companies Growth Growth
2004 2003 2004 2003
Rate Rate
FAW 1,013,300 903,777 12.12% 620,886 557,378 11.39%
SAIC 848,542 782,036 8.50% 617,257 597,518 3.30%
Changan
579520 472119 22.75% 157,171 117,319 33.97%
(and Jiangling)
BAIC 530,993 336,657 57.73% 173,924 70,454 146.86%
Dongfeng 503,308 471,594 6.72% 212,383 214,552 -1.01%
GAIC 209,551 122,608 70.91% 202,066 117,130 72.51%
Jianghuai 127,607 94,478 35.07% 0 0 N/A
Geely 105,879 81,252 30.31% 105,879 81,252 30.31%
Brilliance 99,572 118,869 -16.23% 19,690 29,956 -34.27%
Yuejing 95,275 100,280 -4.99% 26,553 36,901 -28.04%
Chery 86,568 90,367 -4.20% 86,568 90,367 -4.20%
Southeast 60,069 83,535 -28.09% 28,693 33,557 -14.49%
Great Wall 55,091 58,603 -5.99% 55,091 58,603 -5.99%
Zhongxing 28,114 28,701 -2.05% 0 0 N/A
Source: Fourin China Auto Weekly (2005)
3.3 Component Suppliers
Purchased components and materials account for around 50% of the total value chain, and 66% to
75% of the vehicle content (in terms of value-added) is bought by the vehicle manufacturers from their
suppliers (Holweg and Pil, 2004). Furthermore, increasing complexity of the vehicle has resulted in
specialised suppliers that design and provide entire vehicle systems, such as fuel injection systems,
brake systems, and other modules. Thus, a discussion of this tier in the value chain is critical, as
discussing the vehicle manufacturers alone is not sufficient to evaluate the capabilities of the Chinese
auto industry. The China Automotive and Technical Research Centre reported recently that the overall
turnover of the automotive component industry reached 440 billion Yuan (or US $54 billion) in 2004,
and many of the major international automotive component manufacturers have already established
manufacturing operations in China, both to supply domestic vehicle manufacturers, as well as to
benefit from low labour costs for exports. In 2005, more than 70% of the global top 100 suppliers were
35
operating in China. With labour costs at about 1/30 of those in the developed countries, the export of
components is increasing fast, as we will discuss in Section 3.5.6.
3.3.1 Supplier Landscape
In 2003, approximately 1,700 automotive component suppliers had been registered in China, of
which around 450 were of partial or full foreign ownership, primarily owned by German, Japanese,
U.S., and other European suppliers (KPMG, 2004). Although the number of suppliers in China seems
comparatively large in relation to the manufacturing base, the scale of most operations is small. In
comparison to the vehicle manufacturer landscape, the supply industry is highly fragmented,
illustrated by the fact that the top 10 component suppliers account for only around 20% of the total
sales revenue in the sector (China Market Yearbook, 2004).
Automotive suppliers in China can be categorized to four groups. First there are the leading
independent part and component groups, which include the Wanxiang Group and Torch Automobile
Group, for example. These large local groups insist on self-reliant strategies for technologies and
management, possess economies of scale, and are relatively competitive internationally. Both
Wanxiang and Torch have established factories in the United States. The second group are suppliers
affiliated with local big SOEs, for example Fawer Automotive Parts Co. Ltd or the Shanghai Parts
Industry Group. These part and component manufacturing groups were established by separating and
integrating the previous parts divisions of the big state-owned enterprises, similar to the evolution of
the Ford and GM parts divisions, which became the independent suppliers Visteon and Delphi in the
late 1990s. The second group is, in our view, less competitive, yet their affiliation to large national
vehicle manufacturers is a key advantage in securing business. The third group are small part
manufacturers (there are around 3,000 according to KPMG’s Component Industry Report 2004).
These small suppliers have neither economies of scales nor R&D capabilities, and have largely
focused on supplying the aftermarket. Finally, the fourth group are joint ventures of international
suppliers, or their wholly controlled subsidiaries. This group possesses advanced production
technology and R&D capabilities (mostly abroad). These international suppliers have often engaged in
joint ventures with local suppliers (e.g. Delphi and Visteon), yet some are independent (e.g., Bosch
and Valeo). These suppliers serve the domestic vehicle manufacturers in China, and are exporting a
36
significant proportion of their production, contributing to the increasing exports discussed in Section
3.5.6. The major international suppliers and their activities (up to 2003) in China are listed in
Appendix C.
3.3.2 Content of Sourcing
A central question when analysing automotive value chains in emerging markets is to what extent
components are still imported, if (and to what extent) the content of local sourcing content is
increasing, and what trends can be observed in the future. A truly independent industry obviously
requires a component supply base that not only is capable of supplying all key systems and
components today, but also one that is capable of designing and manufacturing components for future
vehicle generations.
During the planning era of the 1980s, a ‘local content rate’ was strictly stipulated by the
government. Most international joint ventures started with complete knock-down 9 (CKD) kit
operations, but soon had to invest in a local supply base to meet the criteria. The state-owned
enterprises (SOEs) have largely sourced from their indigenous suppliers since then, most of which are
affiliated with their respective groups. Thus, it was a natural migration for these affiliated suppliers to
also supply the international joint ventures.
As regulation was loosened in the late 1990s, a large fraction of China’s auto production still
relied on assembling imported parts and components, as well as purchasing from the foreign suppliers’
operations in China. Knowledge-intensive parts in particular, which local suppliers could not provide,
were imported. Approximately 40% of the components used in GM’s Chinese assembly plants are still
imported from North America, including engines, axles, and exhaust systems. For local suppliers it is a
major challenge to break into the circle of accredited suppliers to the major international vehicle
manufacturers. Although China is seen as a ‘low-cost centre’, the cost of producing components in
9
‘Knock-down’ (KD) assembly operations refers to the approach of assembling and shipping unassembled kits
of vehicles to be assembled in foreign markets. In many cases this approach was used to circumvent high taxes
imposed on imports of finished vehicles, or to avoid the investments for a full vehicle assembly facility where
volumes did not justify this. KD operations can take various forms, from complete knock-down kits (CKD) to
semi-KD (SKD) operations, where pressing, welding and painting operations are done locally, whereas the parts
are imported in sets (as kits) from abroad.
37
China is not significantly lower than in Western countries. Wages in China are as low as as US$
0.50/hour, compared to US$ 31.67 in the United States and US$ 5.04 in Mexico (Wards Automotive
Yearbook, 2005; data for 2002. As a recent study shows however, labour is only a small fraction of the
total costs, seen in Figure 6. The major cost component for many suppliers are raw materials (in
particular steel), which are appreciating as much in China as elsewhere. Furthermore, some domestic
raw materials cannot reach the quality requirement for the automotive industry, so it is necessary to
import raw materials or subcomponents, which further increases the costs, further damaging the cost
structure. Moreover, the appreciation of the Yuan is also driving cost-sensitive vehicle manufacturers
to contemplate purchasing components globally, rather than domestically.
Figure 6: Estimates of Supplier Cost Structure in China
Source: KPMG (2004)
Ford aims to source approximately US$ 1 billion worth of parts and components from China in
2004, most for its local production in China itself. GM’s vice president of worldwide purchasing has
estimated that by 2009, GM will buy US$ 4 billion worth of Chinese parts annually for GM assembly
plants outside of China, up from US$ 200 million in 2003, and an additional US$ 6 billion in Chinese
parts for its operations in China, which is more than twice the value for 2003. DaimlerChrysler is also
looking for suppliers in China to make low-cost parts for its operations worldwide, as well as local
suppliers for the Chrysler Jeep and Mercedes-Benz sedan plants in Beijing. Delphi sourced US$ 247
million of parts from China in 2003, and plans to quadruple the sourcing to US$ 1 billion by 2007.
Japanese and European suppliers are also increasing their investments in China. In early 2004,
Volkswagen announced plans to reduce imports of European auto parts to China by half over the next
five years in order to offset the rise of the Euro against the Yuan. Because the exchange rate of the
Euro against the Dollar had increased by 40% since 2002 (while the Yuan was fixed against the
38
Dollar), transporting European parts to China cost Volkswagen an extra €1.2 billion in the first nine
months of 2003. Volkswagen plans to invest €6 billion in establishing and expanding factories at its
joint ventures in China, with a large portion of this going to parts and component plants.
In general, the vehicle manufacturers still import key components and knowledge-intensive parts
and components, or source from international suppliers with operations in China. The parts sourced
from the local suppliers tend to be labour-intensive or low-value added ones. In total in 2004, China
imported parts and components worth US$ 7.237 billion, with key components worth US$ 3.689
billion, with Germany being the largest provider, followed by Japan. In line with China’s commitment
to the WTO, the tariffs on auto parts and components will be reduced from the current average of
23.4%, to an average of 10% by 2006. These reductions will further increase the attractiveness of
imported parts, unless remedial action is taken. A new policy in this area already levies the same tariff
on sub-assemblies as for entire vehicles, aiming to drive vehicle manufacturers to increase the
localization of key assemblies and parts. Inevitably, the arrival and expansion of international suppliers
will result in a further shrinking share of local suppliers. One the positive side, there are signs that the
fragmented supplier industry is developing economies of scale through restructuring and consolidation,
and the international part and component manufacturing joint ventures will help in the technology
transfer so critically lacking at present.
3.3.3 The Competitiveness of Chinese Suppliers
The competitiveness of the Chinese automotive industry is not only determined by productivity at
the vehicle manufacturer level, but – driven by the high degree of value sourced from suppliers –by
the component suppliers as well. Few studies have benchmarked the competitiveness of the
component supplier industry, but Oliver et al. (1998) have applied a benchmarking methodology to
Chinese suppliers that was previously used to compare the Western suppliers’ competitiveness with
Japan (Oliver et al., 1994). The methodology is a development of the performance benchmarking
approach pioneered by the MIT International Motor Vehicle Program (IMVP) (Womack et al, 1990;
Holweg and Pil, 2004), and had previously been applied to comparative global studies in Europe, US
and Japan. The performance statistics in this study are based on seven automotive component plants in
China from which complete data were obtained. All were suppliers to car makers ranked among the
39
top eight in China. These statistics are shown alongside the Japanese, US and European benchmarks
from the global study on automotive component industry of 1994, and the key findings are
summarized in Table 11. The major performance measures analysed in this study were labour
productivity and quality: labour productivity refers to the output of finished units (e.g., seat sets,
exhaust systems or brake callipers) divided by labour hours. Productivity was adjusted for vertical
integration and, where necessary, product complexity. Quality was measured by the number of units
claimed by the car makers to be defective and is represented in parts per million.
Table 11: Comparative Supplier Performance in Key Regions
Japan US Europe China
Indexed Productivity
65.1 54.8 47.9 17.6
(Best plant=100)
Consumer-Reported Defects
193 263 1,373 3,447
(Parts per Million)
Indexed Unit Labour Costs 47 50 50 31
Capacity Utilisation (%) 89.7 92.9 85.1 80.2
Age of Equipment
7.6 5.2 7.0 2.7
(Age in Years)
Product Variety – Live Part Numbers
241 90 374 8
(Number of Live Part Numbers)
Level of Inventory
18.2 73.1 69.3 91.9
(Hours of Inventory)
Stock Turnover Ratios
80.8 68.7 44.6 13.9
(Ratio of Stocks to Sales)
Source: Oliver et al. (1998)
In summary, the Chinese plants produced only one fourth of units per labour hour of the Japanese
plants, and about one third of the US and European competitors – yet in terms of indexed labour cost
per unit still outperformed the other regions. Thus, although far less productive, the low labour cost
per hour compensates for this deficiency. The performance differences are even larger for the delivered
quality: the Chinese plants delivered 13 times as many defects to their consumers compared to the
American plants, and 18 times the level of the Japanese plants. A key reason for this was the lack of
modern manufacturing methods, such as total quality management and lean production, whose
proliferation was found to be very low, as a mixture of early mass and craft production was still widely
used in the Chinese plants. The less sophisticated production management capabilities were also
40
demonstrated by the high levels of inventory, which stood at five times the levels in Japan, and the low
stock turnover ratios. In conclusion, although limited empirical evidence is available, the above study
clearly shows the prevailing lack of manufacturing capability in the supplier sector. While the
drastically lower costs somewhat compensate for the low labour productivity, the output still shows
much higher levels of defects, as one would expect from a fragmented, craft-based industry. Coupled
with the limited involvement of suppliers in research and development, the overall competitiveness of
the Chinese supplier industry in the late 1990s was poor, and certainly far from the standards of
productivity, quality and production management needed to compete on an international level. How
much improvement has occurred since then is clearly a key question.
3.3.4 Suppliers – Geographical Distribution
The geographical distribution of suppliers in China is one the most crucial characteristics of the
automotive part and component industry from a supply chain view. Provinces and municipalities
around the Yangtze River Delta accounted for around 17% of total component production by revenue
in 2002, while Shanghai remained the largest component manufacturing centre with around 10% of
total production. Zhejiang and Jiangsu, the provinces south and north to Shanghai, together account
for another 8% of total production, while other key areas of production include Guangdong, Liaoning,
Shanxi, Jilin and Hubei, with a combined share of 32%. The distribution of part production in China is
illustrated in Figure 7, and to a large degree maps onto the distribution of vehicle assembly plants in
China.
41
Figure 7: Distribution of Automotive Component Production
Source: China Market Yearbook (2004)
Dispersal of supplies is limited by the cost and time of transportation. Due to limited freight
transportation via railway, and the developing, yet still poor, highway system in China, suppliers must
be close to the car makers. Regional protectionism (exercised by local governments) is another reason
pressuring suppliers into co-locating near to the vehicle manufacturers. Historically, the state-owned
automotive companies purchased components regionally around their major assembly plants to serve
the economic development interests of the municipal governments, and to a certain extent this pressure
still persists still today, even though transportation costs have reduced with the improving
infrastructure.
3.4 Technological Capabilities of the Chinese Auto Industry
3.4.1 Historical Shortage of R&D Capabilities
In addition to manufacturing capabilities, research and design capabilities are of crucial
importance. During our interviews in China in 2005, it soon transpired that the lack of research and
design capabilities was seen a critical inhibitor by senior Chinese auto executives. This applies equally
to vehicle manufacturers, as it does to component suppliers. Both local vehicle manufacturers and
42
suppliers are notoriously short of technology. Governmental policies, by encouraging joint ventures
and prescribing a local content rate, were designed to foster technology transfer from international
automotive makers, and to develop domestic R&D capabilities.
For the Chinese vehicle manufacturers, this general lack of R&D capability manifests itself in a
persistent reliance on foreign manufacturers, usually their joint-venture partners or license providers,
who deliver product designs, and often also tooling, manufacturing equipment and production
expertise. For the suppliers, a lack of R&D expertise means that local suppliers are often excluded
from the bidding processes for new vehicles, as they cannot provide the necessary development
capabilities to develop a component from the concept stage to the final, manufactured item. For
Chinese groups that operate with foreign joint venture partners this means that Chinese suppliers, who
in many cases belong to the same group as the joint venture company, are de facto excluded from the
bidding process. This issue was described to us as ‘a great embarrassment’ by a senior purchasing
executive at a Chinese-Japanese joint venture. Chinese suppliers are thus therefore relegated to
contract manufacturer status, as opposed to being full service suppliers like their European, American
or Japanese competitors that are operating in China.
The problem of inadequate R&D capability is well-known and acknowledged, and the
government has issued policies to address this. R&D is seen as a second step after establishing a local
manufacturing presence, which by now has largely happened – thanks to the numerous joint-ventures
with Western (and lately also Eastern) firms. While China no longer relies on vehicle imports, it still
relies on foreign design, and challenge now is to create an independent Chinese automotive industry.
To this effect, several state-owned enterprises have started to establish their own R&D centres,
although so far the large groups have not yet independently developed any significant products. Our
interviews with Bejing Motors and Dongfeng showed some interest in increasing R&D work in China,
yet concerns were also raised with regards to the competitiveness of such products, and whether they
would meet the standards for the European, US, Japanese and Korean models provided for the Chinese
domestic market. Since the Chinese-designed products were manufactured under the same cost
structure as the non-Chinese products, a design inferiority is implied. Interviewees did not perceive a
need for cars customised to Chinese tastes.
The reasons for limited R&D capability are historic. In the 1980s and 1990s, due to the
43
government policy of focusing on joint ventures, joint ventures were the major players in the Chinese
passenger car industry. Combined with entry limit and trade barriers, this gave the joint ventures a new
monopoly position, especially Shanghai-Volkswagen, FAW-Volkswagen, Dongfeng-Citroen and
Tianjin-Daihatsu. By taking advantage of their oligopolistic position, both local and foreign the joint
ventures partners were able to operate with large profits by holding high prices. In the mean time, the
foreign partners of the joint ventures also adopted a strategy of postponing the update of products in
favour of producing aged models, such as the VW Santana. In 1999, there were only 10 brands and 20
models available in China, and Shanghai-Volkswagen earned profits of US$ 723 million by selling
only 230,000 Santana sedans in 1998 and 1999 (c.f. 21st Century Economics Report, December 27th,
2003). In January 2004, a Goldman Sachs study was cited in the New Beijing Daily, stating that 80%
of Volkswagen’s global earnings came from China in the first half of year 2003.
As a result, R&D technology transfer did not happen to any significant extent during these years.
Even worse for the indigenous industry, since their domestic products faced stiff competition from the
Volkswagen, GM and Peugeot models, the local firms, mostly the ‘Big Three and Small Three’, gave
up R&D and production of their own cars, and merged their own plants into joint ventures. Thus,
although R&D departments were established in the joint ventures according to governmental
requirements, they normally had no significant input into vehicle development. Thus, the joint
ventures failed to transfer advanced product technologies and R&D capabilities to local firms, and
were used as production bases by their foreign partners in the Chinese market. The large state-owned
enterprises have not yet engaged in any significant R&D activities, although the government has
‘encouraged’ them to establish R&D centres. Most have complied, or are in the process of doing so,
yet during our visits in 2005 there was very limited product development activity in these centres. It
seems that the function of most of these R&D centres is to act as showcases of compliance with
governmental policy
Dvelopment activities so far are thus largely limited to minor models, badged under local brands.
At FAW for example, the ‘Red Flag’ model has been developed independently, which is based on a
licensed Audi 100 platform. Most other state-owned enterprises either rely entirely on their joint
venture partners for design, like Dongfeng, or, like SAIC, are actively developing their own
capabilities by acquiring foreign second-tier automakers like Ssangyong and Rover. The R&D
activities at the small independent automakers are more practical and profit-driven, and historically
44
were mostly based on reverse engineering of existing models and components. More recently, even
small manufacturers like Chery have engaged in international development collaboration with
companies like Pininfarina and Bertone (Luo 2005a).
Based on our interviews, we have identified four different strategies how Chinese vehicle
manufacturers seek to gain technological capabilities, and thus loose the reliance on foreign designs.
First, ‘learning-by-doing’ is a strategy commonly found at small manufacturers like Chery and Geely,
whereby manufacturers have started from reverse engineered components and are now gradually
expanding their R&D activities. Second, some large companies have a dual strategy of having both
large joint ventures, as well as their own independent operations. FAW and Changan are examples of
this type. They produce foreign models in joint ventures, license foreign models to be produced in
their independent plants, but also further develop the licensed models. While gaining experience, they
also are engaged in joint ventures, producing foreign designs. Third, companies like Dongfeng and
Guangdong Automotive rely entirely on foreign designs. This type of collaboration seems to be born
out of the need for a strong partner, more than anything. Dongfeng, for example, is in financial
difficulties that limit development, while Guangdong Automotive Industry Group has historic routes in
car production and lacks both R&D knowledge and manufacturing experience. In these relationships,
the function of the Chinese partner seems to cover financial management, while the joint venture
operations are managed by the foreign partners. Finally, some companies like SAIC have sought to
buy in capabilities. SAIC took over 48.92% share holdings of Ssangyong Motors, South Korea’s
fourth largest auto firm in 2003. SAIC aims to utilise the technology of Ssangyong to develop
Shanghai-badged cars, and a similar motive was behind the move to acquire MG Rover in 2004.
3.4.2 Intellectual Property Issues
The protection of intellectual property has been a major concern for foreign companies engaging
in operations in China. Volkswagen soon found that its components were finding their way into
domestic manufacturers’ cars, Toyota lost a case against a local manufacturer about the use of its logo,
and GM battled with Chery over the design of the QQ minicar. Historically, these IPR violations were
openly sanctioned by the government, and copycat designs were even available in official component
catalogues (Dongsheng and Fujimoto, 2003). While open violations are now rare, in particular since
45
the WTO accession, nonetheless it is still very difficult for foreign companies to sustain their
intellectual property rights in Chinese courts.
The intellectual property issues facing the international automakers include several types. First,
through the complex joint venture structure, foreign companies find themselves sharing the same
Chinese partner with the global competitors. For example, Nissan and Honda both have joint ventures
with Dongfeng, Volkswagen, Mazda and Toyota both build cars with FAW, while Volkswagen AG and
General Motors share SAIC as partner. Given this convoluted network of partnerships, intellectual
property is hard to trace and protect. Technologies and manufacturing processes are exposed to
competitors, and this risk was a major part in BMW’s decision (against government wishes) to team
up with the comparatively minor Brilliance Group, as Brilliance did not have existing ventures.
Second, supplier networks are shared, and suppliers commonly also sell the same components to
other manufacturers. For example, Chery used components that bore the Volkswagen logo in its Feng
Yun sedans. The parts were purchased from a supplier of Shanghai Volkswagen, which was
geographically close to Chery’s plants. In 2001, Chery compensated Volkswagen for this, yet the
unofficial transfer of knowledge is unquantifiable. A number of Chery mangers originally worked at
the FAW-Volkswagen joint venture plants, so they were familiar with the product platform and the
local part supply system of Volkswagen.
Third, in addition to open violations, the majority of intellectual property disputes are related to
the reverse engineering of completed cars. Over recent years, a number of ‘young tigers’, including
Geely, Chery, Shuanghuan, Great Wall etc, have been accused of copyright infringement, patent right
infringement or unfair competition. The first case was related to Shuanghuan Automobile Company in
the Hebei province. In November 2003, Honda filed a lawsuit with the Beijing People's Senior Court
against Shuanghuan, alleging the Laibao SRV10 of Shuanghuan was a copy of its CR-V SUV, and
asking for a compensation of 100 million Yuan (US$ 12 million). No hearing was ever held at the
court. Nissan also claimed that the Sing SUV of Great Wall Motor Company copied the design of its
Frontier SUV sold in the United States. Of all the cases that have been raised, only one legal judgment
has ever been reached: in November 2003, Geely won the case put forward by Toyota against Geely
10
SRV = Sport Recreational Vehicle. SUV = Sports Utility Vehicle.
46
for trademark infringement and unfair competition, which was the first ever foreign-related motor
lawsuit after China's entry to the World Trade Organization. Toyota had claimed that the emblem of
Geely is similar to that of Toyota, resulting in trademark infringement and unfair competition.
The most openly discussed design dispute however took place between Chery, China’s leading
‘young tiger’, and General Motors. In May 2003, Chery released the QQ minicar, which bears a
remarkable resemblance to GM Chevrolet Spark (also called Daewoo Matiz in other countries) at a
base price of 49,800 Yuan (US$ 6,000). Figure 8 shows both models in their 2003 configuration.
Figure 8: Chery QQ Minicar (left) and GM Chevrolet Spark/ Daewoo Matiz (right)
The GM Spark was released six months later than Chery QQ, at a relatively higher base price of
61,800 Yuan (US$ 7,446). The Spark is more expensive since it is assembled from knock-down (KD)
kits, the kits being sent to China from Daewoo in Korea. As a result, the Spark failed to take any real
market share from the QQ model due to its later launch and higher price, and the QQ has been
outselling the Spark by 6 to 1. This incident is in particular intricate, as GM’s joint-venture partner in
China, SAIC, also held a 20% stake in Chery.
In 2004, GM openly accused Chery of copying the Daewoo Matiz without paying any royalties,
and even claimed that Chery had accelerated the safety approval of the QQ by using a Matiz in the
crash testing. Chery denied GM’s accusation, and claimed that it developed QQ independently ‘with a
little inspiration from the Daewoo Matiz’. Chery had also filed a design patent for the QQ on January
28, 2002, which was granted on January 15, 2003, while GM had no design application filed for the
Spark in China. GM then exerted pressure on its joint venture partner SAIC, who sold its stake in
Chery in September 2004, and broke all ties with Chery. Meanwhile, the National Ministry of
Commerce and the National Office for Protection of Intellectual Property Rights (NOPIPR) also
47
investigated this case at the request of GM. In September 2004, NOPIPR declared that, according to
the evidence provided by General Motors, Chery cannot be identified as infringing the copyright of
GM, nor carrying out illegal competition activity under Chinese law. NOPIPR encouraged the
companies to solve the disute through mediation or legal means. After one year long controversy
without any results, GM finally filed a lawsuit at the Shanghai No.2 Intermediate Court against Chery
for alleged piracy of GM Daewoo Matiz in December 2004. The case is still pending. According to our
interviews with Chinese legal experts, it will be difficult for GM to win this lawsuit, since Chery has
been granted the design patent of QQ while GM has no design patent for Spark in China. However,
GM’s lawsuit is likely to at least hinder Chery's export plans for the QQ. According to WTO rules,
GM has the right to request all countries to stop importing Chery QQ’s during the lawsuit period.
The latter case vividly illustrates the persisting difficulties foreign companies experience when
operating in China. It is difficult to say whether the situation will significantly improve in the short
term. A sign of increasing local R&D capability is the cooperation of international automotive
technology suppliers from Italy, Germany, Japan, and Austria with Chinese vehicle manufacturers. For
example, Chery is designing cars with the help of Pininfarina, and is producing the first Chery-badged
engines, developed collaboratively with AVL, an Austrian powertrain engineering consultancy (Luo,
2005a).
3.5 Sales and Distribution Networks
3.5.1 Market Structure
A total of 4.4 million and 5.15 million vehicles have been sold in China in 2003 and 2004,
respectively, which makes China the third-largest auto market in the world after the U.S. and Japan.
The major pulling factor in the growth of demand was the rapidly expanding passenger car market, in
which 50% of sales were private purchases (70% in urban areas). In the passenger car market, as
shown in the Table 12, the joint ventures are the leading players; while only two independent domestic
carmakers – Geely (8th) and Chery (10th) – are present in the top ten. Beijing-Hyundai’s sales showed
the greatest expansion, with the launch of the by the Elantra sedan in 2003. Similarly, Changan-Ford,
FAW-Toyota and Guangzhou Honda also significantly increased their sales, and Honda advanced to
third behind Volkswagen and GM. This gain mainly relied on the Accord model, which was the best
48
selling vehicle in the mid-size sedan segment. Overall, the sales figures can be relatively easily
explained with individual successful models, which, in contrary to established markets like the US or
Europe, shows the volatile nature of the Chinese market with double or even triple-digit growth rates
from year to year.
Table 12: Passenger Car Sales by Manufacturer
2004 2003 Growth Share
Companies
Sales Rank Share Sales Rank Share Rate Change
Shanghai
Volkswagen 355,006 1 15.3% 396,023 1 17.0% -10.36% -1.8%
FAW-Volkswagen 300,118 2 12.9% 298,006 2 12.8% +0.71% +0.1%
Shanghai GM 252,109 3 10.8% 201,282 3 8.7% +25.25% +2.2%
Guangzhou Honda 202,066 4 8.7% 117,130 5 5.0% +72.51% +3.7%
Beijing Hyundai 144,090 5 6.2% 52,128 11 2.2% +176.42% +4.0%
Tianjing FAW 130,031 6 5.6% 117,335 4 5.0% +10.82% +0.5%
Changan-Suzuki 110,052 7 4.7% 100,018 7 4.3% +10.03% +0.4%
Geely 105,879 8 4.6% 81,252 9 3.5% +30.31% +1.1%
Shenglong
(PSA-Dongfeng) 89,129 9 3.8% 103,126 6 4.4% -13.57% -0.6%
Chery 86,568 10 3.7% 90,367 8 3.9% -4.20% -0.2%
FAW-Toyota 81,879 11 3.5% 47,287 14 2.0% +73.15% 1.5%
Dongfeng Yueda
Kia 62,506 12 2.7% 51,008 13 2.2% +22.54% +0.5%
Fengshen
(Dongfeng-Nissan) 60,784 13 2.6% 65,108 10 2.8% -6.64% -0.2%
FAW Hainan Mazda 53,205 14 2.3% 43,046 15 1.9% 23.60% 0.4%
FAW Car 50,798 15 2.2% 51,314 12 2.2% -1.01% 0.0%
Changan-Ford 47,119 16 2.0% 17,301 18 0.7% 172.35% 1.3%
Beijing Jeep 29,834 17 1.3% 18,326 17 0.8% 62.80% 0.5%
SouthEast Car 28,693 18 1.2% 33557 16 1.4% -14.49% -0.2%
Source: Fourin China Auto Weekly (2005)
In terms of model mix, the Chinese market is dominated by small cars. According to Fourin
(2005), in 2004 the Chinese market comprised 41% small cars, 27% ‘basic’ cars, 21% mid-sizes
sedans, and only 6% MPVs11 and 5% SUVs. This structure is comparable to other emerging markets
such as Latin America, and one would expect to see a gradual expansion of the larger segments, as
well as a fragmentation into different segments as the market matures.
11
MPV=Multi Purpose Vehicle, SUV=Sports Utility Vehicle.
49
3.5.2 The Purchasing Power of Chinese Consumers
A key determinant of the sustainable growth of the Chinese auto industry is the ability of the
population to purchase vehicles. This ability is driven by two factors: the vehicle price in relation to
household disposable income, and the ability to finance or lease vehicles through financial service
providers. The growing disposable income of the Chinese people has served as the main driving force
in the sedan (limousine) demand, especially with the growing number of urban middle-class customers.
Furthermore, it should be remembered that for most of the 1990s only a very limited number of
models were available (such as the VW Santana and Jetta). With more car companies entering the
market after the WTO accession, the available model range diversified considerably, and posed a
further stimulus in the car market. In parallel, the passenger car market shifted from a primarily
company car market of institutional buyers, to a market which also featured a strong private customer
segment. This shift also meant that the most popular segments became the small-car and mid-size
sedan segments, rather than the large limousines previously sold to company executives or officials.
This trend is illustrated in Figure 9, which shows the increase of the budget segments in the market,
compared the forecast demand in India, which is dominated primarily by private customers.
100%
25%
80%
60%
40% 75%
20% 45%
24% 38%
0%
03 China 04 China 05e China 05e India
>US$ 24,000 US$ 12,000-18,000
US$ 18,000-24,000 <=US$ 12,000
Figure 9: Sales Price of Motor Vehicles in China
Source: Nakamura (2005)
However, a key determinant of sustained growth in the future is not only an affluent middle class,
but the economic situation of the wider population. Here a different picture emerges. The income per
capita in China did not exceed US$ 1,000 until 2003, and data from 2001 shows that even the average
50
income of the top deciles of urban Chinese (48 million in total) had not exceeded US$ 1,834 (Nolan,
2003). If statistical evidence from the development of Japan and South Korea serves as an accurate
example, demand for cars will grow once a country’s ratio of the average auto price to average GDP
per head approaches a ratio of 3:1. For China, where one third of Chinese in the top 10% of earnings
can afford cars worth US$ 6,000 or more, the total (theoretical) market for cars would be still less than
16 million units. Moreover, finance, taxation, fuel and running costs might further deter consumers,
and limit demand. It is very difficult to predict the overall market size of a country given the
uncertainties involved. Nonetheless, if historic analogies from other (now developed) nations in Asia
serve us right, we should expect a total market size of 16 million cars per annum, assuming current
levels and distribution of GDP per capita – a figure that clearly puts the overly optimistic demand
predictions aired in the press into perspective.
3.5.3 Auto Financing and Leasing
Vehicle financing and leasing have been long-established sales instruments in the Western auto
markets, where in US for example one in four cars are sold through financed deals. In China, the auto
demand boom after 2000 was mainly driven by the fast growth of personal car buying, which in turn
was enabled by the increased availability of personal loans, post-1998. From 2000 to 2002, private car
ownership increased by about 25% year on year, and by 2003, personal buyers accounted for over 70%
total car purchases. The official statistics show that in 1998 the total value of auto loans granted was
400 million Yuan, but this increased to 2.5 billion Yuan in 1999, 71.6 billion Yuan in 2002 and over
180 billion Yuan in 2004 (Anbound Information, 2005).
However, the absence of a personal credit system in China and meant that about 100 billion Yuan
of bad debts had accumulated by 2004. Thus, the government intervened and restricted the access to
personal credit, both to reduce the risk of further bad loans and to protect the banking system, as well
as to slow down demand in line the overall economic growth target to avoid over heating the economy.
As of 2004, all banks tightened credit regulation, while some even stopped their loan business
altogether. In 2004 purchases based on loans accounted for only 5% of total auto sales, compared with
more than 30% in 2002. The availability of vehicle financing is a very sensitive measure to control
domestic demand. With the new credit restrictions in place, market growth slowed to a 12%
51
year-on-year increase in 2004, and sales actually dropped by 8% in March 2005, after growth rates of
55% in 2002, 75% in 2003.
The 2004 automotive industry policy encourages the development of auto finance businesses,
and foreign automakers have been allowed to run auto finance businesses in China since then. Thus,
while some domestic banks withdrew from auto finance business because of bad auto debts, foreign
automotive groups’ finance companies are far more optimistic. GM’s Auto Finance Company (GMAC)
optimistically predicted that auto loans will reach 15 million units (total market value of 1.5 trillion
Yuan), with an average car price of 100,000 Yuan (US$ 12,500). Ford’s Motor Finance Company was
the first to receive approval to finance vehicles in China in May 2004, and supports the sales of
vehicles manufactured in China, as well as sales of imported cars. GM, Volkswagen, Toyota and
DaimlerChrysler have all received approval from the Chinese Banking Regulatory Commission to
operate auto finance businesses in China, and some domestic automakers like FAW, SAIC and
Dongfeng also started credit businesses in 2004.
Thus a further growth of the auto finance sector seems likely, even though it is widely
acknowledged that at present these activities are unprofitable. Although a reliable personal credit
system is still developing in China, financing motor vehicles is still a risky undertaking. Given the
sensitivity of demand on the availability of loans however it seems very likely that manufacturers will
maintain their financing activities regardless of the risks, in order to maintain and expand their market
shares.
3.5.4 The Dealer and Service Networks
In line with the stark developments of the manufacturer and supplier landscape in China, the
sales and distribution network has undergone an equally stark transition. Traditional sales channel
were very hierarchical, as vehicle manufacturers sold to National General Sales Agents, who in turn
supplied Regional Sales Agents, then to Provincial Sales Agents, who finally supplied retailers that
served the consumers. Such a multi-stage distribution chain has obvious disadvantages in high
distribution costs, slow feedback from the customer, and inflexibility, and is still found only at some
luxury brands in China. For the volume segment, several different distribution and sales channels exist.
The most popular mode are specialist stores, who sell cars of only one brand. Here, the auto producers
52
directly supply their customers. These specialised stores generally provide integrated pre-sales and
after-sales services in-house, and are commonly also ‘4S stores’ (Sales, Spare parts, Service and
Survey). Another channel is the auto supermarket, which is gaining popularity. These can be of many
different types, such as ‘1S’ (Sales only), ‘4S’ (Sales, Service, Spare Parts, Survey), and ‘3S’ (without
‘Survey’). Auto supermarkets are generally large-scale operations close to metropolitan areas and
feature different brands.
Brand-specific sales structures, similar to the franchised dealer system in Europe, Japan and the
US, are also encouraged by the government. In the 2004 automotive industry policy, a new ‘brand
sales management measure’ was introduced with effect of April 1, 2005, and requires all sales of
passenger cars in China to be executed under the legal umbrella of a brand. The objective is to
reorganise scattered sales networks, and to encourage manufacturers to take partial responsibility for
the sales process, thus providing a certain protection to the end consumer.
For international vehicle manufacturers, who often used the sales outlets of the other brands of
their joint venture partners, this represented a welcome separation from local brands. The overall
distribution network is still developing, but Table 13 gives an overview over current sales network
structures:
53
Table 13: Distribution Network and Sales Outlets, Major Vehicle Manufacturers
Vehicle Maker Models/brands sold 4S Store Non-4S After-sale
Store service shop
FAW Saloon Car Hingqi (Red Flag), 51 51 199
M6 110
FAW-Volkswagen Jetta, Bora, Golf 350 130
Audi 106 16
FAW-Hainan Mazda N/A N/A N/A
FAW-Tianjin Xiali Xiali, Vela, Vizi 182 86 180
FAW-Huali Xingfu Shizhe 59 34 173
FAW-Toyota Corolla, Vios 135 0 17
FAW TOTAL 993 187 699
SAIC-Volkswagen Polo, Santana, Passat, Gol 383 173 180
SAIC-GM Sail, Excel, Regal, Royaum 311 10 321
SAIC-Chery Cheery, QQ 146 114 46
SAIC-MW Chevrolet, Spark 97 0 0
Total SAIC 937 297 547
Dongfeng-PSA Citroen 200 130
Peugeot 76
Dongfeng-Nissan Bluebird, Sunny, Teana 152
Dongfeng-YK Kia 97 14 6
Dongfeng-Honda CR-V DH Dealers 10 0 0
CR-V Gh Outlets 43 0 0
TOTAL Dongfeng 578 144 6
Chang’an Suzuki Alto, Ling Yang, Swift 95 237 505
Chang’an Ford Fiesta, Mondeo, Focus 60
TOTAL Chang’an 155 237 505
Guangzhou-Honda Fit, Accord 220 0 0
BAIC-Hyundai Elantra, Sonata 186
Source: Vehicle manufacturer, internal document
3.5.5 Export of Motor Vehicles and Components
The analysis so far has focused on the domestic automotive market, yet given the advantages in
labour costs, the prospects of vehicle and component export from China are a further enticement for
manufacturers and suppliers to set up operations in China.
So far, the vehicle export from China has been limited, yet has been rapidly growing in recent
years. According to national statistics, China exported US$ 8.2 billion of vehicles and components, an
54
increase of 73% from 2003, while over the same time, imports grew by 13.1% to US$ 16.3 billion,
leaving a trade deficit of US$ 8.1 billion. In 2004, China exported 70,240 passenger cars, which were
mainly Chery and Geely models sold to the Middle East and Africa.
The possibilities of vehicle exports in particular have received attention recently following
announcements by various vehicle manufacturers to export cars in the near future. In 2005. Honda
started to export its Jazz subcompact to Europe, while DaimlerChrysler is contemplating building a
minivan jointly with Chery for export to the US – an announcement that was met with criticism by the
US auto unions. UAW President Ron Gettelfinger commented that this approach ‘reveals worlds about
what is wrong with today's global economy’. Of the domestic manufacturers, Chery is working with
U.S. entrepreneur Malcolm Bricklin to build cars for export to the United States, and sales are to begin
in 2007. While these announcements are few so far, it seems that a considerable fraction of the current
assembly capacity that is being installed in China (to an estimated 7 million units by 2008) will serve
for export purposes.
In terms of components, the prospects are equally ambitious. China’s Vice Minister of Commerce
said in April 2004 that China aims to export between US$ 15- 20 billion worth of automobiles and
components in 2005, which is not unrealistic, and even US$ 70-100 billion by 2010 (US-China
Automotive Parts Industry Overview, 2003). Chinese suppliers still lag behind in terms of production
technology and R&D capability, yet have a major advantage on labour-intensive parts. Given the
extensive joint ventures with international suppliers, one would expect an increasing global presence
of Chinese suppliers. In 2004, the value of exported components accounted 75% of the total
automotive exports.
A main uncertainty in any international trade is currency fluctuation, and the Yuan represents a
special case. The Chinese People’s Bank established the ‘Renminbi’ (=‘people’s money’), in
December 1948, but the currency is more commonly called the ‘Yuan’. China adopted current account
convertibility in 1996, and the Yuan trades in a narrow band of 8.28 Yuan to the Dollar. Under intense
international pressure, the Central Bank ‘de-pegged’ the artificially low Yuan in July 2005, and
revalued it at 8.11 Yuan to the US Dollar. To what extent the currency fluctuations will impact on
future exports of vehicles and components is impossible to predict. If one takes the developments in
Brazil and Argentina as an analogy however, one should expect a major influence of any shifts in the
55
currency on the automotive industry. The sector depends on imports and exports of components to
manufacture its vehicles, and on imports and exports to sell these, and thus has multiple sensitivities to
any fluctuations. So far, the Central Bank in China has only gradually adjusted the Yuan (in
comparison to the drastic adjustments that were made to the rates of the Brazilian Real in 1999, and
the Argentinean Peso in 2002, respectively), which was prudent in light of the South American
perspective. Nonetheless, the exchange rate is a major determinant of future development of growth of
the Chinese auto industry, both in terms of domestic demand and export.
4 The Future – Determinants of Sustainable Growth
4.1 Summary of Key Conclusions
Over the last decade, the Chinese automotive industry has undergone dramatic growth. With
negligible vehicle production until 1975, the government implemented drastic growth policies in
1980’s, which was reiterated in the Industry Policy of 1994, and refined in 2004. Notoriously short on
technology after abandoning the initial collaboration with the Soviet Union, China has relied on
foreign auto manufacturers to partner with local state-owned enterprises to establish a modern car
industry. Volkswagen, as one of the pioneers, was the main beneficiary of this policy by gaining
long-term market leadership with its Santana and Jetta models. With continuing growth and further
economic reform, the Chinese market showed increasing domestic demand and political stability, and
thus became very attractive to foreign vehicle manufacturers, which led to a drastic increase in
installed capacity – a trend which still persists today.
In this paper, we have reviewed the past evolution of the Chinese motor industry in relation to the
economic policies that have been the drivers of this rapid growth since the late 1980’s, and discussed
the key features and continuing challenges at the manufacturer, supplier and retail level in the
automotive value chain. In this section we shall review the key conclusions that we identified in our
study, and provide an outlook on the future development of the Chinese vehicle market. In a dynamic
market such as China, there are multiple uncertainties ranging from micro-economic factors such as
the accessibility of personal loans for vehicle purchases, macro-economic factors such as currency
fluctuations, and global economic factors such as oil prices and energy supply. We shall hence restrict
our predictions to a qualitative description of potential future trajectories and factor sensitivities, rather
56
than quantifying potential future sales and production figures. The latter is continuously being
attempted by consultants and researchers alike, yet as the unforeseen sales recession early 2005 has
shown, these predictions portray a dangerous certainty that is not warranted in such a dynamic setting.
There are four main conclusions from this study. First, the market growth rates that had been
experienced in 2002 and 2003 of 55% and 72%, respectively, are likely not to return, despite the
optimistic predictions that still circulate in the trade press. There are several reasons for our scepticism:
most importantly, the government intervention in personal loans (that had cooled down demand in
2004, and reduced the year-on-year sales growth to 12%), but also the skewed income distribution and
increasing urban traffic congestion that will slow the rate of growth of vehicle sales to below the levels
that pure statistics on vehicle ownership per capita suggests China offers one of the lowest rates of
vehicle ownership in global comparisons, in particular in terms of passenger cars as shown in Table 14.
However, one should not forget that personal vehicle ownership is not - and will not be for the
foreseeable future - economically feasible for a large proportion of the rural population. In the urban
areas, vehicle ownership has already increased considerably, and space, traffic system capacity,
emissions and parking restrictions are already in place, suggesting increasing saturation in urban areas.
Shanghai marks a case in point, as governmental restrictions keep vehicle ownership at a much lower
level than the income per capita would suggest possible. Future predictions of demand must consider
the impact of government intervention, taxation, income distribution, and municipal traffic restrictions
in future demand predictions. A mere extrapolation of past sales are not sufficient.
Table 14: Vehicle Ownership in Selected Developing Countries, 2002
Persons per Number of Number of Passenger cars as
vehicle vehicles in use vehicles in use percentage of total
(passenger cars (total) vehicle park
only)
Argentina 5.4 5.4m 7.0m 77%
Brazil 8.8 15.8m 19.8m 80%
Mexico 8.4 12.2m 17.8m 69%
China 87.6 4.3m 14.5m 30%
Source: Various
57
Second, current assembly capacity is considerably above levels of domestic demand, and as a
result capacity utilisation is very low throughout in China. Until this situation eases, this will limit the
profitability of the Chinese market, and may speed up the rate of consolidation of smaller, independent
Chinese vehicle manufacturers. Overall, with an estimated overcapacity of 1.5-2 million units, the
Chinese auto industry is likely to enter a cycle of overproduction, high inventories, price reductions
and sales incentives. This development is positive for the customer, as it has driven price reductions
across all segments (see Figure 10). For the auto industry as a whole, this situation is dangerous, as
low profitability may result in reduced R&D activity, and thus prolong the reliance on imported
design.
MSRP: 1,000 Yuan
[Price down rate vs. ’03/Q4]
260.7
D-segment
258.1
250 251.7
249.3 -5.3%
246.8
152.0
C-segment
151.0
145
141.8
134.2 -13.6%
130.4
B-segment
94.8
90
89.6 89.7 88.2
79.5
-16.1%
'03/Q4 '04/Q1 '04/Q2 '04/Q3 '04/Q4
Figure 10: Price Trends by Segment12
Source: Nakamura (2005)
Third, while manufacturing capabilities in large joint venture plants are comparable to other
newly industrialised countries, Chinese manufacturing capabilities are not yet up to global standards,
12
The segments refer to vehicle classes (largely determined by size): the B-segment are small cars (e.g. VW
Polo, Ford Fiesta), the C-segment are compact cars (e.g. VW Golf, Ford Focus), the D-segment are mid-size cars
(e.g. VW Passat, Ford Mondeo).
58
and the any competitive advantage is based on labour cost advantages only. While the best
international joint ventures we visited operate to international quality standards with a comparable
labour productivity, the majority of plants we visited however are not employing any advanced
manufacturing techniques, and are not competitive in global terms. A further key constraint of the
future development of the Chinese automotive industry is the lack of technological and R&D
capabilities. While the government policy of 1994 succeeded in establishing a large and modern
vehicle manufacturing base in China, these so far are mostly ‘contract manufacturers’. Almost all
vehicles sold in China are foreign designs, either through joint ventures or licenses. Although most
state-owned enterprises have, or are about to, establish R&D centres, so far these have not comprised
any significant product development activities. Suppliers suffer particularly from the lack of R&D
capabilities, by being de facto excluded from bidding for contracts on new vehicles. The technology
shortage is not going to abate in the near future, and thus continued IPR infringements will most likely
be the consequence. The joint ventures at manufacturer and supplier level, as well as other
international collaborations do have a positive impact, but not in the near term. Thus, in terms of
international competitiveness, China’s key asset is still low labour cost; it is this that enables
manufacturers such as Geely to offer vehicles at prices starting at US$ 4,000. In terms of exports,
these budget cars will surely find a market in the developed world in the entry segments, as have those
of Kia, Daewoo, Hyundai, Perodua and Proton in the past. For higher segments, the actual labour cost
in the vehicle is less critical, as the high-value components are still imported from abroad, and raw
materials are no less expensive in China than elsewhere in the world. Thus, coupled with a low
capacity utilisation, it is hard to see how the export of high-value added cars will be cost competitive
in the near to medium-term future.
Fourth, the key determinant of growth of the Chinese car market is not only economic growth (in
terms of disposable income per capita), but also the distribution of this income. So far, we have
observed major growth of vehicle sales in the urban areas, yet increasing market saturation, as well as
traffic congestion and traffic restrictions, which will limit this market. Furthermore, to the majority of
Chinese, vehicle ownership is still economically infeasible. Thus, with limits to growth in urban areas
and still low income levels in rural areas, future demand will not grow as quickly as in the recent past.
Further mitigating factors are government policies, in particular in relation to vehicle financing, as the
sales recession after the tightening of credit in 2004 has demonstrated. Second, the currency exchange
59
rate is a major uncertainty, both for the domestic and the export market. The experience of motor
industries in Argentina and Brazil have shown that a currency devaluation can have disastrous effects
on local industries. The vehicle output in Argentina, for example, dropped by 32% from 2001 to 2002
(after devaluation of the Peso in January 2002), and only recovered to 2001 levels in 2004. The key
difference between Argentina and China is that the Peso was freely floated and lost over two thirds of
its value in one day, whereas the Yuan adjustment made in July 2005 only resulted in a 20% shift, and
is still controlled in certain bounds. The impacts of further shifts in the Yuan-Dollar exchange rate will
strongly depend on the speed and scope of these adjustments. Third, taxation is another area where the
government could interfere. In 2005, the fuel price in China was half of the price in the US. Recent
announcements have made it clear that the government is considering a fuel tax policy, which will
most likely mean higher fuel prices, in line with the crude oil price.
4.2 Policy Implications of Mass Motorization in China
Finally, a paper on the evolution of the automotive industry in China must comment on the social,
energy and environmental implications of such a rapid growth in the number of vehicles in a country.
Figure 2 shows the growth in vehicles of all classes in use in China between 1951 and 2004.
30
Number of Vehicles in Use
25
(Million Units)
20
15
10
5
0
1951 1956 1961 1966 1971 1976 1981 1986 1991 1998 2004
Year
Figure 2: Diagram of Vehicles in use in China 1900-1993
Source: Various
60
In 2004, there were 27.42 million vehicles on the road in China, of which private cars accounted
for 49.8%, compared to just 21.8% of total vehicles in use in 1994. The accelerating motorization and
industrialization of China has challenged the oil supply, and China’s reliance on imported petroleum is
rapidly growing. China consumed 4.53% of the global oil consumption in 1994, yet has become the
world’s second-largest oil consumer since 2003 (with 7.61% of the total consumed oil in the world).
Of the oil consumed, it is estimated that one third is attributable to motor vehicles. China has imported
8.3 million and 11.7 million tons of petroleum in 2003 and 2004, respectively, and the oil demands for
transportation use in 2010 and 2020 are expected to be 140 million tons and 256 million tons,
accounting for 44% and 57% of China’s total demand (Feng, 2005), see Figure 11. Although China’s
level of dependency on oil imports is still below the average of that of most developed counties, the
predicted growth rate of China’s oil consumption has considerable implications.
500
(Million Tons)
400
300
200
100
0
'96 '97'98 '99'00 '01'02 '03'04'05F '10F '15F
Oil consumption Oil production Oil import
Figure 11: China’s Oil Consumption 1996-2015 (forecast)
Data Source: CPEA and Nakamura (2005)
Rapid motorization also brings environmental problems. Current transportation systems rely
heavily on motor vehicles, and emission levels in urban areas have risen considerably over time, in
line with the increasing number of motor vehicles on the road. Measurements have indicated that in
Guangzhou and Beijing, concentrations of CO frequently exceed China’s national standard (which
allows eight times more emissions than the European standard). Particulate matter is the main
pollutant, where its concentration exceeded the national standard in 54.4% of the 340 monitored cities
61
(Schipper and Ng, 2004).
Finally, road safety is also a major issue in China since the motorization started. Between 1975
and 1998, traffic fatalities increased 243% (Kopits and Cropper, 2003). In comparison, the U.S. with
about six times the number of motor vehicles on the road, has less than half as many fatalities. This
significant number of traffic fatalities is most likely caused by the sudden increase in motor vehicles in
dense urban areas, which operate within an infrastructure that principally was built for non-motorized
transport.
In order to mitigate the conflicts between motorization and its social, energy and environment
impacts, the government has various policy and technology instruments. The ‘Emission Standard for
Exhaust Pollutants from Light-Duty Vehicles’, for example, was implemented in 1999 by the State
Environmental Protection Agency (SEPA) and went into effect in January 2000. This first emission
standard is equivalent to Euro I, and it is projected to increase the requirements gradually. Furthermore,
the 2004 Automotive Industry Policy directly encourages the purchase and use of small vehicles; this
marks a reversal of previous restrictions of operating small cars in urban areas. In the light of lower
fuel consumption however, the government is now actively supporting cars of less than 750 kg with a
maximum fuel intensity of 7.21 l/100 km. Vehicles already on sale were given until January 1st, 2006,
to meet these standards, and a second phase of legislation will become active on January 1st, 2008
(Schipper and Ng, 2005). The actual impact of these standards is still unclear because of the many
uncertainties involved, yet in conjunction with a possible fuel tax these standards might result in a
shift towards smaller, less energy-intensive cars in the market.
Finally, the current Automotive Industrial Policy promotes the use of alternative fuels and
powertrains (Luo, 2004). Although considerable resources are invested in the development of electric,
hybrid and fuel cell powertrains, as well as several pilot projects of CNG and LPG-powered vehicles,
it seems very unlikely that these technologies will see any mainstream applications (with the possible
exception of public transport services, as is planned of the 2008 Olympic Games, and 2010 World
Expo) in the near future.
62
4.3 Outlook
In our analysis of the past, present and future of the Chinese automotive industry ‘growth’ and
‘expansion’ have been central features. In this respect, the government policy aiming to establish a
modern motor industry in China has been very successful, yet challenges remain. Most crucially, the
lack of technological and R&D capabilities will persist, at least in the short term, and largely relegate
the Chinese operations to contract manufacturing outfits that produce designs brought in from abroad.
While some independent R&D efforts can be observed, largely based on ‘reverse engineered’ designs
of competitors, true ‘R&D independence’ is still a far goal for the Chinese auto industry.
Furthermore, although China’s economic growth will undoubtedly continue in the short and
medium term, we are not convinced that the growth in the domestic automotive market will follow suit,
as is commonly predicted. Changes related to loan restrictions, traffic congestion, taxation and, most
importantly, currency fluctuations all pose considerable uncertainties for the future development of the
domestic demand for motor vehicles. Furthermore, the vehicle manufacturers continue to build
production capacity in China, that will – according to their projections (and hopes) – serve long-term
export demand from China to the rest of the world. Currently through, export volumes of 70,000 units
stand against a projected overcapacity of 2,000,000 units by 2008. In the short term, this overcapacity
will result in further price reductions in the Chinese market, and most likely, in the overproduction and
sales incentive battles so common in most Western markets. One could even argue that China is
perfectly replicating many of the problems that afflict the US and European markets at present.
In the long term, the growing energy consumption and vehicle emissions will become an
increasing concern. While this is being recognised at government level, the alternative powertrain
development and pilot projects currently undertaken do not have any real potential to counter this
trend, and the world will have to brace itself for a country, that – assuming the ratio of vehicle sales
per population of the US – could potentially put another 73 million vehicles on the road per annum.
63
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66
Appendices
Appendix A: Summary of the Automotive Industry Policy 1994
1 Policy objectives To open up domestic and foreign markets; promotion of large scale production;
concentration of the industry, eliminating small scale, dispersed operations
2 Product approval Automotive enterprises must submit future product plans for approval; products which are
not approved cannot be sold, imported or used
3 Enterprise organization Formation of automotive industry groups to attain critical mass; state support for enterprises
which exceed certain production volumes and R&D effort
4 Technology policy Encouragement of independent product development
5 Investment policy Encouragement of automotive enterprises to raise development funds from various sources;
trans-regional and trans-departmental investment to support increased industry
concentration
6 Foreign investment Encouragement of joint ventures with foreign partners who meet certain conditions (e.g.
policy technology must be 1990s standards; R&D facilities must be established; foreign partner
must have independent product patents and trademarks, and have a good-capital raising
ability
7 Import management Restriction of imports; entry points limited to four seaports; prohibition of imports of used
policy vehicles
8 Export management Expansion of exports as production rises; priority loans for enterprises whose exports
policy exceed 3-8% of annual sales volume for passenger cars
9 Localization policy Prohibition of knock-down kits; preferential tax rates for enterprises with high localisation
rates
10 Consumption and Encouragement of individual ownership of automobiles; prices of civilian vehicles (except
pricing policy saloons) to be decided by enterprises according to market demand. Prices of saloons to
follow the state guide price.
11 Policies on related Co-ordination and development of supporting industries (metals, materials, capital
industries and social equipment, electronics, rubber, plastics and glass). Infrastructure development
insurance
12 Industry policy Localities and departments to support the Industry Policy; no new complete car facilities to
planning and project be approved during 1994-95
management
Source: The State Planning Committee of China (1994) ‘National Automotive Industry Policy’.
67
Appendix B: Summary of the Automotive Industry Policy 2004
1 Policy Insisting on the principle of combing market theory and government macro planning;
objectives Promotion of the harmonious development of the automotive and associated industries;
Driving industrial structural adjustment;
Enhancing economy of scale and concentration of the industry;
Encouragement of self-reliant product development and local brand development, aiming to build up a
few famous brands and world-level (top 500) automotive groups before 2010;
To become one of the major global auto production countries and to export in big volume;
Fostering the development of local suppliers, and encouraging the participation of global competition.
2 Development The National Development and Reform Commission (NDRC) makes the mid/long term strategic plan
planning for the industry in accordance with this policy;
management The big automotive enterprises (with > 15% market share) should make the strategic plans of their own
in according with the strategic plan of NDRC with the authorization of NDRC.
3 Technology Insisting on the principle of combing technology transfer and self-reliant product development;
policy Encouragement of light duty and fuel-efficient cars;
Promotion of the R&D and commercialization of battery-powered electrical vehicles, hybrids and fuel
cell vehicles;
Promotion of the use of alternative fuels including methanol, ethanol, natural gas and etc.
4 Industrial Encouragement of formation of big automotive groups (with > 15% market share) or alliance;
structure Encouragement of global cooperation and operation of local automotive enterprise;
adjustment Encouragement of international acquisition or merger;
Separation of the part division from assemblers;
Setting up regulations for withdrawing.
5 Entry To constitute ‘Bylaw of Motor Vehicle Management’;
management To constitute compelling automotive product standard criteria for safety, emission, fuel efficiency and
etc.;
To uniform the management systems for the entries of automotive enterprises and products.
6 Brand To encourage self-property products, emphasize intellectual property protection, and improve local
strategy brand reputation;
Encouragement of strategic planning on local brand development and protection;
All the automotive parts and assemblies produced in China should be labeled with brands and
production locations.
7 Product Encouragement and support of establishments of R&D centres in automotive enterprises for improving
development independent product innovation capabilities;
Encourage the involvement of assemblers and suppliers in national R&D projects.
8 Part industry Encouraging suppliers into the product development activities within assemblers;
To form advanced R&D and manufacturing capability and enter the international market;
To encourage various sources of funds entering the part industry.
9 Distribution/s Encouragement of learning the mature international auto sales modes;
ales network Encouragement of the establishment of local brand product sales and service systems;
Passenger car sales and service should be licensed from manufactures and distributed by brands from
2005, all autos from 2006.
10 Investment Chinese share holding in whole car assembly enterprises must be no less than 50%, but not applying to
exportation-targeted projects;
Investment on establishing new auto assembly enterprise must be no less than 2 billion Yuan.
11 Import Support on localization of foreign products;
Restriction of imports;
management
Entry points limited to four seaports and two land ports;
Prohibition of bonded service for imported automobiles in bonded areas of the import ports from 2005;
Prohibition of imports of used vehicles.
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12 Auto Encouragement of auto credit consumption;
Improving the auto insurance policies
consumption
Encouragement of well regulated used car circulation and transactions;
and auto use Encouragement of private car consumption;
Prohibition of extra administration fee and government foundation raising;
Encouragement of light duty, low emission and efficient cars.
Prohibition of the discriminative policies on non-local produced auto products;
Encouragement of private investments on parking plots and other infrastructures.
To constitute national uniform automotive emission standards.
To constitute national uniform motor vehicle registration, inspection and management system.
Source: China National Development and Reform Commission (2004) ‘National Automotive Industry Policy’.
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Appendix C: Operations of Selected International Component Suppliers in China
Calsonic Kansei (Japan)
Established a US$ 8.6 million wholly owned company in Shanghai in August 2003
Calsonic plan to establish a production base in Xiangfan (Hubei) and Huadu (Guangdong)
Cummins Corp (USA)
Established 15 wholly owned and JV companies in China
Has developed a network of 8 regional service centres and over 70 authorized dealers
Strong tie with Donfeng via the 50-50 joint venture, Dongfeng Cummins Engine Company
Delphi Automotive Systems (USA)
Invested more than US$ 500 million in 12 businesses, 10 of them are manufacturing JVs,
Supplies both the major vehicle manufacturers in China and exports to international market
Established 3 customer service centres, 1 technical service centre and 1 training centre
Delphi China exported products worth US$ 147 million to major vehicle manufacturers in
Europe and North America
Denso Corp (Japan)
Established 6 manufacturing joint ventures throughout China
Plan to continue developing partnerships with foreign carmakers in China and expanding retail
sales
GM Daewoo Auto & Tech. Group (USA&Korea)
Inherited 2 JVs after GM acquired Daewoo Corp in 1999: FirstAuto/Daewoo Auto Engines Co
Ltd and Shandong-Daewoo Auto Parts & Components Co Ltd
Hyundai Mobis (Korea)
Established 3 manufacturing and distribution centres in Jiangsu, Beijing and Shanghai
Plan to double production of module parts to 1 million units by 2008
Honeywell (USA)
Invested more than US$ 500 million and set up 22 wholly foreign owned or joint ventures in
China.
In 2002, Honeywell China had over US$ 570 million in sales revenues.
ITT Industries (USA)
ITT’s Connectors & Switches division established 2 JVs in China, one of which has 4
manufacturing locations
Johnson Controls (USA)
11 joint venture plants in four cities in China with an revenue over US$ 800 million in 2003.
Koito Manufacturing Co. (Japan)
Established a Shanghai JV in producing over 100 automotive related products
Commenced construction of a technical centre in June 2000, due for completion in 2001
Robert Bosch (Germany)
Established 10 representative offices, 4 trade firms, 7 wholly-owned subsidiaries and 10 JVs,
150 auto maintenance and repair stores, with a total investment of US$ 600 million
Plans to develop a technical centre in 2004 and establish 1,000 after sales centres by 2010
SKF (Sweden)
Established 2 JVs: Anhui Zhongding CR Seals Ltd, with ASIMCO, manufacturing oil seals,
the other is the Beijing Nankou SKF Railway Bearings Company Ltd
TRW Automotive (USA)
70
9 facilities in China, including 7 joint venture facilities, partnered with SAIC and FAWER
Automotive Parts Co.
Tong Yang (Taiwan)
Established 6 automotive parts and accessories plants including 3 JVs in Changchun,
Chongqing, Fuzhou, Guangzhou, Jiangsu and Tianjin
TYC Brother Industrial Co. Ltd. (Taiwan)
Established 8 automotive headlight plants
Continue to expand production at Changzhou Tamao Lighting Co., its mainland affiliate, in a
to become the largest auto headlight maker within 5 years.
Visteon Corporation
Invested in 17 facilities in China; has an engineering liaison office in Chung-Li, Taiwan, and a
business office in Shanghai; its Asia headquarters moved from Tokyo to Shanghai in2002.
In 2002, generated US$ 550 million in sales in China.
Zahnradfabrik Friedrichshafen (Germany)
Established 6 wholly owned subsidiaries specializing in transmissions, driveline and steering
systems.
Sources: Access Asia (2003) ‘Automotive parts and aftermarket in China’.
U.S. Department of Commerce (2004) ‘U.S.-China Automotive Parts Industry Overview’.
71
Appendix D: Major Vehicle Assembly Plants in China - 2005
Manufacturer Plant Site Products
First Auto Works Group
FAW Liberation Automotive Co. Ltd. Changchun, Jilin Province Liberation Truck
FAW Car Co. Ltd. Changchun, Jilin Province Mazda 6, Red Flag Shijixing, Red Flag Mingsi
Changchun FAW Fengyue Auto Co. Changchun, Jilin Province Land Cruiser
FAW-Volkswagen Automotive Co. Ltd. Changchun, Jilin Province Audi A4, A6; Volkswagen Golf, Jetta, Bora
FAW Huali Motor Co.Ltd. Tianjin SUV Dario Terios, MPV Happy Emissary
Tianjin FAW Xiali Automobile Co. Ltd Tianjin Charade, Vitz, Vela
Tianjin FAW Toyota Motor Co. Tianjin Vios, Corolla, Crown
FAW Jinbei Automotive Co. Ltd. Shenyang, Liaoning Province Chevrolet Blazer, S-10, Tahoe, TrailBlazer
Sichuan Toyota Motor Co. Chengdu, Sichuan Province Toyota Coaster buses, Land cruiser Prado
FAW Haima Automotive Co. Ltd Haikou, Hainan Province Mazda Premacy and 323(SKD)
FAW Hongta Motor Co. Yunnan Province Happy Emissary, Blue Arrows Truck
Shanghai Automotive Industry Corp. (SAIC)
Shanghai Gerneral Motors Corp. Shanghai Buick Regal, Royaum, Excelle
Shanghai Volkswagen Automotive Co.Ltd. Shanghai Volkswagen Gol, Passat Polo, Santana/2000/3000, Touran
SAIC GM Wuling Automobile Co. Liu Zhou Guangxi Province Chevrolet Spark, Wuling-brand minivechiles
Shanghai GM Dong Yue Motors Ltd. Yantai, Shandong Province Chevrolet Sail, Epica
Shanghai GM Norsom Motors Co. Shenyang, Liaoning Province Buick GL8
Dongfeng Motor Corp.
Dongfeng Automobile Co. Xiangfan, Hubei Province Light commercial vehicles, Cummins diesels
Dongfeng Motor Co. Ltd. (Nissan) Shiyan and Huadu Dongfeng commercial vehicles; Nissan bluebird, Sunny, Teana, Tiida
Dongfeng Feugeot Citroen Automobile Co. Wuhan, Hubai Province Citroen Elysee, ZX/Fukang, Xsara, Picasso; Peugeo 307
Dongfeng Honda Automobile (Wuhan) Co. Wuhan, Hubai Province Honda CR-V, Civic
Dongfeng Yueda Kia Motors Co.Ltd Yancheng, Jiangsu Province Kia Optima, Pride, Accent and Carnival
72
Dongfeng Liuzhou Motors Co.Ltd Liu Zhou Guangxi Province Mitsubishi Delica Space Gear
Changan Automotive Group
Changan Automobile Co.Ltd Chongqing Changan-brand minivans, Changan Star series, CM7, CM8
Changan Ford Automobile Co. Chongqing Ford Fiesta, Mondeo, Focus (coming)
Changan Suzuki Automobile Co.Ltd Chongqing Chang’an Alto; Suzuki Gazelle, Cultus, Swift
Changan Kuayue Automobile Co. Ltd Chongqing Changan-brand light trucks
Hebei Changan Automotivel Co. Ltd Dingzhou, Hebei Province Commercial vehicles
Nanjing Changan Automobile Co. Ltd Najing, Jiangsu Province Changan minivans, CM7, Mazda 3 (proposed)
Jiangling Motors Co. Ltd Nanchang, Jiangxi Province Landwind SUV, Baowei, Ford Transit
Beijing Automotive Industry Holdings Co.
Beijing Jeep Co. Ltd Beijing Jeep 2500, Grand Cherokee; BJ 2022, BJ 6400, Heroic; Mishubishi Outlander
Beijing Hyundai Motor Co. Ltd Beijing Hyundai EF Sonata, Elantra
Beijing Benz Co. Ltd Beijing Mercedes Benz C/E class
Beiqi Foton Motor Co., Ltd Beijing Light commercial vehicles
Guangzhou Automotive Industry Group
Guangzhou Honda Automobile Co. Guangzhou, Guangdong Province Honda Accord, Odyssey, Fit
Guangzhou Toyota Automobile Co. Ltd Guangzhou, Guangdong Province Camery (proposed)
Brilliance China Automotive Holdings Ltd.
Brilliance Jinbei Automotive Co. Shengyang, Liaoning Province Zhonghua, New Zhonghua Grador, Jinbei Granse
BMW Brilliance Automotive Co. Shengyang, Liaoning Province BMW 3/5 Series
Geely Automotive Holding Group
Geely Automotive Hangzhou, Jiangsu Province Haoqing, Merrie, Uliou, Maple, Beauty Leopard
Others
Shanghai Maple Automotive Co. Shanghai Haiyu303, Huapu M203, Huapu Biaofeng
Chery Automobile Co. Wuhu, Anhui Province QQ, Oriental Son, Fengyun, Qiyun, Tittoo SUV
Haifei Motor Co. Harbin, Heilongjiang Province Daewoo Tico, Lobo, Saibao, Mitsubishi Mirage Dingo MPV
Guizhou Yunque Automobile Body Parts Co.Ltd Guiyang, Guizhou Province Yunque
73
Hebei Zhongxing Automobile Manufacturing Co. Baoding, Hebei Province Admiral SUV, Star SUV, Cruiser 2400, Zhongxing Pickups
Hunan Changfeng Motor Co. Ltd. Yongzhou, Hunan Province Mitsubishi Liebao/Feitong, Pajero
Jiangxi Changhe Suzuki Automobile Co. Ltd. Jin De Zhen, Jiangxi Province Suzuki Wagon R (Dei Dou Xing)
Jiangxi Changhe Automobile Co. Ltd. Jin De Zhen, Jiangxi Province Ideal
Nanjing Fiat Inc Nanjing, Jiangsu Province Fiat Palio, Siena, Weekend
Nanjing Iveco Auto Co. Ltd Nanjing, Jiangsu Province Iveco Daily minibus
Zhengzhou Nissan Automobile Co. Zhengzhou, Henan Province Nissan Paladin, Datsun pickup
Jilin Tongtian Automobile Co. Jilin, Jilin Province Glow
Jianghuai Automobile Co. Hefei, Anhui Province Refine MPV (Hyundai Starex)
Great Wall Automobile Holding Co. Baoding, Hebei Province Safe, Pegasus, Sing, Hover
BYD Automobile Co. Shenzhen, Guangdong Province Flyer, BYD F3
Southeast Motor. Co Fuzhou, Fujian Province Mitsubishi Lancer, MPV Freeca, Grandis, Soveran
Guizhou Skylark Automobile Co. Anshun, Guizhou Province Skylark Series
Jiangnan Automotive Co. Ltd Xiangtan, Hunan Province Alto, Fengguang
Rongcheng Huatai Automobile Co. Rongcheng, Shandong Province Terracan
Chongqing Isuzu Auto Co. Chongqing ISUZU Light Trucks
Sichuan Heavy Truck Co. Chongqing Hongyan, Steyr Heavy Trucks
Zhejiang Gonow Automobile Co., Ltd. Taizhou, Zhejiang Troy pickups, Gonow Jetstar, Coxswain, Kylin SUV
Source: various.
74
Appendix E: Profiles of Key Domestic Automakers
First Automobile Works Group Changchun, Jilin Province, www.faw.com.cn
First Automobile Works Group set an important benchmark for China’s auto industry in 2004 when it became the
country’s first vehicle maker to produce and sell more than 1 million cars and trucks in a year. FAW, which is
partnered with Volkswagen AG, Toyota Motor Corp. and Mazda Motors in joint venture and licensing deals, sold
1,007,471 vehicles in 2004, up 12.4% over 2003. Passenger-vehicle sales rose 11% to 639,863 units, accounting
for 63.5% of total. Sales of FAW’s legacy vehicles – the company was founded in 1953 to make heavy trucks –
soared 34% last year to 127,850, while medium-truck sales rose 39% to nearly 60,000. The company exports
small numbers of commercial vehicles to developing countries. Because FAW’s two partners are underway on
capacity expansions totaling 930,000 units, the state-owned automaker appears to be solidly on track to hit its
target of 2 million sales annually by 2008.
FAW Car Co.
Ownership: First Auto Works - 64%; Others - 36% Capacity Production Unit sales
2004: 100,000 2004: 50,066 2004: 50,789
Models produced: Red Flag, Mazda6 2003: 90,000 2003: 48,219 2003: 51,266
FAW Haima Automobile Co.
Ownership: First Auto Works - 49%; Haima Automobile Group - 49%; Capacity Production Unit sales
Haima Provincial Government - 2%
2004: 150,000 2004: 66,954 2004: 66,055
Models produced: Mazda Familia, Premacy
2003: N.A. 2003: 54,824 2003: 54,406
Tianjin FAW Xiali Automobile Co.
Ownership: Subsidiary State Holding - 51%: Corporate - 34%; Capacity Production Unit sales
Others - 15% 2004: 180,000 2004: 130,506 2004: 130,182
Models produced: Charade, Vizi, Vela 2003: 180,000 2003: 117,186 2003: 117,335
Changchun FAW Fengyue Auto Co.
Ownership: First Auto Works - 100% Capacity Production Unit sales
2004: 10,000 2004: 4,207 2004: 3,939
Models produced: Toyota Land Cruiser 2003: 10,000 2003: 666 2003: 666
FAW Huali (Tianjin) Motor Co.
Ownership: First Auto Works - 75%; Golden Lion Group of Malaysia - Capacity Production Unit sales
25% 2004: 60,000 2004: 9,127 2004: 8,995
Models produced: Daihatsu Terios, Move 2003: 50,000 2003: 742 2003: 713
Global JV : FAW-Volkswagen Automotive Co.
Ownership: First Auto Works - 60%; Volkswagen AG - 20%; Capacity Production Unit sales
Volkswagen (China) Investment Co. - 10%; Audi AG - 10% 2004: 400,000 2004: 287,117 2004: 300,117
Models produced: Audi A4, A6; Volkswagen Bora, Golf, Jetta, Caddy 2003: 300,000 2003: 302,346 2003: 302,385
Global JV : Tianjin FAW Toyota Motor Co.
Ownership: Toyota Motor Corp. - 40%; Toyota Motor (China) Investment Capacity Production Unit sales
Co. - 10%; FAW Xiali Automobile Co. - 30%; FAW - 20% 2004: 120,000 2004: 83,437 2004: 77,739
Models produced: Toyota Crown, Corolla, Vios 2003: 50,000 2003: 49,535 2003: 48,567
Other FAW subsidiaries:
FAW Liberation Automotive Co. Ltd. Models produced: Liberation Truck
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FAW Jinbei Automotive Co. Ltd. Models produced: Chevrolet Blazer, S-10, Tahoe, TrailBlazer
Sichuan Toyota Motor Co. Models produced: Toyota Coaster buses, Land cruiser Prado
FAW Hongta Motor Co. Models produced: Happy Emissary, Blue Arrows Truck
Shanghai Automotive Industry Corp. Shanghai, www.saicgroup.com
Shanghai Automotive Industry Corp. (SAIC) is a distant second to giant First Auto Works in annual unit sales. It
is partnered with Volkswagen and General Motors in what for now are China’s biggest automotive joint ventures,
aims to be one of the world’s top six automakers by 2020. SAIC’s sales rose 8.5 percent last year to 848,542
units. The automaker, which is owned by the City of Shanghai, is counting on its own international initiatives, as
well as its partnerships with China’s biggest foreign automakers, to fuel that growth. Volkswagen aims to double
capacity of its Shanghai joint venture to near 1 million units a year by 2008, while General Motors says it will
raise capacity in China to 1.3 million units a year by 2007 from 550,000 now. All of GM’s ventures in China are
linked to Shanghai Automotive in one way or another. But SAIC is looking for growth separate from its partners.
In 2003, SAIC became the first Chinese carmaker to take a stake in a foreign automaker when it took a 10.6%
share of GM Daewoo in Korea. Last year, SAIC agreed to acquire a controlling 48.9% stake in Korea’s
Ssangyong Motors, a maker of SUVs, for some US$ 500 million. But as this was going to press, SAIC was
involved with the bid to acquire Britain’s MG Rover Group, but failed with obtaining some intellectual propers
of a few MG Rover models and engines. What’s more, on an even more ambitious scale, SAIC has confirmed
that it’s in discussions with Italy’s Fiat Auto concerning a possible, unspecified collaboration.
Global JV : Shanghai General Motors Corp.
Ownership: SAIC - 50%; General Motors - 50% Capacity Production Unit sales
2004: 200,000 2004: 253,000 2004: 252,000
Models produced: Buick Regal, Royaum, Excelle, GL8 2003: 200,000 2003: 206,964 2003: 201,188
Global JV: SAIC GM Wuling Automobile Co.
Ownership: SAIC - 50%; General Motors - 34%; Wuling Auto - 16% Capacity Production Unit sales
2004: 20, 000 2004: 228,839 2004: 225,046
Models produced: Chevrolet Spark 2003: 18,000 2003: N.A. 2003: N.A.
Global JV : Shanghai GM Dongyue Motors
Ownership: SAIC - 25%; Shanghai General Motors Corp. - 50%; GM Capacity Production Unit sales
China - 25%
2004: 100,000 2004: 50,270 2004: 57,839
Models produced: Chevrolet Sail, Sail SRV, Epica 2003: 100,000 2003: N.A. 2003: N.A.
Global JV : Shanghai GM (Shenyang) Norsom Motors Co.
Ownership: Shanghai General Motors - 50%; SAIC - 25%; GM China - Capacity Production Unit sales
25%
2004: 50,000 2004: 737 2004: 1,653
Models produced: Buick GL8 2003: 30,000 2003: 3,559 2003: 3,285
Global JV : Shanghai Volkswagen Automotive Co.
Ownership: Volkswagen - 40%; SAIC - 50%; Volkswagen (China) Capacity Production Unit sales
Investment Co. - 10%
2004: 450,000 2004: 346,338 2004: 353,649
Models produced: Volkswagen Gol, Passat, Polo, Santana, Santana 3000,
2003: 450,000 2003: 405,252 2003: 396,006
Touran
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Chongqing Changan Automobile Group Chongqing, www.changan.com.cn
The Changan Automobile Group, which traces its roots back to a 1950s military truck factory in the western city
of Chongqing, has become China’s third biggest vehicle maker through licensing and joint-venture ties with
Japan’s Suzuki Motor Corp. Changan sold 579,520 light trucks, cars and minibuses last year, up nearly 23% over
2003. But only 157,000 units were sold by the group’s two joint ventures, Changan Ford Automobile Co. and
Chongqing Changan Suzuki Automobile Co. The government planners in January approved Changan Ford’s
request to build a second assembly plant in Nanjing, which will raise the partners’ capacity in China to some
400,000 cars a year. Although the joint venture with Ford promises to become increasingly important to its
fortunes, Changan’s rice bowl continues to be its relationship with Suzuki, which dates back to 1982. Not
including its joint ventures, Changan sold 422,349 Suzuki-derived and Suzuki-licensed mini- and subcompact
vehicles last year through a tangle of five wholly controlled companies: Chongqing Changan Automobile Co.;
Nanjing Changan Automobile Co.; Hebei Changan Automobile Co.; Hebei Changan Shengli Automobile Co.;
and Chongqing Changan Kuayue Automobile Co. Moreover, like other Chinese carmakers, Changan has made
no secret of its desire to begin exporting cars to Europe and the United States.
Changan Automobile Co.
Ownership: Municipal government - 100% Capacity Production Unit sales
2004: N.A. 2004: 425,030 2004: 422,349
Models produced: Changan-brand minivans, Changan Star series, CM7,
2003: N.A. 2003: 349,033 2003: 344,795
CM8
Global JV : Changan Ford Automobile Co.
Ownership: Ford Motor Co. - 50%; Changan Automotive Co. - 50% Capacity Production Unit sales
2004: 150,000 2004: 50,000 2004: 47,119
Models produced: Ford Fiesta, Mondeo, Focus 2003: 50,000 2003: 18,535 2003: 17,301
Global JV : Chongqing Changan Suzuki Automobile Co.
Ownership: Changan Auto Shareholding Co. - 51%; Suzuki Motor Corp. - Capacity Production Unit sales
35%; Nisshio Iwai Trading - 14%
2004: 100,000 2004: 107,337 2004: 110,052
Models produced: Suzuki Alto, Swift 2003: 100,000 2003: 102,083 2003: 100,018
Other Changan-owned local subsidiaries:
Changan Kuayue Automobile Co. Ltd Models produced: light trucks
Hebei Changan Automotivel Co. Ltd Models produced: Commercial vehicles
Nanjing Changan Automobile Co. Ltd Models produced: Changan minivans, CM7, Mazda 3 (proposed)
Jiangling Motors Co. Ltd Models produced: Landwind SUV, Baowei, Ford Transit
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Dongfeng Motor Corp. Wuhan, www.dfmc.com.cn
Dongfeng Motor Corp., the state-run automaker that has production ventures with Nissan, Honda, Peugeot and
Kia, says it expects to sell more than 600,000 vehicles this year valued at some 100 billion Yuan, or about US$
12.1 billion. In a market that was up 15%, the company’s sales rose 7% last year to 523,000 vehicles (including
commercial trucks), generating turnover of US$ 11.2 billion Yuan, up 17%. Profit rose 23% to US$ 507 million.
Dongfeng produces heavy-duty and light-duty trucks under its own name and cars with its partners. All but the
Peugeot venture registered sales gains in 2004. Dongfeng hopes to launch an IPO on the Hong Kong exchange
this year. The group had planned to raise US$ 1 billion from a Hong Kong share offering last year, but
apparently has scaled that back to around US$ 600 million in the face of China’s overall market slowdown.
Aproposed joint venture negotiation with France’s Renault SA has stalled on, but that it is still expected to
conclude a deal by year end.
Dongfeng Automobile Co.
Ownership: Dongfeng Motor Co. - 70%; Others - 30% Capacity Production Unit sales
2004: 150,000 2004: 61,000 2004: 61,000
Models produced: Light-commercial vehicles, Cummins diesels 2003: 100,000 2003: N.A. 2003: 66,048
Dongfeng Liuzhou Motor Co.
Ownership: Dongfeng Motor Corp. - 100% Capacity Production Unit sales
2004: 50,000 2004: 16,486 2004: 16,589
Models produced: Future 2003: 50,000 2003: 10,302 2003: 10,079
Global JV : Dongfeng Motor Co.
Ownership: Nissan Motor Co. - 50%; Dongfeng Motor Industry Capacity Production Unit sales
Investment Co. - 50%
2004: 150,000 2004: 64,197 2004: 60,784
Models produced: Nissan Bluebird, Sunny, Teana, Tiida 2003: 100,000 2003: 66,134 2003: 65,108
Global JV : Dongfeng Honda Automobile (Wuhan) Co.
Capacity
Ownership: Dongfeng Motor Corp. - 50%; Honda Motor Co. - 50% Production Unit sales
2004: 30,000
2004: 11,898 2004: 10,472
Production began
Models produced: Honda CR-V, Civic 4 04
2004
Global JV : Dongfeng Yueda Kia Automotible Co.
Ownership: Kia Motors - 50%; Dongfeng Motor Industry Investment Co. Capacity Production Unit sales
- 25%; Jiangsu Yueda Co. – 25%
2004: 100,000 2004: 63,267 2004: 62,506
Models produced: Kia Accent, Carnival, Optima 2003: 100,000 2003: 52,017 2003: 51,008
Global JV : Dongfeng Peugeot Citroen Automobile Co.
Ownership: PSA - 50%; Dongfeng Motor Industry Investment Co. - 50% Capacity Production Unit sales
2004: 150,000 2004: 88,034 2004: 89,129
Models produced: Citroen Elysee, Fukang, Picasso, Xsara; Peugeot 307 2003: 150,000 2003: 105,475 2003: 103,126
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Beijing Automotive Industry Corp. Beijing
Beijing Automotive Industry Corp. straddles three of China’s hottest segments – premium and economy sedans,
and SUVs – through joint venture partnerships. The city-owned automaker, which produces heavy, medium and
light trucks, and passenger vans for sale under the Beijing name, assembles cars with Hyundai, and Jeep and
Mitsubishi SUVs with DaimlerChrysler. Production of Mercedes-Benz C- and E-class sedans is scheduled to
begin this summer. Buoyed by a 176% surge at its Beijing-
Hyundai joint venture, the group posted a 58% gain in unit sales last year to 531,000, including commercial
trucks. The partnership with Hyundai bodes well for Beijing Automotive. Sales at Beijing
Benz-DaimlerChrysler, the group’s other joint venture, soared 59% over 2003 with the introduction of the
Mitsubishi Pajero Sport and Outlander SUVs. Exclusive of its joint ventures, Beijing Automotive Industry Corp.
has 10 manufacturing plants with a cumulative capacity of more than 300,000 units.
Beijing Jeep Co. Ltd
Ownership: Municipal government - 100% Capacity Production Unit sales
2004: 100,000 2004: 25,036 2004: 25.062
Models produced: Beijing SUV 2003: N.A. 2003: N.A. 2003: N.A.
Beijing Benz-DaimlerChrysler Automotive Ltd.
Ownership: DaimlerChrysler - 50%; Beijing Automotive Industry Capacity Production Unit sales
Holding Co. - 50%
2004: 100,000 2004: 33,697 2004: 31,505
Models produced: Jeep4700/Jeep4000, Jeep2500, Jeep Grand Cherokee;
2003: 80,000 2003: 19,441 2003: 19,829
Mitsubishi Pajero Sport, Outlander; Benz C/E Class
Beijing Hyundai Motor Co.
Ownership: Hyundai Motor Co. - 50%; Beijing Automotive Industry Capacity Production Unit sales
Holding Co. - 50%
2004: 150,000 2004: 150,158 2004: 144,090
Models produced: Hyundai Elantra, Sonata 2003: 50,000 2003: 55,113 2003: 52,128
Source: Automotive News Europe (2005) ‘Guide to China’s Auto Market’.
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