Amy’s work on China
automobile industry and the World Trade Organisation (WTO)
(Note: all statistical data in this chapter is
attributable to
National Statistical Bureau unless
otherwise stated)
Introduction
This chapter mainly includes two sections. One is to
present a profile of
automobile industry. The other is to review the WTO membership’s impacts on
automobile industry. Through this literature review, the context of this
research can be presented. A brief section on overall Chinese economy will be given based on
industry.
(we need a
short section on Chinese economy based on pest analysis)
3.1 A profile of
3.1.1 A brief history of the Chinese automobile industry
industry has experienced dynamic changes since the founding of the People’s
Republic of
(PRC) in 1949. The development of the industry can be
divided into five stages as follows:
"Times New Roman"'>1.
The first stage (from 1949 to 1965):
name “Red Flag” model CA71, was manufactured and later being appointed as the
diplomatic transportation in the PRC.
"Times New Roman"'>2.
The second stage (from 1966 to 1980): During that period, the
demand of automobile grew gradually, with the emphasis shifted to higher
manufacturing capacities.
government injected an aggregate investment of approximately
ZH-CN'>$0.6 billion. As a result, the yearly production capacity reached
160,000 units.
"Times New Roman"'>3.
The third stage (from 1981 to 1992): The automotive
Take the year of 1998 as an example, there were approximately 557 foreign joint
venture companies and the value of the overseas investment was approximately
US$6.54 billions.
"Times New Roman"'>4.
The fourth stage (From 1992 to 2000): The China’s automotive
increased from 1 million units in 1992 to over 2 million units in 1992.
"Times New Roman"'>5.
The fifth stage (From 2000 to the present).
industry has developed rapidly.
took only two years to reach the three million units in terms of production
volume.
(Source:
adapted from China Statistical Yearbook, 2002)
3.1.2 Current
development of China
automobile industry
Rapid growth
ranked fifth in the world in terms of automobile production volume. Its
production volume reached 3.25 million units in 2002 – a 38.5% increase over
the same period of the previous year. Passenger car production numbers
surpassed the one million mark for the first time and reached 1.09 million
units – a 55% increase over the same period of 2001. The growth rate of
production and volume of
automobile industry during the past 10 years are shown in table 3.1.
rate of production volume (1992-2002)
mso-padding-alt:0in 5.4pt 0in 5.4pt;mso-border-insideh:.5pt solid windowtext;
mso-border-insidev:.5pt solid windowtext'>
(millions
Rate
establishment of its automotive industry in the early 1950s, it took more than
40 years for
to first reach the one million mark in 1992. However, it took
two million mark and then only two more years (from 2000 to 2002) to reach the
three million mark. The very high growth rate in 2002 demonstrated a fact that
automotive industry is in a rapidly growing stage at present.
Market potential
rapid economic growth provides a wide scope for rapid growth of
automobile industry.
has maintained an economic growth rate of 7% since 1991 and an 8% growth rate
in 2002. Gross domestic product (GDP) surpassed 10 trillion renminbi (RMB) in
2002.
increasing purchasing power of consumers provides enormous market potential for
passenger car manufacturers.
per capita GDP has increased from RMB1,000 in 1991 to more than RMB8,000 in
2002. The increased purchasing power of the individual formed a huge market
potential for passenger cars. Private ownership is currently the main trend of
vehicle purchase, especially passenger cars. More than 50% of vehicles were
sold to private individuals in 2002. During the past 10 years, the percentage
of private ownership has increased annually from 16% in 1991 to more than 45%
in 2002. In other words, about half of the 21 million vehicles have been owned
privately in
prosperous economy, development of a high-grade motorway network and increased domestic
and foreign investments also provide a solid foundation for a rapid growth of
commercial vehicles. For the past 10 years,
has maintained a growth rate of more than 20%. Investment in fixed assets has
increased steadily and the increase rate in 2002 was 8.4%. This will also
facilitate the growth of truck and passenger vehicles.
Reduction in automobile price
effectively promoted and stimulated the demand for vehicles, especially the
demand by private consumers. The percentage rate of the price reduction varies from 5%
to 20% for passenger cars. Among them, there was an average 15% price reduction
for mini-cars such as
Changan-Suzuki and Sail and an average price reduction of 7% for economy cars
such as Shanghai Volkswagen (VW), Shenlong Fukang, Shanghai Buick and Guangzhou
Honda, etc. This expanded the numbers of consumers and
triggered a rapid growth in sales
Increased
automobile models
product models offering enabled vehicle manufacturers to meet the demands of
different types of consumers. Since
international automobile giants have increased their investments and production
capacity, and offered their most recent products and latest technologies when
embarking upon a co-operative project. On the other hand, major Chinese
automobile groups, with the involvement of international automotive companies
and by means of restructuring, joint production and merging, etc., have
enhanced their ability in areas such as total production scale, product
offering and product quality. Total production volume of the three major
Chinese automobile groups in 2002 was 565,493 units. This constituted an
increase of 53% over the same period in 2001 for the First Auto Works (FAW),
an increase of 45% over 2001 for the Dongfeng Motors Corporation; and 591,704
units and an increase of 59% over 2001 for the Shanghai Automobile Industry
Corporation (SAIC). These three automobile groups have a much stronger ability
to introduce new models and thus played an important role in the rapid growth
of the industry. Many new models were introduced in 2002 and more than 10 new
passenger car models were introduced, including: Bora (FAW-VW), Sail (General
Motors), Palio (Fiat), Polo (Shanghai VW), Bluebird (Nissan-Fengshen), Vios (
(Hyundai). These new products provided consumers with more alternatives and
satisfied potential market demands. The sale of 250,000 units of new models
represented 50% of the 500,000 units increased sales volume in 2002, which
indicates the vital role that new products had played in the growth of the
industry.
3.1.3 Main trends in
automobile industry
Consolidation:
As
opens to more competition, local firms are under pressure to become
competitive. The auto parts industry
will be affected by a surge in new technology imports entering
subsequent development of the more technologically advanced products. Quality
concerns will remain an issue. Some
industry commentators have stated, a visible result of this will be a reduction
of up to 70 percent of
automotive component suppliers in post-WTO transition.
due to the increased competition nationally and internationally.
International
Investment:
The
including $750 million in its main
venture and GM has launched several new models. In addition, Ford,
domestic and foreign players all plan to raise capacity to about seven million
units annually.
Volkswagen AG, which
counts
second-most important region outside Europe, said that sales in
in the first quarter of 2003, offsetting a slowdown in the American.
months ended March 31, putting the company's sales in
to surpass 600,000 units this year.
However some analysts
warned that the mushrooming capacity and intensifying competition from domestic
and international players would cause the sliding of the prices.
to expert mass ownership of cars in
where disposable income in
its richest city, averaged just US $1,600 in 2002.
Elimination of the
Technology Gap:
There are still
wide technology and quality gaps between domestic suppliers
and international market needs. Owing to a growing trend toward sourcing
in
domestic competition, cost cutting and localization among foreign owned
manufacturers in
the local demand for higher quality parts is also growing. In such case,
many local components suppliers are gobbling up manufacturing technologies in
order to get their products up to speed. This trend may present significant
opportunities for manufacturing technology providers.
According to the
Governmental goals, by the end of year 2005, the performance and quality level
of automobiles, parts and components will approach international standards and
safety features will significantly be improved under the new regulations.
medium buses and heavy-duty trucks. More
passenger cars will be equipped with ABS and safety airbags.
side-collision requirement based on the successful implementation of frontal
collision standards. In sum, newly
assembled cars, light and mini vehicles, large and medium buses as well as
heavy-duty and medium trucks should meet Euro II emission standards. Mid- to
high-level cars and luxury large and medium coaches should meet Euro III
emission standards.
To achieve the goals,
most big Chinese automakers are furthering cooperation with overseas
enterprises. By 2005, two to three
national vehicle development centres will be set up for the development of new
trucks, six to eight state-level development centres for automotive parts and
components.
Purchasing Power:
style='font-size:12.0pt;mso-bidi-font-size:24.0pt;line-height:150%;mso-fareast-font-family:
??;font-weight:normal'>After China's entry into WTO, non-bank foreign financial
institutions (like GE Capital, GMAC) have been permitted to engage in the
business of automobile financing, allowing Chinese consumers to apply for loans
from car credit institutions and pay for automobile on instalment plans.
However, industry insiders are still waiting for the final approved
regulations. Given China
growing middle class, and a growing "car culture," new financing
options will likely lead to an additional spurt in car purchases.
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3.2 WTO accession and its impacts on China ’s
automobile industry
It is necessary to get a general understanding of
on
automobile industry.
3.2.1 Accession to WTOstyle='mso-bidi-font-size:10.5pt'>
one of the 23 original signatories of the General Agreement on Tariffs and
Trade (GATT) in 1948. After
revolution in 1949, the government in
announced that
would leave the GATT system. Although the government in
never recognized this withdrawal decision, nearly 40 years later, in 1986,
the GATT of its wish to resume its status as a GATT contracting party (
Andreas, 2000). A substantial part of
accession process involved bilateral negotiations between
members. These were usually conducted privately, either at the WTO in
Other meetings concern either informal or formal sessions of the Working Party.
While several areas of China's trade policies, i.e. schedules of market access
commitments in goods and specific commitments on services, have been the focus
of bilateral and plurilateral negotiations, it was the responsibility of the
Working Party to maintain an overview of how the negotiations were progressing
and to ensure that all aspects of China's trade policies were addressed.
negotiations with the governments of WTO members. As of February 2000,
members, including the
States
completed fifteen years of negotiation and became a full member of the World
Trade Organization (WTO).
3.2.2. Major China’s WTO agreementstyle='mso-bidi-font-size:10.5pt'>
biggest step forward to enter the WTO was marked by the successful end of
negotiations with the
States
partner and therefore requires a detailed and specific agreement. Hence, the
outline of the agreement between the
States
(Appendix 1) can provide a guideline on the major commitments made by
WTO entry.
3.2.3 Impacts of WTO accession on China
In general,
general privilege treatment within the organization as well as corresponding
obligations, which include significantly bringing down tariff rate,
establishing an integrated pricing system parallel to the international market,
reducing or phasing out import licenses and offering national treatment to
foreign investors. All these will adversely affect the manufacturing and market
patterns currently effective in the country, and make it an important matter
for
to undertake industrial restructuring. The improvement of trading and
investment environment following the WTO membership will attract foreign
investments as well as new products and new technology to
will narrow the gap between the industries in
terms of technology know-how. Foreign investments help upgrade product mix and
technology structure of the Chinese industry, speed up the establishment of a
market competition mechanism in State-owned firms and accelerate the reform of
state-owned enterprises.
3.2.4 China
of December 2001. Membership in the WTO
means numerous changes in trade policies in this country, for example,
reduction of tariffs, abolition of non-tariff barriers and the opening up of
the country's service sector. One of the industries that have mostly affected by
the WTO entry is automobile industry. Under the WTO accession agreement,
committed to the following changes in its trade policies relating to the
automobile industry.
- The tariff of imported cars will be
decreased to 25% by July 2006.
tariff of imported cars yearly as showed in table 3.2.
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2002.1.1
2003.1.1
2004.1.1
2005.1.1
2006.1.1
2006.7.1
43.80
38.2
34.20
30.00
28.00
25.00
- The average
tariff for automobile components will be lowered from 35% to 10 percent by
July 2006. - Total amount of annual quota for
completed car and car components was restricted to US$ 6 billions in 2002.
Annual increase is 15% until 2005. The quota system will be abolished in
2005.
"Times New Roman"'>4.
Currently,
foreign companies can only export to one interior destination in
not allowed to ship or distribute products among cities without working through
a Chinese freight forwarder.
also be able to run their own sales and service networks which will make it
possible for them to service their own vehicles even after the warranty period
has expired.
3.2.5 Impacts of the WTO accession
in
has opened their markets to foreign investment and involved in global
automobile market. As noted in the
previous section, the benchmark for tariffs on the imports of automobiles will
be lowered from the level of 80 -100% to 25% by 2006, and tariffs on the import
of parts and components will be lowered to 10% by 2006. Import quota will be
increased immediately to US$6 billion per year and will increase each year
until it is completely abolished by 2005 (World Trade Organisation, 2002). With
respect to direct investment, plans for the next two years will include
abolishing limits on types of automobiles produced with foreign capital, expanding
local governments’ rights to approve projects, and allowing joint production of
engines. Finally, by way of relaxing restrictions on related services
industries, foreign companies will be allowed to participate in providing car
loans, distribution, and maintenance services over a three-year phase-in period
after accession.
into the WTO brings great impacts on the automobile industry.
accession of
will generate benefits for
automotive industry with long-term concerns. The
automotive industry has embraced the challenges and
opportunities, which stemmed from reductions in automobile tariffs by becoming
more export oriented. The overall outlook for the automotive
market and growing exports. The WTO membership will provide
opportunities to enter into the international automobile market on a
competitive basis. In addition, industrial efficiency will be enhanced and
companies may benefit from cheaper imported automobile parts and components and
more advanced foreign technologies.
dimension of micro-analysis, the impacts of WTO
accession have been felt chiefly in two segments of the
industry, namely automobile components and completed vehicles.
It is believed the major changes resulting from WTO
accession will be in the completed vehicles segment.
The high market value of passenger cars and the high cost
of transport have made foreign automobile makers focus on this segment. The
amount of import tax is based on CIF (cost, insurance, freight) price.
Therefore, the higher the price, the more the reduction in total price paid.
The current gap between imported car and domestic manufactured car prices has
been narrowed with the WTO accession. In 2000, the price gap between domestic
made and imported cars could be as big as 50%-100%, but the gradual import
tariff reductions will narrow the gap to 25%-50%. (World Trade Organisation, 2002).
This will provide enough incentive for local customers to switch to imported
cars.
component’s manufactures have to face fierce competition from the foreign
competitors after WTO entry. Technologically, Chinese component makers are
behind in the manufacturing of ABS, automatic gearbox and Global Positioning
System (GPS), etc. According to an estimate by the China Association of
Automobile Manufacturers (CAAM), a mere 30% of the Chinese manufacturers are
able to complete with global peers.
Furthermore, WTO membership means that the Chinese
government will not impose any quota for using local contents on cars locally.
Therefore, local automobile makers will be free to source their components
globally. In other words, the purchasing decision will rest on pricing rather
than the need to comply with government regulations.
Finally, the decline in automobile retail prices have
forced Chinese component makers to pass on any efficiency gains to their
customers. Coupled with relaxation in respect of the use of Chinese parts in
completed cars, the Chinese automotive component manufacturers have faced an
even more difficult operating environment..
In sum,
accession to the WTO helps facilitate the development of the automobile market
by encouraging an open, rational market structure.
relatively weak in comparison with developed countries, and will have to
face increasing competition as the market becomes internationalised. In a word,
Impacts on
automobile industry are both negative and positive.
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