Amy's work on Chapter 3 China's automobile industry and the World Trade Organisation (WTO)

(Note: all statistical data in this chapter is attributable to China National Statistical Bureau  unless otherwise stated)

 

Introduction

This chapter mainly includes two sections. One is to present a profile of China's automobile industry. The other is to review the WTO membership's impacts on China's 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 PEST analyse before narrowing down to china's automobile industry.

(we need a short section on Chinese economy based on pest analysis)

 

3.1 A profile of China's automobile industry

 

3.1.1 A brief history of the Chinese automobile industry

China's automobile industry has experienced dynamic changes since the founding of the People's Republic of China (PRC) in 1949. The development of the industry can be divided into five stages as follows:

1.      The first stage (from 1949 to 1965):  In this period the first automobile under the name "Red Flag" model CA71, was manufactured and later being appointed as the diplomatic transportation in the PRC.

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. China's government injected an aggregate investment of approximately $0.6 billion. As a result, the yearly production capacity reached 160,000 units.

3.      The third stage (from 1981 to 1992): The automotive industry continued to expand with vast foreign investment. 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.

4.      The fourth stage (From 1992 to 2000): The China's automotive industry grew stably. Total production of vehicles was increased from 1 million units in 1992 to over 2 million units in 1992.

5.      The fifth stage (From 2000 to the present). China's automobile industry has developed rapidly. China 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's automobile industry

 

Rapid growth

In 2002, China was 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 China's automobile industry during the past 10 years are shown in table 3.1.

Table 3.1 Growth rate of production volume (1992-2002)

Year	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002
Output (millions	1.062	1.297	1.353	1.453	1.475	1.585	1.629	1.832	2.068	2.347	3.251
Growth Rate	49.8%	22.1%	4.3%	7.4%	1.5%	7.5%	2.8%	12.5%	12.9%	13.2%	38.5%

 

Since the establishment of its automotive industry in the early 1950s, it took more than 40 years for China to first reach the one million mark in 1992. However, it took   eight years (from 1992 to 2000) to reach the 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 China's automotive industry is in a rapidly growing stage at present.

 

 

Market potential 

 

China's stable and rapid economic growth provides a wide scope for rapid growth of China's automobile industry. China 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.

 

The steadily increasing purchasing power of consumers provides enormous market potential for passenger car manufacturers. China's 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 China.

 

In addition, a 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, China's road and expressway system 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

 

A reduction in prices of various types of vehicles in 2002 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

Xiali, 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

 

A largely increased product models offering enabled vehicle manufacturers to meet the demands of different types of consumers. Since China entered the WTO, 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), 415,748 units and 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 (Toyota) and Sonata (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 China's automobile industry

Consolidation:

As China's market 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 China and the 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 China's automotive component suppliers in post-WTO transition.  The government supports this type of consolidation due to the increased competition nationally and internationally.

 

International Investment:

The U.S. giant GM has invested enormous sums, including $750 million in its main Shanghai venture and GM has launched several new models. In addition, Ford, Toyota, Honda and other domestic and foreign players all plan to raise capacity to about seven million units annually.

Volkswagen AG, which counts China as its second-most important region outside Europe, said that sales in China rose 86% in the first quarter of 2003, offsetting a slowdown in the American.  Sales rose to 162,000 units in the three months ended March 31, putting the company's sales in China on track 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.  Many suggest that it is also unrealistic to expert mass ownership of cars in China where disposable income in Shanghai, 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 China, increasing domestic competition, cost cutting and localization among foreign owned manufacturers in China, 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.  ABS systems will be applied to large and medium buses and heavy-duty trucks.  More passenger cars will be equipped with ABS and safety airbags.  New cars, light and mini buses are to satisfy 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:

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's growing middle class, and a growing "car culture," new financing options will likely lead to an additional spurt in car purchases.

 

3.2 WTO accession and its impacts on China's automobile industry

It is necessary to get a general understanding of China's WTO accession before arguing the impacts on China's automobile industry.

 

3.2.1 Accession to WTO

China was one of the 23 original signatories of the General Agreement on Tariffs and

Trade (GATT) in 1948. After China's revolution in 1949, the government in Taiwan announced that China would leave the GATT system. Although the government in Beijing never recognized this withdrawal decision, nearly 40 years later, in 1986, China notified the GATT of its wish to resume its status as a GATT contracting party ( Andreas, 2000). A substantial part of China's accession process involved bilateral negotiations between China and WTO members. These were usually conducted privately, either at the WTO in Geneva or in capitals. 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. In 1999 and early 2000 China intensified its bilateral negotiations with the governments of WTO members. As of February 2000, China had concluded negotiations with 21 WTO members, including the United States (World Trade Organisation, 2000). On December 11, 2001, China finally completed fifteen years of negotiation and became a full member of the World Trade Organization (WTO).

 

3.2.2. Major China's WTO agreement

China's biggest step forward to enter the WTO was marked by the successful end of negotiations with the United States on November 15,1999. The United States is China's second largest trade partner and therefore requires a detailed and specific agreement. Hence, the outline of the agreement between the United States and China (Appendix 1) can provide a guideline on the major commitments made by China after the WTO entry.

 

3.2.3 Impacts of WTO accession on China

In general, China's WTO membership means 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 China 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 China. This will narrow the gap between the industries in China and foreign countries 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's automobile industrial policies after the WTO entry

 

China became the 143^rd full member of the WTO on 11^th 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, China has committed to the following changes in its trade policies relating to the automobile industry.

1. The tariff of imported cars will be decreased to 25% by July 2006. China promises to decrease the tariff of imported cars yearly as showed in table 3.2.

Table 3.2 The plan of decreasing tariff of imported cars (2002-2006)

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

 

2. The average tariff for automobile components will be lowered from 35% to 10 percent by July 2006.
3. 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.

4.      Currently, foreign companies can only export to one interior destination in China and are not allowed to ship or distribute products among cities without working through a Chinese freight forwarder.  By the year of 2006, foreign companies will 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.

(Source: World Trade Organisation, 2002)

 

3.2.5 Impacts of the WTO accession  on China's automobile industry

 

With China's entry into WTO made official in Doha in November 2001, the automotive industry in China 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.

 

Obviously, China's entry into the WTO brings great impacts on the automobile industry.  From the dimension of macro-analysis, the accession of China to WTO will generate benefits for China's 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 industry is strong with good prospects in the domestic market and growing exports. The WTO membership will provide China with 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.

 

From the dimension of micro-analysis, the impacts of WTO accession have been felt chiefly in two segments of the China automobile 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.

 

Meanwhile, in the field of automobile components, Chinese automobile 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, China's accession to the WTO helps facilitate the development of the automobile market by encouraging an open, rational market structure. China's automobile industry is relatively weak in comparison with developed countries, and will have to face increasing competition as the market becomes internationalised. In a word, Impacts on China's automobile industry are both negative and positive.

 

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