With a dynamic view, China became a member of WTO several years ago, so the government has to take off some of its foreign protection policies for its domestic car companies. For example, to reduce its tariffs gradually to international standard, and it has to reduce its restraints in trade and service issues, also it would have to reduce the constraints on the foreign car enterprises’ direct investment and related issues. So in the political aspects, the environment is a bit optimistic, and that’s why all the big car enterprises of the world has made solid bases in this land and other small car enterprises are trying their best to enter China markets. So as a new comer, it has to see also the negative side from the intense competition from the foreign companies, it also has to awake the other protective policies the Chinese government would take for its domestic car producers.
2.1.3 Economic perspective
The economic environment refers mainly to the economic development of the whole nation, such as the GDP growth speed, the economic structure, the labour market and other macro-economic policies. China has enjoyed unprecedented high economic growth speed in the last 20 years, in their schedule the following annual GDP growth would still be about 7%. As for the economic structure, China’s secondary industry grows very fast and is contributing to the biggest proportion of GDP, while the proportion of GDP contributed by the primary industry decreases greatly. The economic level directly determines the population of cars, more and more cars are owned by per capital in China. The economic development also directs the car industrial development level and the different types of cars. Right now in China, the most popular and potential may be those economical cars, for the urbanization of China has made more people need this kind. In developed areas, the luxurious cars also have great markets as those white-collar managers get more disposable income.
This economic structure adjustment made the Chinese income distribution gap much bigger, which is also why the luxurious cars could found more and more markets in China. With this change, more and more rural labour forces are moving into the town and the industrial sectors. So in one hand these low labour costs brings full cost advantages for those car enterprises that operates in China, but on the other hand, there would still be obvious lacking in technique workers to bring efficiency. To train the workshop workers of China to improve their quality would be a challenging job for any foreign new comers, though the early comers have accumulated much experience and achieved some achievement, especially in China-Japan joint car ventures.
The high speed of Chinese development also brings many other opportunities for car companies, both domestic and foreign. Like the car component enterprises have vast markets in China not only for those operating in China, also it could earn much profit by exporting those components while enjoying the low-producing cost of China. Admittedly, with the sustainable rapid economic development, the foreign companies would also have to adjust many of its actions, like better employment policy and more transparent and just ways of communications with Chinese government, which all bring new challenges.
As China is more and more becoming a part of the global economy, all the car enterprises have also got to have the global perspective in its strategy and marketing management. Besides these, we should also to use some dynamic view to keep currently with what’s happening in China, like the financial policies, in 2005 China began improve its currency ratio of RMB to dollar is just one sign of information that Chinese economy is going to be more and more global, so the global environment may make many Chinese economic environment take new appearances.
2.1.4 Social and culture perspective
The social and culture environment mainly refers to the population situation, the education and culture, the religious belief and even the geographic distribution. Take the Chinese population for example, it has about 1.3 billion people, which provides unlimited consumption for cars, especially considering most Chinese are present got not enough money for cars. Among these markets, the family car may again hold the biggest potential, and the luxurious may wait a longer time for such a big potential to become reality. But we should also notice here that China is entering an old-age society beforehand, as old people are more conservative while holding more money, thus, this also constitutes some big challenges for car producers. However, the big population base has made the car producers to cater for the different needs of many Chinese young guys. A new trend in Chinese value change of cars is they are turning more to high-quality, brand and after-sell service, rather than sole focus on the prices, so this brings new challenges for car marketing in China.
Also the culture factors also matters much in Chinese context, the foreign car enterprises have to pay special attention to the differing views of Chinese consumers.( Yang, 2005) For example, in China consumers are just enjoying the car with an end part, just like the image of JiaoZi (a traditional transportation tool in Chinese history, the use of which indicates status and celebrity), while the westerners may not be so prejudiced with two-carriage cars, or they just leave the end part for loading stuff. So there are many little details for the foreign companies to pay careful attention.
Finally, as China is so big a country, the interregional economic imbalance is a very big issue to consider when entering this market. Different regions have different natural resources and customs owing to the Chinese bigness and history, and the governmental leaders have make some obvious tendency to develop some areas for the car industry, like the coastal regions. And different region governmental leaders want to improve its regional GDP bigger and thus all put fragmental efforts in car industry building, which consequently bring big opportunity for new comers facing so many early comers. But considering the government would ultimately take actions to harmonize these industrial and regional imbalances, this becomes a big challenge at the same time.
2.1.5 Technique perspective
The technique environment mainly refers to the car technique and new development, such as new instrument, new material or new procedures and so on. Form the Chinese consumers’ aspects, their demand of high-quality while not expensive cars bring big challenges for car producers. So if a company with high techniques in the overall producing course or just single stage, this holds big opportunities.
Actually, one of the very first motives for Chinese government to attract foreign car producers in the beginning of its reform is to try to learn from the new techniques and management. Right now the Chinese domestic car producers are very lacking in their master of car producing technique, in those joint car ventures this could be better for the Chinese part. However, even in these joint ventures, the world biggest car producers still want to keep their core techniques for secrecy, which as a resource to some extent constitutes their competitive advantage (Barny, 1991). So if any new comer wants to enter this potential market, maybe this could be a good reason to bargain and negotiate with Chinese government. Finally, as the Chinese are more awakening the environmental and sustainable development problem, they are asking for more energy-saving and green cars, this indeed has many technique implications for any car enterprises. Actually, the Chinese government has used some policy benefits to encourage the new technique in such applications.
2.2 External environmental analysis
From the international perspective, the international environment mainly refers to the global level of the political, economic and other environment. As China is becoming more and more global, this consideration seems justify its efforts. Actually the academics also put great efforts to distinguish the global company and the multinational companies, which mean different strategy, logistics and marketing arrangements through the whole world. For a European or American car company that wants to operate in China this international context should not be ignored. For example, the use of cars consumes great energy, while China right now are consuming much more energy than its production, and the energy reserve is far from need, including some key materials to make a car(like steel). So as multinational car enterprises it should harmonize its global arrangement, and more importantly, with a long-term dynamic eyesight to handle this problem. After all, China has failed in its recent big attempts to merge or acquire big oil companies in the west countries and Russia.
From the law perspective, the law environment mainly refers to the laws itself and its implementation level. For a car company, the laws may include the national car industry policy, and China made its “Car industry policy” in 1994, followed by other laws to encourage car consumption (Li, 2004). Also China made many tariff laws and restraints on the foreign investment in car industry to protect its domestic car companies, all of which worth further reading, for China’s entry of WTO would make all this more complicated for a new comer. Here we need to know some more information concerning the law environment in China. For example, there are not so perfect laws and corresponding implementation for property rights protection in China, which constitute a great challenge for foreign car enterprises if they want to keep their core competency. And with a dynamic view, as China developing a more and more advanced marketing economy, the relationships with Chinese government would be more and more transparent, which would make the old corruption tactics more risky for extra-policy supports.
2.3 Major Domestic Automobile Enterprises and foreign makers
The general market conditions and circumstances of China can be reflected in the sales volume of the manufactures and the car brands.
Table 1: The Sales Volume of the Top 10 Manufacturers (by Automobile Total Sales Volume), Jan, 2005-Dec 2005 (Unit: thousand)
SAI: Shanghai Automobile Industry Corporation (Group)
BAW: Beijing Automobile Works
GAI: Guangzhou Automobile Industry Group Co., Ltd.
Source: RIS 2006
Table 2: The Sales Volume of the Top 10 Manufacturers (by Saloon Car Sales Volume), Jan, 2005-Dec 2005( Unit: thousand)
Source: RIS 2006
Figure 1 The Output and Sales volume of China Automotive Industry, H1 2005 and H1 2006
Source: RIS 2006
The General Motors has invested up to US$ 2,000m in China to set up three vehicle joint ventures and one solely- funded accessory sale centre since 1989, including Shanghai GM, Shenyang Gold Cup GM, and Liuzhou Wuling Motor Co. Ltd. Which is currently under negotiations. A series of its products have been successfully introduced to China by now, such as de luxe model of Buick, Buick GL8 for business, Sail family car, Chevrolet and Pickup vehicles and so forth. GM has planned to turn the Shanghai GM into its production base in the Asia region. To secure a promising future, GM in China is moving towards the goal to make most use of China's cheap human resources and advantages in the cheap raw material processing. ()
SVW itself was modernizing its production line, and introduced its Passat model vehicle to its assembly lines in March 2000. For this vehicle, SVW officials maintained the technical standard was the same as that used in Europe, and processes such as laser welding had been introduced at the Shanghai facility. “With good quality, we will have no disadvantages against imports,” according to one manager. To ensure these developments, VW offered training programmers to members of their 250-company Chinese supplier network. (China Association of Automobile Manufacturers, and China Automotive Technology & Research Center, 2000: “Automotive Industry of China”.)
Two Japanese entrants to China’s domestic production field, Honda and Toyota, stood to change the face of the auto production landscape in the first decade of the new century.
3 Policy Review and Trend
3.1 Previous Policies on Automobile Industry
China stands out as the world largest potential market. Domestic assemblers and parts suppliers enjoy considerable government support, demand for vehicles is strong, and the country’s economy is growing very fast. Also for China there are numerous advantages. In addition to equity investment, foreign companies provide considerable technology and management know-how and are helping spread the principles of efficiency, cost, quality and timeliness.
In an effort to protect China’s auto production centres and lessen the outflow of foreign exchange, the government imposed a system of import licenses, quotas and high tariff rates on foreign-made vehicles in 1986. These rates ranked among the highest in the world but now China is finally expected to reduce them according to its lately signed WTO agreement with the US. (Howe, Kueh and Robert, 2002)
The government still controls many facets of China’s auto industry. There is the Ministry of Machine-Building Industry (MMBI), the State Administration of Building Materials, the China National Automotive Industry Corp. (CNAIC), and the Auto Industry Bureau all of which supervise the auto industry. CNAIC that has been traditionally the most important player now concentrates on attracting new foreign investment instead of setting and implementing industry policies. Many investment rules apply to vehicle joint ventures, though firms considering investment projects must first determine which authorities and government ministries must sign off on a deal, as there is no standard approval process within the auto sector.
However, it sometimes seems that protecting China’s infant auto industry remains a priority to the Chinese government as they concentrate on consolidating the industry through expansion of the existent major production bases such as First and Second Auto works. In that way China also counts on the development of the domestic auto industry to stimulate growth in supporting industries such as steel, plastics and glass. Therefore all domestic assemblers are expected to achieve 80 % local content within eight years of production.
China’s ultimate aim is to build a fully integrated automotive industry capable of designing, engineering, manufacturing, and assembling vehicles, in short – China wants to build a strong car making industry, but on its own terms. Without foreign company’s help this is impossible but foreign companies have to go through a certain humiliation if they want to share in China’s huge potential.
Although the official Chinese policy have viewed and assessed the foreign investment as critical to the country's economic development strategies, the barriers and controls on foreign investment are still maintained to better serve the national development strategy. Foreign investment in priority infrastructure sectors such as energy production, communications, agriculture, forestry, environmental protection and transportation are encouraged, while in sectors where China wants to protect a domestic industry, the direct investment is seriously restricted, with the automobile industry as a typical example.
Restricting Auto import by high-tariff barriers: In addition to the above policy instruments, the most effective method in import substitution is the tariff barrier. In the majority of the time in the 1990s, the tariff rate for imported cars maintain at a level of 200%, making the car price one of the highest in the world in China.
Restrictions by Non-tariff barriers: After the gradual liberalization of the Chinese auto industry, the Chinese government has lowered the rates of tariff to fulfil its promise in the accession to WTO, yet still maintain some non-tariff barriers to protect the domestic car makers. Accompanied with the tariff barriers are the non-tariff ones, which act as important tactics to restrain the liberal movements of the exotic companies. The non-tariff barriers impose regulatory restrictions on the foreign companies, mainly on the freedom of investment and incorporation.
Various forms of non-tariff barriers will impose much burden for the influx of foreign companies. For example, quantity restrictions had a significant impact not only on the level of imports, but on their sensitivity to income and price variations (Giuseppe and Riccardo 1990).
The non-tariff barriers are designed to restrict the excessive growth of the foreign companies, at least in the host country. There are generally two categories of non-tariff barriers, which are considered according to whether they discriminate only against the foreign exporter or also against the local subsidiary of the foreign-owned firm. (Francesca 1996)
The Chinese authority imposes restrictions on the direct entry of the multinational company. According to Itay and Assaf (2006), FDI (foreign direct investments) enables the owner to obtain refined information about the firm. This superiority, relative to FPI (foreign portfolio investments), comes with a cost: a firm owned by the FDI investor has a low resale price because of asymmetric information between the owner and potential buyers.
3.2 Policies in the Liberalization Process
However, due to the Chinese economy at present is largely a state-directed one, the significant role the state plays in directing the investment activities of private and state owned enterprise through industrial policy and in regulating business activity can not be underestimated. These efforts will greatly undermine the expected fruition of the foreign makers if an utter liberalization is carried out. The Chinese should use the regulations as tools to ensure the stability of the infant automotive industry, particularly, the measures which are drafted for capital controls to restrict the unlimited growth of the MNCs, avoiding the total loss of the domestic automobile manufacturers. Some of the measures recommended by previous researchers are that introducing measures to trim overcapacity in auto sector and promoting local brands, which is indeed necessity for domestic auto manufacturers. Such moves will greatly steer the stability of the car sector.
The negative impact of the liberalization brought to the domestic makers can be greatly neutralized because of the subsidiaries of the central and local government and the incorporation among the state owned car makers. Besides of the inclined and favourable policies, it is also no secret that state-owned enterprises (SOEs) in China have received substantial subsidies from government budgets. (Richard 2005) Besides, because of the restrictions of the government policies, direct factories of the foreign makers are not allowed. The joint ventures are good sources for the incrementing of the empirical experiences and the R&D capabilities. The support, both of regulatory and of financial, from the Chinese government, will greatly subdue the pressures of the domestic makers in the liberalization process. Although in the liberalization process, these subsidiaries are strongly restricted according to the play rules, the Chinese carmakers can still receive supports. In many cases, the local government’s support, which is not directly restricted from international pressure, is the major contributes.
China has been pursuing an ‘open and reform’ policy for two decades now. It has made remarkable progress in trade liberalization in recent years as it attempts to meet the requirements of the World Trade Organization (WTO). Since the adoption of the Harmonized System (HS) code in 1992, there have been four rounds of significant tariff cuts. The average tariff rate was reduced from 43.2 percent in 1992 to 17 percent in 1997. At present it is about 13 percent, close to the average level for developing countries.
The Chinese government sticks with its promises to eliminate the tariff and non-tariff barriers. Yet, the government also makes unrelenting resolutions to protect the infant auto industry, such as policy instruments to encourage localization, and the levels of tariff on imported components would be reduced, and non-tariff barriers for certain types of imported cars.
The Chinese government has gradually liberalized its auto market to fulfil its promises on the entrance of the WTO. Actual steps have already been stepped forward, as the pressure from external entities. Removal of Non-tariff Barriers: In addition to the reduction of tariff levels, China has also removed some significant non-tariff barriers (NTBs) on certain areas to fulfil the promise of entering WTO.
4. Conclusion and Recommendations
From the above analysis, it can get much useful information to guide car industry development. When it takes the Chinese specific context, these advantages and disadvantages would take new appearances. However, there are still some basic standards to consider when making entry mode: core competence and the pressure to decrease costs (Charles, 2001). As it said before, the technique environment make any companies which possess technique advantage in energy-saving and reduce cost would probably consider direct investment. Also if the foreign car company could enjoy its core competency from its global logistics or other management levels, then the expansion into china may be the joint venture form. As for the second standard of reducing cost, facing china’s low labour cost, this would almost be a good choice to any big foreign car enterprises. Certainly, if the foreign company is not big enough to hold that risk, then different choice of entry mode still means much difference in reducing cost.
5. References
Barney J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120.
Charles W.L. Hill (2001), International Business: competing in the global marketplace, McGraw-Hill Companies, p 503-506.
Eric Harwit 2001 the Impact of WTO Membership on the Automobile Industry in China: the China Quarterly (2001), 167: 655-670 Cambridge University Press
Francesca Sanna-Randaccio 1996 New protectionism and multinational companies Journal of International Economics Volume 41, Issues 1-2 , August 1996, Pages 29-51
Giuseppe Bertola and Riccardo Faini 1990 Import demand and non-tariff barriers: The impact of trade liberalization: An application to Morocco Data Published in Journal of Development Economics Volume 34, Issues 1-2, November 1990, Pages 269-286
Howe Christopher, Y.Y. Kueh, and Robert Ash, (eds.) (2002), China’s Economic Reform: A Study with Documents, (London: Curzon Press).
Itay Goldsteina, and Assaf Razinb 2006 An information-based trade off between foreign direct investment and foreign portfolio investment Published in Journal of International Economics Volume 70, Issue 1, September 2006, Pages 271-295
Li Wenyi (2004), Car Marketing, China Communications Press, p 39-40.
RIS 2006 China Automotive Industry report (Merger & Reorganization), 2005-2006. RIS: the organization of research in China
URL:http://www.researchinchina.com/report/Automtive/1559.html
Yang Deli 2005 Culture matters to multinationals’ intellectual property businesses Published in Journal of World Business Volume 40, Issue 3, August 2005, Pages 281-301 Bradford University School of Management, UK
