Fighting for American Industrial Renewal; Industry and Manufacturing Advocacy Group for public Education

Trade with China

Brief History of 20th Century China and its automotive industry:

By Daniel Adams, BA Anthropology and Chinese language.

Studies at University of Michigan,

China Foreign Affairs University (Beijing, China) and Oakland University.

 

The Chinese government understands how to build a successful industry from the ground up in a very short period of time.  First, you must gather some of the best minds of the industry to your country and force them to contribute their ideas to your domestic industry.  How?  Fund the research and development and share profits with foreign companies.  Second, apply these technologies and findings to your domestic industry.  Third, phase out foreign competition and take hold of the market share within your borders while exporting your industry’s goods around the world with some of the best technology available.

 

China began its move to significantly expand its automotive industry in the early 1980s.  The expansion exploded during the 1990s and up until the present.  The method of establishing China as a significant player in the automotive industry has been done primarily through the encouragement of foreign investment in its country.  Joint ventures between Chinese automakers and foreign automakers has sped the transfer of technologies from the world to China.

China’s automotive needs are becoming increasingly similar to the needs of the United States.  Individual consumerism is on the rise in China.  Most economists agree that China will eventually surpass the US in demand for oil and for passenger cars. 

 At left, a 2006 Chinese Brilliance BS6 fails a German offset frontal impact crash test.

 

Environmental Policy

China is taking steps to lower emissions and enhance the energy efficiency of its automobiles.  In 2000, it moved to require that all its new vehicles come equipped with a catalytic converter.  It has moved to require that all its vehicles are fuel injected as well.  It is obvious that China still lags many years behind the United States in emissions standards; recently they have made strides to close that gap.  However, major environmental problems still exist in China, and many are still not adequately addressed.  They power most of their plants with coal that contributes to smog in its cities that is far worse than any American city.  Beijing and Shanghai are notorious for this problem, even though the Chinese government made progress towards making Beijing a much cleaner city for the 2008 Olympics.  China lags behind in environmental policy in just about every category; they also host the world’s most polluted city as voted by the Blacksmith Institute (The City of Linfen).  The city is so polluted that if you hang your clothes up after washing them (a common practice as many Chinese do not have the luxury of a dryer) you can expect that by the time that they dry, they will also be covered in black soot. 

Automotive Industry Policy

The Chinese government plays a much more direct role in the planning of its automotive industry.  It is clear that China has made it a priority to maintain and expand its automotive sector each year for the past thirty years.  The Automotive Industry Readjustment and Revitalization Plan of 1994 sets rules for how Chinese automakers will cooperate with foreign firms.  The rules are made to ensure its domestic companies the greatest advantage and the greatest transfer of information from the foreign investors to Chinese automakers.  For example, the foreign companies must have the ability to do its own research and development and to independently fund this.  China is clearly making a big move to gather technology at a rapid pace.  The most profound move by China is the requirement that all joint ventures in China allow the Chinese automaker an at least 50% holding.  This way all profits generated by the joint venture will contribute to the future of domestic manufacturing in the country (Reference: http://www.gerpisa.univ-evry.fr/actes/34/34-6.pdf). 

Compared to the United States, China seems to place a much greater value on its domestic manufacturing sector and ensures that it continues to gain market share domestically, and eventually gain significant market share abroad.  China is using the power of European, Japanese, and American automakers to its advantage and has encouraged them to compete for the third largest automotive market in the world specifically through joint ventures.  These joint ventures are just tempting enough for foreign automakers to encourage their investment in China and share their research, development, and technology, but they still maintain that any profits made in China should be shared with domestic companies. 

Every five years, the Chinese government reevaluates its economy and initiates new programs to further its industrial capacity (aka Five Year Plan). In 1995, China released its Ninth Five Year Plan.  Through this plan, China established an automotive industry trust and an investment company that is largely responsible for funding the development of the automotive industry in China.  Both foreign investors and domestic automakers receive the benefits of these institutions.  The Chinese government directly finances the research and development of its automotive industry.  This sort of direct investment is absent from the United States government and thus grants further advantages to the Chinese automakers over their American counterparts.  Couple this with having one of the fastest growing automotive markets in the world and it is easy to see why Chinese automakers are on the rise.  Of course, American automakers are benefitting from this as well, but they must share the benefits with Chinese automakers.  Furthermore, the funding of Research and Development by the Chinese government has led to an influx of talented development engineers from around the world to China. Compare this to the situation here in America.  Domestic automakers must privately finance the development of its vehicles.  This is a huge cost that eventually gets passed on to our consumers.  Furthermore, there is no requirement made for the sharing of technology between foreign automakers and American automakers. 

Through the Ninth Five Year Plan, China encouraged the export of automobiles through an Export Bank.  The Bank offers loans to companies that engage in the exportation of its vehicles to help cover the cost of shipping and tariff rates on its vehicles.  As a result of this policy and the natural increase in overall production of automobiles in China, auto exports reached 26,000 vehicles in April of 2009 and most recently General Motors has announced that it will begin exporting vehicles it produces in China to the United States (52,000 annually by 2014). 

China’s main interest as a result of these polices is not to make its country a base for the expansion of foreign automakers into its borders, but to use these foreign automakers to boost the competitiveness of its own automakers.  As a result, the foreign companies with the most success in China are the companies that have furthered the capacity of China’s domestic industry to compete on its own in the future. 

The Current Situation

The Automotive Industry Policy was updated in 2004.  One major change was made.  It designed the automotive market in China so that Chinese automakers will seize control of the market and begin to kick out American, Japanese, Korean, and European automakers.  It is stated that by 2010, the automotive production in China will be dominated by Chinese automakers.  The goal is to have Chinese automakers take up at least half of the market share.  They have nearly already attained the goal.  As of 2008, the Chinese Big Three (Shanghai Automotive Industry Corporation, China First Automobile Works Corporation, and Dongfeng Motor Corporation) sold 4.57 million cars (48.7% of market share) in China.  In 2009 it is likely that China will surpass the United States in total vehicle production.  Clearly, the goal of China is to increase the strength of its own automakers and decrease the strength of foreign competitors in its country.  Furthermore, China has plans to begin global competition with companies like GM, Ford, and Chrysler by beginning the exportation of its vehicles into American markets.  China will become an increasingly less profitable market for foreign competitors as its own corporations take up more and more of its own market share (Reference:  http://www.freshfields.com/publications/pdfs/sectors/9935.pdf). 

China’s response to the global financial crisis was swift with regards to its own automotive industry.  They have, as of January, passed a stimulus bill that includes incentives to buy fuel efficient vehicles and incentives to upgrade from a less fuel efficient vehicle to a more efficient car.  In the future, we can expect Chinese automakers to claim a large portion of the American market share, thereby chipping away at American automakers share of the market.  This will cause even more problems for the Big Three and will further exacerbate the problems already present in American companies.  

An opinion piece on trade policy with China can also be found at:

 
Further visual examples below of the common Chinese practice; "counterfeiting" vehicle designs and corporate logos:
 

 

Timeline, 1911-Current Day

 

1911 The Qing Dynasty is overthrown, The Republic of China is founded.

1913 Model T Fords are first exported to China

1920s GM Buicks are exported to China for the first time

Sun Yat-sen writes to Henry Ford, asking him to help build an automotive industry in China.

Ford sets up a sales and service branch in Shanghai.

Maoist revolution begins in China and the famed Long March from southeastern China to Northern China takes place.

1930s  GM Buicks account for 1 of every 6 automobiles on the road in China

1937  Japan invades China

1945 Japan surrenders and this ends the Sino-Japanese War, but starts a Civil War between the communists lead by Mao Tse-Tung and the Nationalists who hold power in the cities.

1947  China becomes a founding member of the General Agreement on Tariffs and Trade.

1949 Maoist forces win out, Nationalists flee to Taiwan and the People’s Republic of China is founded.

1949-50  Mao negotiates with Stalin for Sino-Soviet Treaty of Friendship, Alliance and Mutual Assistance

1950 United States imposes a trade embargo on China (Korean War)

1953 China forms the Automotive Industry Administrative Bureau

1953 First Auto Works is established in Changchun

1958 First Auto Works produces its first passenger car

1958 Shanghai Automotive Assembly Plant produces its first passenger car

1960 Soviet Union withdraws all economic assistance. China is isolated economically from most of the rest of the world.

1960 The Great Leap Forward program instituted under the direction of Chairman Mao proves a disastrous failure, widespread famine throughout China.

1963 China’s production level for automobiles is a grand total of eleven cars

1964 Third Front campaign launched, spurring establishment of many rural automobile factories.  The Shiyan Number Two Automobile Factory (Second Auto Works), now called Dongfeng Motor Corporation is founded.

1964 China explodes its first atomic bomb

1965 China National Automotive Industrial Corporation is formed to oversee auto companies and coordinate planning for the industry.

1966 Cultural Revolution launched, purging many people with bourgeois  connections – Passenger Car Production ceases.

1966 China National Automotive Industrial Corporation is eliminated

1969 China opens back up to the world

1969 US National Security Advisor Henry Kissinger secretly flies to China to open up communication channels between the United States and China

1971 Ping Pong Diplomacy in China.  US and Chinese Ping Pong teams play in China

1971 United Nations admits the People’s Republic of China to its General Assembly

1972 President Nixon flies to China to meet Chairman Mao.

1976 Mao Zedong dies, the Cultural Revolution ends

1979 Formal normalization of relations with the United States

1979 Jimmy Carter and Deng Xiaoping sign Agreement on Cooperation in Science and Technology.

1980 China applies for observer status at the GATT

1980 Chinese government imposes tight import restrictions on passenger cars.

1982 China is granted observer status at the GATT

1982 State Council reinstates the China National Automotive Industry Corporation

1983 Beijing Jeep joint venture established between AMC and Beijing Auto Works.

1984 China officially permits the ownership of cars.

1984 Import Restrictions are temporarily relaxed.

1986 China applies for full membership at the GATT

1986 State Council releases Provisions for the Encouragement of Foreign Investment

1987 CNAIC is designated an “association” and loses significant power

1988 Top Chinese leaders announce “Big Three, Little Three” industrial plan to consolidate dozens of auto companies into six major firms.

1989 Tiananmen Square massacre

1989 Chinese government again imposes tight import restrictions

1991 Eighth Five Year Plan is published, designating the auto industry as a “pillar industry”

1992 Ford opens a representative office

1993 China becomes a net oil importer

1994 New Automotive Industry Policy announced by State Planning Commission.

1994 GM China office opens in Beijing

1995 Negotiations for Shanghai GM joint venture begin.

1995 Ford establishes Ford Motor China Ltd.

1995 Jinbei GM closes down for four years.

1997 Shanghai GM joint venture between Shanghai Automotive Industry Corporation and General Motors established.

1999 Regular Production of Shanghai GM Buick New Century sedan begins.

1999 Permanent Normal Trade Relations status between US and China conclude.

1999 Jinbei GM reestablished

1999 China launches Clean Vehicle Action program to deploy alternative-fueled vehicles.

1999 China Ministry of Science and Technology launches research program to develop electric vehicles in China and creates an electric demonstration project in City of Shantou

2000 General Motors donates five electric vehicles to MOST.

2000 US Senate passes PNTR bill, paving the way for China to join the WTO.  The PNTR agreement enters into force in October.  PNTR specifies many changes for foreign direct investment in China and for policies governing the automotive sector in particular, including:

· Phasing down tariffs on all vehicles to 25% by 2006

· Phasing down tariffs on auto parts to 9.5% by 2006

· Eliminating quotas by 2005

· Opening the auto-financing market fully to foreign investors

· Eliminating any export performance, trade, foreign-exchange balancing, and prior-experience requirements as criteria  for trading rights

· Eliminating conditions on investment, including performance offsets, foreign-exchange balancing, or R&D

· Abiding by the Trade-Related Investment Measures agreement of the WTO

· Eliminating all subsidies that are prohibited under WTO rules

2000 First Buick Sail is produced

2000 China requires that all new cars produced in China must have a catalytic converter and meet EURO I emission standards.  New cars in Beijing, Shanghai, and Chongqing have to meet EURO II standards.  Leaded fuel is banned.

2001 Chang’An Ford joint venture is established between Chang’An Automotive company and Ford Motor Company in Chongqing.

2001 Chevy Blazer begins production at Jinbei GM.

2001 Buick Sail begins regular production at Shanghai GM

2001 China becomes the 143rd member of the WTO.

2001 China’s Ministry of Science and Technology launches major R&D initiative in its “863”(High-Tech) Program for the development and deployment of electric, hybrid-electric, and fuel-cell vehicles during the 10th Five-Year Plan period.

2001 10th Five year plan is released

  • Total output of passenger cars shall reach 1.1 million
  • Added value of entire motor-vehicle industry (including trucks and motorcycles) shall reach US $15.72 billion.
  • Passenger cars will comprise 35 percent of total vehicle-fleet mix.
  • Independent development capabilities will be strengthened.
  • Carburetor cars will be banned as well as those using CFC-12 air conditioners
  • Energy-efficiency rules for vehicles will be formulated and stricter emission controls issued.
  • State-level R&D centers at major automotive enterprises will be created that will receive preferential treatment.
  • Further development of the auto parts-and-components industry will be encouraged.

2002  SAIC-Wuling-GM announce a new joint venture to produce minibuses.

2002 China produces over 1 million passenger cars for the first time in one year.

2003 Shanghai GM buys new factory in Yantai, Shandong Province, in order to double its capacity.

2004 The Chinese government announces a set of proposed fuel-efficiency standards

2004 The Chinese government issues a revision of its 1994 Auto Industry Policy

2005 China’s first fuel-efficiency standards for automobiles take effect.

Source:  “China Shifts Gears: Automakers, Oil, Pollution, and Development” Kelly Sims Gallagher.