COMPARATIVE ANALYSIS ON ST&I

Paper: How the Chinese government promoted a global automobile industry

Author: Wan-Wen Chu
Research Center for Humanities and Social Sciences, Academia Sinica, Taipei,
Taiwan
Prepared by Nicolaus Shombe (PHD14407)
December, 2014

OUTLINE
Introduction
Questions
Automotive industry development in China
Industrial Policy Formulation and Implementation
in China
Evolution of Industrial Policy
Implementation of Joint venture Policy
Conclusion
Lesson learned

Introduction
The claim by experts that:
The Chinese state lacks the capability to practice pro-active industrial policy.
Chinas phenomenal growth has been caused by economic liberalization and
not by industrial policies,
Governments automotive industrial policy especially that of relying upon
foreign joint ventures, were deemed ineffective to promote development.
This article argues that the Chinese state has practiced pro-active industrial
policies effectively in the automobile industry.

Questions
1. Does the Chinese state have the capability to promote
industries successfully?
2. Has it relied upon industrial policies to achieve fast growth
since reform began in 1978?
3. Or instead, have industries grown merely from the
liberalization of markets and the opening up to foreign direct
investment (FDI) as presumed by many free market
economists?
4. Has economic decentralization led to self-seeking local
governments which rendered the central state powerless to
practice industrial policies?
5. Has FDI played a leading role in Chinas development? Or
has the government had effective control over the FDI?

Automotive industry development in China

In the early 1950s, China set up the first auto plant, the first auto
works (FAW), in Manchuria, and transferred Russian technology
to produce trucks not passenger cars.
In the late 1960s, China established the second auto works (SAW)
in the mountains near Wuhan in central China.
After 1978, Joint Venture became a policy

From 2001 onward, on top of the existing joint ventures,

indigenous automobile firms started to appear in China, including
the state-owned Hafei and Chery, and the privately owned Geely
and BYD.

Evolution of Industrial Policy

Under central planning (1949 -1978): China did not have an industrial policy as defined in a market economy.
It set a goal of rapid catch up and made developing heavy industry a top
priority,
Central planning determined the pattern of industrial development in China.
PRC since 1978: The term industrial policy 1st appeared in the 5-year plan of the 7th fiveyear plan of 1986, though referring mainly to industrial structure
adjustment.
In 1988, the government established the Bureau of Industrial Policy.
In 1994, it issued an industrial policy framework to set goals for industrial
structure adjustment and upgrading, organization, technology, and
allocation.
The automobile industry was not even included in the sixth five-year plan
(19811985), while at the same time auto imports and smuggling were
clearly on the rise.
Thus, the auto industry was added as a pillar industry in 1986.

Evolution of Auto Industry Policy

China chose the JV route and began to seek out foreign partners as a way of
foreign technology transfer.

In 1988, strategy of supporting 3 majors and 3 minorswith FAW, SAW,

and SAIC named as the three majors, and Beijing, Tianjin, and Guangzhou
firms as the three minors
Limit the total number of firms, and providing a high degree of protection.
In 1992, FAWVW was established, and SAW and Citroen also set up the
joint venture Shenlong.
The policy goal of this period focused on market concentration ratios and
economies of scale.
In 1987, SVW was ordered to increase its domestic content rate to 40%
within 3 years. It achieved 60% in 1990, and 90% in 1997.
Under the protection of high tariffs and entry restrictions, these joint venture
companies and enjoyed high profit rates without introducing new technology.

Evolution of Auto Industry Policy

The Automotive Industry Policy issued in 1994 formalized the import substitution
policy

In 1997, in order to prepare for the entry into the WTO it allowed in more foreign
investors and demanded they bring in the latest technology, including ShanghaiGM and Guangzhou-Honda.

In 2000, revised the foreign business law, lifted the domestic content
requirement, and relaxed the entry restriction.

Emergence of indigenous firms - Chery Automobile of Wuhu, Anhui Province, and

Geely Automobile of Taizhou, Zhejiang Province.

In 2001, the state granted car assembly permit to 4 indigenous firms: Chery,
Geely, Hafei, and Brilliance.

In 2004 the new policy began to emphasize indigenous technology development

and nurturing of national brands.

In the 11th five-year plan (20062010) policy objectives for the automobile
industry included the usual structural targets, and the authority also continued to
push consolidation. In 2007, SAIC acquired Nanjing Auto, and NDRC announced at
the signing ceremony that this be the model of groupization.

Implementation of Joint venture Policy

In late 1978, General Motors and other foreign auto companies was
invited to China to discuss cooperation.
SAIC signed a JV pact with VW, the one which showed most
interest, in 1984
In 1997, SAIC and GM signed JV agreement , with GM agreeing to
inject a large sum of capital, introduce frontier technology, and
establish the Pan-Asia Technical Automotive Center.

1998
2000
2001
Guangzhou- Tianjin- ChanganHonda
Faw-Toyota Ford

2002
BeijingHyundai

2002
BrillianceBMW

2002
DongfengNissan

Automotive industry Production

The automotive industry in China has been the largest in the
world measured by automobile unit production since 2008.
Of the automobiles produced, 44.3% were local brands
(including BYD, Dongfeng Motor, FAW Group, SAIC Motor,
Lifan, Chang'an (Chana), Geely, Chery, Hafei, Jianghuai (JAC),
Great Wall and Roewe), and the rest were produced by joint
ventures with foreign car makers such as Volkswagen, General
Motors, Hyundai, Nissan, Honda, Toyota, Mitsubishi etc.
China still have advantage of population and economic growth.
The current 2014 estimate is 1,393,783,836, this does not
include Taiwan, Hong Kong and Macau.

Automobile production in China (1955 2005)

4,000,000

3,000,000

2,000,000

1,000,000

0
55

60

65

70

75

80

85

Commercial vehicles
Passenger Cars
TRUCKS
YEAR

90

95

00

05

Industrial Policy Formulation and Implementation in China

catching-up
consensus
Central
Govern
ment

Local Government

Ministries

Private

SOEs

SOEs

SOEs

SOEs

Conclusion
China is a multilayered one, and has to be considered as a
whole.
Decentralization, however, allows room for policy
experiments by the local governments,
The strong social consensus to catch up with the West
propels the central state to continue to improve its policy
toward this goal.

13

Lesson learned
Establishment of indigenous enterprises is
important in order to control the direction of
technology and economic development.
Support indigenous is important to have
national Champion.
Policy formulation is not static phenomena is
dynamic depend on the existing circumstances.
The process of policy making is a learning
process.
For developing countries to have national goal
is very important like China had catch up west

Chinese model of industrial policy propelled by the

catch-up consensus has successfully promoted a
global automobile industry despite earlier mistakes.