"The Chinese government views [joint ventures] as pawns in a larger game whose basic rule is that foreign automakers need China more than China needs any one of them: there are a dozen global automakers, but only one China market."
Ever since the Chinese government announced its Auto industry policy in 1994, the industry has grown by leaps and bounds. An IBM Study titled ‘Inside China - The Chinese view their automotive future’, notes, “Since 1994, foreign automakers have invested close to US$20 billion. Billions more are planned in order to increase capacity by 2010.”
With a view to enable the development of a strong domestic industry, the policy sought to swap the market access to foreign firms with technology transfers by means of joint ventures. The cornerstone of the JVs is the 50:50 rule, which limited the foreign ownership to 50%. While development of strong domestic players is the objective of China, the foreign enterprises have forayed with a two-fold objective – to capture the huge potential of the domestic market and to use China as an export hub. So far, the JVs have been fruitful in tapping the domestic market only, while little has been achieved on the export front. In its 2004 policy update too, the Chinese government decided to retain its 50:50 JV rule, much to the dismay of the foreign partners.
Presumably, China’s automotive policy is largely inspired from similar policies made by Japanese and Korean governments which initially employed strong protectionist policies, supporting the development of their respective auto industries. The long-term vision that these governments had for their automobile industries was significant, while they played a key role in making sure that their industries had access to or developed advanced automotive technologies. This allowed them to carefully nurture their domestic industries as they grew gradually to become world-class and globally competitive in the pre-WTO era.
Regulations and protectionist measures to an extent have aided the growth of domestic auto sectors in other Asian countries such as India, Thailand and Malaysia. Post-WTO these countries have been liberal in opening up their auto sectors to foreign investment and reducing restrictions in the markets. Lacking expertise in product development, manufacturing, technology and technical know-how, the Asian countries have ensured that they became important pieces of strategy for every global automaker. Most of them are fast emerging as global export hubs, offering largely unrestricted markets with minimal or no state controls.
Foreign partners aver that China offers fewer incentives to them for transferring the crucial technical know-how and product development skills. Offering a market with tight state controls, huge price sensitivity, weak IPR laws have made it a risky proposition for foreign automakers to introduce advanced technology and process know-how. The result is that the foreign partners have been bringing in dated technologies to build and serve the markets with huge demand for cheaper products. This resulted in a roadblock where neither party likes to budge an inch.
China could follow the footsteps of Korea which initially followed protectionist policies before developing its automobile industry into a globally competitive one. Experts opine that by relaxing the restrictions and import policies China will aid the growth of a robust domestic industry; the argument – technology transfer will happen at a faster pace into China as foreign automakers stand to gain more by exporting from China.
China needs to address major roadblocks such as its highly fragmented industry, poor controls for providing better IPR laws etc. Efficient controls to oversee proper technology transfer and product development skills and policies favouring the creation of a few major players will ensure the creation of a robust domestic industry with access to the latest automotive technologies – essential to spur the industry development.
