In the wake of the 2008 financial crisis, China overhauled its automobile industry. In the law itself it was acknowledged that the change was bound to happen, and the financial crisis only sped it up.
The first sentence of the “Program for the Adjustment and Rejuvenation of the Auto Industry” reads roughly as follows: “The auto industry is an important pillar industry for the people, it has a long industrial chain, high level of connections, high employment potential, a large pull on consumers, and has an important role in the development of the people’s economy and society.”
The goals for the law consisted of increasing local firms’ market control to forty percent, have new energy vehicles compose five percent of the market, create national champions out of domestic firms that could enter the international market, increase credit to car consumers, and increase urban infrastructure projects.
These goals now seem damning because the country faces: a massive credit crisis, heavy local government debt in part due to infrastructure spending, and still no sign of strong domestic auto firms.
So, it’s only natural that the government made an announcement on November 19, 2013 that soon enough the auto industry joint venture regulation (limiting foreign firms to at most a fifty percent stake in any Chinese branch, and forcing foreign firms to partner with domestic firms) would soon be changed to give more leeway to foreign companies.
Isn’t that a complete turn around from what the government was saying only five years before? First of all, the fifty-fifty joint venture law has been in place for almost twenty years, and China’s domestic auto producers are still lagging far behind.
There is adequate reason to believe this is because the majority of the Chinese sides of the joint ventures are held by state-owned enterprises. The main evidence for this is that it is not possible for foreign companies to own land in China, so they need government connections. Thus, local governments backed certain state-owned companies that partnered up with foreign firms and rested on the foreign companies’ brand appeal, technological advantages, management techniques, etc. all while not working at all to improve their own operations. All these state-owned firms had to do was supply land and labor to foreign firms dying to enter a huge market, then sit back and count half of every RMB that these companies made.
Clearly, the technology spillover didn’t quite work the way the government had planned. So given these arguments, why are some people, like the Vice President of the Chinese Association of Automobile Manufacturers not supporting a revision of the law?
It can be argued that the benefits the law has provided lie in the fact that more and more foreign firms are relocating R&D centers to China. Therefore, Chinese auto workers have increased ability to learn from within these established firms and increase the rate of technology spillover. Granted, this hasn’t worked in the last twenty years, so I wouldn’t bank on there being a technological breakthrough soon.
There seems to have been a slow trickle of spillover though, as independent Chinese brands managed to conquer the low cost market for a brief enough stint of time for two producers to work their way into China’s top 10 auto company list. Unfortunately for them, foreign companies are now breaching this market, with inexpensive cars like Toyota Corollas, Honda Fits, and the Japanese-made Yangguang.
The worry is that by allowing foreign companies to more freely operate within the Chinese market, the government risks completely stomping out all of the small independent manufacturers that they have worked so hard over the past twenty years to protect.
The only problem with this argument is that one of the most successful independent Chinese companies’ board members has spoken out in favor of giving foreign companies more freedom. Geely’s board member, Li Shufu has made the argument that he doesn’t believe foreign firms can operate on their own in China, primarily because they need Chinese companies to help with government relations in order to receive the government support that they need.
I’m not sure that this is the best stance for Mr. Li to take, considering that it seems the government is looking to wean off state-owned enterprises’ dominance of the fifty-fifty joint venture contracts. If this is the case, then don’t expect local governments to be so stingy on helping out foreign companies, especially if China’s economy hits a rough patch...or a hard landing.