New auto policy sets a fair playfield
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Shanghai Daily, January 31, 2012
Chinese government has warmly embraced foreign investment in car manufacturing over the past few decades, helping the nation to surpass the United States as the No.1 auto market in the world at an astonishing pace.
But now that industrial juggernaut is about to face some dramatic policy changes.
The National Development and Reform Commission recently announced it would remove the car industry from its list of priorities for foreign investment. The country's top economic planning agency said the move is aimed at "ensuring the healthy development of the industry." Foreign investment in fuel-efficient vehicles will still be encouraged, it added.
Many foreign media interpreted the move as a means of giving China's domestic carmakers a more competitive edge, to the detriment of giant foreign manufacturers who have dominated the industry.
Well, protecting domestic car industries is nothing new in the real world. The US bailed out two of its biggest automakers when the global financial crisis struck. Australia subsidizes an auto industry that would have pulled up stakes and moved offshore a long time ago without handouts. Russia lifted the threshold on sales of foreign automobiles there. The list goes on.
In China, the auto making is considered one of the pillar industries of the economy, involving hundreds of thousands of jobs.
Chance to catch up
From my point of view, the change in policy isn't intended to throttle cooperation between Chinese automakers and foreign rivals. Rather, it is to give domestic carmakers the chance to catch up in terms of competitiveness.
I don't think that foreign auto companies, who have touted the Chinese market as their salvation in a world of slowing car sales, really need to worry about future growth prospects in China. The car market will remain open, and each product will have to compete on price and merits.
With the new policy that took effect yesterday, overseas carmakers will probably face more requirements and longer waiting times to secure state approval to build new plants. Favorable tax policies also will disappear.
Foreign investment played an important role in developing China's domestic auto industry.
Seeking to attract technological expertise, the government opened the auto industry in the early 1980s, encouraging foreign auto giants to set up car manufacturing joint ventures in China.
The flow of technology into the country helped a budding domestic industry find its footing.
Chinese auto companies, including Chery and BYD, began turning out their own brand models, though they still lagged their foreign rivals in styling, advanced systems, quality control and management expertise. Even more importantly, a car-parts industry developed to feed both foreign and domestic automakers.
Chinese auto companies have benefited from all the progress and from a growing number of domestic car industry professionals. At the same time, they have been subjected to perhaps the cutthroat car market in the world, which forced them to adapt or perish.
China has not been immune from the trend toward slower car sales in the world. Last year for the first time in four, sales growth in China slowed to 2.5 percent from 30 percent a year earlier. Much of that was blamed on the end of government car-purchase incentives.
The slowdown in China hit domestic automakers the hardest. The joint ventures of General Motors and Volkswagen reported more than 15 percent sales growth in China last year, while their domestic counterparts suffered sinking profits or even losses.
The market share of Chinese brand passenger vehicles fell 3.37 percentage points to 42 percent last year.
Foreign companies have been the big winners in the car sweepstakes in China for a long time. GM said China has become its biggest market. At the same time, foreign automakers have been reticent to share their core technologies and brands with Chinese partners.
The change in China's stance this year doesn't mean Chinese auto companies can sit back and relax.
Companies such as VW are already well established here, making the withdrawal of state policy support unlikely to do much damage.
GM, which plans to boost production capacity by 25 percent to 40 percent over the next two years and introduce more than 60 new and redesigned models by 2015, said in a statement it expects minimal negative impact from the new policies.
Product matters
The problem for domestic carmakers is that Chinese consumers, on the whole, just haven't gotten excited by their models despite the millions of yuan they are pouring into technological and styling upgrades. The only thing domestic models have had going for them is cheap prices, which many consumers translate to cheap products.
Foreign automakers have certainly dominated the top end of the market, where buyers with the cash to splash choose the prestige, quality and look of foreign models.
It hasn't helped much that some Chinese carmakers are developing their own brands under government pressure, which usually ignores the forces of market demand. At the same time, the government is encouraging industry consolidation, driving smaller players out of the market. Chinese auto companies need to seize the breathing space afforded by the new policies to shore up their research and development capabilities, beef up design and improve quality control. In the end, it's the product that will determine their fate, not government policies.
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