Tuesday, April 7, 2009

Guess What's NOT in China's Auto Policy

A few weeks ago, China's State Council published a new comprehensive auto policy, the "Automobile Industry Adjustment and Stimulus Plan" (《汽车产业调整和振兴规划》). Because it's a little long (and because I did not really expect to see anything new) I took my time reading through the whole thing. Though I finally finished reading it over a week ago, only today did it occur to me that something is conspicuously missing from this policy.

But first, the briefest of sketches of what the policy does contain...

The policy's authors make the case that "adjustment" of this industry is necessary if China is to have a globally competitive auto industry, and they also make the case that this adjustment is made all the more necessary by the "international financial crisis". I am not certain if this is the real intention, but I would have worded it differently: the international financial crisis has provided China with a golden opportunity to leap into the upper echelon of industrial nations while the global auto giants suffer from a sharp decrease in demand.

Intentions aside, most of the provisions of this policy had already been announced by the time this comprehensive policy was released. Industry consolidation, plans to stimulate purchases through tax breaks and subsidies, a new focus on independent Chinese brands and development of alternative energy vehicles all figure prominently in the new policy. Many previous posts on this blog have already covered these topics ad nauseum.

Added to these major policies are additional policies to develop the financial and physical infrastructure necessary to support a strong auto industry. This includes development of auto financing alternatives, insurance, credit bureaus, auto loan securitization, a second-hand auto market, and construction of roads and parking facilities.

So what's missing from this policy?

A role for the foreign automakers.

There is no mention of a future role for the foreign players and the joint ventures in which they currently participate -- not even a mention of the desire for technology transfer or foreign investment.

The policy contains an explicit goal that, within three years, domestic brands will account for 40 percent of China's market. (Domestic brand market share was 25 percent in 2008.) This, of course, implies that foreign brands still dominate China's market, but the clear goal is to whittle away at that domination in the near future. (See chart below.)

If foreign players are under some kind of delusion that they will be long-term partners in the future growth of China's market, they may want to re-think their strategies. The words of China's policy were crafted through careful deliberation. The lack of a reference to the role of foreign automakers was not an oversight.


This chart (from WSJ) shows the top ten sellers of vehicles in China in 2008. Only two of these sellers are domestic: Chery and Geely.


  1. Greg,

    The role of the foreign auto makers does not have to be written in he policy documents. The foreign OEMs will continue to be the source of technological innovations for the Chinese car companies until the capabilities in the critical areas of development have been localized. China has given a lot of careful thought to the critical capabilities that are required of an automotive enterprise and have relied on foreign OEMs - prodded by localization policies - to provide access to those technologies in their JVs or through their supply base. A couple of forces run counter to the plan to wean China from their dependence on foreign auto technology:

    1. The simple fact that Chinese consumers reward foreign brands with premium pricing and thereby higher margins. Chinese consumers who can afford it buy foreign brands and even imported brands. China can try to tip the playing field toward the domestic brands - but Chinese consumers are pretty savvy - they know the Chinese brands are technology followers have not delivered a clear value proposition beyond "low price".

    2. The lack of maturity of the industry places Chinese OEMs at least 1 -2 generations behind the competition in terms of learning how to engineer cars to market requirements. Sure China can buy assets to try to close the gap...but it takes time and experience to close the innovation gap and until then, there is a critical role for "foreign experts" to provide the "software" to run the "hardware".

    So independent of what is written, there is a clear role for the foreign automakers. Until affluent Chinese shop for Chinese premium brands, I doubt they can get rid of the wai guo ren from the China auto industry.

    Bill Russo

  2. Thanks for your excellent points, Bill. I am happy to have your insider's perspective here.

    I did not intend to imply that foreigners are immediately on their way out. Since the policy intends for domestic brands to account for 40% of the market in three years, that means that foreign brands will still occupy the other 60%.

    Also, if China's market grows at 10% per year according to their plans, then, even if the foreign brands lose 15% of market share over the next three years, they would still be selling about the same number of vehicles every year as they do now.

    What I think is interesting here is that, whereas the foreign contribution has been a part of auto policies in the past, the fact that it doesn't even get a mention in this most comprehensive of policies is quite significant.

    What I don't think, however, is that this means foreigners will have no role whatsoever going forward -- just that it will diminish over time. The JVs will cease to be the centerpieces of auto production as the domestic brands improve. And they will improve because that is basically what the policy is ordering all Chinese auto companies to do. (If anything, there is a lot of wasteful spending on incremental improvement at the moment.)

    However, I agree with you 100% that most of the breakthrough innovations in this space will, for the time being, continue to come out of the US. (See my response to Aimee's comments to my previous post.)


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