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This article was adapted from an earlier version of the paper that was written for presentation at IMVP Researchers' Meeting, International Motor Vehicle Program, Center for Technology, Policy and Industrial Development, Massachusetts Institute of Technology, at Cambridge, Massachusetts. The author wishes to thank Dr. I. C. O. for the criticisms he rendered to her during the writing of this article.
While China is changing from the command to market economy, both the central and provincial governments are still using the management of the center-periphery relations as the principal tool for managing this transition. China at times faces more restraints, being a weaker partner in its rapidly emerging global linkages. This has resulted in greater policy ambivalence and contradictions. As the experience in the automobile industry suggests, China relies on cross-border partnerships to obtain the foreign capital and technology needed for introducing new products and modernizing the production process. For this reason, China has sometimes to allow the local decision units to retain more policy autonomy. It has also to retreat from disallowing the foreign partners access to the Chinese partners' domestic market. The process of globalization in the automobile industry and accompanying global linkages have also begun to restructure the manufacturer-supplier relations in the Chinese auto industry.
At the end of the 20th century, the globalizing trend of the world economy is beginning to effect on the government management of the national economies. National governments are turning increasingly to the market for economic management and retreating from their insulation against the international market forces. In this period of transition from mercantilist, command and protection-oriented national economies to global market forces, all national economies have ambivalent and sometimes contradictory policies. Thus, the United States holds onto managed trade through quota, retaliation and strategic trade policies. At the same time, it seeks to enhance national competitiveness by creating the advanced factor endowments(1) and infrastructure (Barnet & Cavanagh, 1994), such as the project on information highways. The second largest economy Japan rejects managed trade but maintains voluntary export restraints. The People's Republic of China is also in a period of transition from the command economy. It is trying to create market mechanisms to attract foreign investment as well as establish linkages with the global economy.
Nowadays, neither market demand nor corporate operation confine themselves to the territorial borders of the nation-states. To survive in a global marketplace, companies must compete globally. Moreover, they rely on strategic alliances(1) with former rivals to succeed. Gone are the days when the Ford Motor Company could act as a lone ranger in pursuit of global growth (Barnet & Cavanagh, 1994). Firms need strategic alliances not only to pull skills and human resources, improve understanding of diverse national tastes and share risks and costs in R&D and production (Lei, 1989; Gugler, 1992), but also to cross policy barriers and take advantage of policy incentives (Barnet & Cavanagh, 1994)--both established and maintained by government regulations.
Whereas the national governments are turning to the market to manage the national economies, the market forces are shifting more and more power to the global corporations. When private investment replaces public funds in financing, it in turn affects the national economic boundaries. First, the sources of the factor endowments that determine corporate and national competitiveness have changed. Instead of physical resources, they now increasingly depend on the existence and strength of the strategic alliances. Second, the ownership of these factor endowments has also changed. It is claimed jointly by the national corporations and their foreign allies. Still, national governments continue an effort to maintain the boundaries, both to improve national competitiveness and to meet the demands of the domestic politics which make it imperative to keep up with certain level of employment and demands of the national security.
From 1949 to 1980, China managed its command economy by periodically shifting the locus of policy making between the center and the provincial governments on the one hand and between the former and the production units on the other (Schumann, 1968). When flexibility in policy implementation was needed for the policy of the center to suit the local conditions, the central planners in Beijing would decentralize decision making power to the provinces and/or the factories (Schumann, 1960). But when decentralization led to "cellularized" local production and trade contrary to the objective of developing inter-regional specialization of production, economy of scale and comparative advantages of resources (Donnithorne, 1964, 1972), they would take back the policy making autonomy (Reynolds, 1978), resulting in cyclical shifts in reforms (Winckler, 1973; Nathan, 1976).
China has continued with these shifts after the reforms began in the early 1980s. When the reforms produce results different from their original intention, the central government tries to correct it by adjusting the policy-making autonomy. Several times in the past decade it tried to freeze or curb the expansionary investment of the local governments and enterprises so as to stop the resources from being diverted from the centrally supported key projects. More latest examples of recentralization include Beijing's decisions to unify the circulated currencies and tighten up the control of the banking so as, among others, to more effectively manage the foreign exchange, stop rampant speculation on the real estate and restore payments to the peasants and teachers.
The Chinese central government still depends on achieving flexibility of policy making by shifting the center-periphery relations. However, in many cases these adjustments have also to take into account the country's emerging linkages with the global economy. They can not be totally autarkic, as long as China's national economy is increasingly being linked with the global economy. The central government must consider the consequences in balancing its policy objective with flexibility in implementation in the periphery nowadays. It has had to minimize the destablizing effect on the interests of the foreign investors when it amends the joint venture laws and prevent such amendment from driving them away. It has also had to introduce some changes in the domestic economic and legal systems to establish or maintain the global linkages. For instance, China may have to grant the burgeoning securities markets independence from the oversight of the People's Bank of China and give the foreign creditors more legal rights versus the Chinese factory directors to draw capital from the world.(1)
This means that the Chinese national economic boundaries have become porous with the global linkages. In automobile manufacturing, more than in any other industries, China has witnessed the porousness of the economic boundaries thanks to the extensive linkages it has built with the global economy. In the same industry, China has also had frequent opportunities to display its policy ambivalence and contradictions towards the global market forces. The Chinese have had to rely on the global linkages to develop their auto industry, despite their preference for having a national industry. They want to develop it into a "pillar industry",(1) one that represents the maturing of the industrial revolution in China, even though it contributes only modestly to its employment and national income.
Sino-foreign linkages, however, differ from the inter-corporate alliances in the west. The Chinese need foreign partnerships because they do not have the technology to develop new products. Neither do they have the capital to finance the design and manufacture of these products or the capacity to export them to the world market. They are therefore a weaker partner of the technologically and financially powerful foreign corporations. In comparison, inter-corporate strategic alliances in the advanced economies arise among firms of equal strength on the basis of complimentarity in skills, competencies and technology. They are pulled together by a competitive strategy for developing better products in a faster and/or a more efficient way (Nueno & Oosterveid, 1988; Lei, 1980; Baranson, 1990). This article argues that, as the weaker of the two partners, China has had to exercise more restraint in policy ambivalence and minimize policy contradictions instead of repeating the swings of the previous decades to maintain the global linkages.
Globalization has affected not only the "triad"(1)--the United States, Japan and Europe, as well as newly industrialized countries--but also economies like China that are outside it. That is to say, global competition is rendering it increasingly difficult for the societies in the worldwide network economy, certain developing countries included, to continue with the policy of insulation and defy the competitive principles of the market for upgrading the national economies. Here, the network economy refers to intra-industry production and trade that are carried out by competing "global value chains".(2) It has evolved from corporate alliances and their sourcing partnerships,(3) as a result of the corporate shift away from "self-help" or reliance on internal resources for competitiveness that is followed by a similar shift of the national governments towards achieving national competitiveness by building linkages with the world economy.
In the developed economies, globalization rides on strategic alliances. Firms forge alliances with former business rivals, because reliance on internal resources alone no longer suffices for competing simultaneously across many functions, multiple cultures and many regulatory boundaries so as to add as much value as possible in each functional activity, wherever it is located (Porter, 1986; Michalet, 1991). Thus, they have replaced bilateral "multi-domestic" investment of the 1960s and 1970s with multi-lateral(4) deals of the past two decades. Unlike in a "multi-domestic" operation, where a corporation keeps its R&D at the home country (Kindleberger, 1977) while duplicating other functions for targeted foreign national markets, a global firm executes each functional activity and competence at any given location for the global market, attending to diverse national preferences from the stage of product design onwards (Lynch, 1990).
But globalization also involves broader yet more subtle cross-border linkages than strategic alliances. This is reflected in the increasing porousness of the boundaries demarcating manufacturer-supplier relations that are traditionally defined by informal rules, customs and national regulations. As they restructure inter-firm organizational linkages domestically to support the strategic alliances,(5) corporations leave behind closed plants and laid off staff, thereby dividing up the foreign and domestic sectors of the national economy and stirring up bitter political debate. Some of them, such as those on the identity of a product or corporation, assume a nationalist theme. Others, like the debate on whether the boundaries between corporate competition and cooperation should be redrawn, touches on the basic philosophical belief of a society. Both point to imperfection of the market competition as grounds for policy action from the national political authorities.
Global competition has also led corporations to form partnerships with a few economies at lower stages of development that offer competitive functional performance and/or strategic market access. The objectives are not only to delay the decline in profit rates on their standardized products (Vernon, 1966, 1977), as in the previous decades, but also to recover the sunken costs on the technologies that must be phased out in globalization.
The change in the corporate competitive strategy reflects changing realities in the world economy. Today, it is such strategic inputs as the skills, know-how and even knowledge of a nation's labor force, its information infrastructure, picky domestic consumers as well as competitive suppliers at home instead of the comparative advantages in the physical resources that determine the pattern of international investment and commerce (Porter, 1990; Drucker, 1993). Further, corporate command of technology, know-how and access to worldwide capital and major consumer markets has come to influence at what levels nations produce and trade, which in turn settles the welfare levels of the nation-states (Michalet, 1991; Strange, 1991, 1992).
Since the locational advantage derivable from the physical resources has become less and less important for competitiveness, national governments need to find alternative ways to sovereign control of the economic boundaries to maintain and improve the national living standards (Strange, 1991, 1992). This pressure, along with the opportunities for moving up the manufacturing ladder which restructuring in the advanced economies has opened up for the economies at lower stages of development, has prompted the national governments outside the Triad to drop their hostility towards the international capital and embrace foreign investment and technology. They begin to create business-friendly environment, including agreeing to restructuring the manufacturer-supplier linkages, to meet the global corporations' requirements for performance. In exchange, they seek the latter's cooperation in raising the local content of the production.
In automobile manufacturing, worldwide competition has also driven the producers in the Triad towards strategic alliances (Husbands & Schuller, 1993). Wherever they take shape, these alliances bring along the pressure on realigning the manufacturer-supplier relationship. While they phase out standardized products and processes in the Triad, global producers are also extending their life cycles to those economies at lower tiers of technological development that offer strategic potentials for automobile consumption and production.
China began taking over these standard products and processes to upgrade the skills and technology in auto manufacturing from the late 1970s onwards. Since the initial projects on technology imports and joint assembly ventures were limited in scale and incidental in nature for China's auto industry, the local governments that had traditional control over the local supplies did not want to discontinue the administrative style of managing the automotive business. Neither did they give much consideration to the effect of such policy on the foreign partners of the joint ventures. Short of upgrading the subordinate enterprises that were engaged in parts and components production, including both numerous assemblers themselves and the suppliers which had fixed matching relations with them, administrative control proved effective for keeping them in business. This protectionist approach to management, however, made it difficult for the joint venture assemblers to build linkages with China's domestic suppliers. It prolonged their dependence on foreign supplied knock-down kits and helped to put a constraint on scale expansion in these assemblers.
But its transition to large-scale import-substitution car production since the late 1980s has made it impossible for China to ignore the demands of the foreign investors. To raise the domestic content of the vehicle assembly, a second-stage development of the import substitution production, it has had to deal with the problem of product quality, a key purchasing condition of the joint venture auto builders. The matching suppliers are forced to modernize as speedily as possible to prevent more businesses from losing to the foreign suppliers and new entrants like the defense enterprises. Similarly, the local governments are racing to improve the local business climate so as to lure the badly needed capital and domestic sourcing business into the areas under their own geographical control.
Until the mid-1980s, auto manufacturing in China remained dependent on a "comprehensive" or fully vertically integrated system of production. This applied to both vehicle assembly and parts and components production, be they under the supervision of the central industrial ministries or local governments. The "big and comprehensive" plants started by imitating the Ford system of the 1930s, copied from the Soviet Union during the 1950s.6 But the fixed relations between the manufacturers and their matching suppliers which the government had installed to support entry, balance demand and production as well as guarantee 80% of the inputs supplies needed by the enterprises in China's Òthree 80sÓ supplies system7 were responsible for maintaining and diffusing it. By 1979, numerous "small and comprehensive" and "medium and comprehensive" auto makers which the local authorities had established to support the development of the local industries had joined two centrally managed volume producers,(8) contributing to a total of about 130 assemblers that built 185,700 vehicles for the year, mostly trucks and truck chassis (Table 3). Combined, they had matching relations with more than 2,000 direct suppliers whose number just about doubled at one point in the mid-1980s.(9)
The Chinese enterprises had tried to come together in groups after assuming "self-management" and a renewed profit retention scheme in the early 1980s, with the objective of expanding market, adding new products, concentrating the industry, rationalizing production as well as securing the certainty and improving the quality of the inputs supplies. Some auto assemblers, components suppliers and a number of defense factories interested in entering automotive business formed "combined management companies" (CMCs)(10)--a sort of divisionalized conglomerates. A "core" enterprise, usually the largest and technologically strongest assembler in a group, coordinated production as well as managed procurement and marketing across the municipal and provincial boundaries, where the group members were located, thereby achieving a degree of specialization and division of labor within a CMC.(11)
But the conglomerate strategy ran into difficulties, because the local authorities that were interested in promoting local industrial development would continue to support the operation of the incompetent enterprises under their geographical jurisdiction,(12) often allowing them to continue to dump shoddy inputs on the assemblers, disregarding its concerns for quality. In the event, only those technologically more sophisticated builders that had powerful political connections in the center, such as the Second Auto Works (SAW), were able to resist this administrative pressure to a degree.(13)
In other words, decentralization was generating fragmentation again as in previous decades. But instead of taking back the control as previously, the central authorities extended it. This was because China had had to turn to foreign technology to add new products and modernize facilities, after having devoted the past decades to simple reproduction for a captive market while neglecting product quality, design and R&D.(14) To solicit foreign linkages in developing the auto industry, maintaining an impression of autonomy in the periphery became necessary. This shift in the development strategy of China's auto industry found support in the general policy of the central authorities. As early as 1979, the central government had in the legislation for special economic zones (SEZs) removed the principle of "self-reliance" from national economic development. Now, it was switching from relying on SEZs towards using China's large and medium-sized state enterprises, its main industrial base, to transfer the type of technology the country needed for upgrading its technological capabilities .
To attract investment and other types of technical linkages from the global corporations into these enterprises, China had to improve the terms of foreign investment. As it began to amend its legislation, China had also to incorporate the lessons of Sino-foreign joint ventures learned in SEZs. In the 1983 provision to the joint venture laws, for example, it lengthened the period of partnerships to give foreign investors more time to recover their initial investment. It made conditional concessions on inputs sourcing requirements to enable the foreign partners to supervise product quality in line with the image of their brand names. Similarly, the 1983 provision opened up China's market conditionally to allow them to broaden product sales. In retrospect, it also laid out a foundation for resolving the problem of the shortages in foreign exchange that might plague a joint venture if it depended on the imported knock-down parts and materials for production.(15)
To assure foreign investors of the autonomy of the Chinese enterprises, the People's Congress further enacted the General Principles of the Civil Law in 1986 to authorize the managers of a limited number of the enterprises with the power to sign contracts directly with foreign technology suppliers, subject to prior approval of the Ministry of Foreign Economic Relations and Trade.(16) This coupled with the promulgation of the ÒProvision of the State Council for the Encouragement of Foreign InvestmentÓ in the same year that reaffirmed joint venturesÕ autonomy in management, including that for marketing and procurement.(17) B. Technology Transfer in Auto Industry, 1979-1985
Tables 1a, 1b, 2a and 2b summarize the contacts which China's auto industry has built with the west since the late 1970s. From these tables, one can see that those starting the technology transfer projects ranged from various branches of the central bureaucracy, including China Auto Industry General Co. (CAIGC), the central agency supervising the auto industry, to the local governments and their subordinate enterprises, to the defense bureaucracy and its subordinate factories and, finally, to SAW and its competitor, the First Auto Works (FAW). That so many parties were establishing the cross-border linkages simultaneously came as a direct result of the autonomy in the periphery, following the decentralization in foreign trade and that in the management of the enterprises.
With so many parties launching projects simultaneously, duplication became inevitable.(18) The danger of duplication is not only waste but, more seriously, its constraints on the scale and depth of the technology transferred. When resources are scattered, both the scale of the projects and subsequent volume of production may be limited. This would hinder the recipients' ability to bring imported production lines to full capacity to climb up scale-related learning curves. The problem for China was that many technology transfer projects began precisely with a low threshold. This reflected the fact that the Chinese provinces and automotive enterprises were continuing with the past tendency of reform. They were sponsoring the local industrial projects at the expense of the coordinated development of a rational system for production.
Consequently, redundancy and fragmentation in production persisted, particularly for the auto assembly. A glance at the regional configuration of the vehicle outputs for mid-1980s is illustrative. Beijing, Tianjin, Liaoning, Shanghai, Jiangsu, Shandong and Sichuan, where foreign assembly technology had made inroads, achieved an annual output of 50,064, 20,787, 32,730, 12,165, 24,474, 15,517 and 16,901 respectively in 1985, while fourteen other provinces made one to several thousands of vehicles each. In 1986, three assemblers in Beijing, including Beijing Jeep,(19) Nanjing Auto Works, as well as Tianjin Auto Works, again, produced 58,392, 20,403 and 21,542 respectively. Shanghai-Volkswagen made about 5,000 sedans whereas Guangzhou Peugeot only 790 cars and 592 pickup trucks. In fact, most of the 130 auto assemblers in China built only hundreds of vehicles each this year.(20)
The situation revealed a difficult question facing those assemblers that had imported foreign technology or entered into joint ventures with foreign auto makers. How could they deepen technological learning without support from the vast majority of the automotive enterprises who had not matched up in technological upgrading? How could the demands for quality and certainty of the incoming inputs compatible with the requirements of the transferred technology be met domestically when shortages and shoddy quality continue to characterize the business environment in the intermediate inputs market? When they had prolonged the imports of the knock-down kits, these assemblers had seen their external balances worsened and expansion plans hurt. Beijing Jeep, for one, had to halt production while fighting with the Beijing government for additional foreign exchange allocation. The incident proved a big disappointment for the American stake-holder, even though the joint venture could boost profits by continuing to build and sell domestically the outdated BJ212, the product of the Chinese partner for the past decades, instead of phasing it out as planned.(21) Significantly, the central planners came to Beijing Jeep's rescue as a show case of their commitment to developing China's auto industry with the global linkages instead of following a strategy of withdrawal after having just put them in place.(22) This was reinforced by the announcement of the State Council's provision on enlarging the involvement of the foreign investment in China's industrial development shortly after the Beijing Jeep crisis was over.(23)
The question is what happened to coordination in technology transfer. From the above four tables one gets an impression that a degree of partial coordination was evolving. Shanghai stood out in this regard. The municipal government seemed to be sponsoring or supporting the auto parts projects(24) in the accompaniment of the progress in the city's car venture with Volkswagen.(25) But evidence for other government apparatus--provincial governments, defense industrial establishment and automotive-related branches of central bureaucracy--gave less indication of such a "market pull" approach to foreign technology transfer.
It is fair to say that CAIGC had worked hard on sorting out the chaos in technological acquisition to make some sense of its role in the development of China's auto industry. In this effort, it had taken over part of the MACHIMPEX as a specialized arm in imports and exports, evidently to influence the direction and scale of technology transfer and to coordinate various projects so that they supported or at least would not conflict with CAIGC's pet targets. The strategy revealed its deep suspicion about the ability of the locally initiated projects to integrate with the suppliers that had not transferred foreign technology so as to move beyond production for local consumption and climb up the learning curve. Surely, its suspicion was grounded in an understanding of the paucity of the resources, especially funding capacity and engineering manpower, among the local assemblers. It also arose from an understanding of the incentives which the reforms were giving to the local governments to seek local industrial development, maintain jobs and bring at least some of the subordinate enterprises up-to-date in technology by keeping the inefficient local plants from closing down.
Thus, CAIGC had run into much difficulty in performing its function in coordination. This was not only because its policy preference differed from the rational interests of most of the local governments and their subordinate assemblers, which had resulted in resistance from the latter, but also because decentralization had weakened its financial power, which had rendered it impossible to enforce its administrative authority effectively so as to overcome the trend of fragmentation in the development of China's auto industry. In fact, CAIGC had to leave those local governments capable of devising their own funding to pull their own acts in their own ways.(26) It also refrained from confrontation with defiant local authorities, provided they would not threaten to divert the resources it otherwise could access itself. When Jinggangshan Auto Works, Jiangxi province, decided to import production lines for engine and driver's cab from Isuzu to upgrade its production of small trucks, for example, CAIGC argued in its favor before the superior authorities. It endorsed the project, not only because small trucks remained in short supply nationwide, but also because Jiangxi planned to fund the deal itself without asking Beijing for foreign exchange. It would thus not hurt CAIGC's Styre project.(27)
Finally, the constraint on CAIGC's role as the coordinator in the development of China's auto industry came from a lack of cooperation from other branches of the central bureaucracies. The reforms, while decentralizing power to the periphery, had also divided up the policy control within the central authorities. CAIGC had to give a green light to the technology transfer projects of the defense enterprises, for example, because they fell under the jurisdiction of the military industrial apparatus, an independent system with independent resources. But it was also aware of the technological contributions these enterprises could make to China's auto industry upon conversion. More problematic was the slow response which some of the materials industries(28) were making to the demand of the auto assemblers and parts makers that had modernized their products and facilities with foreign technology. The boom in auto imports in the mid-1980s (Table 3) and subsequent rush in auto production must have further compounded the problems in supplies. As a result, 40% of the steel products, 23% of the pig iron and from 30% to 60% of the non-ferrous metals needed by automotive industry went unmet.(29)
Such shortages, as well as the tendency to fragmentation and chaos in the industry, reflected also the disruptive effect of the abusive behavior of certain local authorities of their special trading status and foreign exchange control resulting from decentralization in the reforms.(30) Likewise, they revealed the absence of a concerted national transportation strategy that targeted the transformation of China's auto industry, resulting in the disparity in technological upgrading within the auto industry as well as between it and related industries.(31) The role of the auto manufacturing in the overall development of China's economy and that of the technology and foreign partnerships in this process were also unclear. For example, the Chinese seemed to be using auto manufacturing to join the world economy at a higher value-adding level than light processing plants in SEZs. This outward orientation explained why Shanghai reportedly chose Volkswagen over its Japanese competitors in forming the joint venture.(32) It also explained why future exports were part of the deal for Shanghai-Volkswagen and Beijing Jeep, conditioned, however, on the Chinese delivery of quality and performance specs. But how could China move from assembly of the imported knock-down units to exports of some automotive parts and components and even complete cars? Beijing Jeep's prolonged dependence on the imported kits and its subsequent foreign exchange crisis that was followed by its dramatic showdown with the Beijing government reflected China's confusion of how exports that were so easily realized in SEZs may be repeated in a technologically sophisticated infant industry.
The confusion centered on how to find the appropriate device to switch import substitution to exports. As a first step, it was necessary for those assemblers with various types of foreign linkages to add more value to the vehicles than merely assembling the imported supplies. To achieve this goal, they must link up with the domestic parts and components makers. This in turn required that the Chinese suppliers begin to pay attention to product quality to meet the procurement requirements of the assemblers instead of continuing to hide behind the protective walls of the local authorities. Meanwhile, the local governments had to turn to support the subordinate enterprises in competition for product quality instead of shielding them from the challenge of the market forces.
This means that China needed to change the way in which it used foreign technology and partnerships. Instead of employing them solely for overcoming the technological bottlenecks or upgrading of skills and facilities in individual enterprises, China had to connect it with resolving the fundamental constraints on the automotive enterprises' performance, namely, the inter-firm organizational relations that continued to be controlled by the administrative directives of the local governments. The absence of any serious official measures addressing this problem seemed to suggest, first, that China had underestimated the structural impact of the foreign linkages and, second, that the local authorities had used their decision making authority to resist any change and promote the local developmental agenda instead.
China had thus entered a cross-roads by the mid-1980s. It could put a halt to the fragmented development in the auto industry by returning to central control. But this would sever its ties with the world economy which it had established for developing its auto industry in the first place. Alternatively, it could go further with globalization, turning to the market forces to manage the development of its auto manufacturing. Adopting the principle of market competition, however, necessitated China's concession on restructuring the manufacturer-supplier relations, particularly the concession from the local authorities that were gaining increasing control over the transactions in the intermediate inputs market.
From the 7th FYP period (1986-1990) onwards, China has increased reliance on joint ventures in the development of auto manufacturing, with auto assembly spearheading the trend (Tables 1a and 1b). Taking the lead are China's "Three Bigs"--SAW-Citroen, FAW-Volkwagen and Shanghai-Volkswagen--so named not only because they are much larger in scale than other joint ventures in assembly but also because SAW and FAW have traditionally been the two largest auto builders in China whereas Shanghai-Volkswagen aims to match them in future capacity. These ventures have overshadowed the development in the "Three Smalls", Beijing Jeep, Tianjin-Daihatsu and Guangzhou-Peugeot, which have earned the center's recognition of their de facto status, and projects like Changan-Suzuki, which the defense establishment has pushed through of its own will. They have also called into question of whether the future of most of some one hundred auto assemblers in China lie in staying with mainstream vehicle assembly or developing specialization by converting to fitting of specialty vehicles or components manufacture.
The conversion of SAW and FAW to joint ventures, despite their tradition of reverse engineering both products and production processes, surely proved China's commitment to using the global linkages to develop its auto industry. As with everywhere in the world, joint ventures allow them to take advantage of the relatively advanced technology in the world. Since SAW and FAW are able to persuade the auto makers and their bankers in the Triad to leverage some of the products, equipment and facilities whose life cycles have already ended in the advanced economies for a stake in the former's projects, they can also fetch a discount in the fixed capital expenditure. More importantly, SAW and FAW can learn from the foreign partners how to keep up the image of the brand names. This may prove useful not only for deepening the technological learning along with restructuring the linkages with the domestic suppliers, but also for competing for market shares in the national market in the future.
Presently, however, the first to benefit from the large scale joint ventures in car assembly are the global linkages in the supplies sector, both joint ventures and other types of tie-ups that may not involve foreign equity investment (Tables 2a and 2b). China's linkages with the foreign suppliers have shot up dramatically in number to answer the demands of the joint venture assemblers' for quality parts and components, with whose standards its domestic suppliers have yet to learn to deliver. In joint venture production of the auto parts and components, additionally, capital no longer comes from only the Triad. It begins to flow in from the newly industrialized countries (NICs), particularly Hong Kong, followed by Taiwan, Thailand and South Korea. Most of these projects are local in nature, evidenced by the scale of their investment. But some begin to cross the local administrative boundaries to direct at the regional and even national market, such as a three-way deal(33) on tire production set up in 1986 and a tire cord business in Hainan in 1991.
Unlike joint ventures, those technology sharing deals that do not involve equity investment continue to be dominated by the European, Japanese and North American firms from 1986 onwards . One reason may be that they involve more sophisticated technology. Their scale is also going up compared to the first half of the 1980s, clearly to support the expansion in the joint ventures in auto assembly. Interestingly, the central bureaucracies have maintained their presence in some of these projects, perhaps to approve a project when the total sum of a deal has exceeded an official cap or to strengthen the bargaining position of the subordinate enterprises versus the technologically and financially powerful foreign firms. This indicates an effort of the center to maintain an influence on the direction and scale of the Sino-foreign partnerships without causing the enterprises to lose most of their decision-making autonomy. Indeed, the center's attempt to adjust its policy in the auto industry seems to relate more to the changes in the general conditions such as the resource availability in the economy than to a deliberate retreat from the foreign linkages. For instance, those Sino-foreign tie-ups that involve no equity investment seemed to have slowed own from 1989 to 1992 (Table 2b), following the budgetary contraction and probably corollary cut in foreign exchange spending. But the same "recession" did not significantly affect the number of the equity joint ventures being established in the same period (Table 2a).
Further, the growing number of the cross-border partnerships seems to indicate a Chinese effort to expand the global linkages with the auto suppliers in the world. This suspicion finds support in the geographical spread of these relationships for automotive parts and components production. By virtue of the diversity of the jurisdictional affiliation of the Chinese parties involved, these linkages also confirm the continuity of decentralization in China. Indeed, the partners of these linkages include not only some local parts makers, certain defence enterprises, major assemblers like SAW and FAW and such key national suppliers as Beijing General Internal Combustion Engine Plant, but also an upstream supplier like Ma'Anshan Iron and Steel Corp. in Anhui province which has entered the potentially lucrative automotive parts business with the foreign capital.
China's growing linkages with the foreign suppliers certainly are manifested in the increasing scale of the Sino-foreign partnerships, which in turn is heralding a movement towards supply beyond the local destination. For instance, the tire plant which the factory at Chaoyang, Liaoning, ordered from Britain's Dunlop International in 1986 (Table 2b) must have intended to sell its products to users in other places besides Liaoning, because its scale of production was 150,000 units a year, well beyond the provincial needs. Similarly, the capacity, product variety and quality of the meters to be made at Siping, Jilin, clearly proved superior enough to supply cross-regionally. Significantly, its clientele outside Jilin included assemblers in not only North and Northeast China, but also the middle and southwestern parts of the country. With the capacity of nearly 600,000 units annually by 1990, the Shenyang Battery Plant must have also aimed at cross-regional supply. One expects it to reach at least FAW with whom the former may have had either matching relations or "combined management" linkages thanks to geographical proximity and/or membership in the Jiefang Group that is headed by FAW.
Finally, Beijing General Internal Combustion Engine Plant's modernization programs aims obviously at meeting the demand in the entire nation. This compares with the probable national intention of the joint venture production of tire cords in Hainan, involving an investment of $48 million (Table 2a). These, of course, are matched by the Three Bigs' efforts to technologically upgrade the parts and components production under their own supervision. Notably, Shanghai seems to be pushing joint ventures more vigorously than SAW and FAW. In 1993, it sealed a letter of intent with Ford on investing $90 million to produce plastic and trim parts in Pudong Development Zone, which may evolve to include fabrication of glass and climate control components locally through a number of related joint ventures.
By entering large-scale car assembly with joint ventures, therefore, China has also become integrated with two tiers of foreign auto suppliers. The first tier consists of those from the Triad who may have started the linkages with China through supplying the knock-down kits. One expects China's ties with the suppliers in the Triad to expand continuously, as it deepens the development of auto production. The second involves a growing number of the companies from the NICs with whom the Chinese suppliers begin to establish joint investment partnerships. Because these linkages are used to upgrade their skills and technology as well as to develop an ability to attend to the assemblers' sensitivity to quality, those suppliers with foreign connections stand to receive favorable consideration from the joint venture assemblers in the latter's drive to rebuild the supplier linkages in China on the basis of the competitiveness in product quality.
B. Strategy of Domestic Sourcing and Restructuring of the Assembler-Supplier Linkages
In both assembly and parts and components supplies, foreign linkages have proliferated after 1986 in response to growing competitive pressure faced by the Chinese auto industry. For instance, SAW and FAW have entered into joint ventures in car assembly and various other deals for parts and components production, because, as the country's two largest producers, they must shoulder the main burden for developing auto manufacturing into a "pillar" industry. Formal initiation of import substitution assembly, in turn, translates into grave pressure for raising the domestic content of the assembled cars, which the joint venture assemblers need so as to bring their production to the intended scale and which the local suppliers need so as to stay in business as well as fulfill their function in the development of the local industries.
The problem is that the joint venture assemblers want to select the suppliers according to the market criteria, particularly product quality, a perennial problem in China, instead of the government assignment. Indeed, the Three Bigs have pursued domestic sourcing aggressively, perhaps not only to raise the scale of the production but also to compete for national market shares. Shanghai-VW, for example, seems to have involved in numerous joint ventures and various types of technology sharing arrangements with the local parts makers. The coordinated fashion with which these projects have come together may have much to do with the experience of the enterprises in Shanghai and the surrounding areas in working with one another. But it must have also benefited from the market-based industrial management which the Shanghai government has adopted since the start of the post-Mao reforms.
In comparison, SAW-Citroen and FAW-VW have relied more on the technical tie-ups without foreign equity investment to raise the domestic content of the car assembly, perhaps because they are more vertically integrated to start with. But the two are also trying hard to coordinate the transition to domestic sourcing with their strategies of market positioning in the whole country. Both, for example, have sought to diversify business with three-way investment. Both have encouraged the member enterprises in their combined management companies to specialize in selected operations through joint ventures. FAW, one step behind SAW in strategic grouping, has also sought to strengthen its position by merging and acquiring plants and research facilities in Jilin, its home province in northeast China, as well as in such distant provinces as northwest Qinghai.(34)
Joining the competition for the domestic sourcing business are also the defense enterprises. This is not only because they have the demands from the assembly plants within the military industrial system to meet, but also because the movement to replace imports with the domestic supplies provided them with an opportunity to convert to lucrative civilian production by making full use of their traditional "competitive advantage". Such advantage includes their relatively advanced facilities and more experienced engineering manpower capable of internalizing the imported parts and components technology and of solving certain design problems, as well as their experience in delivering product quality. Perhaps this explains why NORINCO, the umbrella corporation for the defense industry, is one of the parties besides SAW and FAW involved in acquiring "soft" auto technology from overseas (Table 4). But the defense contractors such as former aircraft manufacturers have also rendered FAW and SAW assistance in developing devices for vehicle riding safety. Similarly, they have been sought out by Shanghai-Volkswagen and Beijing Jeep when the latter began to purchase supplies from China.(35)
With their ability to quickly reverse engineer products of superior quality and swiftly enter a new business, the defense enterprises have helped to keep the more competitive of the suppliers in the civilian sector on their toes instead of sleeping on the matching relations. The following story is illustrative. In the late 1980s, Chinese drivers began to converge on preference for the trucks fitted with the engines made by Beijing General Internal Combustion Engine Plant (BICE). In response, Nanjing-Iveco shifted its procurement from a local supplier to BICE. This forced a competitor in Shenyang to adopt the same purchasing strategy. When demand surged, however, BICE failed to expand supply accordingly, partly because it had to guarantee the supply to its main users in Beijing, as Beijing Auto Industry Association--the management arm of the Beijing Government--had stipulated it. But an engine plant affiliated with the military industry in Changsha, Hunan province, immediately filled the gap. Since the reverse engineered engines made by the Changsha plant proved better in quality, BICE was left to defend its market share by maintaining the cost advantage in production.(36) One suspects that the competitive challenge of the Changsha plant may have some influence on BICE's decision to import facilities from GM in 1990 (Table 2b). But the counter-offensive of BICE also revealed a weakness of the Changsha plant, namely, its small volume of production and high unit costs. This points to scale expansion as the direction towards which the defense enterprises should probably go, particularly if the Chinese auto assemblers will have to become price elastic, as will China's institutional buyers of the automobiles, when the country joins the GATT.
The above discussion indicates emergence of two approaches to domestic sourcing in China, namely, competition versus development. The joint venture assemblers emphasize competition, because they need to ensure the quality of the incoming inputs sufficiently to maintain the image of the brand-name products. This is necessary for future competition for the market shares in China . Consequently, they prefer national bidding to purchasing from the parts makers located in the same cities or provinces so as to source supplies on the basis of the suppliers' "competitive advantage" instead of according to the local governments' commands. In contrast, the local authorities that have developmental needs to consider and that have gained increasing control of the industrial outputs produced under the state plans(37) would rather raise the domestic content of the assembled cars in their own administrative areas. They would like the joint venture assemblers to work through the problems of quality with the local suppliers. But the joint venture assemblers that have learning curves to climb and expansion plans to realize refuse to wait for the local suppliers to catch up in quality. Beijing Jeep, for one, decided to purchase tires from a factory in Qingdao after a thorough national search instead of from a supplier in Beijing as the municipal government would have liked it.(38) On its part, the tire factory in Qingdao was able to overcome the barrier of the matching relations that its counterpart in Beijing had enjoyed with Beijing Auto Works, the Chinese partner of Beijing Jeep, because it had aggressively implemented modernization. In 1989, the Qingdao plant introduced a $30 million project with Pirelli's equipment and technology (Table 2b).
By holding onto the discriminatory terms of purchasing, including refusing to take substandard inputs from the local matching suppliers as ordered by the local authorities, the joint venture assemblers have come to exert an increasing influence on the transactions in the intermediate supplies market. Together with the competitive drive of the parts and components makers that have implemented technology transfer projects through foreign linkages, it is forcing the rest of the matching suppliers to reconsider how to measure up in performance rather than continuing to rely on the fixed relations with the assemblers and the superior agencies' protection to secure business orders and guarantee sales.(39) They begin to join the race in factory and product modernization. Most parts makers, however, continue to feel the pinch in financing.(40) Some of them are teaming up with the assemblers to solve this problem innovatively.(41) Others are finding relief in financing from Hong Kong, South Korea, Taiwan, Thailand and Singapore.
In this regard, they find help in the protective barriers remaining in the country. Automotive business, both car assembly and parts processing, has become very profitable,(42) thanks to a combined tax and tariffs of up to 250% of the wholesale price of an imported vehicle(43) and a tariff of 120% on the imported knock-down inputs.(44) The business is profitable, also because the suppliers get to fatten up with high charges if they deliver parts of sufficient quality amid acute shortages in quality parts.(45) The profit-making opportunity, along with new rules permitting three-way joint ventures to be used for reducing the risks of investment, has subsequently lured the capital from the East Asian NICs.
C. Market Competition Versus Government Management of Domestic Sourcing
As they introduce the market criteria for procurement in the processes of replacing the knock-down imports with the domestically sourced parts and components, the joint venture car builders have challenged the government's ability to determine which suppliers will get businesses--the foreign suppliers, the domestic parts and components makers who have used foreign linkages to upgrade their skills and technology and, thus, have learned to deliver products of acceptable quality or those who have not gone through this transformation and, thus, remain dependent on the government protection to stay open. What seems an obvious choice from the perspective of profitability nonetheless poses serious questions from that of the government management of the national economy, particularly for a national leading industry whose development depends on the partnerships with the international market forces.
First of all, what should the government do about the inefficient state enterprises in auto manufacturing? Should it allow market competition to sweep them away or should it have them somehow linked up with import substitution assembly so as to deepen the technological learning and development of China's auto industry? If it allows them to close down, who will take care of the consequences of the plant closure, especially since most of the state enterprises are inefficient and may all have to be closed down if the market rule of game gets its way? If it wants the joint venture assemblers to pull the development in the domestic supplies sector, what measures should the government take to get them to link up with the Chinese suppliers?
Since it continues to rely on the joint ventures for developing auto manufacturing into a leading industry, China finds it necessary to adopt the rules of the international market in its effort to raise the domestic content of the auto assembly. Both the central and local Chinese governments have also had to expand the joint ventures' access to the Chinese market and remove the administrative barriers that hinder their ability to manage their business competitively. In an unprecedented decision in the latter half of the 1980s, the State Planning Commission (SPC) relieved SAW and FAW, the Chinese partners of the two largest joint venture assemblers, from the supervision of CNAIC, the successor of CAIGC or the top agency supervising the development of China's auto industry. Instead, SPC placed them under its direct care.(46) The decision has surely given them greater autonomy in setting the tone of technology transfer as well as the conditions of purchasing. It has also been intended to more effectively channel the quality inputs supplies to the two joint venture auto builders.
SPC's decision has additionally served to direct CNAIC towards supporting the Three Bigs' efforts in moving up the learning curve while raising the domestic content of the auto assembly. Indeed, CNAIC identifies its new policy focus as promoting a few "auto assembly centers"(47) around "key" enterprises which are specialized in one or a few products each, an idea which it has been selling for years (Womack, 1987). By the early 1990s, CNAIC has finally won SPC's endorsement for keeping the number of the joint venture producers at eight, although it has been unable to limit it to three. Future development effort of the auto industry, according to CNAIC, will focus on expanding these eight ventures instead of starting any new ones among the rest of one hundred and twenty auto assembly plants. This has received support from the regulation that requires any large scale of Sino-foreign investment to petition approval from SPC, which is intended explicitly to discourage "off-track production".(48)
CNAIC has pursued its new policy focus diligently. In financing, CNAIC has taken on the role of the industry's, particularly the Three Bigs', spokesmen. It, for instance, argues before SPC for giving the auto enterprises priority in funding.(49) If the policy of fostering a few "auto assembly centers" around "key" enterprises is any guide, one understands it to mean giving the Three Bigs, among others, priority in investment financing.
In supplies, CNAIC has sought to guarantee delivery of the scarce quality inputs to the Three Bigs and other assembly centers during the 8th FYP period (1991-1995).(50) It must have come as a relief when the Ministry of Chemical Industry pledged to dramatically increase production of the radial tires to meet the needs of the joint venture car builders.(51) Similarly, it is good news that China's old mills under the supervision of the Ministry of the Metallurgical Industry are finally launching modernization programs to improve the quality of the steel products supplied to the auto makers. On its part, CNAIC offers consulting services to the related industries on what foreign technology to transfer and which direction to go in research to link more effectively with the auto production.(52)
To encourage the joint venture assemblers to rebuild the linkages with the Chinese auto suppliers, CNAIC has further announced its plan to establish fifty "auto-parts manufacturing groups" by 1995.(53) This is in addition to the 60% domestic content rule which China has already adopted to support the domestic sourcing programs of the individual joint ventures.(54) It hopes that the "cooperation, regrouping and merging" to be launched among the Chinese parts makers would reduce their number, consolidate their scale and rationalize their development in a manner compatible with the competitive advantages of each, with each able to meet the tough demands of the joint venture assemblers. If all goes according to the wish of CNAIC's chairman Cai Shiqing, such linked development should help to narrow China's gap with the world-class auto makers to ten years of difference when its total annual output hits three million at the turn of the century, with car production taking up two millions or 65% (Table 3).(55)
CNAIC and the highest economic decision-making apparatus, the State Planning Commission and State Economic Commission, are also beginning to combine policy tools(56) instead of using them in a disparate fashion, sometimes in conflict with one another, to stabilize production in the joint ventures and ensure the progress in replacing the imported knock-down kits with domestically sourced supplies. In 1988 and 1989, for example, SPC twice allocated special funds to buy up the stocks of the Three Bigs and Three Smalls built up as a result of the procurement freeze during the budgetary "recessions".(57) This compared with a "hands-off" policy which the central authorities had adopted through the previous budgetary recession in 1980 and 1981. CNAIC also took to stimulate demand by forcing the retirement of the "gas guzzlers" on the road.(58)
While the central authorities are making it easier for the foreign investors to access the Chinese market, the local authorities are expanding the Sino-foreign linkages in the areas under their own geographical control. They are beginning to support the modernization efforts in the subordinate suppliers to help them to upgrade the business relations with the joint venture assemblers on the basis of competitive performance. For instance, the Beijing government reportedly has allocated much of its own funds to help some 100 parts makers to develop the capability to source the inputs for Beijing Jeep's Cherokees.(59) Admittedly, most local governments still have to find ways to overcome the shortages of capital financing. Hubei government, for example, has tried a strategy of concentration. In one instance, it focused investment on setting up a competitive base for manufacturing automotive clutch at Huangshi.(60) Other local authorities seek to upgrade the products and production processes of the local parts makers through alliances with the Three Bigs. Qinghai government, for one, let FAW merge an axle factory and a vehicle refitting plant, in addition to an auto research institute, in support of FAW's development of 8-ton trucks in competition with licensed production at SAW. In exchange, Qinghai received a multi-year profit-sharing contract.(61)
A number of the local authorities are even bolder in policy innovation. The government of Wuhan, for example, introduced its own targeting after SAW selected the provincial capital as its operational center in order to break out of its isolation in Shiyan. Wuhan established a bonded warehouse to facilitate trans-shipment of the automotive products. It is also planning to link the manufacturing, trade and storage facilities with "a state level of auto market"(62) that is large enough to allow business transactions for the entire nation. One suspects that Wuhan government is emulating its Shanghai counterpart in providing an infrastructure supporting the development programs of its member of the Three Bigs, especially after Shanghai established Pudong Development Zone to attract foreign investment for transforming the city's industries, including the auto supplies capabilities. Certainly, Wuhan hopes to bring in more capital from the NICs by creating a friendly investment climate with a series of liberal policies, including privatizing some of the state enterprises for majority foreign ownership.(63) Wuhan and Shanghai are followed by Guangdong province when the latter announced its plan to establish a free trade zone to handle trans-shipment of the complete vehicles and parts and components for Guangzhou Peugeot and other automotive joint ventures in spring 1993.(64)
This means that the local governments are breaking their own jurisdictional barriers after raising them in the first half of the 1980s. But what has caused this change? One possibility is that the joint venture assemblers have demonstrated their bargaining power to the superior administrative authorities. As the latter has found out, the joint venture assemblers do not have to make concessions on matching supplies like the state owned assemblers in China. They can always overcome the shortages of the quality inputs with imports. In fact, they would rather halt production to protect the product image of the foreign partners than keeping the operation going with inferior parts, as Beijing Jeep's experience suggests. If the local governments insisted on forcing the joint venture assemblers to localize sourcing with the matching suppliers only, they would have driven the foreign partners away. On the other hand, the new approach to industrial management promises to broaden the sources of investment capital while giving the local enterprises an opportunity to transform themselves and climb up the manufacturing ladder in a restructured relationship with the joint venture auto makers.
While both the central and local authorities are converging with Shanghai on the method of managing the development of the auto industry, the Shanghai government is intensifying its assistance to Shanghai-Volkswagen to accelerate the pace at which it raises the domestic content of the Santanas. To help it to expand the assembly, the municipal government has sought agreement with the customs authorities on extending tariff exemptions to the knock-down kits.(65) The municipal People's Congress has additionally enacted rulings to guarantee the Chinese partner of Shanghai-Volkswagen full amount of the inputs instead of the usual 80% under the "three 80s" supplies system. Similarly, Shanghai has promised preferential treatment to the assembler, including tax holidays, for any equity ventures it establishes with local parts makers to raise the domestic content of its production.(66) Where scale is required for introducing automotive parts technology from abroad, it is willing to push concentration among the local suppliers. For example, it merged two factories in Shanghai to install a facility for making auto bearings, potentially the largest such facility in the country with a designed annual capacity of 100 million units (Table 2b). The municipal authorities must have also been instrumental in securing cooperation from Hainan International Investment Co. Ltd. in establishing Huqiong Auto Co. Ltd. with Shanghai Auto Industry Marketing Co. to market the Santanas in the island, after the sales arm of Shanghai-Volkswagen had received CNAIC's approval for the partnership in 1992.(67)
Finally, some local enterprises are pushing expansion even while the foreign partners hesitate to support the move. A number of them have set up dummy corporations overseas to mobilize funds directly from foreign capital markets. An example is Shenyang's Brilliance, a registered company at Bermuda and majority shareholder of Jinbei Co.--a joint venture assembler between a group of ninety-six former truck and auto parts makers in Liaoning province and America's GM. It made headlines by first throwing a secondary offering at New York Stock Exchange in Oct. 1992 then planning another float at Singapore Exchange in mid-1993 to gather funds for scaling up the production of GM's pickups. Brilliance's move was followed by Denway, the Chinese shareholder of Guangzhou Peugeot and a registered investment firm in Hong Kong. The latter sold shares in Hong Kong to raise capital for increasing Guangzhou-Peugeot's annual capacity from 25,000 to 150,000 units by 1997 which should allow it to catch up with the expansion in the Three Bigs. According to its plan, more than 60% of the funds was destined for expanding assembly and production of the electrical equipment and automotive parts, with the rest to be used as working capital.(68)
In developing the global linkages to implement their own business plans, therefore, the local enterprises are benefiting from an increasing diversify of the sources of foreign capital in recent years. Indeed, foreign financing has enabled them to expand production, bypassing the budgetary constraints and other discriminatory policies of CNAIC.(69) Examples like these demonstrate the constraints that the central authorities are receiving from the partnerships with foreign corporations in the ability to push the policy of their own choice.
Figure 1 gives a graphic illustration of the linkages that China has built with the auto builders in Europe, Japan and the United States, the first-tier countries in the globalizing economy. This has translated into a rapid expansion in import substitution assembly of foreign brands, shown as the real and projected outputs in Tables 3. China's integration with the globalizing industry includes not only assembly operations, but also parts and components production (Tables 2a, 2b) and, to a less yet growing extent, R&D (Table 4). With the programs on raising the domestic procurement, these linkages are extending further to the second-tier economies, such as the East Asian NICs.
B. Special Role of the Foreign Partners
Surely, the increasing integration has come from China's shift from self-help during the first half of the 1980s to an emphasis later on using joint ventures with foreign corporations to develop its auto industry. In this transition, cross-border partnerships have taken on a fundamental instead of previously incidental function in the overall development of this industry, one that serves to rebuild the inter-firm organizational linkages on the competitiveness in performance. While obligated to raise the domestic content of the car assembly, the foreign partners of the joint venture assemblers have come to exert great influence on who may participate in domestic sourcing and at what pace this process may proceed. Volkswagen, as agreed, has assumed the responsibility for determining whether the outputs of a Chinese supplier meet its quality standards and performance specs and, thus, qualify as a vendor for Shanghai-VW.(70)
In the coming decade, the foreign investors may see their influence growing, as China seeks to use the foreign capital,(71) design skills, know-how and expertise to further consolidate and rationalize its auto assembly as well as parts and components production(72) in the hope to realize specialization, standardization and cost competitiveness in auto manufacturing.(73) For example, corporations like Ford with whom CNAIC signed a letter of intent in 1993 on establishing an R&D center for automotive supplies may hold much sway on China's evolving supplies structure in the future. This is especially given that the participants of the deal included a good number of the top-brass in China's auto industry, the Three Bigs representing their respective manufacturing groups, as well as Nanjing Auto Corp. (Table 4), a major local assembler of light trucks with the backing in the center.
C. Further Structural Implications for China's Auto Manufacturing
Foreign linkages have thus become a critical component of China's auto industry, one that is integral to its success or failure as China's developmental "pillar". But one result of targeting is pinning the industry's future on the outcome of domestic procurement programs. This, in turn, depends on how successful the Chinese will be in restructuring the matching relations between the joint venture assemblers and their domestic parts and materials suppliers.
China has taken great pains to demonstrate its commitment to using the Sino-foreign partnerships in developing the auto industry. Its latest efforts in this respect focus on easing the foreign investors' involvement in shaping the outcomes of the domestic sourcing programs. According to the new regulations on the investment risks and decisions of the central authority, for example, the statutes on 100% foreign ownership(74) and three-party investment have become applicable to the automotive production. The CNAIC officials are also beginning to talk about developing R&D through a "shareholding system and further cooperation with foreign companies".(75) Measures like these serve at least partly to alleviate the fear of such major companies as Ford and Nissan for over-exposure in this country(76) while they continue to battle over-capacity and slow sales elsewhere in the world and at home.
This means that the ambitious output and local content targets set for the Chinese auto assemblers for the decade ahead are likely to translate into greater pressure for structural change than in the 1980s. The higher the targets, the greater will probably be the pressure. The greater the pressure for structural change, the more serious will probably also be its impact on China's economic boundaries.. In China, as in other countries, the economic boundaries are kept by formal tariff barriers as well as policies designed to define and control the inter-firm organizational linkages. The Chinese may have to lower the tariff barriers soon to deliver the commitment they made at the Seattle Conference and to obtain their seat in the GATT. This compares with the latter boundary, the informal rules(77) in the form of the administrative control of the fixed relations between the matching enterprises,(78) which has already been eroding, with the central government letting the joint ventures in auto assembly set the standards for domestic sourcing while local authorities shifting to support the enterprises in their jurisdictional areas to change and meet more effectively the performance expectations of these assemblers. As it seeks to direct future assembly operation in China(79) and as it tries to attract more external investment in parts and components production, the Chinese government is bound to receive further constraint on the freedom with which it can switch policies.
D. Limits to Integration with the Globalizing Industry
The discussion so far suggests that China's integration with the globalizing auto industry is finding expression in not only the formal legal partnerships which its automotive enterprises have reached with their foreign counterparts, but also certain rules and standards in the economic system towards which they are gradually converging. The Chinese suppliers are having to worry about the quality of their products and learning to meet the expectations of the joint venture assemblers when it comes to getting domestic sourcing deals from the latter. This is quite a break from the past when most of the suppliers would not care much about the minimal quality and performance standards in production.
China's integration with the globalizing industry, however, remains limited. Most of its outputs, complete vehicles as well as parts and components, are still made for domestic use only. Although exports have always been its objective, according to both the terms of the Sino-foreign tie-ups and CNAIC's official statements,(80) China has yet to show it can sell overseas in a significant way.(81) The Chinese, in fact, have had to sit on their exports ambition and focus instead on building a solid position in the rapidly growing domestic market combat the threat of imports when they open up the border under the GATT rules.
In other words, China has still a far distance to travel to become fully integrated with the globalizing industry, when its complete vehicles will be exported to the Triad and be tested in the world's toughest markets. As a first step towards that point, it needs to get the automotive enterprises competitive at home. Whether it likes it or not, the global linkages in place are already helping to turn the domestic market increasingly into a battleground. To be truly competitive, however, China will have to move away from cuddling the infant industry with high tariffs, imports licensing,(82) "buy import substitutes" campaign,(83) as well as a captive consumer base whose demands are elastic to the government's fiscal policies instead of product price(84) so as to escalate the competitive pressure among both the joint venture assemblers and their Chinese suppliers. It may want to adjust the geographical jurisdictional boundaries in marketing and sales(85) and building a pool of picky consumers, perhaps among a rapidly growing middle-class.
More importantly, the Chinese will have to find ways to build a competitive production system at home. This brings up the question of what system they want to develop through partnership with the international market forces. What will eventually emerge? These questions the Chinese seem ill-prepared to answer. When Cai Shiqing, chairman of CNAIC, talked about narrowing China's gap with the world's most advanced to ten years of difference by early next century, he did not clarify what world's most advanced meant and against which system China would measure up.
On the other hand, lean production has become a standard word for the best practices and principles of management, towards which the most competitive of the automotive firms in the advanced economies have converged. With built-in flexibility for adjusting production quantity and variety, lean system satisfies cost-efficiently both diverse tastes and rapid shifts in consumer demands. But lean system or the Japanese style of decentralized production presumes a number of technical and institutional environments to operate. Among them are zero defects of the incoming inputs, tight inventory control and production scheduling as well as just-in-time delivery and manufacturing which require a close proximity in the location of the facilities of the auto assemblers and their suppliers, together with a decentralized system of R&D between them. Above all, it presumes institutionalized teamwork between the assemblers and suppliers from which these best practices have evolved.
In China, these conditions are either absent or violated. The supplies, for instance, are still infested with defects and delivery notoriously uncertain. Both assembly and supplies remain disparate and their location widely scattered throughout some thirty provinces. Furthermore, the technical capabilities and deployment of such scarce resources as engineering manpower, skilled labor and capital are extremely unequal between the assembly enterprises and parts supplies sector. In the past, this disparity was reinforced by China's compartmentalized management of mutually exclusive branches of the central bureaucracy and protectionist policies of the local authorities. As a legacy of the history, the Chinese still find it hard to work in teams, except within the framework of the fixed matching relations or under sponsorship from the administrative superiors. This means that both deployment of China's auto industry and the nature of its structural linkages make transfer of the lean system a remote possibility.(86)
The pattern of the linkages which China has established with the west and the conglomeration strategy which the combined management companies have pursued both support this suspicion. In the past decade, it has built more ties with European producers, especially Volkswagen whose past competitiveness lay in pushing Ford's system to the extreme. By moving towards "product specialization", the Chinese enterprises seem also to have adopted divisionalized operation as GM developed it in the 1920s and 1930s while leaving the vertically integrated system largely intact.
Thus, mass production seems to hold broad appeal in China, particularly with its auto industry hurrying to position strategically in the rapidly expanding domestic market. But the Chinese auto builders are beginning to receive counter-influence from those foreign corporations that practice lean production successfully, as they diversify the foreign linkages. Recently, China is wooing Ford which has transformed from the mass to lean production for assistance in rationalizing its auto parts and components production.(87) The Japanese producers are also beginning to look seriously at China while awaiting recovery elsewhere in the Triad. Nissan, for instance, intends to organize its keiretsu suppliers to transfer production to China. Besides lowering production costs, one of its objectives is to test the water for a full-scale manufacturing venture in the future.(88) But how will Volkswagen's method of production mix with that of a lean Ford across the intermediate supplies market? How may the practice of the Japanese keiretsu affect the changing structural linkages in China's auto industry? How will the parts production established with investment from the NICs fit into this picture? Finally, will a European type of discrete components manufacturing sector emerge from the processes of consolidation, merger and reduction in the number of direct suppliers or will tiering and some type of the Japanese Alps structure result?(89)
Questions like these point to long-term implications of the technological synthesis with which the Chinese have yet to come to grip. For now, however, any attempt at guessing China's prospects in technological catching up requires a return to its starting point--the constraints built in the fixed matching relations between the Chinese enterprises. One has reason to believe that they hold the key for China's future insofar as duplicating institutionalized teamwork is necessary for technological learning, just as Toyota found it six decades earlier, and as the followers of lean production have learned.
It has been pointed out that the matching relations provide the foundation of cooperation among China's automotive enterprises. Like in a Japanese keiretsu, personal networking, trust, and long-term commitment have held together this inter-firm structural relationship. But unlike in a keiretsu, the function of the matching relations remains largely protecting infant industry instead of perpetual technological learning after market entry, as a result of the government policy of insulating the domestic enterprises against the competitive challenge of the market forces. What the matching relations lacks is an emphasis on merit, which Toyota built in its keiretsu network by first introducing the two-supplier procurement strategy(90) and then supporting the competitive pressure of the market disciplines with voice.(91)
The situation in China is gradually changing, however. With the disciplinary effect of the demands of the joint venture assemblers, including the competitiveness of their knockdown units and their discriminatory purchasing strategy, merit is becoming a key ingredient for keeping up the matching relations. It may gain further importance, as both central and local governments retreat to give the market forces more play in replacing the imported with more and more domestically produced automotive parts and components .
At the turn of the century, China is switching from economic autarky to partnership with the global market forces to develop its auto industry. The Chinese government identifies global linkages as crucial for acquiring the technology, technical know-how and managerial expertise the country needs for moving up the ladder of manufacturing and, possibly, developing new comparative advantage in international trade. Compared to the advanced economies like the United States and Japan, however, China has entered into the global linkages as the weaker of the two partners. Its only major bargaining chip versus the global corporations is access to the rapidly growing domestic market. Thus, it may demand that they buy more parts and components from the Chinese suppliers in joint production of the automobiles. But, in exchange, China has also to follow the new rules of game arriving with the foreign capital, ones which demand competitiveness in performance, reward merit and punish dependence on the fixed matching relations for business.
As a weaker partner, China can not change at will the terms of market entry and on-going relationships with the global corporations. This is a contrast to the policy swings which the central authorities were free to impose historically on the provincial governments and state enterprises. When conflicts arise in the joint ventures, the central government has to accommodate the interests of the foreign partners in order to keep them in the country instead of retaliate against them as may an advanced economy, the United States. It has also consistently improved the terms of foreign investment instead of retreating from the world economy in anticipation of future conflicts. The central government made special allocation of the foreign exchange to Beijing Jeep to help it to continue to import the supplies for assembly when the latter ran into serious foreign currency shortages. Then it enacted legislation to assure the foreign investors of their freedom of decision-making and introduced rules and procedures to improve the management of the foreign exchange for joint venture operation in the future. At the same time, the Chinese government, at both the central and local levels, has had to introduce changes in the structural relations between the auto manufacturers and suppliers to resolve the issue of imports and development of the domestic capabilities more fundamentally.
Thus, the global linkages have affected not only the relationship between China and the world economy, but also that between the central and local government authorities and the Chinese enterprises. The central decision makers have had to let the provinces and enterprises keep their independence to maintain the existing Sino-foreign partnerships and attract more foreign investors into the country. The local governments have also had to retreat from their administrative control. They are turning, instead, to improve the local investment climate to attract capital and technology into their own administrative areas so as to help some of the local enterprises to change and catch up in manufacturing capability. This way, the local authorities are helping to reduce an important market barrier in China. One their part, the automotive parts and components makers have also begun to take measures to transform themselves into competitive performers. They are building cross-border linkages with the foreign suppliers to modernize their products and facilities, learn to correct the problems in product quality and meet the new criteria for transactions in the intermediate inputs market. With market competition continuing to take roots, the pressure may grow further for the Chinese enterprises to improve their technical and managerial capabilities. In this process, they may gradually move towards re-focusing the matching relations on long-term technological learning to develop a competitive production system. Thus, the auto industry in China is entering a new era of growth. The transformations going on at both the center and periphery hold promise for not only the Chinese auto industry, but also the foreign firms that take a long-term perspective of business and profitability.
Footnotes
1 For the origin of the term and concept of "triad", see K. Ohame, Triad Power:
The Coming Shape of Global Competition (New York: The Free Press, 1985).
2 For the origin of the concept, see M. Porter, Competition in Global
Industries (Boston, MA: Harvard Business School Press, 1986).
3 The conception of the network economy in the world may be driven home by a
map of strategic alliances among the rival micro-electronic giants. see P.
Gugler, "Building Transnational Alliances to Create Competitive Advantage,"
Long Range Planning 25, no.1, (1992), 90-99.
4 A map of a corporate network of strategic alliances helps illustrate the
motivation for multi-laterism among global corporations. For an exampke in the
micro-electronics industry, see Ibid.
5 Ikujiro Nonaka, "The Knowledge-Creating Company," Harvard Business Review
(November-December 1991), 96-104. Also Masaaki Kotabe and J.Y. Murray,
"Linking Product and Process Innovations and Modes of International Sourcing in
Global Competition: A Case of Foreign Multinational Firms," Journal of
International Business Studies Third Quarter (1990), 383-408. Lei,
"Strategies for Global Competition."
6 For more description of the birth and development of China's auto industry,
consult Q. Xue, Chinese Motor Vehicle Industry: Technology, Strategy for the
Future (Cambridge, MA: Masters Thesis, Sloan Management School, 1988),
particularly 33, 42-44, 49-52.
7 That is, the government guaranteed only 80% of the inputs for the
enterprises, so that the latter must figure out how to make up for the rest of
the 20%on their own. Nobuo Maruyama, "China's System of Economic Management
and Its Impact on Joint Venture," CN 26 (1980), 3-6. The system, however, had
evolved initially as a device for encouraging savings on inputs and costs. For
an analysis of how the Chinese bureaucracy used allocative and planning
policies to regulate the behavior of the state enterprises for cost savings,
consult D. Perkins, Market Control and Planning in Communist China (Cambridge,
MA: Harvard University Press, 1966).
8 Among the "medium" assemblers were Beijing Autowork manufacturing BJ 212
Jeep, Nanjing Autowork manufacturing a model of 2.5-ton truck, Shanghai
Autowork manufacturing sedans and Jinan Autowork producing 8-ton Yellow River
trucks. Later, Beijing No.2 Autowork joined in to assemble BJ130 light trucks.
Some of them, such as the Beijing and Nanjing Autoworks, were converted from
repair to craft assembly during China's Great Leap Forward period in 1958.
Exception for some information on Beijing No.2 Autowork, see Xue, Chinese
Motor Vehicle Industry: Technology, Strategy for the Future , 1988,
particularly 43-44, 47.
9 According to one Chinese insider, the total number of the assemblers were
reduced to 37 by 1983, then rose to about 80 in 1985, and to 116 in 1986. They
were scattered in 22 local administrative regions and fell under the control of
8 ministries. Idem., 11, 48-52, 58.
Among the 130 assemblers, 40 were still engaged in some scale of vehicle
assembly in 1993, with the rest probably in fitting of special-purpose vehicles
and buses or production of components. S. Vines, "Industry Tastes Life in Fast
Lane," South China Morning Post, 28 March 1993, 3.
10 SAW pioneered the organizational form. Byrd, 1992. With the sanction from
CAIGC, the central agency coordinating development of the auto industry, the
combined management company that was first introduced by SAW diffused
throughout China. Sixce such conglemerates emerged besides the Dongfeng group
headed by SAW, named Jiefang, Nanjing, Heavy Duty, Beijing-Tianjin and Shenxi
groups which had emerged by 1983 with CAIGC's approval, followed by the
Shanghai Auto-Tractor Industry Co. and an Auto Parts Industry Co. Combined,
they grouped together 290 enterprises from 10 industrial branches and 27
provinces and cities. The total membership increased to 406 by 1986, while the
number of the combined management companies reduced with consolidation. Most
of the members seemed to follow the path blazed by Dongfeng--they fitted parts
to the main assemblies supplied by the respective core assemblers. Z. H.
Ding, ."A Year of Innovation and Development in China's Auto Industry," In
Zhongguo Jingji Nianjian, 1984 (Almanac of China's Economy, 1984) (Beijing:
Jingji Guanli Chubanshe, 1984), IV56-IV57; S. Kagawa, "China's Enterprise
Management and Japan-China Technological Cooperation,"China Newsletter (CN)44
(1983), 13-18; M. Iwagaki, "The State of China's Automobile Industry," CN 63
(1986) 9-12, 16; A. Fujimoto, "Progress in China's Enterprise Reform,"CN 68
(1987), 2-6.
11 Dongfeng group's experience is illustrative. For detail, see Byrd, 1992.
For how the Chinese industrial enterprises sought easy expansion through
inflationary growth, consult Iwagaki, "The State of China's Automobile
Industry."
12 Zhong, Zhongguo Jingji Nianjiang, 1986 (Almanac of China's Economy, 1986);
W. A. Byrd, " The Second Motor Vehicle Manufacturing Plant," In Chinese
Industrial Firms under Reform Ed. W. A. Byrd (Washington D. C.: Oxford
University Press published for the World Bank, 1992), 371-426.
13 Byrd, " The Second Motor Vehicle Manufacturing Plant."
14 Although SAW and the First Auto Works, China's two largest auto producers,
had begun scrambling for engineering talents while formalizing internal R&D
since the early 1980s, they had yet to learn to come up with their own
products, unable to meet the rapidly growing demands. Ibid. and Xue, "Chinese
Motor Vehicle Industry: Technology, Strategy for the Future ."
15 J. A. Cohen and J. P. Horseley, "The New Joint Venture Regulations,"China
Business Review 10, no. 6 (1983), 44-48.
16 J. A. Cohen, "China Adopts Civil Law Principles,"China Business Review, 13,
no. 5 (1986), 48-50.
17 Xue, "Chinese Motor Vehicle Industry: Technology, Strategy for the Future ,"
110.
18 In 1985, for example, two transmission lines were imported for the centrally
targetted Styre trucks, whose output came to 8,600 the next year. For Styre
project, see M. Weil, "Overhauling the Automotive Industry,"CBR 13, no. 4
(1986), 28-33. The output figure should be correct if it includes the output
of the defense enterprises. The figure for "heavy" trucks in Tables1.1.9. in
University of Michigan,US-China Automotive Industry Cooperation Project, Final
Report, Vol.1 (Ann Arbor: MI, Univeristy of Michigan, Mar. 1989).
19 Beijing Jeep produced 24,087 jeeps, Beijing Autowork, the Chinese parter of
Beijing Jeep, made 11,805 light trucks and Beijing Second Autowork make 22,500
light trucks, too. For the output figures quoted in this paragraph, see
University of Michigan, "US-China Automotive Industry Cooperation Project,"
Tables 1.1.2 and 1.1.9.
20 In 1986, the assemblers in Shenyang, Qinghai, Chongqing and Xi'an were
reportedly making thousand-vehicle per year. Iwagaki, "The State of China's
Automobile Industry."
21 Xue, "Chinese Motor Vehicle Industry: Technology, Strategy for the Future ,"
118-120.
22 J. Mann, Beijing Jeep. (New York: Simon & Schuster, 1989).
23 Xue, "Chinese Motor Vehicle Industry: Technology, Strategy for the Future ,"
110.
24 The explanation to Shanghai's uniqueness is simple. Along with Sichuan, it
had pioneered one of two approaches to industrial reform since 1979. Unlike in
Sichuan, where individual factories made investment and other decisions, the
municipal bureau in Shanghai coordinated investment by assuming the
responsibility for aggregating tax-revenue as well as planning and supervising
how their subordinate enterprises might use the retained funds. This
"market-based" method of management proved extremely helpful in later years for
Shanghai-Volkswagen's localization effort. For the two approaches to
industrial reform , see A. Fujimoto, The Economic Responsibility System in
China's Industrial Sector,"CN 41 (1981), 2-8.
25 The car venture was formed in 1983-1984. But negotiation on it began in
1980-1981 .
26 Guangzhou-Peogeut was a case in point. Its Chinese partner, Guangzhou
Autowork, had not invovled in car production. Before the post-Mao reforms
began in the late 1970s, FAW and Shanghai Autoworks had been China's car
assemblers. By 1980, FAW had terminated its production of the Hongqi or Red
Flag limos. FAW did not begin to seriously consider car assembly until its
agreement with Daimler Benz AG on knockdown assembly of one-thousand 200
series of Mercedes and threee thousands of a modified version of the German
cars in 1985. The output data from CAIGC confirmed FAW's absence in car
production. They indicate that Jilin province where FAW is located, produced
no cars in 1985. University of Michigan, "US-China Automotive Industry
Cooperation Project," Table 1.1.2. If it planned to build sedan again, CAIGC
would have done so at either of these enterprises. Indeed, CAIGC supported
Shanghai Autoworks by lending its presence in the conclusion of its tie-up with
Volkswagen (Table 1a). But Guangzhou had the special autonomy as well as
capital mobilization capability to cut its own deal. One year after Shanghai
sealed its liaison with Volkswagen, Guangzhou tied up with French producer
Peugeot. Compared to Shanghai-Volkswagen, which received official backing from
the cautious Bank of China (BOC), CAIGC and the German producer itself,
Guangzhou-Peugeot got financial support from China International Trust and
Investment Corp. (CITIC), a newly established state investment company that
tended to be more risk-taking than (BOC) in decisions, the French assembler and
its French bank, as well as the World Bank's International Finance Corp. (IFC).
IFC reportedly loaned Guangzhou-Peugeot $15 million for a 10% stake on the
condition that it would pursue autonomy by issuing stocks to the public. see
"Public Listing Considered for Guangzhou Peugeot," Agence France Presse, 1
April 1993. 2
27 Interview with in Beijing (A), January 1992. Jiangxi began its negotiation
with Isuzu in 1984. CBR 11, no.4 (1984), 54.
28 The production of Steel and pig iron, for example, fell under the
jurisdiction of the Ministry of Metallurgical Industry.
29 M. Lee, "More Desired than Driven in China,"Far Eastern Economic Review
(FEER ), 3 October 1985, 72-74.
30 Hainan government, for one, gained notoriety for abusing its duty-free
status to import most of the complete cars in 1984 and 1985 and profit from
sales to the interior provinces at inflated prices. This must have undermined
further the central bureaucracy's ability in concentrating resources to develop
a few major bases of production, which entailed suppressing duplicate assembly
and technology acquisition projects.
31 In fact, major modes of transportation continued to be rail and water in
these years.
32 L. Do Rosario, "Who Will Pick the Plum of a 1 Billion Market?" FEER , 22
August 1985, 79-84.
33 3-way ventures refer to those involving three partners, typically with one
of the investors being an automotive enterprise of national stature and the
other a foreign investor. The third party may be the recipient of the
investment, a plant under the jurisdiction of a local government. For
regulations on three-way investment, see Cohen, "China Adopts Civil Law
Principles."
34 "No.a Auto Plant Absorbs Three Qinghai Plants," Xinhua General Overseas News
Service, 14March 1991. For FAW's merging of China's best research institute on
automobiles, see Xue, "Chinese Motor Vehicle Industry: Technology, Strategy for
the Future ."
35 Interview in Beijing (A and B) , January 1992.
36 Interview in Beijing (A), January 1992.
37 The State Planning Commission had reduced its control of the outputs of the
enterprises under the government's mandetory planning to 10-20% of the total by
the end of 1988. It had shifted the control over the rest 80-90% to the local
authorities instead of the enterprises. But the local governments turned out
to be more rigid in administration. While they were responsible for securing
much of their inputs now, comporable with their autonomy in production
planning, marketing and so on, the enterprises found they had to listen to the
local authorities. see L. Do Rasorio, "Too Many Cooks," FEER, 8 September 1988,
128-130.
38 Mann, Beijing Jeep, Chapter 18.
39 The manager of Shenyang's Fuyang Parts Plant, for instance, imported a new
generation of heat furnace and bundled assistance to modernize its cast metal
process in the late 1980s when he realized that it might lose its matching
assembler, FAW, to two plants in Guangzhou, Guangdong province, and Dalian,
Liaoning province. Both of the latter had acquired foreign technology to
improve supplies. R. F. Grow, "How Factories Choose Technology," China
Business Review. 14, no. 3 (1987), 35-39.
40 Such inattention to the suppliers' funding needs is not new. Besides the
side-effect of a vertically integrated system of production, the backward state
of China's automotive supplies sector owes credit to the governmental neglect.
For decades, both central planners and local decision makers made assembly an
investment priority. Parts supply, in comparison, always received an adjunct
instead of a strategic role in the investment plans. Consequently, the
intended investment for parts manufacturing had always failed to keep up with
assembly. This bias has displayed itself again when the local authorities
pumped in support for the assemblers in their areas of jurisdiction to import
technology and set up joint ventures while giving little financing to the
suppliers for modernization. Interview in Beijing (A and B), January 1992.
41 For instance, a number of parts makers in Beijing accepted compensation
arrangements with the matching assembler, Beijing Light Auto Ltd., to improve
product quality and keep business orders. They took dies and imported
equipment from Beijing Light. In return, they sourced orders and substracted
service charges from the fees on these more advanced hardwares. Interview in
Beijing (B), January 1992.
42 Becasue they are able to make big profits by charging as much as three times
that of the average price in the west, the Chinese auto builders reportedly can
post profits of from 30 to 60%. G. Murray, "China Seeks Foreing Investment to
Update Car Industry," Japan Economic Newswire, 12 April 1993.
43 Do Rasorio, L. "State Industrial Bosses Sign on for Profits," FEER, 8
September 1988, 132-133. Compare with S. Vines, "Car Import Business Slips
into Top Gear," South China Morning Post, 28 March 1993, 3.
44 "No Time to Waste on Theory," Newsweek 18 January 1993, 43; C. Raj, "China
Companies Set for Listing on Singapore Exchange," Business Times, 11 March
1993, 1.
45 Mann, Beijing Jeep, chapter 18
46 J. Karp, "Back on the Road," FEER, 26 March 1992, 49-50; Yuichi Takayama,
"The Chinese Automobile Industry," CN 94 (1991), 16-21.
47 Karp, "Back on the Road"; Takayama, "The Chinese Automobile Industry."
48 G. Murray, "China Seeks foreign Investment to Update Car Industry," Japan
Economic Newswire, 12 April 1993. For the number of assembly plants, see "Car
Industry Explores bold Financing Plan," Xinhua General Overseas News Service ,
29 November 1992.
49 "Car Industry Explores Bold Financing Plan," Xinhua General Overseas News
Service , 28 November 1992.
50 Karp, "Back on the Road"; Takayama, The Chinese Automobile Industry."
51 "China Sets Five-Year Program for Rubber Industry," Xinhua General Overseas
News Service, 6 March 1991.
52 Interview in Beijing (A), January 1992.
53 Karp, "Back on the Road"; Takayama, The Chinese Automobile Industry."
54 That is, if the domestic content reaches 60%, then an assembler would be
entitled to preferential tariff treatment instead of having to pay 120% tariffs
on the imported knock-down inputs. For 120% rate, see "No Time to Waste on
Theory"; Raj, "China Companies Set for Listing on Singapore Exchange." For 60%
domestic content rule, see "GATT Would Bring New challenge for China's auto
Industry," Xinhua General News Service Service,, 22 November 1992. Note the
60% domestic content is measured according to the value of production. Karp,
"Back on the Road."
55 "China to Make Auto Industry Its Pillar," Xinhua General News Service
Service,, 29 Feburary 1993.
56 China is certainly walking extra miles to show that the targeted joint
ventures can turn out successful in delivering both profitability and
development. It does so by assuring the west that the market forces will
incresingly be important for the country's economy in the future. In a display
of partnerships with the international market forces, its President Jiang Zemin
consulted Carl Hahn, Chairman of Volkswagen, on the German capitalist view of
China's reform at a conference on how China may work out the role of the state
in managing the economy that was sponsored by the State Planning Commission in
May 1993. "China to Learn Foreign Experience in Market Economy: Jiang," Xinhua
General News Service, 12 May 1993.
57 L. Do Rasorio, "Driven away," FEER, 9 November 1989, 60.
58 Interview in Beijing (A), January 1992.
59 The Chinese boast havi ng raised Cherokee's domestic content to 61%. see
"Parts of Cherokee Jeep Made in China," Xinhua General Overseas News Service
20 Feburary 1993.
60 Interview in Beijing (A), January 1992.
61 "No.1 Auto Plant Absorbs Three Qinghai Plants," Xinhua General Overseas News
Service, 14 March 1991.
62 "Wuhan to Set up First Inland Bonded Warehouse," Xinhua General Overseas
News Service, 25 March 1993.
63 Wuhan pioneered this trend in 1992 by allowing Hong Kong investors to buy up
some of the local factories. It city then sent a delegation to Singapore,
headed by officials of the local bureau of the Foreign Economic Relations and
Trade Commission , to invite more capital to come in. Wuhan has targeted
Singapore, because the investors from the latter rank among the most aggressive
in participating in China's privatization drive. One of them, Oei Hong Leong,
reportedly took over 41 state enterprises in Fujian's Quanzhou and has formed a
joint venture to buy 101 plants in Dalian, Northeast China. In comparison,
Wuhan had 11 deals with Singapore by early 1993. see Y. P. Ang, "Wuhan Woos
Singapore Businessmen to Buy Its State Industries," Business Times, 11 March
1993, Section: companies, 11.
64 "Guangzhou Free Trade Zone to Focus on Re-Export Trade," Xinhua General News
Service, 17 April 1993.
65 "VW to Increase Investment in Shanghai," Agence France Presses, 21 October
1992; "Automobile Indusutry Steps up Localization Efforts," Xinhua General
Overseas news Service, 13 Feburary 1992.
66 T. A. Gelatt, "New Rule for Investors," CBR 17, no.2 (1990), 30-39.
67 "Santana Cars to be Sold in Hainan," Xinhua General Overseas News Service,
18 August 1992.
68 In New Yor, Brilliance' shares were valued at $80 million. For Brilliance,
see "No Time to Waste on Theory"; Raj, "China Companies Set for Listing on
Singapore Exchange." For Denway, see I. Tong, "Yuan, GATT Risk in Mainland
Offer," South China Morning Post, 5 Feburary 1993, 1; "Denway Offer a Record
658 Times Oversubscribed," Agence France Presse, 15 Feburary 1993; A. Leung,
"Hong Kong's New Issue Fever Seen Spreading to China," Reuter Asia-Pacific
Business Report , 24 Feburary 1993; "China Plays Spark Fear over Securities
Loans and Lead to a Study on Banking Liquidity," Thomson's International
Banking Regulator 3, no.7, 22 Feburary 1993, Section: Asian News, 8; "Denway
Offer a Record 658 Times Oversubscribed," Agence France Presse, 15 Feburary
1993.
69 The Chinese enterprises and/or joint ventures can easily bypass CNAIC's
rules by drawing capital from abroad. For example, Beijing Light sought
financing from outside China through profit-minded CITIC, one of its
shareholders (Table 1a). More recently, Qingling-Isuzu received equity
investment from CITIC Hong Kong after the latter's trading arm Dah Chong Hong
displayed high earnings through car sales. see "No CITIC Pacific Cash Call in
3 Months--Larry Yung," Reuters,, 22 April 1993.
70 Volkswagen quality tests these parts . Interview in Beijing (A), January
1992.
71 The Chinese seem to be refering to the experience in the west in concluding
that modernization of the automotive parts and components manufacturing
requires 150% of the investment that has been made into auto asembly. See
"GATT Would Bring New Challenge for China'as Auto Industry"; and Xinhua General
Overseas News Service , 29 November 1992.
72 "Ford Company Opens Office in Beijing," Xinhua General Overseas News
Service , 11 October 1992.
73 "Plans to Upgrade Motor Industry," BBC Summary of World Broadcast, 17 March
1993 from NCNA in English 1542 GMT, 19 Feburary 1992.
74 An official at CNAIC expressed a willingness to consider 100% foreign
ownership for some ventures". see "GATT Would Bring New Challenge for China'as
Auto Industry."
75 "China to Make Auto Industry Its Pillar," Xinhua General News Service
Service,, 19 Feburary 1993.
76 Nissan and Ford reportedly want to come in full-scale only after parts
industry has improved. see G. Murray, "Nissan Adopts Step-by-Step strategy in
China,"Japana Economic Newswire , 2 June 1993.
77 This aspect of the national economic boundaries are recently negotiated,
when the Chinese signed an agreement with the Office of the United States Trade
Representatives. According to the agreement, China will make its regulatory
rules more "transparent". This means that the bilateral trade would be
governed by regulatory policies that are open to the foreign partners instead
of the administrative commands issued to the Chinese business organizations and
that the former must be the solely operational policy. Similarly, it means
simplifying the import control procedure, particularly by letting the American
companies know who they must deal with from the start so that they do not have
to overcome one administrative barriers after another against imports. the
transparentcy pertains to auto and auto parts imports. see H. Hansen, "China
Agrees to Increase Market Access for U.S. Exports," East Asian Executive
Reports 14, no.10, 15 October 1992, 16.
78 As discussed earlier, the central government used this fixed structural
relationship for decades to overcome the entry barrier for infant industries.
When the local authorities emulated this policy, however, China's industrial
base fragmented along the geographical boundaries of the provinces. In the
years after Mao's rule, the local governments initially sought to upgrade such
infant industries as auto manufacturing and improve revenue income by
maintaining the same structural barriers.
79 CNAIC would like to see foreign auto builders who are interested in
assembly ventures in China to introduce production of new categories of
vehicles. In addition to minivans, the new targets may include commercial
vehicles which China has tried to develop since 1983 and for which China still
depends substantially on imports. In the latter area, one expects more
linkages to evolve between the firms from the Triad and the defense enterprises
in China. Accordign to the suggestion of senior MOFERT officials, large-scale
of joint ventures would be welcome for production of trucks, container trailers
and large buses. G. Murray, "China Seeks Foreign Investment to Update Car
Industry", Japan Economic Newswire, 12 April 1993.
80 In the words of its chairman, the industry would like not only to increase
the total value of its export which stand at $200 to $300 million a year at
this moment, but also to improve its composition in favor of the complete
vehicles. "Plans to Upgrade Motor Industry."
81 Except for a few trucks to the Third World countries and small sum of parts
to the Triad. The trucks were exported mostly in Asian , Middle Eastern and
African countries in 1988 and 1989. In 1988, it managed to sell the
Netherlands a few 4WDs and Russia 26 cars. World Motor vehicle Data (Michigan
Motor Vehicle Manufacturers Association, 1991), 45.
82 S. Vines, "Car Import Business Slips into Top Gear," South China Morning
Post, 28 March 1993, 3.
83 Originally its designed for rationing consumption when China's auto industry
remained in its infancy while the economy as a whole was managed by planned
balancing. S. Vines, "China Puts out Welcome Mat for Imports," Automotive
News, 19 April 1993, 22.
84 These are institutional buyers composed essencially of the government
bodies, economic enterprises and certain business organizations. According to
one source, Beijing Jeep had kept its profitability by setting price as it
wished, subject to approval from the superior governments. It could get away
with the practice, because the Cherokees are purchased mainly by the govt
organizations. Of course, it was also because the Cherokees, like other
foreign brand names made in the joint venture assemblers, prove to be superior
in design and quality and, thus, popular, in the Chinese market. Reportedly,
the government had been guaranteeing Beijing Jeep's profits since the crisis of
1986 when the latter shut down its assembly line for two months for lack of the
CKD kits. The same source also notes that the Americans were making profits
from three sources: i) CKD kits; 2) assembly process conducted at Beijing Jeep;
3) assembly of BJ212. While the final assembly of BJ212 had rolled over from
Beijing Auto Work to Beijing Jeep, components production remained in the old
facilities of Beijing Auto Work. see Xue, "Chinese Motor Vehicle Industry:
Technology, Strategy for the Future ," 118-120
85 Vehicles, light trucks at least, are still often sold according to the
administrative regions which may include a number of the municipal or
provincial.jurisdictional areas in the same adjascent region, such as "North
China", "Central China", "South China", etc. Interview in Beijing (A), January
1992.
86 One suspects the nightmarish structural constraints in China to be one
critical explaination to Toyota's hesitancy in committing itself to China in
any significant way. The other reasons may be its greater interests in
Souhteast Asia and its relative inexperience, certainly compared to Nissan, in
working with outsiders.
87 "Ford Company Opens Office in Beijing," Xinhua General Overseas News
Service, 11 October 1992.
88 G. Murray, "Nissan Adopts Step-by-Step strategy in China,"Japana Economic
Newswire, 2 June 1993.
89 For the "Alps" structure, see Toshihiro Nishiguchi, May 1987. Separately, a
Vice President of Ford commented upon disclosig the company's interests in
ennering parts production linkages in China that for more than four thousands
of parts makers to supply directly to 125 assemblers with annual capacity of
700,000 vehicles a year was simply too much. China needed concentration,
which could be achieved through merger, he believed. See "Ford Company Opens
Office in Beijing."
90 F. Adachi, K. Ono, and K. Odaka, "Ancillary Firm Development in the Japanese
Automobile Industry," inThe Motor Vehicle Industry in Asia: A Study of
Ancillary Firm Development in Asia. Ed. E. Odaka (Singapore: Singapore
University Press, 1983), 325-396.
91 S. Helper, "Comparative Supplier Relations in the U.S. and Japanese Auto
Industries."
(end of paper)