The Automotive Sector - World Bank Documents & Reports

Report No. 121 34-CHA

ChinaIndustrial Organization and EfficiencyCase Study: The Automotive SectorDecember 31, 1993

industry and Energy Operations DivisionChina and Mongolia DepartmentEast Asia and Pacific Regional OfficeFOR OFFICIAL USE ONLY

MICROGRAPHICS

Report No: 12134 CNType! SEC

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization

CURRENCY EQUIVALENTS

Curretcy Unit = Yuan (Y)

November 30, 1990 December 30, 1993

$1.00 = Y 5.22 $1.00 = Y 5.80Y 1.00 = $0.19 Y 1.00 = $0.17

FISCAL Y9EAR

January 1 - December 31

WEIGHTS AND MEASURS

Metric System

ABBREVIATIONS AND ACRONYMS

.f. - cost, insurance and freight MMI - Ministry of Machinery ndustry

XKD - completely knocked down MNC - multinational corporation

CNAIC - China National Automotive Industry MOFERT - Ministry of Foreign Economic

Corporation Relations and Trade

CRS - contact responsibility system MOME - Ministry of Materials and Equipment

EC - European Communities NAW - Nanjig Auto Works

FAW - First Auto Works NIC - newly industrialized county

FYP - five-year plan OECD - Organization for Economic

GATT - General Agreement on Trade and Cooperation and Development

Tariffs QR - quantity restrictions

GDP - gross domestic product R & D - research and development

GM - General Motors (USA) SAE - Society of American Engineers

GOC - Government of China SAIC - Shanghai Automotive Industry

JICA - Japanese Intermational Cooperation Corporation

Agency SAW - Second Auto Works

JIT - just-in-time SKD - semiknocked down

km - kilometers SOE - state-owned enterprise

km/h - kilometers per hour SPC - State Plaming Commission

MES - minimum efficient scale SVW - Shanghai-Volkswagen

MFN - most-favored-nation TVE - township and village enterprise

MM - Ministry of Trade and Industry (Japan) ZEV - zero emissions vehicle

FOR OFFICIAL USE ONLY

CONTENTS

Preface ........................................... vExecutiveSummr ........... . ....................... vii

1 Developmer&A of Automotive Industry in Ckt aa .................. 1

A. Rationale for Automotive Sector Work ...................... 1

B. Development of the Automotive Industry in China ............... 4First Phase: Beginnings of the Domestic Industry ............. 4Second Phase: Modemization Drive ...................... 5China Natior.al Automotive Industry Corporation .............. 5Pilr Industry ........... ........................ 7Large Investments ................................. 7infu-ion of Foreign Technology and Capital ................. 8

C. Currer t Industry Trends. 9High Growth and Product Mix Change .................... 9Import Substitution ....... 11Fragmentation and Dispersion .......................... 13Dualistic Industry and Emerging Leaders ................... 13

D. Looking Ahead: Developmental Objectives ................... 18

2 TrennaionaTedandDometlc Demand .................... 20

A. Trends in the World Industry ............. ............... 20B. DomesticDemand ................................... 27

Freight Vehicles .......... ........................ 27Passenger Vehicles ................................ 28Projections of Domestic Demand ........................ 30Implications of Domestic Demand Projections ................ 31

3 Policy Framework and Its Impact on the Automotive Industry .... .... 36

A. Entry Policy . ..................................... 36

B. Exit Policy . ...................................... 38C. CompetitionPolicy . .................................. 38

D. Foreign Trade Policy ................ ................. 41

E. Demand Management ................................ 43

F. Sector Management ................. 45G. Localization Programs ................. 49

This document has a resticted distrton and may be used by recpien only in the pof throffcial duties Its contents may not otbwie be disclosed witbout World Bafik __

H. Foreign Direct Investment Policy ....................... .. 50I. Enterfise Govenance ................................ 50

4 Perspectives on a Strategy for the Automotive Industry ............ 54

A. Comparative Advantage ............ .. ................. 54B. Mniimum Efficient Scale .............................. 56C. TechnologcaEfficiency ............................... 58

Phased Development .............. ................. 59Less o From Experience ........... .. ............... 61

D. VerticalDisntegration and Subcontracting ....... .. ........... 64E. Role of Govemment Intervention and Competition ..... .. ........ 66F. Issues and Opportunities ...... ......................... 72

5 PolicRecommendations ................................ 74

A. BaIancing Proection and Competition ............ .. ......... 74B. Creating ncentives t Innovate ....... .................. 75C. The Role of Government in Facilitating the Creation of an Efficient

Industia Structe ................ .................. 76D. Long-Term Goals-The Development of Product Technology ... ..... 78E. Conclusion ................... .................... 79

StatiCS . ................... ...................... 81

1.1 Leading Players in the Automotive Industry ................... 172.1 Tariffs on Autos in Selected Countries ...................... 23

1.1 Eighth Five-Year Plan Investment in the Automotive Sector .... ..... 81.2 ChineseAuomotivebyType, 1955-92 ...................... 101.3 Annual Production Targets of the Eighth Five-Year Plan .... ....... 101.4 ProductionPlan, 1993 ................................ 111.5 Production and Imports of Automotives, 1980-91 ................. 121.6 Share of Knock-Down Parts in Imports ...................... 131.7 Enterprises in Chinese Automotive Industry, 1980-90 ............. 141.8 Distribution of Automotive Assembler by Production Capacity ... .... 141.9 Geographical Diprsion of Production Capacity ................ 151.10 Passenger Car Prices ................................. 171.11 Truck and Bus Prices (1990) .18

2.1 Desired Stock of Vehicles Projeed for the Year 2000 ............ 302.2 Annual Demand for Vehicles, 1995 and 2000 . ................. 312.3 Output-Demand Deficit Projections by Type of Vehicle:

Unconstined Scentio .. .............................. 322.4 Increase in Highway Capacity Over the Eighth Five-Year Plan Period ... 332.5 Motor Veh.le Emission Pollution Contribution to Total Man-made

Pollution in the Beijing Urban Area (Witiin the Third Ring Road) ..... 35

3.1 LnportTariffs . . .42

3.2 Enterprises and Production by Supervising Entity, 1989 .48

4. 1 Raw Matera Price Comparison . .55

4.2 Fragmentation of Production in Trucls and Buses . .594.3 Stylistc Presentation of the Four Stages of the Development of Industry . 60

3.1 China: AutomotiveIndustrySupervisoryControl ............... 46

PREFACE

This report is based on the findings of three missions that viited Chinabetween Sepeiber 1990 and December 1992. The report was prepared by Jae-Hak KimC(ask Manager). Peter Harrold (Lead Economist) made contributions to the ExecutiveSummary. Jyoti Shukla (Consultant, Economist) contributed to Chapter 2 and assisted indrftng the report. The report draws extensively on the findings of members of the earliermissions: Sally Zeijlon (Economist), Harbaksh Sethi (Senior Advisor, Engieering andSteel Industries), irtcolas Mathieu (Senior Economist), Wang Yuan (Economic Officer),Arnaud Domel (Economist), Jerry Saunders (Consultant), Bor-Ruey Fu (Consultant), andT. subramanian (under a UNDP-World Bank training program). Yongmiao Zhangat the Resident Mission in Beijing and Li (Local Consultant) also provided invaluableinformation.

The missions received invaluable support from representatives of the Chineseautomotive industry. The CNAIC countrpart team was led by Mr. Zhang Zheng, GeneralManag,er, Strategy PoLhcy and Computer Dvision, and included Messrs. Yijian Zhou, WuDongling, Zhu Shui Yu, and others too numerous to list. Assistance was also receivedfrom the First Auto Works, Second Auto Works, the Shanghai Automotive IndustryCorporation, the Beijing Jeep Company, Nanjing Motor Company, China National HeavyDuty Truck Corporation. The mission also met with govemment officials in Shanghai andBeijing.

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EXECUTIVE SUMMARY

INMODUCnON

L. The process of economic reform and decentralization has raised newchallenges for China in the areas of industrial strategy and organization. While the roleof the state in resource allocation and investment planning has been declining, the marketforces are not in full play yet, with China's economy still in transition toward a market-driven one. This raises particular questions for the government in determining policytowards particular industries, and in deciding wheni and in what ways to ease transitionaldifficulties hindering the development of such industnes. Moreover, in the current stateof the reform program, there are also questions about what instruments the governmentshould use to effectively shape the future of the industry and at the same time to advancefurther development of market forces.

iu. The automotive industry is perhaps the sector that best exemplifies theseissues for two primary reasons. First, this industry is capital-intensive with particularlylarge ec cnomies of scale. We have thus observed in many countries, including developedcountries, that the state has had a significant role in developing industry, either in its earlystage of development or in its restructuring. Second, from the standpoint of economicstrategy, the automotive industry is important for its industrial, macroeconomic, and socialimpact. This industry has the potential for becoming a leading sector through enormousbackward and forward linkages; it is inextricably linked to national transport strategy andto the integration of the domestic market; and it has many externalities such as pollutionand urban xongestion.

iii. The Chinese automotive industry has now become a significant contributorto industral output, having reached 1 million units of vehicle production in 1992. TheChinese automotive industry rnks twelfth in world production, approaching that of Brazil.A substantial part of this production came from the commercial vehicle segment, makingChina the world's fifth largest producer. The passenger car segisent, which contributedmodestly with about 160,000 units, however, is growing rapidly already, and has greatpotential for additional expansion. This level of production is the result of the rapidgrowth in the 1980s-18.7 percent per annum-and an acceleration in the '990s. Vehicleoutput has nearly doubled during the last three years. Nevertheless, given the size ofChina's economy and its current rate of income growth, a redoubling of the subsector issurely expected during the rest of this decade.

iv. This report intends to examine these challenges facing the government ofChina in formulating industrial policy and strategy, using the automotive industry as anexample. Although the report's recommendations focus on how to address these issues in

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the context of this particular industry, these considerations should equally apply to othersubsectors. The study of this subsector is significant because the industry is at a relativelyearly stage of development and because of the potential links to the rest of the economy.Decisions taken today will have a lasting impact on the pattem of economic developmentin China over the rest of this decade, and beyond. Fiially, it is fitting because ourexamination of the present strategy has revealed serious problems that need to be addressedwith some urgency.

v. The report first reviews the deveiopment of the automotive industry in Chinain the light of world trends. It then analyzes the issues, both technical and policy-oriented,that impede the industry's progress toward international competitiveness. It then presentspolicy recommendations for the automotive industry in China.

DEVELOPMENr OF THE AUOMOVE INDUY IN CINA

vi. The automotive industry was first established in China in 1956 but grew onlyslowly until the early 1980s. 'his level of development was owing to the government'stransport stratgjl that emphasized railroads for long-haul freight transport and the use ofnonmotorized vehicles, particularly bicycles, for short-distance passenger traffic. In itsearly years, the automotive industry thus focused primarily on the production of trucks andbuses. The industry remained technologically backward, as it was isolated from the restof the world at a time when many technological breakthroughs were taking place.

vii. Since the early 1980s, however, the character of the automotive industry haschanged dramaticaly, with the infusion of foreign technology and large investments tomodernize the industry. Several major joint ventures have been set up with intemationalproducers-for example, Volkswagen, Citroen, and Peugeot for the production ofpassenger cars and Chrysler for the production of the Jeep. Licensed production of lighttrucks with Iveco and Is w technology and of heavy trucks with technology from Steyrand Cummins has also started.

viii. As a result of large investments, the industry has changed in size, productmix, and quality. Vehicle production increased fourfold in the last five years to reach theone million mark in 1992, already exceeding the production target of the Eighth Five-YearPlan (1991-95). The product mix has changed, with the passenger car and light-trucksegments showing high rates of growth. International collaboration has also radicallyimproved the product quality of passenger cars and light trucks, although the dominantmedium-size truck segment is still largely reliant on the sturdy 'Jiefang" and "Dongfeng'built with 1950s Soviet technology.

ix. The rapid increase in domestic production allowed the Chinese automotiveindustry to supply almost 90 percent of the market in recent years. Imported vehicles asa percentage of domestic sales declined from a high of 44 percent in 1985 to 12 percentin 1991. The reversal in the position of imports is particularly significant for passengercars. Imports of 27,600 passenger cars in 1992 represented only Lo percent of domesticproduction, in contrast to the situation in 1985 when domestic demand was larI -ly met

with imports. However, the 1993 import spree of sedan cars tipped up the import shareslightly to 20 percent in the first three quarters.

x. The development of the industry has seen two pattems emerge in recentyears. First, growth has been largely led by the original, large producers as well as some

new players gradually emerging from the fragmented industrial structure, a subset of which

are likely to be the industry leaders in the years to come. At the same time, thedecentralization of investment decisionmaking has pernitted the establishment of vast

numbers of small-scale producers that essentially asse.ble kits.

xi. In the small-passenger vehicle segment, eight enterprises are leading the

growth in the industry:1/

(a) The Big Three - First Auto Works (FAW), Second Auto Works (SAW),and Shanghai Volkswagen (SVW);

(b) The Little Three - Tianjin Daihatsu, Beijing Jeep, and Guangzhou Peugeot;and

(c) The Mini Two - Chongqing Suzuld and Guizhou Fuji.

Among the foreign partners, Volkswagen has clearly emerged as the dominant player in

the passenger car market. Two Volkswagen cars, the Santana produced by Shanghai

Volkswagen and the Audi by FAW, captured 60 percent of the domestic market in 1992.

When the presently planned production capacity becomes operational, Volkswagen-

designed cars are expected to provide 50 percent of the toal domestic passenger car

production in 1995.

xii. In the light truck segment, Nanjing Iveco, Southwest Isuzu, Beijing Isuzu,

and Shenyang Goldcup are emerging as the industry leaders. The production of mediumtrucks continues to be the domain of PAW and SAW and the China Heavy-Duty Truck

Manufacturing Group dominates production of heavy trucks.

INTERNA¶TONAL TRRNDS AND DoMlsrrc DEMAND

xiii. Dunng this period when the Chinese automotive industry has been

modernizing and trying to catch up with the rest of the world, the world automotiveindustry itmlf has been undergoing rd change. The industry has in the past been heavily

dominated in terms of both supply and demand by three regions: North America, Japan,

and Western Europe. Their combined production accounted for 83 percent of the world

total of 49 million units in 1990. These major markets, however, have been stagnating in

1/ In 1992, th BigThee coliectivelycapreda maket shareof 60 percent; theIitdeThree, 40 prcent;and ffie Mini Two, mininmI with productim just strting. When the capacity epansion projects arefinished in 1995, the Big Muree collectively will bhve an estimated 64 percent of domestic prodoctincaacity, the Uttfle Mree, 28 percent; and the Mini Two, 8 percent.

recent years, causing the leading players to suffer from overcapacity. The consequentintense competition made production technology the key to success and enabled thiemaintenance of profits, forcing the industry to seek globalization of manufacturing throughexchange of goods, capital, and technology for low-ost sourcing.

xiv. The Chinese domestic market has also changed, with a diversified pattemnof ownership emerging on the demand side. Until recently, private ownership wasdiscouraged in China. As a consequence, in 1985, 95 percent of the vehicle fleet wasowned by the government or state-owned enterprises (SOEs). In the lasc few years,however, controls over vehicle ownership have been relaxed. With increased incomes andmore rapid growth of township and village enterpises (TVEs), urban collectives (UCsl,and private businesses, and with the emergence of high-eani;ng individuals in the mostmodern sectors of the economy, new consumers have been allowed to enter the market.

xv. At the same time, the government has realized t!iat the lack of developmentof the highway sector has acted as a constraint to the development of competition in thedomestic market. The current investment strategy of the central government in thetransport sector places particular importance on the development of a set of integratedhighways across the country designed to pernit a much more rapid and flexible movementof goods and people.

xvi. The entry of these new categories of consumers, coupled with improvedinfrastructure for vehicles, can be expected to lead to a rapid expansion of the domesticmarket for vehicles, and to continued changes in its product mix. Two Sino-Foreign jointstudies of the Chinese market indicate **at domestic demand could increase to about 2nillion vehicles per year by the end of the century,2/ unless constained by thegovernment. The demand for small passenger vehicles will rise faster than the demand forfreight vehicles and could reach 700,000 to 1,200,000 units per year by the year 2000,accounting for about three quarters of all expansion. Within the truck segment, thedemand for light trucls will far outpace the demand for medium trucks, owing to theincreased demand for short-haul, light-freight traffic. Therefore, m examining policies inthe subsector, particular attention should be paid to these segments of the market

PROxLM FACING TEE INDuSmY

xvii. Despite the rapid growth of the last few years, the automotive industry inChina still faces several systemic and structural problems that must be resolved before itcan achieve international standards of costs and quality. Production costs of most Chineseautomottves, especally in the passenger car segment, continue to be much higher thanworld standards. Shanghai Volkswagen, arguably the most dynamic and efficiententerprise in the industry, reports an ex-factory price for the Santana of Y 104,000 orapproximately $20,000 at the official exchange rate, almost twice comparable intenational

ZI CMina'ssomoive Inday: Dewopmem Sroe8y Towads 2 by the Joit Committee_ of Chinand J ane Experts, 1987 and Deweopnen Staemfor the 2)wqpoiason Se&or to 2000, A JointSttdy tby Cainese and Genran Expes.

levels. In contrast, prices for commercial vehicles are comnparatively low. For example,the S-ton Jiefang truck is priced at $3,500 to $5,000. However, the quality, safety, andreliability standards of Chinese automotives are also far below intemnational norms.Several facts explain these problems.

xviii. First, the Chinese automotive industry still has nnt escaped the historicallegacy of fragmentation and the geographic dispersion of production capacity. The

industrial structure has thus not yet evolved to support an efficient and modern productionsystem. For the cunrent market size of barely 1 million umits per year, the industry isextremely fragmented, with a total of 117 enterprises that assemble complete vehicles with

their own chassis. To this already large number must be added 459 enterprises (oftencalled converters) that produce vehicles with procured chassis. In 1990, only 10enterprises out of the 117 had production capacity over 10,000 units per year. Theindustry is also extremely dispersed geographically and almost every province hasproduction facilities. Despite recent government policies aimed at establishing large-scalecapacity, none of the major producers has as yet been able to produce at an economiclevel, and the achievement of scale production does not seem to be in sight.

xix. Second, the automotive industry is extremely sheltered from all sources ofcompetition-import, export, and domestic-and proteted fiom market discipline. Hightariffs and quantitative restictions (QRs) make imports very difficult and limited.Moreover, internal trade barriers still remain high, as evidenced by the lage numbers ofassembly plants of uneconomic size that continue to succeed. The Bank mission foundmany examples of restrictions effected rough local procurenwent preferences andinstructions, and intemal import barriers. This protection (a) allows inefficient domesticenterpises to survive indefinitely despite their high costs and poor quality and (b) delaysrationalization of the industry towards intemational competitiveness. It is therefore nosurprise that a viable export sector has yet to emerge. Moreover, there is no policy for

the removal of these barriers to competition, and curent policies seem to be entirelyfocused on achieving domestic self-sufficiency rather than international competitiveness.

xx. Third, this industrial orgnation has had the result that significant portionsof the industry have not been touched by mornizaton, particularly in the parts andcomponents segments, as well as the medium- and large-truck and bus segments. Evenin the new joint ventures, technological capability lacks depth. With a few exceptions,capability is still at the level of knocked-down (KD) kits assembly technology or, in thelarger plants s7zh as Shanghai VW, is based on relatively old models. The technologicallimitation in the parts and components setor and upstream industies forces the industryta continue its reliance on imported components.

xxi. Fourth, at the sectoral level, the policy regime and administaton arecomplicated and inapprriate to the needs of a modern high-technology industry. Amyriad of regulatory agencies have complex and sometimes overlapping supervisoryresponsibilities over enterpdses, restricting enterprise autonomy and flexibility. Yet,industrywide regulo functions with significant positive extenalities, such as themaintenance of quality, sa*, and environmental standards, are inadequatdy performed.

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In addition, the government has not addrssed in any serious way the center-lkcal conflictin this area. The government needs to establish clear policies and guidelines to preventthe further fragmentation of the subsector and the creation of new, uneconomic capacity.

xxii. Fifth, a' iat enterprise level, the major auto works are organized in waysthat are m -ark conarast to what has been found to be most effective internationally. Themost efficient producers outsource component manufacture as much as possible, andmanagement is organized along product lines, with each layer of management subject toresults measurement. In contrast, Chinese manufactiumes are highly vertically integratedwith large production lines. Management is organized along functional lines and in acentralized organizational structure. When this is coupled with a hierarchical managementsystem, it leads to a situation with no clear delineation of accountability. The enterprisesalso typically lack crucial skills of strategic planning, product development, marketing, anddistribution. Quality assurance systems both within the enterprnses and at the industry levelare underdeveloped. Finally, Chinese automotive producers do not sell direcdy tocustomers and lack the elaborate marketing and distribution networls that are a vital partof comipetition among the intemational players. As a result, Chinese producers receiveittle feedback from customers and have litle incentive to innovate, being furither shielded

from market pesure. While this may bave been acceptable in a planned economy withchronic supply shortages, it will not fit the market economy.

ssuEs A OPPoRTuNrn3s

xxixm. First, the goveanment's policy framework for the automotive industry needsto be reformulated, as it is not consistent with developmental objectives. The cmrentsWategy seeks to achieve full domestic self-sufficiency. The government has, it believes,identified the various levels of demand for different vehicles over the next 10 years, andhas then "assigned" different segments of the market to different producers: luxury carsto Audi, mid-size sedans to Santana, compacts to Citroen, and so forth. Joint ventureshave been attacted to these segments by means of high levels of domestic protection, attariff rates well over 100 percent. Moreo"er, producers are then exhorted to maxmizelocal sourcing and given further incentives to do so, through tariffs and bans on importsof parts.

xxiv. perience in many counties has demonstrated that, in dts industy, astrategy based soley on Import protection (the "i?fant industry" theory) will never lead toefficincy and intemadonal competiens. Rather, import protection incurs high socialcosts through excessive domestic prices, and creates a powerful interest group for themaintenance of the protection. Thus, the present Chinese strategy to develop a competiauomotive ndustry is doomed to failre unss key elements are changed. Rather, anintenational market orientation to the strategy for the automotive sector is crucial-thatis a stategy that aims for international cost competitiveness at the eariest dme, and theabandonment of facilities that cannot achive this level of competitveness.

xxv. This said, it must be recognized that scale economies cannot be achievedovernight, especially in what is stl a relatively small market. Thus, the sudden

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engagement in free foreign trade would deny the opportunity for the domestic industry tobuild a base, and for the economy to benefit from spill-over effects.

xxvi. The way to reconcile these two factors at this stage of the industry'sdevelopment is to protect domestic producers for a stated and limited period of time. Theindustry would be disciplined by increasing exposure to import competition over time, bymeans of declining tariff and nontariff barriers. At the end of the procdon period, tariffswould have been reduced to average levels (15 to 20 percent), and nontariff barriers wouldhave been eliminated entirely.

xxvii. Second, and perhaps the most difficult issue for the govemment, productioncapacity in the automotive industry needs to be concentrated in terms of the number offinal producers, and speialized in terms of component manuacture. It seems impossibleto achieve economies of scale in the industry without the elimination of great numbers ofthe small, inefficient prducers (although some of these could, no doubt, be converted tocomponent manufturing). This could be accomplished by the following two alternaiveapproaches: The first approach would be the 'laissez-faire' way, that is, simply removingprotection, both foreign and domestic, and letting the market determine the survivors. Theaternative approch would offer a more proactive role for the state in restructuringexisting industry. Nevertheless, the bottom line is lear. Significant rationaon otheexisting automotive industv-; is necesary; many of the present assembly plants will haveto disappear, and their workers found altnative employment, if a competitive industry isto develop. Of course, govremment has the choice of protecting the present producersforever, preventing exit, and acceptng a high-cost, domestically oriented automotiveindustry. It should only do so, however, with the kmowledge that this would be a subsidyfrom the rest of society to the workers in those plants; this is not compatible with China'smarket economy apprcach or its desire to develop a world-class industry.

xxviii. Third, the strategy for the dcvelopment of the Chinese automotive industryshould be formulated in the light of world trends in the industry. The current inteaionaltrend is toward globaliation of manufacturing and sourcing. This is particularly true forthe component and parts industry; in this case, China needs a larger production volumethan the domestic marlet can support and thus access to forign market. This means thatChina needs the right incentives and stteg for foreign direct investment, which wouldbring forth synergies between the domestic industry and foreign producers.

RBCO1mmDATONS: AN AGzriDA FOR AcTON

xxix. The 1990s will present the Chinese automotive industry with the greatestopporuities and challenges it has faed so far. Strategic and selecdve government actionwill be critica in facilitafing the transition. The government has, in our view, two mainfunctions that it alone can perform: First, and most importan, it must create the nghtsectoral policy framework-one that would be conducive to addring the issues desibedabove. Second, it must create an appropriate supporting insftiutional framework to assistthe industry to adjust to the new policies. These two functions are no different in thissector than in any otber. The difference is that economies of scale make entry much more

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expensive and that past policies male the problem of exit significantly larger an in manyother subsectors of the economy.

A. Balncing Protection and Competition

xxx. The challenge to government policy is to find the balance between providingthe domestic industry with just enough protection from imports to give it time to movedown the learning curve, while ensuring that some import competition-and the sureknowledge that protection will decline to low levels in the future-provide domesticproducers with the incentives to learn and internalize new technologies, to continuouslyreduce costs, and to improve quality.

xxxi. Therefore, the government of China should announce its program, based onoffering protection that is limited in time and scope.j/ It is recommended that thecustoms tariff at the end of the protecdon period should not exceed 20 percent. This tariffshould be the only instrument to implement the trade policy, and all nontariff trade bariers(QRs) should be removed, including import quotas, import licenses, and prohibition onforein exchange purchase. Similarly, all rights to import vehicles free of duty should beabolished.

xxxii. Although the protection period should be determined after internal study,experience elsewhere has indicated that a period of five years after policy announcementshould be adequate, at the end of which only the 15 to 20 percent tariff would prevail. Alonger period would not necessarily guarantee the domestic industry's commitment tohigher efficiency, as it would be outside the typical planning and investment hoizon.

B. Creating Incentives to Innovate

xxxiii. The creation of extenal sources of competition and pressures to innovatemust also be accompanied by an appropriate hamework of domestic policy. The economicand regulatoy enviroment and the incentives and attitudes of managers and techniciansin the automotive firms will be crucial factors in the development of the industry and inthe transfer and application of modern technology. In this regard, three areas seem to beof particular importance.

xxxiv. Clear ladersip In supervisory agencies and sectoral developmentalstrategy. A weakness in the present system of sector management is the multitude of first-tier suprvisoy agencies and the ambiguity of the relationship between supvisors andsupevisees at the enterprise level. The government of China needs to assign clearauthority and responsibility to a single agency, such as CNAIC, for developing andimposing national priorities, particularly in the areas of creation of new capacity andtechnology development. (niis also applies to some of the othe issues with respect to therole of government, discussed in section C.) This is because in the present policy

Annowcig d pimm is imVortant so tmt existing and potitial competito knw th e ad willrpodwith their investment strateies in a com4etitie fasion.

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framework, and until such time as the reform program in this sector has taken hold, there

could otherwise be investment decisions that would be inappropriate in the medium term.

Repetition of such investment mistakes would only create increased pressures not to goforward with the reforms, on the grounds of the loss of production facilities. Moreover,it is necessary to formulate a clear and detailed development stategy for the automotivesector, and to spearhead the restructuring and adjustment program. Finally, the current

overlapping responsibilities create excessive and repetitive supervision, and an environmentthat stifles enterprise management.

xxxv. Domestic Competition. The government should eliminate impediments to

domestic competition, for example, interprovincial trade barriers, such as local

procurement preference guideines; government subsidies, such as on raw materials

supplied through the Ministry of Intemal Trade; government control on prices and

distribution; and limited managerial autonomy and accountability.4/ Enteprises should

be allowed the full 14 autonomies ganted in the "Regulations on the Transformation of

the Operating Mechanism of SOEs." In particular, and subject to policies for the sectoras a whole, decisions on production volume and parts sourcing should be left entirely to

enterprises, as should decisions to invvest, once the new policy framework is in place. TheMinistry of Internal Trade should pay particular attention to competition in this industry,

ensuing that purchases by provincial and local governments and SOEs are based on quality

and price, and not on tax or financial relationships.

xxxvi. Enterprise Goverance. The automotive industry poses particular

challenges in the area of governance, but its size also offers opportunity. The separation

of regulation, ownership, and management should be addressed specifically in this sector.

The role of CNAIC should increasingly be one of regulation and provision of infonnation,rather than as direct owner. The major enteprises in the industry should be formed as

joint-stock companies. Given the need to stimulate competition over time, government

should not form a sector holding company in the automotive area. Rather, shares could

be vested in portfolio holding companies, with local govenments, and, perhaps, in banks.

Given their overall and aepected profitability, these enterprises would seem to be

candidates for listing on the domesfic stock exchange. (Indeed, one company, Gold Cup,

has alrady been listed on the New York Stock Exchange.) Boards of diretors should be

created for all such enterprises, and for the joint ventures, the foreign partners should be

given the leading role.

C. Facilitating the Creation of an Efficient Industial Structure

xxxvii. It is not the view of this report that the government can simply create the

right policy framework and let the market do its work. Rather, the role of govemment

should be to facilitate the pror functioning of the market, through actions to asit

economic agents to react to new market signals. Moeover, the market in China is as yet

M For concrets examples, se the main report, chapter 3.

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underdeveloped, and may fail in the absence of government action. There are six areasof government intervention that we would consider appropriate and helpful.

xxxviii. Inefficient enterprises producing with obsolete technology and at anuneconomic scale should leave the Industry. Because the market is extremely crowdedand fragmented, small-scale inefficient producers should be forced to exit. There is simplynot room for 117 full producers and 459 assemblers. As noted earlier, we can foresee twoalternative approaches to this process of rationaliation. Under the first, laissez-faireapproach, the government would develop minimum quality and safety codes for vehicles.Serious enforcement of the codes, in conjunction with removal of import protection, woulddrive unsafe and poorquality vehicles and their producers out of the market. A related,but more proactive approach, would be to set up minimum standards for productionfacilities (ncluding size) and technology resources, administered in the form of productionlicenses. Producers with hopelessly inefficient production facilities, or an excessivelybackward technology level, would be made to exit entirely from the sector. Producerswith salvageable facilities and technology could be allowed to merge with larger and moreefficient producers.

xxxix. A more direct approach to this would be for the government of China toestablish a task force to draw up a set of criteria wVth which to review all current facilities.They would then be clasified into those that will survive, those that may be salvageable,and those that must be closed down. This would also require the provision of funding toassist exit-including maintenance of welfare coverage and transition financing-anddiagnostic assistance to salvageable enterprises. Foreign technical assistance could besought in this restrucwing diagnostic function.

xl. While the first strategy is more suited to the market economy, it must berecognized that the Chinese market is as yet far from developed. In particular, there is adanger that if all the small producers are permitted to continue to exist, the interest groupsassociated with these facilities-notably local governments-may seek to undermine thebasic policy of developing competition, the basis for developing a sound industry in thefuture.

xli. The Government should not encourage new entry to passenger and light-truck segments at subeconomic size, In the long run, competition would be the keydeterminant in aping future industry concentration; however, until competition hasdeveloped through the removal of trade barriers, the government should prohibit new entryat a capacity level belew 100,000 units per year. Indeed, there is a case for thegovernment to prohibit entry at all. However, it would not be appropriate to discouragea new, genuine joint venture that was based on clear knowledge of the future policyframework for the sector, indeed, this could speed up the transformatior. of the existingjoint venures into competitive production.

xii. For other seegments, entry by joint ventures should be encouraged asthese segments have long been neglected In foreign Investment. This applies especiallyto medium and heavy tucks, which are heavily concentrated in two producers in China.

- xvii -

The total investment in bus and heavy-truck segments represents only 2.5 percent of thetotal during the Eighth Five-Year Plan. These segments are also the most backward in theautomotive sector and thus could benefit from the infusion of advanced technology fromforeign sources. For the component and parts segment, entry by foreign componentproducers should be also encouraged as the segment needs foreign technology and heavyinvestment because of its high capital intensity. However, most of the joint ventures todate have emphasized partnership between the domestic and foreign partner, with thedomestic partner clearly regarded as the senior. There is a good case for encouragingsome wholly owned foreign entrants, or joint ventures in which the foreign partner issenior. These arrangements would aBow for the development of factories that will regardChina as a production base, and the domestic market as just one part of the market for theoutput of the enterprise.

xliii. The development of the component sector should be a priority. Selectivedevelopment of the components sector is suggested at this stage. The government shouldcreate a leading group to prioritize major components that can be realistically targeted forlocalization. This must be based on an awareness that economies of scale for theproduction of some components are very high and that the inability of upstream industriesmay constrain the effective localiztion of some other components. The existing foreignpartners should be invited to participate in such a task force and to provide guidance toChinese policymakers in international experience. Once the priority list was determined,it could form the basis for a targeted search for foreip partners in such industries,together with the search for parners in the areas noted in the previous paragraph.However, special incentive systems should not be adopted for such subsectors.

xdiv. The development of subcontracting networks should be a priority. Themost important change in process technology in recent years has been the abandonment ofvertically integrated production technology and the development of geographicaly close,but organizationally separate, subcontracting. This is best characterized by Toyota'stechnology. It is recommended that the Chinese government seek assistance from thosefamiliar with the development of this approach to create a framework for its developmentin China. In particular, this should be possibly linked to the closing down of many of theexisting subeconomic assembly plants, for some of this expertise could be converted intosubcontracting. This could be facilitated through financial, informational, and managerialassistance in meeting the standards required of modern components suppliers. In Japan,vehicle assemblers provided this type of assistance to components suppliers to help themovercome initial production problems. In China, given the managerial weaknesses of theassemblers themselves, state-sponsored research and consulting agencies may be moreapproprate, with suitable foreign advice. The development of product and qualitystandards by an industrywide agency would also be particularly useful at this stage,because it will help small entrepneurs understand the quality standards expected of them.The designation of an agency to lead the development of the parts and components sec.oris recommended, but it is observed that this seems to be an appr3piate function forCNAIC.

- xviii -

xlv. Enterprise Management. At the enterprise level, organizational andmanagement systems must be realigned to encourage efficiency and innovation, given theirvertical integration and lack of accountability. The level of vertcal integration should bereduced drastically and except for the manuf.cture of some key components, all parts andcomponents should be subcontracted. Organizationally, they should be reorganized alongproduct divisions and each division should be an independent accounting entity.Managenally, the management systems should be decentrazed, with transparentperformance evaluation systems and close links between parformance and pay. The autoworks also need to develop new skills in strategic planning, marketing, and distribution.A lot of training will be required both for workers and for managers in acquiring thesenew skills. New systems of production management such as contemporary best-practicemanagement methods of just-in-time inventory management and total quality control shouldbe studied and adopted.

xlvi. To identify such problems is straightforward, but implementation and reformdesign is more difficult. In particular, the question arises as to who should spearhead thesetechnical and organizational reforms. It is suggested that CNAIC should seek technicalassistance to finance detailed restructuring studies to be carried out by this organizationwith the help of foreign and local consultants, for the two or three largest enterprises (suchas FAW, SAW, Nanjing). This should be done once a new policy framework has beendesigned and adopted. This should be regarded as assistance to the industry in formulatinga plan to adapt to the new policy framework, but it would be for the enterprise and itsboard of directors, not for CNAIC, to decide on fuure steps for the enterpise, and for themanagement of the enterprise to implement any such plan. This should thus be seen as anexercise in the separation of govemment, ownership, and management.

D. Long-Term Goals-The Development of Product Technology

xlvii. The ultimate transition to an intemational player in a competitiveenvironment will depend in large part on the success on developing inherent producttechnology capability. This underscores the importance of effective government policiesin facilitating the development of domestic research and development capability and humanresources. They will ensure resilient and adaptable domestic industry under the continuallychanging internatonal market.

CONCusON

xlviii. The automotive industry exemplifies all the industrial policy questions facingthe govemment of China today: how fast and to what level to liberalize imports; how tomake inefficient and uneconomic enterpnses viable; what to do with displaced workers;how to balance state intervention with market forces during China's transition toward themarket economy; and how far to let management go when a market-oriented corporategovenance system is yet to emerge; and how to guide the industry development withoutresorting to the instruments used in the planned economy. This study has attempted toprovide a range of suggestions to answer these questions, while recognizing that China isstill in its transition towards a market economy and that in some cases further study hasto be recommended. The short- to medium-term answers to the challenges facing theChinese automotive industry may change over time with changing macroeconomic

- Xix -

envirment and deepning market reform. However, it cannot be too much emphasizedthat m the long run the Chinese automotive sector will have a most efficien, industrialoganization when its development, dictated by intenaonal compedtion and stateparttcipation in the sector, is eventually replaced by entreeurial ownership.

1. DEVELOPMENT OF AUTOMOTIVE INDUSTRY IN CHINA

A. RATIONALE FOR AuroMoTm SECrOR WoRC

1.1 The Chinese automotive industry has now become a s;gnificant contributorto industrial output, having reached 1 million units of vehicle production in 1992. Thisoutput ranks the Chinese automotive industry twelfth in world production, approaching thatof Brazil. A substantial part of this production came from the commercil vehiclesegment, of which China is the world's fifth largest producer. The passenger-car segmentcontributed modesdy with about 160,000 units; this segment is growing most rapidly andhas the greatest potential for additional expansion. This level of production is the resultof the rapid growth in the 1980s-18.7 percent per year-and an acceleration in the 1990s.Vehicle output has nearly doubled during the last three years. Nevertheless, given the sizeof China's economy and current income growth rates, a redoubling of the subsector isconfidently expected during the rest of this decade.

1.2 The process of economic reform and decentralization has raised newchallenges for China in the areas of industrial strategy and organization. While the roleof the state in resource allocation and investnent planning has been declining, the marketforces are not in full play yet, with China's economy still in transitioi towards a market-driven one. This raises particular questions for the government in deternimng policytoward particular industies, and in deciding when and in what ways to ease transitionaldifficulties hindering the development of such industries. Moreover, in the cufrent stateof the reform program, there are also questions about what instruments the govemmentshould use to effectively shape the future of the industry and at the same time to advancefurther development of market forces.

1.3 The automotive sector best exemplifies these issues for two primary reasons.First, this industry is capital-intensive with particularly large economies of scale. We havethus observed in many countries, including developed countries, that the state bas had asignificant role in developing industry, either in its early stage of development or inrestructuing. Second, from the standpoint of economic stategy, the automotive industryis important for its industrial, macroeconomic, and social impact This industry has thepotential for becoming a leading sector thrDugh enormous backward and forward linkges;it is inextricably linked to national transport strategy and the integration of the domesticmarket; and, it has many externalities such as pollution and urban congestion.

1.4 With the backward linkages, the Chinese automotive industry could act asan engine of growth for the related industies that supply it with raw matials,intermdiat goods, and machinery. For example, the automotive industry consumed2.6 nmllion tons of ste and iron in 1990, about 4.5 percent of China's national output

Experience in the United States and more reently in Brazil, however, indicates that theautomotive industry has far greater impact on the growth and transformation of relatedindustries. In the United States, 22 percent of primary iron and steel, 9 percent of rubberand plastic, 16 percent of electrical machinery, 17 percent of fabricated metal, and6 percent of nonferrous metal were supplied to the automotive industry as first-tierintermediate goods or raw materials. In Brazil, where the automotive industry constitutesonly 6 percent of manufacturing production and 3 percent of industrial employment, itabsorbs 76 percent of aluminum alloys produced in the country, 43 percent of zinc alloys,36 percekot of cast iron, and 18 percent of uncoated flat-rolled iron and steel products.j/Evidence from the United States, for example, suggests that related industries benefit fromthe development of the automotive industry with every $1 of value-added in the automotiveindustry generating an additional $0.65 in value added in backward Iinkages.2/ 1/

1.5 Forward linkages of the automotive industry are estimated to be even greaterwith $1 in the United States generating $7.63 in value of output and 3.5 jobs in forwardindustries.4/ This is created in dealerships, repair facilities, and gas stations, as well asin the financial intermedianes and insurance companies that broaden the market byproviding financing and risk sharing. Therefore, the automotive industry has proven tobe an effective vehicle for industialization in many countries, and GOC needs to make aconcerted effort to maximze the potential benefit the industry could offer to the economy.

1.6 The automotive industry also has a linkge to China's transport strategybecause road tLansport is becoming more efficient in handling goods for short to mediumdistances relative to other modes of transportation. Even though there is concern regardingroad capacity in China,5/ road transport has been increasingly used in recent years to theextent that in 1988 this mode of transport canied 75 percent of goods in total tonnages and19 percent in total ton-kilometers, increasing its share over the years from 70 percent and9 percent in 1980, respectively. In this context, an important element of the strategytoward national market integration is that of ensuring an adequate supply of types ofvehicles that are consistent with the transport strategy, thereby removing a major physicalconstraint to internal trade.

I/ Karmokolias, Yannis, Aomove Indony, Tend and Prope for Iwsnet in DevlpingCoun*e, IFC Discussion Paper No. 7, 1990.

2/ The definition of the term amotive industry3 is at the three-digit level d includes fnal asemblyand body consruction, major auto components and parts, and heavy trcks and buses.

3/ U.S. -China Automodve Indwsry Cooperation Project: Fia Repo, Univesi of Michigan, 1989.

41 US. -China Automotive Idwty Coopern oect: Fnd alRpon, University of Mchigan, 1989;Shaid Yusuf, Chi Indwll R]_euruMg: A Tal of Three Cida, The Wodd Bank, 1993.

I/ Total road mileages in China is lightly above 1 million kilomete in 1992. Chine road mileagesper capits is only 0.91 mder per person and ane of the lowest in the vwrd-the compartive figefor the United States is 26.1 meters; Frnce, 14.6 meters; India, 2.2 meters. See China's RoadSratgy In Yer 2aao, by the Sino- n Joint Study Team, 1990

1.7 The development of the automotive industry and the resulting increase in theuse of automotive vehicles in urban areas yield negative externalities that cannot be ignoredin the develLpmental strategy of the nation: pollution and urban traffic congestion.Automotive-related air pollution in Chinese urban areas is already serious; for example,exhaust gas produces 39 percent of total carbon monoxide emissions, 46 percent of totalnitrogen oxide emissions, and 75 percent of total hydrocarbon emissions in Beijing.6IThese levels of pollution compare with OECD countries respectively at 66 percent,47 percent. and 39 percent enjoying a significantly higher level of motorization.2/ Thisproblem w continue to worsen as the number of automotive fleets continue to grow andthe current practice of using high-lead gasoline and diesel oil for automotive fuel continues.Government actions on automotive-related pollution are obviously needed to stop firtherdegradation of air.

1.8 Traffic congestion is already becoming a major problem in large Chinesecities with inner-city taffic rarely exceeding 15 kilometers per hour (kn/h) and slowingdown to 8 km/h in peak hours. In some cities, bicycle speeds are often observed to behigher than other automotive modes, especially public transport.1/ The experience ofmany cities in the rapidly growing economies of Asia indicates that traffic congesdon couldbecome even worse, with increased levels of motorization and associated economic costsalready amounting to as much as 1 percent of gross national product (GNP).2/ Thisdatum suggests that GOC should identify the desirable level of automobility and possiblyconstrain the growth of the automotive fleet in line with urban development stategy.

1.9 This report intends to examine these challenges facing GOC in formulatingindustial policy and strategy by using the automotive industry as an example. Althoughthe report's recommendations focus on how to address these issues in the context of thisparticular industry, these considerations should be equally applicable to other subsectors.This seems an appropriate subsector to study because the industry is at a relatively earlystage of development and because of the potential links to the rest of the economy.Decisions taken today will have a lasting impact on the pattern of economic developmentin China over the rest of this decade, and beyond. Finally, it is fittng becauseexamination of the current strategy has revealed senous problems that need to be addressedwith some urgency.

£I Ma Ra et al., Vd ei Emission Poluant Control and Tedical Measww in haina, Te HhwayResearwch Insfiite Ministy of Comation, PRC, 1990.

2/ Asif Faiz, Kumates Sinba, Michal Walsh, and Amiy Varma, Auomote Air Poudtion, The WoddBank Working Papr, 1990.

I/ Urban hanspor in Ausl. An Operational Staegy for the 1990s, The World Bank Yellow CoverDra.

9/ Op. cit., p. 21. In Bangkok, for example, traffic often oomre to a complte stanstl. Peak hourtraffic speeds im central Ban*ok aved 2 kilometers per hour in 1990 before mpro to9 kilometers per hour in 1993.

B. DEVEOPMENr OF THE AUTOMOTIVE INDUSIRY IN CHNA

1.10 The development of the Chinese automotive industry can be broken downinto two phases that are distinctly contrasted with respect to prevailing economic rationale,sector objectives, te^'hnology development, product emphasis, and growth rate. The firstphase-from 1950 t, 1980-established the foundation of the industry. The prevailingeconomic rationale was self-sufficiency, and the industry mainly relied on indigenoustechnology, except for the initial Soviet infusion in the early 1950s on truck manufacturing.In this phase, growth was slow and the industry mostly produced trucks that were used tosupplement railroad transport. The second phase-since 1980-has marked themodernization of the industry under the umbrella of the open-door policy and economicreform. The Chinese automotive industry launched policy initiatives to foster industrydevelopment and actively recruited foreign technology and capital, which resulted inimpressive growth and founded the modem passenger car industry. The following sectionsoutline GOC's strategy toward the adtomotive industry in both phases and trace the growthand development of the industry.

First Phase: Beinnin of the Domestic Industry

1.11 The Chinese automotive industry was first established in 1953, when GOCbroke ground for the First Auto Works (PAW) in Changchun, Jin Province. FAW wasdesigned to produce 30,000 five-ton trucks annually and comprised several plants toproduce parts for a single truck design. Technology, equipment, and training wereacquired from the Soviet Union, and the first -Riefang' trucks rolled off the assembly linein 1956.1W/ The successful launching of FAW gave government planners theconfidence to expand shortly afterwards into other segments of the industry. As part ofthe "Great Leap Forward," initiated in 1958, GOC diversified the automotive industry intothe production of light trucks (at Nanjing), heavy trucks (Jinan), and passenger cars(Changchun and Shanghai). Later, in the early 1960s, GOC further expanded the sectorby beginning to produce buses on the "Jiefang' truck chassis in plants scattered around thecountry.

1.12 In 1965, another large project for the Second Auto Works (SAW) wasinitiated at Shiyan, Hubei Province, initially for the production of medium-size trucks.The decision on this remote location was primarily dominated by military and politicalconsideration to shelter the heavy industry from possible foreign intrusion and to developinland and coastal areas equitably. Owing to the then souring relationship with the formerSoviet Union, GOC set out to construct this project solely with indigenous technicalcapability. As a result, GOC soon had to struggle with technical difficulties and limitedresources; consequently, SAW could begin to produce vehicles only a decade later. It wasonly in 1980 that SAW reached full capacity production of the "Dongfeng" truck, whichhelped the industry break a new production record of 200,000 units per year.

IQ/ Ibe Chinese technology level ws well below conteporay world standards as the Soviet technologyimportd in 1953 was itslf a dedvative of the America truck desipns of the 1920s.

1.13 During this phase, the automotive industry predominantly produced trucks.Passenger cars (sedans only) manufactured with domestic technology comprised less than1 percent of total vehicle production. This was in line with the automotive indu'try'sdevelopment objective of supporting the transport strategy by providing a vehicle fleet toshare cargo demand with the railroad transport system.

1.14 Absent was any sectoral policy to deliberately exploit economies of scale andlocational advantages, which resulted in the dispersion of capacity across the nation. Thespatial dispersion of subscale plants went to such an extreme that by 1979, for example,405 establishments (n every province but one) were producing engines for themarket,U/ the size of which would be hardly enough for one efficient plant. Thespatial dispersion of capacity across the country also impeded the diffusion of technologicalknowledge and contributed to the backwardness of the Chinese automotive industry. Thisdispersion and fragmentation of capacity was due in large part to: the tendency ofprovincial and I-:A governments to establish their own industrial bases; the reluctance totransfer resources at the arbitrary prices posted by the central authorities; and conflictingobjectives among central and local governments. The lack of proper and timely sectorpolicy left an indelible imprint on the Chinese automotive industry. The industry todayhas yet to go through the ordeal of restructunng before shedding its past legacy andattaining an efficient scale of production.

Second Phase: Modernization Drive

1.15 Since 1980, the second phase of the Chinese automotive industry experiencedsignificant changes that lead to the modernization of the industry, which were spurred byeconomic reform and reinforced by a proactive sector policy. GOC's intention to makethe automotive industry a "pillar industry" was made public and repeatedly confirmed:The China National Automotive Industry Corporation (CNAIC) was created to raise theeffectiveness of industrial organization; large investment projects were initiated andimplemented; and foreign collaboration in technology and capital was actively sought. Asa result of policy changes, the industry showed rapid growth, breaking new records invehicle production, expanding its product lines into newly found market niches, andreaching the 1 million mark in 1992. The outlook for the automobile industry remainspromising.

China National Automotive Industry Corporation

1.16 For the Chinese automotive industry, the establishment of the China NationalAutomotive Industry Corporation (CNAIC) in 1982 marks one of the most visible andsignificant organizational changes. CNAIC was established to address thecompartmentalization of the planning bureaucracies (central ministries, provincialgovernments, and municipalities) by providing industrial focus to the planning system.nitially, CNAIC had eight subsidiary companies defined along product or functional lines

.I/ Thomas P. Lyons, Spatial AspeVs of Development in China: he Motor Vehicle industy, 1956-5,'mern4atonal Regional Science Reiew, Vol. 11, No. 1, 1987.

rather than traditional planning bureaucracy boundaries. Five companies were eachconcerned primarily with production of finished vehicles with one or more of the majorplants as its core. For example, the Jiefang Company, which based the main plant in Jilin,was to specialize in "Jiefang" series medium trucks and in conversions that used theliefang chassis. Three companies specalized in parts production, marketing services, andforeign trade. The CNAIC system grew rapidly. At its heyday of power in 1983, 291enterpises under 10 ministries and 27 of 29 provinces participated in the system; theenterprses contributed to about 80 percent of the industry's total gross output.

1.17 Despite the preeminent position of CNAIC in the industry, the allocation ofdecisionmaling authonty among CNAIC, its subsidiary companies, and the establishedministerial and provincial bureaucracies was not made clear. Officially, CNAIC wassupposed to become an independent economic entity under the "guidance' of a centralizedplan. CNAIC was not intended to be a state administrative organ mandatorily subject toand involved with the planning and resource allocation system, which is a source of powerin the planned economy.l2/ In reality, however, CNAIC seems to have replaced thecental administrative bureau that had oversight authority over the automotive industry bygetting involved with planning and overseeing the implementation planning efforts of theState Plar.niing Commission (SPC) in some enterprises. Yet, CNAIC did not gain effectivecontrol over aU participating compaimes because its plan sometimes conflicted with theinterests of those provincial governments that retained nominal ownership of the productionplants themselves and were responsible for physically providing resources that were oftenin short supply. CNAIC remained influential, however, through its easy access to SPC.CNAIC also continued the effort to centralize the decisionmaking process, especially forthe medium- to long-term panning of the industry, by tightly monitoring the investmentprojects inifiated by provincial governments.

1.18 Counter to this centraliation effort was the trend of economic reform towardthe devolution of central authority to provincial governments and enterprises, andeventualy to the market, resulting in the waning of CNAIC control over the industry. In1987, CNAIC was disbanded and reformed to act as a federation of nationwide automotiveenterpises, becoming far less powerfil until regaining in 1989 some of its authority andcontrol over investment decisions. Since then, CNAIC remains active in its facilitativerole by rendering support services to the enterprises, by coordinating research anddevelopment (R & D) and technology transfer among enterprises, and by carrying outlimited administrative functions on the issues delegated from the State Council. It alsomaintains a supervisory role at the Technology Institute and Research and Quality Centersand reains major ownership of the Auto Parts and Accessory Corporation, the NanjingMotor Corporaion, and the Automotive Industry Imports and Export Company. Eventhough the authonty of CNAIC waxed and waned in tandem with GOC's approach tosector management (centralization, decentralization, and recentraliation), CNAIC remainsinfluential in the industry in its advisory role to SPC and continues to be useful to GOCas the only organization fully focused on the automotive industry.

12! Zgguo Jixe, 1988.

Pillar Industry

1.19 In recognition of the potential role of the automotive industry in fosteringeconomic integration and growth, GOC accorded -pillar industry- status to the automotivesector in the outline of the Seventh Five-Year Plan (FYP, 1986-90).j/ This statusprovided a strong stimulus for the development of the domestic industry, entitling it tofinancial benefits such as soft loans, a preferential tax regime (e.g., the abolition of thespecial consumption tax), easy access to foreign exchange and simplified administrativeprocedures for several activities (e.g., obtaining construction permits, hiring or firingworkers, foreign travel of employees, and increased share of R&D activities undertakenby state-controlled institutes). Whether the government policy of preferential treatmentwas effective in attaining the development objectives needs to be discussed; however,promulgating the pillar status itself instilled confidence into the industry and investmentprojects.

Lare Investments

1.20 During the Seventh and Eighth FYP (1991-95) periods, large investmentshave been initiated and implemented for the automotive industry. The Seventh FYPalocated Y 11.7 billion to the CNAIC system.l4/ An additional $460 million offoreign capital was utilized in the industry,l5/ 60 percent of which was derived frommixed loans from foreign governments and the balance from foreign direct investment.

1.21 The Seventh FYP initiated investment projects for the production of knock-down (KD) assembly of foreign-designed cars, and marked the begiing of the modernChinese passenger car industry at Shanghai-Volkswagen (SVW), Tianjin-Daihatsu, andBeijing-Jeep.16/ In parallel with new passenger car projects, the Seventh FYPcontinued to support the truck segment with seven projects designed to develop theproduction capacity and to upgrade the technology of heavy and light trucks. Theimplementation of most of the truck projects, however, was delayed, and these werecarried .er to the Eighth FYP.

13/ Electronics, machine tool, and cement industies are other industr desgnated for the pillar-industrystats.

14/ The CNAIC system does not include automotive investments by the Ministry of Aerospace and theMinisty of Ordnamce Industry, which ae planed sepately.

15/ This amount does not include the FAW-VW or SAW-Citroen joint ventures, for which contracts weresigned in the final months of the Seventh FYP period. Note also that direct foreign investment is notincluded in the total investment made during the Seventh FYP as recorded in China, because the foreigfunds were used to import eqipment and mateals and tbus are not contsued as competig fordomestic resource allocaions.

16/ Beijing-Jeep p-oduces a multpurpose vehicle, which i8 used both for passenger and as a light cargovehicle. It is also used as a military vehicle in China.

1.22 The Eighth FYP quadrupled the total allocated investment in the automotivesector to Y 46 billion, and reinforced the emphasis on the passenger car segment with twothirds of the planned investment in the Eighth FYP allocated to that segment. Two majorprojects for passenger-car production-Volkcwagen-FAW and Citroen-SAW-startedproduction during the early years of the Eighth FYP. In addition, the Eighth FYPhighlighted the light-truck segment and also began to recognize the importance of upstreamsegments-both parts and components-and related industry-as prerequisites for raisingthe local content. This was accomplished by setting aside a significant share of theinvestment. Table 1.1 provides a detailed breakdown of the Eighth FYP investments inthe automotive sector.

Table 1.1: EIG FIVE-YEAR PLAN INVESrM IN THE AuTooTIv SEcrOR

Y billion

Carryover from Seventh FYP 4.40

Paseenaer Car ProiectsCars 13.90Parts and components 10.60Tianjin engine 1.60Forming complete set 2.50Minicar projects 1.64

Subtotal 30.24

Heavy-duty truck 0.28Light-duty truck 6.45Bus 0.86Die and mold 1.60R & D and training 0.88Other 1.50

Total 46.00

Infusion of Foreign Technology and Capital

1.23 Another major force shaping the development of the Chinese automotiveindustry during the last decade has been GOC's active recruitment of foreign collaboration.Foreign collaboration has brought about capital, technology, and management practices thathave become the driving force behind the modernization of the industry. By the end of1990, the Chinese automotive industry had received about $460 million of foreigninvestment; even lager investment-$6.85 billion-is anticipated in the Eighth FYP. Inthe earlier years of the industry's development, the prevalent form of foreign collaborationwas that of acquiring only hard technology through license agreements. Facing a largeneed for investment capital, however, the govemment in recent years encouraged the

bundling of capital with technology and management partcipation-in the form of the jointventure-as an inducement to foreign investors. As a result, most of the major passenger-car assembly projects have been joint-venture agreements.

1.24 Among the most prominent early foreign collaboations are the joint-ventureprojects for passenger cars: Shanghai-Volkswagen, Guangzhou-Peugeot, Beijing-Jeep,Tianjin-Daihatsu. In the past two years, this list has expanded to include FAW-Volkswagen for Golf and Jetta-model passenger cars; SAW-Citroen for passenger cars;several ventures for the production of light trucks with Isuzu, Iveco and Toyota; andtechnology transfer agreements with Cummins and Steyr. Collaboration agreements havealso been concluded recently for the production of minicars between Chongqing and Suzuldand between Guizhou and Fuji. Most of the technology transfer agreements have beenconcluded with European firms. American firms have only a marginal presence in theassembly industry. Japanese finns also remained relatively passive in spite of their activerole in the world automotive industry, but recently initiated two major joint-ventureagreements for the manufacture of minicars.

1.25 There is also considerable, if not enough, foreign participation in theautomotive components sector. Table 4.4 in the Annex gives a list of some of the keyprojects with foreign coabation in the components sector.

C. CURRENT INDUSMY TREND

High Growth and Product Mix Change

1.26 In the last decade and especialy since the Seventh FYP, the automotivesector in China has made significant strides by achieving high growth of the industry,substituting imports, establishing domestic bases for the passenger car industry anddiversifying into light trucks.

1.27 Since the early 1980s, the annual output of vehicles has increased more thanfour times, rising from 222,300 in 1980 to touch the 1 million mark in 1992 (Tble1.2) ./ This rapid increase in production is attributable to new projects and betterperformance from existing projects on the sWpply side and the rapid growth in the Chineseeconomy on the demand side, especally in the light industry, township and villageenterprise (rVE), and collecdves sectors. The 1992 total production of the Chineseautomodve industry is equivalent to the total automotive production in Bzil (960,115units) and Mexico (989,373 units) in 1991 and the Republic of Korea (1,083,655) in1988,J1 even though passenger car production in these economies is much higher thanin China: 745,274 units in Brazil in 1991; 720,384 in Mexico in 1991; and 872,074 inKoea in 1988. The 1992 total production outperformed the target producdon of 900,000

17/ The output in 1993 passed 1,200,000 units.

18/ World Motor Vdicle Data, 1990 edition, by Motor Vebicle M Associatian of X UnitedStes, Inc.

Table 1.2: CmEnnE AuroMonVzE tO)UCIoN, BY TPME, 19&5-92

Year Total Truck Passenger Car

1955 (61.0) (61.0)1960 22.5 17.1 (98.0)1965 40.5 26.5 (133.0)1970 87.1 47.1 (196.0)1975 139.8 77.6 1.81980 222.2 135.5 5.41985 443.4 236.9 5.21986 372.8 218.9 10.81987 472.5 299.4 17.91988 647.0 364.0 36.81989 586.9 342.9 35.51990 509.2 269.1 42.41991 709.0 370.0 80.01992 1,061.7 590.4 160.0

Noe Uni is 1,000 units of autmwtv except fo the dota in die which aum in absolute_mbs TIe diffeence beteew pduction figures and th total of tucs and passenger cars

for chasss, Cos-oty tucks, specil vedcles and buses.

Source For 1955-90, CNAIC Chi Auto Yewobo* (1991); for 1991, from local oonsultant for 1992,7ZwAi=uo Qiche Dao (January 29, 1993).

units in the Eigth FYPi (Table 1.3). Raising the share of passenger cars to one third ofthe total by producig 300,000 units is yet to be achieved, however.

Table 1.3: ANNUAL PRoDUCnION TARGEIS OF 1o D EiGHT FfiVE-YEAR PLAN

Total Automobile Production 900.000

Cars 300.000High-level car (2.5-4 liters) 20,000Medium-level car (1.6-2.5 liters) 155,000Poapular car (1-1.6 liters) 75,000Minicar (<I liter) 50,000

Trucks 600.000Heavy truck 31,000Medium truck 201,000Light truck 303,000Minitruck 65,000

Sourr CNAIC.

- 11 -

1.28 Another significant development in the industry has been its shift away froman almost complete emphasis on the production of trucks, buses, and special vehicles toa greater focus on small passenger-vehicles, especially passenger cars and light trucks. In1985, less than 1 percent of total automotive production was passenger cars. By 1992, theproduction of passenger cars was 16 prcent of total automotive production.j9 Eventhis dramatic increase in the production of passenger cars, however, could not keep upwith growing demand, and market premiums for passenger cars persist. The productionof light trucks has also increased from one third of total truck production in 1981 to morethan half in 1992. This trend is also reflected in the 1993 production, in which more than700,000 units of light trucks and passenger cars are planned for production by enterprises(Table 1.4).

Table 1.4: PRODUCIION PLAN, 1993('000 units)

Type 1993 Production Plan 1993 SPC Plan

Heavy truck 34.8 28.0Medium truck 259.1 221.9Light truck 320.0 207.6Minitruck 120.0 60.0Large & medium bus 35.8 28.0Small bus 122.6 107.4Passenger car 293.5 250.0

Note. The 1993 Production Plan is the sum of the plans reported by the enterprises, totaling to 1,185,800units. The 1993 SPC pla tots 900,000 units. The numbers are on a preiminary basis, and thedifference is to be reconciled over the reiterative planring process.

Source: 7ioungguo Qidce Bo, January 29, 1993.

i,mport Subs ton

1.29 The rapid increase in domestic production allowed the industry to substitutethe imports with almost 90 percent of the domestic market being served by producers inChina. Imports of complete vehicles and knock-down parts as a percentage of domesticsales continuously declined from a high 44 percent to about 12 percent in recent years(rable 1.5). In addition, the Chinese producers continued to replace complete vehicleimports with knock-down parts imports, further accelerating import substitution. Theimported knock-down parts were to be assembled in China with domestically sources parts,and thus rising knock-down parts imports were often matched with rising domesticproduction of complete vehicles. For example, in the sedan car segment, the domestic

WI Cop"redwithSlpwt mhdia,89pacent in Yuavi473pcent in Brl,65pecent inJapanand 63 peren in te United Stts.

- 12 -

production increased its volume in tandem with the increase in imports since two thirds of

imports were knock-down parts. As a result, in 1992 despite the large increase in imports,

the share of imported cars represented only 15 percent with 27,645 sets. However, the

1993 import spree of sedan cars tipped off the import share slightly to 20 percent in the

first three quarters (Cable 1.6).

Table 1.5: PRODCTIoN AND INMRIrs oF AUTOMOTrES, 1980-91('000 units)

DomesticYear Market Imports Share of imports (X)

1980 273.3 51.1 18.6

1982 212.2 16.1 7.6

1984 402.6 88.7 22.0

1985 797.4 354.0 44.4

1986 521.6 150.1 28.8

1987 561.4 89.0 15.9

1988 741.7 94.7 12.8

1989 671.5 84.6 12.6

1990 572.8 63.6 11.1

1991 806.8 98.0 12.1

1992 1,271.9 210.2 16.6

Note: Import figures include knock-down parts as well as completely assembled vehicles. Thus, the

market size is oveetimatd by double countng of vehicles domestically assembled with knock-

down parts. However, data are reasonably accurate for all practical purposes.

Source For 1980-90, China Auto Yearbook (1991); for 1991-92, CNAIC.

1.30 Another achievement for the automotive sector was an impressve

performance in the export of automotive components, which grew 32 percent between 1985

and 1988. This is one of the highest growth rates recorded among developing-countrysuppliers, surpassed only by Thailand. Chinese automotive component exports, however,

have largely been in the low value-low technology spectrum. Of the Chinese automotiveexports to the United States in 1989, for example, 26 percent were radio-tape player

combinations, and the other leading categories were fasteners (11 percent); jacks, hoists

and winches (9 percent); roller bearings (9 percent); and mirrors (6 percent).20t

2&I Bowrng, nia, the U.S. Automotive ftemret.: Opportunies and Contrasfor DevelopingCounhy Supplr, Industry and Enry Deptment Woding Pe, hdustry Senes Pap No. 39,

- 13 -

Table 1.6: SHAmE OF KNOCK-DowN PARIS iN ImpoRTS

Vehicle As KD As complete (b)/(a)imports parts vehicles (X)(a) (b) (c)

For All Vehicle TyDes, 1988-92

1988 94,696 26,907 67,789 281989 84,575 31,043 53,532 371990 63,687 24,176 39,541 381992 210,206 128,690 81,516 62

For Passenger Car Sedans. 1988-93

1988 57,433 24,127 33,306 421989 45,000 20,560 24,440 461990 34,067 18,136 15,927 531992 115,759 88,114 27,645 761993 117,670 74,384 43,286 63

Fragentation and Dipersion

1.31 In today's Chinese automotive industry, fragmentation and geograhicaldispersion of production capacity, the leg,acy of the first phase of the development,continue to persist. For the current market size of barely 1 mitlion units per year, theChinese automotive industry is extremely fragmented. A total of 117 enterprises assemblecomplete vehicles with their own chassis, with an additional 459 independent assemblers(often called converters) producing vehicles with procured chassis. In 1990, only 10enterprises out of 117 had a production capacity of over 10,000 units per year (Tables 1.7and 1.8).

1.32 The Chinese automotive industry is also extremely dispersed geographically;every province except for Ningxia and Tibet has automotive production capacity C(able1.9). The proliferation of production sites, however, reduced the production capacity ofindividual provinces to such a small scale that the yearly provincial output is less than10,000 units for all provinces except for (a) the three largest municipalities (Shanghai,3eijing, and Tianjin) and (b) the provinces where the two largest truck producers arelocated (FAW in Jilin and SAW in Hubei). Moreover, this small provincial productioncapacity is further fragmented at the provincial level, further reducing productivity.

Dualistic Industry and Emerging Leaders

1.33 Evolving from the fragmented and dispersed industry is the development ofa dualistic structure in which the industry shows a bimodal distibution in the size of

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Table 1.7: ENEPRI IN CEMNsE AUTOMOIV I SRY, 1980-90

1980 1985 1989 1990

Number of Enterprises 2.357 2.857 2.596 2.596Vehicle producer 56 114 117 117Converter 192 319 464 459Engine producer la 64Parts and components 2,109 2,429 1,948 1,958

Number of Emplovees /b 719 1.363 1.570 1.565

La Engme producers ar counted i compont and paentpriss for yeas oter than 1990./b Unit is 1,000 persons.

Table 1.8: D MON OF AuTOMOTiE ASSEmBLRBY PtODUCerON CAPACIlY

Annual ProductionCapacity (units) Number of Plants

Under 100 21100- 500 29500 - 1,000 20

1,000 - 2,000 332,000 - 5,000 135,000 - 10,000 8

10,000 - 20,000 520,000 - 50,000 3Over 50,000 2

Noter. Geographicafly distn plants in the sam entepris are counted searately.Total of plants in the above table is 134, which is larger tban the number ofenepie, 117.

Source:i Auto Yearbook, p. 115.

production capacity; in the degree of exposure to foreig collaboration in technology andcapital; and the profitability of product lines. Despite the fragmentation and dispersion ofthe Chinese automotive indusay, it shows a bimodal distribution in size as a few producersoperate at a much larger scale than the others. As a result, the industry has relatively highconcentration ratios for individual segments. The two leading plants in the medium-trucksegment, for example, captured as high as 80 percent of the production in 1987 with theircombined output in that year of 112,200 units, compared with a total national output of139,800 units. In the bus segment and the beavy-truck segment, hre was no ignificant

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Table 1.9: GEOGRAPHCAL DISRON OF PRODUCTON CAPACrrY

Total produc-tion (units) Provinces (number of plants in the province)

Over 50,000 Jilin (5), Hubei (6)20,000 - 50,000 Beijing (9)10,000 - 20,000 Shanghai (5), Tianjin (5), Liaoning (8), Sichuan (16)5,000 - 10,000 Guangdong (4), Guangxi (3), Shandong (6), Jiangxi (4)2,000 - 5,000 Heilongjiang (5), Jiangsu (10), Zhejiang (4),

Guizhou (3)1,000 - 2,000 Yunnan (6), Shanxi (3), Xinjiang (1), Anhui (3),

Henan (4), Hunan (9)Soo - 1,000 Qinghai (1)100 - 500 Gansu (1), Shanxi (3), Fujian (3)

Below 100 Inner Mongolia (1)

Source. China Auto Yearbook (1991).

concentradon. In the passenger-car segment, Shanghai Santana captred 40 percent of themarket in 1992 by producing 65,000 units, compared with the total national output of160,000; Santana and other Volkswagen-designed cars (Audi and Jetta produced in PAW)captured nearly 60 percent of the market.21/ The concentration in the passenger-carsegment is yet to be seen because enterprises are now in the middle of capacity expansion,however, even though two Volkswagen joint ventures (PAW-VW, and Shanghai Santana)are likely to remain influential.

1.34 In the last decade, the dualistic structure of the automotive industry in Chinahas been further accentuated by foreign technology and capital infusion becevse the benefitsof foreign collaboration usually went preferentialy to large enterprises or enteaprises inthe passenger-car and light-truck segments. As a result, today two contrasting segmentsof the industry exist: one is a fast-growing and very profitable segment, notably passengercars and light trucks to some degree; the other is stagnant and less profitable segment,notably buses and, to some degree, medium trucks. Enterpises in the high-growthsegment of the industry embody high levels of foreign technology infusion and foreigncollaboration, a large proportion of imported components, high-uality standards, and well-paid and motivated personnel. The relatively stagnant segment comprises predominantlythe numerous, unprofitable plants for truck and bus production; they typically embody100 percent local content, obsolete technology, poor-uality standards, and a poorly paidand unmotivated work force. Often the latter segment also functions at uneconomic scales

U/ Source: Private communicaDon with CNAIC. n 1992, the out of pass0e ca was 65,000 unitsby Shanai Santsna; 30,000 by FAW (Audi and Jeta); 3s,000 by Chande by Tinin-Daihaa;15,000 Pegeot by Guangthou Peugeot; 15000 by Bejing Jeep; 3,000 by Citrodendsigd cas bySAW.

of production with very high costs. Such contrasts sometimes exist within the sameenterprise, with a motivated and well-aid labor force working in the joint-venture sectionof the enterprise and the rest trailing far behind in automation, motivation, compensation,and often product quality.

1.35 Emerging are the prospective industry leaders who were strategicallypositioned to receive benefits during the modernization drive and are likely to playimportant roles in the future development of the industry. In the passenger car segment,eight enterprises are leading the growth in the industry:

* The Big Three-First Auto Works (FAW), Second Auto Works (SAW), andShanghai Santana

* The Little Three-Tianjin Daihatsu, Beijing Jeep, and Guangzhou Peugeot

* The Mini Two-Chongqing Suzuki and Guizhou Fuji.

In the light-truck segment, Nanjing Iveco, Southwest Isuzu, Beijing Isuzu, and ShenyangGoldeup Toyota are emerging as the industry leaders. The Heavy-Duty TruckManufacturing Group dominates production for heavy truck, (Box 1.1). The dualisticnature of the industry is likely to have significant implications for the restructuring of theindustry in the coming years as leading enterprises in the high-growth segment are betterpositioned to achieve internationally competitive standards than enterprises in the othersegment who will continue to fall even further behind.

1.36 The dualistic nature of the industry is also observed in the pricing structureof products as prices for passenger cars are at two to three times the international level,while that for trucks are well below the international level. Shanghai Santana, forexample, the best-selling car in China today, is priced at Y 173,820, which is equivalentto $20,500 at the swap exchange rate or to $30,500 at the official exchange rateC(able 1.10). The Santana is a 1970s model, and no comparable model exists in thedeveloped countries. The price of the Santana is believed to be very high for a car withan engine size of 1.6 liters and no significant electronic component. In contrast, the truckprice is about $6,500 at the official exchange rate for a 5-ton truck, which is far lower thanthe international level, despite the low product quality (Table 1.11).

1.37 An interesting feature of the sales price for passenger cars is the foreignexchange component. Due to tight foreign exchange controls, enterprises have difficultiesin acquiring the foreign exchange that is needed for the import of parts and raw materials,especially in the early years of operation. As part of measures approved by the StateCouncil, however, subject to the approval of the Foreign Exchange Commission, joint-venture products that are import substitutes can be sold pardy or completely in foreignexchange. The sale prce of the vehicle then becomes negotiable: the higher theproportion of foreign exchange, the lower the selling price.

I" 1.1: ZADING PLAYERS IN TiE Auioonvz INmxsmY

SmaU Pase VehiclesFiist Auto Wodks Volkagn-Gof/Jefte 150,000Second Auto Wor Citrom 150,000Shnghai Santa Volkswaen, 150,000Beijing-Jeep Chrysler 100,000Tiamjin,Charade Dailiatsu 80,000Guangzhou-Peugeot Peugeot 15,000Choagqing Suizr1 30,000Guiuhou Fuji 30,000

Lieht TrucksNanjing Iveco 60,000Southwest Isum Isz 60,000FAW Toyota 60,000Shenyang Goldcup Toyota/GM 60,000Beiji.azu Isum 40,000Trnjin na. 20,000Hatbin na. 10,000Guangzhou na. 10,000

Medium TrucksFAW na. 100,000SAW na. 140,000

Hxeavy !miHeavy Duty Auto Mfg. Goup Steyr 20,000

Table 1.10: PAssE?GER CAR PRIcEs(Yuan)

Item ShanaghAi Beijing Guangheou Audi Tianjin Jetta

Ex-factory 61,200 55,558 63,659 94,000 42,200 120,900price and $9,100 and $10,600 and $11,034 and $17,000 and *3,500 and $9,874

Sales price 127,450 131,606 143,316 215,934 69,107 131,236

Sales price andtaxes included 173,8201a 164,646 187,716 265,284 78,073 160,536

La At the officild foreig exchange rate, this is equivaenmt to $30,500. At the swap rae of Januay 1993,this is conered to $20,500.

- 18 -

Table 1.11: TiucK ArD Bus Piucus (1990)(Yuan)

Type Ex-factory Market

Mini truck 319000 37,000Daihatsu Van (TJ11O)

Liaht Truck 23,600 27,600Yejin (NJ1041M)

Medium TruckJiefang (CA101) 29,800 34,400/aDongfeng (EQF 140-1) 31,400 42,100

Heavy TruckRuanghe (JN162) 92,500 99,000

BusBeijing (BJ632A, 16 seats) 32,500 41,000Huanghai (DD6800, 61 seats) 92,400 96,800

/a This is converted to $6,300 equivalet at the official exchange rate. The spread between the officialand sw rates was smaller (about 10 percet) in December 1990 tan in Januy 1993.

Source: CNAIC.

D. LOOKNG AIEAD: DEVELOPMENTAL OBJECrIV

1.38 As the future unfolds, there is great expectation and optimism withsignificant challenge from outside and within the industry. In 1993, the market forautomobiles in China is buoyant and the mood in the industry is optimistic. The continuedhigh growth of the economy, and the light-industry sector in particular, is expected to leadto a boom in the demand for cars and small vehicle segment of the automobile market.On October 12, 1992, the 14th Party Congress reinforced the optimism in the automotiveindustry by reiterating its status as one of the "pillar" industries. Encouraged by the highrates of growth in the last few years, investment and capacity in the industry is expandingat a rapid pace.

1.39 The 1990s will, however, present the automotive industry not just withopportunities, but also with the greatest challenges to date. With China's immiilent entryinto the General Agreement on Trade and Tariffs (GA[TI) and lowering of import tariffs,the present seller's market is likely to face more discerning and demanding consumers asthey are increasingly exposed to high-quality, low-priced imports. The industry, however,is not yet ready for competition with the sophisticated international players owing to itsantiquated, fragmented, and dispersed capacity and the inefficient industry oganizadon and

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enterprise management. It will require a herculean effort on the part of the industry todefend the domestic market and to possibly achieve international competitiveness in orderto export in the long run.

1.40 In this context, GOC's developmental objectives and strategies for theautomotive industry need to be reviewei for their congruency and consistency. DespiteGOC's repeated confirmation of its intention to develop the automotive industry as a pillarindustry, surprisingly few official documents containing developmental objectives andstrategy and a coherent policy framework were issued.22/ However, the recent industrydevelopment and available official documents indicate that GOC perceives the automotiveindustry as an industry of the future with the potential (a) to become an engine for growthand industrialization through its forward and backward linkages and (b) to supply vehiclesat internationaly competitive prices.

1.41 There is natural tension between these two objectives because developing adomestic industry calls for some protection from import competition, while the availabilityof vehicles at internationally competitive prices is only possible with no import barriers.Experience in many countries and to a certain degree also in China suggests that protectionbased on the infant industry theory fails to breed efficiency and competitiveness; instead,protection incurs social costs with high domestic prices and poor export performance.Liewise, although free foreign trade may maxmize the consumer surplus, but free trademay lead to a trade deficit and deny an opportumity for domestic producer. This conflictimplies that GOC should pursue an intertemporal policy tade-off by preparing thedomestic industry during the protection period for eventual competition with internationalplayers in the domestic market in the medium term and in the international market in thelong term.

1.42 This objective of tWuning around the small, inefficient and technologicallyobsolescent domestic industry to be on a par with the large-scale, efficient, andtechnologically sophisticated international players in a short period of time is difficult toachieve without an effective government policy. The effectiveness of the current policyframework to achieve these developmental objectives is discussed in Chapter 3, after theinternational trend of the industry and the domestic market prospects have been reviewedin Chapter 2. Chapter 4 deals with the issues to consider in formulating the developmentalstrategies and Chapter 5 with recommendations.

W Impkntation Method of Ste Industo Policy for Atonwbilk Industy, a 17-paw memoandumprepared and distibuted by CNAIC on October 10, 1990, is the one that is closest to an officialdocument. However, there is little evidence on whether it has been approved by the State Council orgenerally accepted in the industry. Anohr docment most frequently quoted on the developmentalsltregy is the repoxt by the joint Sino-Japan experts' study.

2. INTERNATIONAL TREND AND DOMESTIC DEMAND

2.1 The world automotive industry is heavily dominated by three regions, NorthAmerica, Japan, and Western Europe. Out of a total production of 49 million units in1990, Western European countries produced 15.5 million units; Japan, 13.5 million; andNorth America, 11.7 million units. The world automotive industry is also heavilyinfluenced by about 10 leading players whose combined market share reached 70 percentin 1989 with the US manufacers maintaining the strong first and second spots.I/

2.2 Demand also has been concentrated in the above three regions: as the abovemarket becomes stnant, however, the leading players suffer from overcapacity andintense global competition. This increased competition shapes the industry trend towardglobaization of manufacturing through the exchange of goods, capital, and technology.Production technology has risen as an important competitive edge, and continuedtechnology changes in product design and pollution-free vehicles such as electric cars areshaping the future industry.

2.3 There have been two Sino-foreign joint studies on the projection of domesticdemand for automotive products in China. The assumptions of these studiaes vary, but thestudies yield a range of market projections that indicates a domestic market of 1-1.5million units by 1995 and 1.6-2.3 million units by 2000.

A. TIS IN TE WORD INUSTRY

2.4 Overcapacity In the Global Mrket. Global demand for automotiveproducts, which has been growing steadily snce World War II, is becoming saturated inthe developed countie, with growth in registration of new passenger cars acualynegative in 1990 and in 1991 in the prime markets of the United States, Japan, andEurope.2/ With the exception of southern Europe, demand in most OECD counties inthe coming years will consist primarily of vehicle replacement. The leveling off ofautomotive demand has led to overcapacity in the global industry. Overcaacity has beenestimated to reach 9 million units in the early 1990s, of which more than half will be in

I/ Fac and Figww '91 by the Mot Vehicle Manfacturets Asocia of the Unted St. Wheoverseas subsidia plan ar included, in 1989 Gener Motos produced 7.6 millian u and Ford6 millio uts. The combined share was 28 percent Thid and fourth large producers wer theJapaes Toyota and N-isa, with 4.3 million units and 3 million units respectively. Volkswagnranked fifth by producing 2.9 milion units.

ZI McArdle, JIm, World Car Fonem.: Dhe OalookJbr Sala, Produion and Viddes in Use to 1996,Economist Ingc Unit, Speca Report 2112, 1991.

- 21 -

North America.3/ The slowing down of the developed country markets is also reflectedin tough financial times for most of the leading manufacturers in the world industry. Thecombined losses of General Motors (GM), Ford, and Chrysler reached an amazing $7.3billion in 1991. Toyota's worldwide pretax profits for the year ending June 30, 1992 fellby 40 percent compared with the previous year. Nissan expected to have a big loss in thefirst half of 1992 and for the first time failed to pay dividends-_/

2.5 Growth In the Developing Countries. With saturation in developedmarkets, further growth in the world automotive market is likely to come from developngcountries. Vehicle demand in developing countries is expected to grow 220 percent during1988-2000. Nevertheless, the total number of vehicles to be sold in developing countriesin the year 2000, estimated to be 16 million units, is still likely to be one third of that inOECD countries. Among these countries, the Asian newly industrial countries (NICs) area primary source of demand as well as eastern Europe, Russia, South America, andcounties such as China, Lidia, and Indonesia, which have large populations but as yetlimited purchasing power.S/ Given these dynamics, most of the leading manuf rshave been looking toward developing countries for the expansion of their operations. Ajoint venture with a domestic company is a typical instrument. The nature of therelationships between developed country manufacturers of technology and developingcountry buyers is likely to be ftrer influenced by some key developments in automotiveproduction technology.

2.6 Globalization of Car Manufachting. One charactistc of the worldautomotive industry in the 1980s has been its increasing globaliztion, with largemovements of goods, capital, and technology across interatonal borders. Interationaltrade increased through the 1980s with global automobile exports increasing at 4 percentper annum to a total of 13.6 million units in 1988.6/ The 1980s also marked the virtualdominance of the Japanese automotive industry, with one third of total world exwortscoming from Japan (4.4 million). Another significant development in the globalizion ofthe industry has been the growth in capital interlinkages among major automotiveprodacers. Though capital and technology flows from developed to developing countriesexisted before, this period marked an increasing trend toward the internationalizon ofdomestic industr in developed countries as well.

2.7 This trend began in the early 1980s because of trade frictions owing toJapan's increasing exports to the United States and the ensuing impact on the US domesticautomotive industry. To address these concerns, Japanese producers established producdon

21 Bowing, Antoaia, De U.S. A odmdeAai*e: OpponiiuWudCoaanusforDevlping CowwySupplier, ustry and Ener Dprtmn Workmng Pae, h World Bank, 1990.

41 -Endles Econmni, The Enmit, Octobar 17,1992, p.4.

fI Karmokohias, Yanis, Awaomoih Indwoy, 1Mxes and Prospec for Imwnne In DevelopingCouWris, Intme nd Finne Cporpason, Discusdon Pqa 7, 1990.

O1 Op. it

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facilities based in the United States in collaboration with American manufacturers. Suchjoint-venture collaborations proved to be of muta benefit; on the one hand, the Japaneseproducers were able to increase their market share in the American market and learn themarketing and distribution channels of a foreign market while avoiding political barriers.On the other, the American companies benefited from access to the new Japanesemanagement techniques and production technologies. By 1992, the annual output ofJapanese transplants in America reached 2 million units in an annual US market of 13million. Japanese transplants are now also being established in Europe, with a Hondaengine plant in southern England and Toyota engine and assembly plants in the UnitedKingdom.

2.8 The Japanese transplants have marked a new era of symbiosis between themajor world players. As intemational competition has grown, so have the interlinksamong the leading manufacturers as a means of reducing costs, pooling risks, and gainingaccess to new regtional markets. The strongest links exist between Japanese and USautomakers. Ford, for exanple, holds a 25 percent equity stake in Mazda of Japan, whilein the United States, Mazda operates an assembly plant that produces cars under both theFord and Mazda brands. Chrysler and Mitsubishi have a joint venture, Diamond Star,which also produces cars for both sales networks. Since the early 1980s, GM and Toyota,respectively the largest US and Japanese vehicle makers, run a joint venture in Fremont,California-New United Motor Manufacturing-that produces Toyota-designed cars for thetwo companies' US sales network. Both US and Japanese producers also are increasingcollabrations in Europe; in 1989, GM purchased a 50 percent stake in Saab, the Swedishauto and space group, while Volvo and Mitsubishi negotiated a joint venture in Europe.Such collaborations also are taking place in developing countres, with Ford andVolkswagen joining hands in South America to form Autolatina.

2.9 Increased Trade in Components. Another trend by the leading automotiveproducers is decreasing vertical intgation and increasing outsourcing of components, thusleading to increased trade in components. Automotive component exports increased in the1980s by 4 percent per annum to reach $57 billion in 1988. Developing countriesaccounted for only $3.7 billion of these exports in 1988, largely in low-value, labor-intensive components, but the rates of growth of their exports have been very high. Sixty-one percent of these exports were for the US market,2/ imports to which increased from$14.4 bilion in 1986 to $24.7 billion in 1990 (excluding Canada). Japanese producers,which have traditionally depended on their own component suppLiers, are also for the firsttime lng up with intemational component producers. In 1990, Nissan announced itwould purchase parts from the US manuf Associated Fuel Pump SystemsCorporation-a joint venture of Nippondensu (a Toyota affiliate) and Robert Bosch ofGermany. Nissan also announced its intentions to purchase a high volume of cylinderblocks from GM, signaling a greer import content in the traditionally domesticcomponents industry.

I/ For da, we Bowug and Karmokolias, op. ct

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2.10 Reduced Foreign Trade Protection in Industralng Countries. Thehigh levels of domestic market protection and local content requirements that characterizedpolicy among industrializing counties for the automotive industry have been reduced.Among latecomers to the automotive industry, only Korea, Argentina, and Brazil hadachieved domestic content greater than 90 percent in 1988. Mexico, India, Thailand, andTaiwan (China) have achieved local content levels of 50 to 65 percent. In realizing thatprotection often erodes the competitiveness of their industries, most of these economies arenow lowering their local content requirements and reducing tariffs on automotive andcomponent imports to encourage competition in their markets. Mexico now requires only36 percent local content, and Taiwan (China) imposes a 50 percent domestic contentrequirement.8/ Argentina, faced with a domestic industry that was declining rapidly inthe wake of high domestic-content requirements is reducing local content requirements.For passenger cars and light vehicles, the allowed use of imported parts will double up to1994, and for commercial vehicles, it has already been increased 2.3 times. Brazil hasalso announced a schedule of significantly reduced import tariffs on parts and components(Box 2.1).

Box 2.1: TAm ON Auros iN SELEcrE COUNTIES

ikk cm Truck Om

United States 1992 2.5% 25% 3%

Brzil 1991 60% 60% 55% 30%1992 50% 50% 45% 25%1993 40% 40% 35% 20%1994 35% 35% 30% 20%

Mexico mid-1980s no imports 50-100%1991 15%

Taiwan (China) 1985 65%1991 30%

Korea 1990 20% 20% 13%1992 15% 15% 9%1993 10% 10% 8%

Turkey mid-1980s 100%1991 39%

1/ Awtoo Indury 3Sd, Booz Asm & Hamiton, Ibc., Am 1992.

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2.11 The Rise of Production Technology as a Competitive Edge. Productiontechnology innovations made by Japanese producers in what has come to be known as"lean production" are setting industry norms across the globe.2/ A key aspect of theadoption of the lean production system has been radical changes in the relationshipsbetween vehicle assemblers and their components suppliers. These changing relationshipsare reflected in an increase in the outsourcing of components from a small group ofprimary suppliers, who also take increased responsibility for maintenance of qualitystandards, and for reliability forjust-in-time delivery schedules and who participate activelyin product development. The advantages of this system have been logistcal efficiency,economies of scale, and specialization of R & D of component produ,ts.

2.12 The adoption of lean production systems has implied that vehiclemanufacturs have drastically reduced the level of vertical integration. In Japan, as muchas 70 percent of the value of a completed car comes from outside component suppliers.Learning from the success of Japan, vehicle manufacurers in the United States and Europealso have increased the outsourcing of their components and now source about 50 percentof the value of the car from component suppliers.I1/

2.13 Although the percentage of outsourced production is increasing, the numberof primary component suppliers to assemblers is decreasing. Ford North America, forexample, trimmed its primary component suppliers from 20,000 in 1985 to 6,000 in 1989.Ford Europe similarly reduced its primary suppliers by 64 percent in the same period,from 2,500 in 1985 to 900 in 1989. This reduction has been accomplished by singlesourcing of parts from suppliers and by primary suppliers taling responsibility for theproduction of larger modular units or subassemblies.U/

2.14 Although the number of first-tier suppliers has been reduced, they in turndeal with a large number of second-tier suppliers. For example, one Japanesemanufactr directly procured engine parts from only 25 pimary sppliers, but the latterdealt with 912 subcontractors, who, in turn, procured from 4,960 third-tier suppliers.Following the reduction in the number of primary suppLers, stable, long-term relationshipsbetween component suppliers and assemblers have developed, whereby the suppliers areactively responsible for quality control and actively participate in product development.Two Japanese component suppliers devote between 4 and 6 percent of their sales toward

2/ For more information on iean prodcwtion syslems, so Womack, James P., Daniel T. Jon, andDaiel T. Roos, The Machw Tha Chnged the World, New Yor Macilan Pubishtng, 1990.

IQ/ Endle Road, The EonmLu, op. cit.

a/ Ka ekolia, op. cit

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R & D.12/ GM expects its first-tier suppliers to devote 1 percent of their sales revenueto R & D, failing which the relationship can be terminated.13/

2.15 With emphasis on economies of scale and on the need for the componentmanufacturers to undertake R & D and product development, large componentmanufacturing firms that operate globally have emerged with greater prominence in theworld industry. Large international component manufacturers with large production scalesthat reduce per unit production costs as well as R & D costs are beginning to dominate theglobal automotive industry in ways similar to the leading vehicle assemblers-for example,Germany's Robert Bosch and France's Valeo in electronics, America's TRW in steering,and Britain's GKN in bearings. One industry analyst has suggested that by the end of thedecade the components business will be dominated by 50 specialty companies, supportedby a network of second-tier and third-tier producers. 14/ Given the premium on stable,long-term relationships in lean production systems, in many cases, these componentmanufacturers are following the movements of interational capital in the assemblyindustry. Following Japanese assembly transplants into the United States were Japanesecomponent manufacturers; by 1988, 142 Japanese majority-owned and affiliated automotiveparts suppliers had set up facilities in the United States.

2.16 Japanese manufacturers are now developing a new generation of productiontechnology with flexible assembly lines that aRow for the production of vanous modelswith no retooling. Such a flexible assembly line will allow for a completely customizedautomotive product to be produced on the same assembly line. It would be able to buildnot just different models of the same car on the assembly line but also different cars-amove back from the mass production concept back to that of custom engineering withproduction rns of one. A completely different vehicle can be made each time with thecost comparable to that of a mass producer. The increased robofization and flexibleautomation, the procurement of subassembly systems rather than individual components,and the increased use of plastics aU contribute to this new production technology, whichwould have immense impacts on the development of future global competition in theautomotive industry.

2.17 Continued Changes in Industial Technology. In the coning years,significant changes are heralded in the nature of product and production technology. Amajor change that is emerging is in flexible production technology; this change isredefining the concept of large production runs and will allow manufacturers moreflexibility in custom designing automotive products. There are also changes in existingproduct technologies with the increasing use of electronics and plastics. As a response to

JI Kurt Hoffman, and Raphael Kaplini, Driing Force: h Gobal RndwIng of Technology,Labour and Invwanem in the Awomobike Conem Indwny, Bolder: Wehaview Prow, 1988.

1I/ Karmokolas, op cit.

14/ As quod in owg, op. cit. p. 23.

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growing environmental concerns, more revolutionary changes may come from thedevelopment of totally new technologies such as the electric car.

2.18 Electroics. Although estimates vary, the consensus is that 20 percent ofthe value of the car of the future will be represented by electronics, with computersfacilitating the entire driving process from the pistons to the wheels.lJ/ GM hasestimated that the average value of electronics in a typical car will rise from abouit $500in 1988 to more than $1,200 in 1995. Today's typical car in the West embodies 25electronically controlled subsystems, and more than 300 are anticipated by 1997.1W

2.19 Plastics and Aluminum. Replacing sheet steel in some of the new carmodels is plastics and aluminum. The new GM Lumina, for example, has plastic bodypanels bonded to the metal frame. The percentage of steel in an average Germa car isexpected to drop to 60 percent in the year 2000 from 72 percent in 1989, whereasaluminum and plastic are expected to increase from 3 to 8 percent and 7 to 17 percent,respectively.

2.20 Change in Product. Another set of initiatives in the car industry areconing from the need to develop altemative products to meet the growing concern aboutenvironmental pollution. In September 1990, the California Air Resources Board adoptedtough new rules to reduce air pollution above Los Angeles, requiring that by 19982 percent of the cars sold by each manufacuer in the state be zero emissions vehicles(ZEVs). This proportion is to increase to 10 percent in 2003. Given present technologies,this quest for ZEVs has prompted greater efforts toward the development of electic cars.All the world's large car makers are developing electric cars. Initiatives to encourage thedevelopment of electric cars are also taking root in other counties. In France, the state-owned utility has signed an accord with Renault and Peugeot to equip 10 French cities withelectic cars and battery rechargng stations. In Japan, the Ministry of Trade and Industry(MMTI) too has set a goal of seeing 200,000 electric cars on the road by the end of thedecade, with half of those being produced in Japan.

2.21 Inteo Alliances in Technology Developmt. One consequenceof the increased competition in the automotive market has been the increasing realizationfor the need to benefit from economies of scale and for risk pooling in productdevelopment. GM spent $3 billion for the design, development, and tooling of the Saturncar.l-/ With the increasing cost of product development, one movement in theautomotve industry has been in global cooperation in the development of technology.Mazda has been talking to Ford aboZt jointly manufacturing cars in Europe. Ford andNissan are to build a sports utility vehicle together. Recently, the Big Three in the USmarket have announced plans to collaborate on the development of the electric car.

15/ As quWotd in Kamaakolss, op. cit

J1I As quod in Bowring, op. cit.

171 'Endls Rod' Sk FEonm, op. i

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B. DONEMC DEMAND

Freight Vehicles

2.22 Built on the rationale of fulfilling national freight needs, truck productionhas been at the core of the automotive market in China. Trucks have consistentlycomprised more than half of the automotive market in China, with the primary source ofdemand comning from government institutions. In the coming years, the market for truckswill continue to grow, with increases in demand for trucks coming from three sources:(1) the increase in freight traffic with economic growth, (2) diversion of some freightpresently carried by railways to roads, and (3) a growing replacement demand for anincreasingly dilapidated and obsolete fleet of trucks.

2.23 Level of Demand. Cross-country experience has shown that with thegrowth in economic activity, the demand for freight camed by road transport nsesconcomitantly. A recent study of cross-country experiences has found that for every1 percent increase in GDP, the demand for road freight is liklMy to increase by at least1.25 percent.l8/ In China, this trend is likely to be reinforced by the trend toward thediversion of some freight from railways to roads because the percentage of freight movedby rail in China is already high.12/ The rapid growth of containerization will also leadto an increase in the demand for road freight services, owing to its caacity for quick andinexpensive intermodal freight loading and unloading capJbility and its ability to integrateroad freight networks with rail and ship freight networks.2

2.24 These trends are already becoming apparent in China. While overall freighttraffic grew at an annual rate of 7.6 percent over 1980-90, the growth rate in freight roadtaffic was almost double at 15.5 percent over the same period, outpacing the 6 percentgrowth in rail freight during the same period.21/

2.25 The increase in demand for trucks due to rising demand for freight is likelyto be reinforced by pressures to modernize and upgrade the quality of a truck fleet ofobsolete design and safety standards. In 1988, one sixth of the fleet was more than

IF8 Er Bennatan, Juie Fraser, and Louis S. Thompson, liWat Denn Dsnad for FM&ighlDwpo?, Tho World Bank, Policy Rearch Workig Pae 998, 19. Te report concludes tafor developing countries, the demand elasticity for road fteight is liDky to bve a lower boumd of 1.25.

12/ In 1989, railways acowuntd 41.6 pent of freight traffic in China copoared with 13.5 percent offreight traffic cared by highways. Most of he remang freight taffic is caried by waterways.

2Q/ Such itrmda contaneized fnight transport capability, however, reqWues smitactor-tai. Chinaas yet has a veiy limited capacity to produce tbtor-triles.

?lI China Cowany Ecamk Manonun, Rqfon and the Roe of te Pan in the 19%, ReportNo. 10199-CHLA.

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10 years old,22/ and an almost equal proportion of the fleet was classified as "not ingood working condition."22/

2.26 Demand Structure. The structural change in the market for trucks is likelyto come from the composition of the truck fleet. Currently, China's truck fleet isdominated by medium trucks with the ratio of medium to light trucks being 3:1, comparedto 1:3 in the United States.24/ The predominance of medium trucks in the fleet is due,in large part, to the large production capacities installed in FAW and SAW. Half of theannual output of trucks in China is comprised of medium trucks, a much higher proportionthan virtually any automotive industry in the world.

2.27 Over time, the demand structure is lilely to favor a change in the productmix of the industry away from medium toward light trucks. Currently, medium trucksoften perform tasks that could have been performed more efficiently by light trucks. Giventhe current patterns of growth in the Chinese economy, with its strengths in light industry,TVEs, and urban collectives, the demand for short haul for small fteight loads is likely togrow. Light trucks are ideally suited for this type of freight loads, are versatile in theirablity to carry a small passenger load, and are also cheaper and more fuel efficien thanmedium trucks. Furtier, the same basic model can be modified slightly, for example aflat-bed or a box-van, to serve a variety of users. Given all these factors, the marketdemand for light trucks is likely to grow.

2.28 The market for heavy trucks is expected to continue to exist because of itsuses in mines, oil fields, metallurgical industries, capital constuction, and long-distancetransport. This growth rate is projected, however, to be less than the total growth in thetruck fleet; thus, the proportion of heavy trucks in the total truck fleet is expected to fallmarginally. Based on the factors enumerated above, the composition of the total truck fleetis likely to change from 1:7.4:2.4 for light, medium and heavy trucks in 1987 to1 :3.5:5.5.2$/

Passenger Vehicles

2.29 Passenger traffic is also likely to increase both for intercity and intracity use.Experience from other developing countnes has shown that demand for all vehicles,particularly passenger vehicles, has accelerated when income and urban population havegrown rapidly. The increase in passenger traffic will translate into increased demand for

2/ Ame Hope, China's Motor Indusny: Ruk wad Oppoities to 2000, Specia Repot #2008,Econoist Intgence Unit, London, 1989.

22/ S& tical Yeabook of Chna, 1991. Of the trucs under the China Highway TransportatonCorporaion, 81.6 percent were classified as *good woving condition.'

?AI U.S. -Cln Momolve Indway Cooperaion Project: Final Report, Univety of Michigan, 1989.

2S/ op. cit.

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large passenger vehicles (for example, buses) and for small passenger vehicles (forexample, passenger cars and minivans).

2.30 Buses. Increased demand for bus services will come both from highway useand urban intracity use. The mobility of the Chinese people is among the lowest in theworld. In 1990, the average intercity travel in China was about 550 kilometers per personcompared with 4,570 kilometers for the former Soviet Union, 23,580 kilometers for theUnited States, and 10,560 kilometers for Germany.26/ Low mobility is, in part, aresult of saturated pasenger transport capacity. In 1989, express passenger trains carriedabout 30 percent more traffic than seats available. While some of this traffic will becarried by the railway system, road transport will increasingly carry a greater share of thetraffic because of its greater flexibility.

2.31 With the growing sprawl of cities, demand for bus services is also likely toincrease in China's urban zones. Buses are currently relatively underutilized in China'surban zones, accounting for only 15 p-rcent of the daily vehicle kilometers.27/ Forexample, only 24 percent of all trips ir Shanghai are by public transport, which includesboth buses and ferries. Pedestrian tri- s account for 42 prcent of the total, and bicyclesfor 32 percent. In Bangkok, Tha and, in the mid-1980s, more than two thirds ofmotorized passenger trips were made by bus or minibus.2a/ Bicycle use, which hasbeen the preferred mode of transport in China's urban centers, may be nearing a satrationpoint in some of the larger cities because they cause congestion, accidents, delays to otherroad users and are inefficient users of road space relative to full buses. Because buses insome cities in China are already operating over full capacity in urban areas, there is a cleardemand for increasing the use of buses.

2.32 Cars. The most novel changes in the market for automotive products arelikely to come from the passenger car segment. The market for passenger cars in Chinais small by international standards, owing in part to the limited purchasing power ofChinese households, but chiefly to the deliberate government policies that discouragedownership of passenger vehicles. In the last two or three years, the apparent demand forpassenger cars has increased substantialy with unprecedented, high growth rates thatprobably onginated from the existence of suppressed demand. Though this growth isunlikely to be sustained once the suppressed demand has been met, the present patterns ofgrowth in the Chinese economy suggest that the market for passenger cars is likey tocontinue to grow. New types of purchasers such as town and village enterprises, urbancollectives, and taxi and tour operators, and to a smaller extent, private households willcontinue to enter the market.

MI A S&udy of dte Sovit Economy, IMF/Wodd BanrOECDlEBRD, Vol. 3, 1991. As cited in China.Cowuvy Economic Memorandum, Reform and the Rok of the Plan in the 1990s, Report No. 10199-CHA, June 19, 1992.

27/ John Hamburg, *Urban Transortation, China Business Review, MarchlApril 1989.

28/ Alan Armstrong-Wright and Sebasien Thiriez, Bus Services: Reducing Costs, Raising Standards,"Woodd Bank Technical Paper 66 (Washington, DC: World Bank, 1987), p. 87.

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Projections of Domestic Demand

2.33 Projections of annual demand for vehicles in China are difficult to makebecause of the significant structural changes that are taking place in the patterns ofdomestic demand. Nevertheless, in the past few years, two comprehensive projections ofdemand have been made by a Joint Committee of Chinese and Japanese Experts and by aJoint Committee of Chinese and German experts.22/ In the Sino-Japanese study, thedemand for trucks and buses is projected on the basis of growti rates of highwaypassengers and cargo, and the demand for cars and minivans is projected on the basis ofhousehold sample surveys. The Sino-German study makes projections on the basis of fivemethods-including regression estimates, projections of traffic volumes and elasticitycoefficients-all of which converge to yield a range of demand estimates. The assumptionsof these studies vary, but yield a range of market projections that are instructive(rables 2.1 and 2.2).

Table 2.1: DESIMED STOCK OF VEHICLES PROJECTED FOR TEM YEAR 2000(in millions, except for buses)

Adjusted Estimates on theSino-Japanese Study Sino-German studyLa

Total CarRO Vehicles 8.2-8.9 9.0-9.5Heavy 0.9-0*95Medium 3.15-3.3Light 4.95-5.25

Buses 900.000 600.000-700.000

Small Passeuger Vehicles 5.4-6.7 4.2-4.9Cars 3.8-4.6 2.9-3.4Vans 1.6-2.1 1.3-1.5

Total Vehileg. 14.5-16.5 13.8-15.1

La The estma of dosied stock and annual demand for small passenger vehicles in the Smb-Gemanstudy have been adjused to reflect a product mix of 70 percent passe cas and 30 perent minivansin the smanU passenger vehicles segment. he implicit product mix in the original Sino-Ge3rmndocumentwas 50 peren passege cars and 50 perce mnivans. Te now assumption reflects suveyresults of consumer preference in the Sino-Jpanese study and is coser to the cdhning stcure of theChinse market today.

21 See CTna 's Automotive Indhy: Dewcpnen Stregy Towadi 2000, Joit Committee of Chinesand Japne Experts, 1987 and Deveopment Srtoy for sde Dhwwpoaldon Seor to 2XO, JoitStudy by Chinse and Gfman Experts, 1990.

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Table 2.2: AWUAL DEALND FOR VEHaCLRS, 1995 AND 2000('000)

Adiusted estimatesSino-JaUsnese Study /a Sino-German Study

1995 2000 1995 2000

Total Cargo Vehicles 670-770 900-1.000 720-870 970-1.130Heavy 60-70 75-90 65-80 80-100Medium 100-140 130-190 105-160 140-210Light 510-560 690-730 550-630 740-820

Buses 30 120 40-60

Small Passenger Vehicles 550-750 980-1.280 420-460 775-880Cars 400-500 700-900 290-320 540-620Vans 150-250 280-380 130-240 235-260

Total 1.250-1.550 2.000-2.400 1.170-1.360 1.785-2.070

/a The beakdown by ight, mediun, and heavy tuks uses the proportons of the Sio-German study asno such breakdown is provided in this sudy.

2.34 According to these projections, fte total vehicle fleet is expected to growat an annual avege rate of between 10 percent to 12 percent over 1990-2000. Marketgrowth is likely to be led by the passenger car segment, growing annually at a rate ofbetween 13 percent to 14 percent; if the truck fleet is expected to grow between 7 to8 percent. Annual demand for vehicles is lily to reach the 2 million mark by the year2000, with estinates of small passenger vehicles ranging from 650,000 to 1.3 million.The estimates for small passenger vehicles include passenger cars and minivans.

Implications of Domestic Demand Projections

2.35 Balance with Projected Capacity. If project implementation remains onschedule, by the end of the Eighth FYP, overall production cpacity for trucks will meetdemand (rable 2.3). The product mix will contain, however, a much higher percentageof medium trucks and a smaller percentage of light trucks than consumers would prefer.By the year 2000, additional capacity in the light-truck segment will be required andovercapacity in medium trucks will persist. However, technological modernizatoninvestment in the medium-truck segment will be required.

2.36 In the passenger vehicle segment, overcapacity in the passenger car segmentis projected in the short to medium term. If the Chongqing and Guizhou joint ventures are

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Table 2.3: OurPUr-DA&ND DEFIICr PROJECTIONS BY TYPE OF VERnCLE:UNCONSTIURAED SCENARIO

('000)

Range ofDemand Estimates Projected Capacity1995 2000 8th PYP

Trucks 670-870 900-1.100 875Heavy 60-80 75-100 50Medium 100-160 130-210 240Light 510-630 690-820 585

Medium & Larae Buses 30 40-120 30

Small Passenrer Vehicles 420-750 775-1.280 820Cars 300-525 550-900 700Minivans 120-225 225-380 120La

/a Light bus production in 1992 is t as proxy for capacity in the Eighth FYP pwiod. The definitionof light buS needs to be confirmed.

planning Capacities greater than the capacity planned in the Eighth FYP,Iovercapacity may persist in the long term as well. At the same time, many segments ofthe passenger vehicle market have not received adequate repesentaton in productionplanning.

2.37 Infrastucture Implications. A major issue associated with rapid growthin vehiclar traffic is the extent to which present programs of infatcture developmentwill be able to bear this increase without undue congestion. Road trffic in China is veryunevenly distributed within its network of 880,000 kIlometers of paved highways,31/and most of the traffic is concentrated in the eastern provinces, which cover only about15 percent of the total road network. It is beyond the scope of this report to analyze indetail the infrastructural implications; however, existing data indicate that the increase inoverall road capacity is likely to be in the same range as the growth in the vehicle fleet ifthe road projects in the Eighth FYP are carried out. Nevertheless, localized botdenecksare likdy to emerge in some areas, and proadve policies of infuc developmentand traffic management will need to be put in place.

3Q/ The apacity for Chongqg and Gui&iou in the Eighth FYP is 30,000 units each According to theindustry expens, a discussin is going on with Iunzu for the possible eanon of this apacity to300,000 units annally.

2l Shlcat Yerbook, 19,°1.

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2.38 Total road length (paved and unpaved) is planned to be increased from1 million lklometers to 1.1 million kilometers over the next 10 years. About 2,000kldometers of expressway and 67,000 kIlometers of class 1 and 2 roads are going to beadded to the network, primarily in the most congested areas in the eastern portion of thecountry (Table 2.4). Assuming that these 67,000 ldlometers are equally divided betweenclass 1 and 2 roads and are upgrades of class 3 and 4 highways, the vehicle carryingcapacity of the road network is likely to increase by 11 percent per annum over the nextdecade. This increase will broadly match the increase in the vehicle fleet of between10 and 12 percent over the next decade.

Table 2.4: INCREASE IN EHIGHwAY CAPACrrY OVERTHE EIGHnT FWVEYEAR PLAN PEUOD La

,/b 1989 IC 1989 /d1 Eighth FYP Eighth FYPClass Capacity Length Capacity Length le Capacity Id

EXpress 25 271 7 2,271 57Class 1 10 2,784 28 36,284 363Class 2 5 37,400 187 70,900 355Class 3 2 164,300 329 130,800 329Class 4 0.2 511,100 102 477,600 -Unclassified 0.2 298,400 60 298,400 60

Total 1.014.255 712 1.016.255 1.265

La The desgned capcity i based on tehica specifications. Each cIss of road is deigned to sutaina mmm number of vehicles per day, regtsteed at one locaton. le deiged capacty is asfolows: Expresway, 25,000; Clas highways, 10,000; Clss 2,5,000; Cls 3,2,000; and Chss 4,200.

L Capacity in thousands of veicles per day./c Length of road "stem in klometers at the begirning oft 8FYP.M4 Capacity in mniis of daly vehicle-kiomees.X. Length of road qstem in kiomets at the end of the Eighth FYP.

2.39 The carrying capacity of the existing highway network can be increasedthrough some complementary measures. The government is already undertaling plans toimprove the traffic capacity of eisting roads by upgrading roads, constructing side roadsfor traditional traffic and thus reserving the main road for motor vehicles, enlarging accessroads to cities, and constructing roads to bypass large cities. These measures will increasethe vehicle carrying capacity of the highways without a change in the length of the highwaysys;em.

2.40 Despite this overall increase in highway capacity, unequal regionalconcentration of traffic flows will imply that loclid infrastructural bottlenecks are likelyto emerge. According to a survey made by the Ministry of Transport and Communicationsin 1988, the traffic level on a sample of 110,000 kIlometers of main highways was

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estimated at 85 billion vehicle-kilometes, well above the designed capacity of 73 billionvehicle-kilometers. In some coastal areas, the observed road traffic was as high as sixtimes the designed capacity. However, the draft final report of the Yangtze EconomicZone Transport Study covering the industrial and economic heartland of China indicatesthat the problem of overcongestion is not an issue in that area.32/ More studies focusedat the regional level will be needed to identify the potential sources of interurban,infrastructural bottlenecks from growth in the vehicle fleet.

2.41 Apart from infrastructural constraints in the highway network, trafficcongestion problems are also likely to intensify in urban centers. The experience of manycities in the rapidly growing economies of Asia is instructive as unplanned andunconstrained growth of automobiles is leading to major problems of congestion. Not onlydoes such congestion promote greater fuel consumption and a resulting increase in airpollution, but the severe increase in transit times can have a substantial impact oneconomic productivity. A recent study by the Japanese International Cooperation Agencyconcluded that Bangkok loses about one third of its potential gross city-product, owing tocongestion-induced travel delays, and that this could rise to 60 percent if no action istaken.3/ The urban traffic in China is especally complicated owing to the prevalenceof nonmotorized vehicles because they reduce traffic speeds. In large cities such asShanghai and Tianjin, urban congestion is already becoming a major problem. Data fromAnshan, Fushun, Shenyang, and Tianjin suggest that in most cities bicycle speeds are oftenhigher than speeds by other modes-especally public transport.M/ The incidence oftraffic fatalities in Shanghai is 10 times that of Tokyo, owing to the high proportion ofpedestrians and cyclists in the traffic network and delays in providing first aid to accidentvictims. Now, as China itself is moving closer to the consumption patterns of itsneighbors, some preventive measures should be tak to ensure that urban motor vehicleuse in China does not lead to the type of congestion problems that are emerging in othercountries.

2.42 Environmental lIplications. The increase in the vehicle fleet will alsohave a significant environmental impact, especially in urban areas. Chinese cities alreadyhave some of the highest total suspended particulate and sulfur dioxide readings in theworld.35/ Even though much of this pollution can be traced to the use of coal as anenergy source, diesel fuel burned by trucks and buses also results in high levels ofpollutants and toxic emissions. During peak traffic periods, the share of air pollution

32/ Volume to Capacity (V/C) ratios (a commn measure of congestion whereby a V/C of 1.0 or aboveindicates sgficant congestion) confirm the generl low level of congesion mdi the a networc m1990, with only 17 percet of link having V/C ratos gter tan 0.7 and 4 peret of the links overa ratio of 1.0. All class 1 roads and 76 percent of Class 2 bighways have V/C ratiows of 0.5 or less.'

221 Urban Danpon in Asia An Opef at Strat4giesfor the 1990s, World Bak Yellow Cover draft,1993.

31/ Oe. atp, p. IS.

351 Cha EAWrownm Stmuf Paper, 1993, p. 16.

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emitting from motor vehicles at major city crossroads can be as high as 80 percent.Consider for example, the following results (Table 2.5) emerging from a survey of theBeijing urban area (within the third ring road) that was conducted by the HighwayResearch Institute. Moreover, pollution from automobile exhaust is growing as the nunberof motor vehicles has considerably increased in the past 10 years in urban areas.

Table 2.5: MoTOR VEHICLE EMION POLUMON CONTRUIONTO TOTAL MAN-MADE PoLWIoN IN THE BEWG URBAN AEA

(WTN NE TRD RING ROAD)(Percentage)

Pollutant Winter time Summer time Annual Average

co 26.1 58.5 39.1N0 38.0 55.3 46.2HC 62.7 85.7 74.8

Source: ehicke Finsion Pollutw Control and Tedcnical Measures in COina, Ma Hua, Li Guoxiang andShu Migxim, The Highway Research Istitute, Ministry of Commumications, PRC, August 1990.

2.43 Experience from other rapidly motorizing Asian countries also offersevidence that a rapid and large increase in urban concentration of vehicles poses significanthazard to the urban environment and potential health risks to the population. The mostcommon adverse health effects of vehicle pollution takes the form of an increased incidenceof respiratory illnesses such as asthma and bromLchitis. Other adverse health effects includelung cancer, which can be caused by certain air pollutants that are known to becarcinogenic, such as those emitted frow. diesel vehicles. No data on the costs of thehealth effects of vehicle pollution are available for Asia, but the Amercan LungAssociation concluded that "national health costs worth between $4.43 billion and $93.49billion were due to automotive and truck exhaust pollution and could be avoided. -/

2.44 Vehicles in China often pollute at a level 10 times higher than comparablevehicles in Western countries. This difference is due to manufacturng inefficienc.-s ofsome vehicle parts (carburetors), lack of exhaust-gas filtering devices (catalytic converters),the use of leaded gas, older vehicle age, motor defects, and poor maintenance. Strongaction on this end is obviously needed to ensure that cleaner technologies are used in theproduct design of vehicles and that emission codes on a par with international standardsare established and maintained.

2fi 9 As quoted by Urban fhow In Asia. An Operational SraNgfor the 1990s, Wodd Bank drat July1991.

3. POLICY ITS IMACTON THE AUTOMOTIVE IDUSTRY

3.1 This chapter reviews the effectiveness of GOC's current policy frameworkthat is designed to achieve sectoral objectives in the international and domestic market.This chapter assesses whether there is a welldefined policy framework that is understoodand broadly supported by central and local governments, sector management agencies, andenterpises. It also analyzes whether the policy framework is consistent among its policyelements or goals. Policy distortions as well as feasibility are also addressed.

A. ENmY Poucy

3.2 Entry into the automotive industry has been directly controlled by the centralgovernment with the state investment system, although the center's power in investmentdecisions has been in decline in the reform era. GOC's role in controlling entry goes farbeyond the regulatory function that would be normally expected in a market economy, bywhich the entry is passively screened through merger investigations or prodiuction andproduct licenses. Actually, GOC exerts direct and extensive control. This control hasbeen possible and necessary as the centra government controls the supply of material andfinancial resources that any new entrant would need to turn its entry decision into aphysical reality. In contrast with a market economy, the Chinese enterprises have limitedautonomy in makdng investment decisions as their access to factors such as land, water,electricity, rail transport, and bank finance is limited, even though the ongoing economyreform is beginning to give enterpnses more flexibility than before.

3.3 The state investment system addresses two different types of investment:(1) capital construction that emphasizes the creation of new enterprises or major expansionof existing enterprises (investment for entry) and (2) technical updating or transformationthat is intended for the modification of existing facilities. Historically, capital constructionprojects were more tightly controlled by the central government than technicaltransformation projects, as indicated by the lower 'free limit' for capital constructionprojects.1/ In 1990, for example, the free limit for capital construction investnents wasY 10 million while that for technology transformation. was Y 30 million.2/ Thisdifference may have been related to capital construction being financed by the budget,

I/ Free limit is the ceiling on tie total amount of investment below which the provincia and localgove_nmnts are not required to obtain the approval from the centml auhorities (usually SPC). Fordetailed discussion on hina's industrial policy, see hnde4jit Singh, ChLna Indusria Polies for anEoonomy in Traiion, Thm World Bank Discussion Paper 143, 1992.

V This was Y 50 million until Jamnuy 1990.

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while technology transformation by the depreciation fund. This distinction, however, hasbecome less clear-cut in recent years because budgetary funds are channeled through banksand technology transformation investments are funded to a large extent by bank loans.

3.4 The policy instrument of the state investment system has not been entirelysuccessful at achieving the objective of imposing national priorities on entry decisions.Even though the tight control and approval limit on capitalization investments could beinterpreted as prudent entry policy designed to impose national priorities on majorinvestments, it backfired as tight control and low free limits led to the miniatuization ofinvestment. Provincial and local governments broke up large investment projects intosmaller ones to evade administrative control and invested in suboptimal capacity. Toprevent this circumvention, especially during the stabilization period, the State Councildeclared that all investment in restricted sectors, the automotive industry being the first onthe list,2/ is subject to central government approva!, regardless of the sources and scaleof the project.

3.5 The effectiveness of the state investment system would be further erodedwith the progress of economic reform. The key element of economic reform is thedecentralization of financial resources and economic decisionmalang power from thecentral government to lower levels of government. The availability of raw materials andcredits and the subsidies generated from paying below-market state prices have been thekey source of influence with which the central government aligned the provincial and localinvestment priorities with the national ones. Economic reform has made material resourcesreadily available at market prices, whlie the spread between market and stae prices hasbeen narrowing through price reform, decreasing the reliance on the central government.Furthermore, financial resources have been increasingly shifted from the centralgovernment to enterprises (and provincial governments who supervise them) throughincreased retention (percentage of profit retention by enterprises increased from 18 percentin 1981 to 68 percent in 1988, see Table 5.1 in the Annex), which increases the role ofprovincial governmnents in investment decisions.

3.6 The increasing role of provincial governments on entry decisions needs tobe checked, however, as provincial governments have shown their inclination to erect entrybarriers that have no economic rationale. In an attempt to protect the provincial tax base,the provincial industrial bureaus tend to block these new out-of-province entrants thatwould threaten the profitability of existing enterprises regardless of their economic

I/ 0Oudine of China's Industrial Policies, The State Council of China, People's Daly, Beijing,Fehruay 14, 1989. To cool off the economy and rectify the shuctr imbalaces betwen sectors,it listed -riority sectors and *resticted sectors for which the production will be encouraged on aprioity basis and strictly controlled. For resticed sectors, capital construction was susended orstictly controlled. The automotive industry was listed first i te restricted sector. CNAIC wouldcary out the approval function on behalf of SPC. The only case whe local government approvalwould be permitted is for direct foreign investments below $5 million, the output of which is intededsolely for exporl This was due to other measures intended to attract foreign investment and encouaeexports tough s8mlified apprval procedures at the local level. For moe discussion, see Chuna.InduWs Poldes for an Ecnomy in Transition, The World Bank Disusio Paper by L Siugh.

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efficiency. Thus, in formulating a national developmental strategy, an entry policy thatwill superimpose national priorities over local ones needs to be devised.

B. ExIr POIuCY

3.7 Chinese enterprises in general have high exit barriers as there are highimmobilities in labor and transfer of capital and assets. These immobilities forceunprofitable enterprises to continue unhealthy operation by continuously draining resourcesthat otherwise would have been economically used. The unemployment resulting fromexits is one reason why the provincial and local governments steadfastly support theenterprises under their supervision or in their territories. The constraint on labor mobilitywill be partaly alleviated through the labor contract system and by plans to transfer thewelfare system to local and provincial governments. With time, l4bor mobility will alsobe enhanced with housing reform and labor retraining. In the maentime, however, morecan be done to remove barriers to capital mobility by creating a legal and regulatoryframework on bankruptcy procedures and asset transfers.

3.8 In the Chinese automotive industry, in particular, declining industryprofitability and a rising need for restructuring creates a pressing need for an active exitpolicy. The long-term average industry profitability has continually declined in the pastfrom 16 percent return on sale in 1981 to 5 percent in 1990 (see Table 5.1 in the Annex).Moreover, there appear marginal players whose profitability is eroded much more thanothers during economic downturns due to their disadvantages in size, technology, andindustrial bases. For example, small-size entepises showed a profit of only 2.9 percentin 1990 compared with 7 percent for large- or medium-size enterprises; converters yieldeda profit of only 2.4 percent compared with 5 to 6 percent for producers of vehicles,engines, or parts. Also, the fragmented structure of the automotive industry leaves mostproducers with economically efficient production scales, the problem of which needs to beresolved to attain international competitiveness.

C. CoIrEmMON POLICY

3.9 The central and local govermnents should expose enterprises to competitionby revising their anticompetitive policy and practices. The Chinese automotive enterprisesare excessively sheltered from aU sources of competition-import, export, and domestic.Protection from imports for a limited time and scope could be justified as part of theindustrialization strategy and export competition is too premature for the infant Chineseindustry; however, more definitely needs to be done to enhance domestic competition.

3.10 Domestic competition is distorted owing to interprovincial trade barriers,govemment subsidies, government control on price and distribution, and limited managerialautonomy and accountability. The interprovincial trade could be substantially facilitatedif economic and structural impediments such as institutional constraints (for example, thelack of an interbank setdement system) or physical constraints (tsport botdenecks) areresolved. Integration of the national market would not be possible, however, withoutaddressing the practices along administrave boundaries. There are widespread practices

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on the side of provincial and local governments to preferentialy purchase locally producedgoods or levy penalties on vehicles produced outside of their territories. For example,during the period of austerity or low demand for automotive products, say, as recently asin 1990, provincial and municipal governments issued circulars in which it was announcedthat automotive dealers within their areas would be forbidden from dealing with "similar"products from outside provinces and municipalities;4/ otherwise, different fees would becharged on the vehicles purchased from the outside.l/ In some cases, this discriminationagainst similar products sourced from outside went to such extremes that localtransportation management would refuse to issue license plates and gasoline supplyauthorities would refuse to grant fuel quotas.f/ Recognizing that internal barriers hadrevived during the economic downturn, the central government warned provincialgovemnments to take actions against trade barriers;7/ nevertheless, barriers alongadministrative boundaries stil exist.

3.11 Government subsidies to loss-making enterprises or vehicle buyers are alsocistortng domestic competition. The heavy-handed restriction by provincial and localgovernments on the purchase of outside vehicles is often paired with the guarantee thatprices of locally produced vehicles wil be lower than similar products sourced from theoutside. This low-price guarantee is usually backed up by covering the price differentialwith either adjustment of taxes or low transfer prices of factors, which in turn causesanother distortion in the factor market. Buyers are also given subsidies in the form ofexemption from fees, tax breaks such as deductions for the payment of automotive loansfrom before-tax profit, and financial incentives such as the use of the depreciation fund forautomotive purchases.B/

3.12 Subsidies for inputs are the result of distortion in the state-run materalallocation system, leading to misallocation of resources. The material allocation is tiedwith the mandatory production plan. For example, steel, a key raw material, is subjectto different price regimes: (a) state price, which is fixed by the central government;2/

4/ Similar product meams products that have the same performce charactrstics as and thus could besubstituted with the products produced within the area.

5/ The purchase fee is 5 pernt for locally produced vehicles and that for vehicles from outside of thearea is 15 percet. Besides, gasoline allocation is guarted only for the locally produced vebicles.

6/ Curalar on granting preferlo pol aafor the local brand wuhicle, Document No. 1990-004,jointlyprepared by Provincial Planning Commission, Provincial Matials Bureau, Provincial Security Bureauand Provincial Petroleum Corporation in an Inner province. Circular on issues concerning purchasesof locaUy produced vhildes, Municipal Planning Commission Document, 1990, by a Northeasternmnmicipality.

I/ "Beijing launches new offensive agamst regional trade protection," lhe Hongkong Sandard,November 24, 1990.

I/ Ibid.

2/ The cetral govem means a consensus between CNAIC, SPC, and the National Price Bureau.

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(b) domestic market price; and (c) import price. Raw materials purchased at state pricesare used to produce that pcrtion of vehicles to be sold at state prices to designatedgovernment sales agencies. However, it is hard to stop subsidization of inputs for productssold at market prices. especially in periods of economic downturn. The reverse has alsohappened. In periods of expansion and high demand, insufficient inputs from themandatory allocation system have been available, and profit from mandatory sales has beensharply reduced when inputs purchased at market prices had to be substituted to reachoutput targets. When the profit from easy access to state-priced matials can overshadowthe profits from the efficiency gains, enterprises have less incentive for fair and transparentcompetition.

3.13 Market distortions also exist in the area of pricing and distribution as priceis set by the Price Bureau and the distribution of automotive products is directly controlledby the central government. Distortion due to dual pricing between state-plan prices andmarket prices also exists in the automotive industry;Il/ but the distortion is expectedto become less significant with the progress of price reform and a decreasing share ofmandatory production quotas. However, price fixng by the central government should beavoided (other than vigilance against monopoly or cartel pricing tactics). This practice isanticompetitive and unfairly restrains efficient enteprises from transfering producersurplus to consumers because price cuts will be absorbed in the distribution channel in thecurrent system.

3.14 The current policy of separting distribution and sales functions, botheffective tools of competition, from producers undermines the long-term potential of theautomotive enteprises. The distribution of passenger cars, for example, is carried out by210 authorized organizations,1 all of which belong to either the Ministry of Materialsand Equipment (MOME) system or the CNAIC system. The producers are requireu toturn in most of their output to the state-controlled distribution organizations and areallowed to sell only few of their products; for instance, Shanghai Santana and Beijing Jeepdirectly sold only 5 percent of their products in 1991. There are many more organizationsfor truck sales; in this segment, enterprises also do not have control over the instrumentsto compete in the national market.

3.15 As a result of the separation between production and distribution, theproducers of automotive products have limited contact with consumers and usvrs of theirproducts, contributing to a large extent to the lack of consumer orientation among the automanufcturers. No feedback loop exists for consumers to be able to provide input to themanufacturer. The existence of a seller's market and general lack of customer orientationhave also implied that after-sales service networks are neither extensive nor well integratedwith the distnbution networks. Shanghai Santana has only six after-sales service outlets

10/ The price differet betweea the ste price and the maret price is, for example, in 1987, about30 percent for Jiefang truck with the state pnce of Y 29,800 and the market price of Y 39,004.

II/ The number of authorid organiations increased from 81 to 210 o Jalauay 13, 1993. This was thefourth me that such authoriion for automotive dealeships has been made. Last time it was in 1990.

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in Shanghai and 88 authorized service stations across China (to which Shanghai-Santanaprovides parts, training, and management).

3.16 In the future, the lack of experience in sales, distribution, and marketing islikely to emerge as a severe handicap for the domestic industry in competing with moresophisticated international competition.

3.17 Limited autonomy and accountability of the enterprise management reducesthe role of enterprises as key agents in the competition. Even though the ContractResponsibility System (CRS) has made significant strides toward the autonomy andaccountability of enterprise management, the system is still not able to separate themultiple functions of ownership, regulation, and management of the supervisory agencies.As a result, there is no clear separation of decisionmaking authoriy between the enterprisemanagement and the agencies that have an ownership interest in or supervisory orregulatory responsibility over the enterprise. These agencies duplicate managementdecisions, which makes it difficult to impose accountability and economic discipline on theenterprise management.

3.18 The intensity of competition and budgetary constraints are necessary but notsufficient conditions for economic discipline. In this regard, the interests ofdecisionmakers need to be aligned with the charered goal of the enterprises throughaccountability and incentives.

D. FoRE[GN TRADE PoLIcY

3.19 Protection from intemational competition is provided through import tariffsand import licenses adminisd by the Ministry of Foreign Economic Relations and Trade(MOFERT) with the objectives to protect the domestic market, raise domestic value-added,and mnmize the trade deficit. Table 3.1 presents the tariffs for the import of completedvehicles. The taiffs are large-as high as 270 percent-for the import of passenger carsfrom countries not under the Most Favored Nation (MFN) trade agreements.

3.20 To protect the domestic market, import tarff rates on vehicles have raisedthe c.i.f. import price to a level comparable to the domestic ex-factory price, and importquotas have been established to ensure that the vehicles produced in China are sold first.Despite these high tariffs and nontariff barriers, many imported passenger cars are seenon the streets of China's major cities, indicating consumer preference for imported carsand apparent smuggling during certain years in the past. However, with the growth ofdomestic industry, imports have declined fast, and import competition in the automotivesector remains weak.

3.21 Import protection for completed vehicles is supplemented by policies topromote domestic value-added in manufacturing, both for the preservation of foreignexchange and, more importantly, for the development of local manufacturing capability.High customs tariffs of 150 percent on imports of completely knocked down (CKD) kits

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Table 3.1: IMpoRT TARIFS(Percent)

Category Most Favored Nations Others

CarsLess than 2 liters 180 230Greater than 2 liters 220 270

Diesel TrucksLess than 5 tons 60 80Greater than 5 tons 50 70

Gasoline trucksLess than 1.5 tons 50 70< 1.8 tons < 5 tons 60 80Greater than 5 tons 50 70

BusesMore than 36 passengers 70 9010 < passengers < 30 180 230

Road trailer 50 70Automatic loader 40 50Truck chassis 40 60Bus chassis (>30 passengers) 50 70

Source: CNAIC.

are levied as a policy instrument designed to encourage localization.12/ The level oftariffs on imported components is reduced as an enterprise achieves higher localizationrates. With a localization content of 40 percent, the tariff level is reduced to 80 to 100percent. Localization programs are also encouraged by simplified administrativeprocedures when an enterprise achieves a threshold level of domestic content. Enterpriseswith a 40 percent localization content can import CKD parts without license and, with a60 percent localization content, enterprises are not subject to production quotas fromSPC.13/

3.22 Another incentive for raising domestic value-added comes from the restrictedavailability of foreign exchange. Joint ventures are required to balance expenditures forimported parts and components with foreign exchange earnings. Raising local content is

12/ Localization measures the degree of locally made content in a car. Ihe localization rate is measuredas the ratio between the value of locally made components at imported CKD base-year prices to thevalue of the car at the same base-year price. Thus, it is a quantity index weighted with base-yearprices, in which the base year is the year during which the vehicle was completely assembled withi-poRd parts.

13/ An automotive component is considered locally produced if less than 40 percent of its components areimported. Thus, a car with 60 percent localization could in theory have as little as 36 percent localcontent

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a solution to this limited access to foreign exchange. However, during early years ofoperation, enterprses find it very difficult to match export earnings to foreign exchangeexpenditures for raw materials and intermediate goods. As a result, automotive enterprisesare sometimes allowed to undertake measures such as selling vebicles partly or completelyin foreign exchange, or perhaps requesting government foreign exchange quotas.4JA

3.23 The import tariff and nontariff barriers may create a bias against exportsbecause domestic producers find it easier to sell at high prices on the domestic market thanat low prices on the foreign markets. In an attempt to offset this bias and to promoteexports, the government has established a number of favorable measures: financingfacilities, bonded warehouses, direct exporting privileges, and the right to retain foreignexchange. Although these measures are helpful, price and product quality remain in mostsegments as major obstacles to export.

3.24 While there is some reason to protect an industry at the outset, anyprolongation of protection can be detrimental to the competitiveness of the sector.15/In the case of China, the establishment of a program to eventually dismantle trade barrierswould be necessary if China reenters the GAIT agreement. Thus, a new trade policy thatexposes domestic industry to the threat of imports needs to be designed.

E. DEMAND MANAGEMENT

3.25 Demand for automotive products in China has been greatly affected by thegovernment policy instruments and practices such as administrative procedures, taxation,government purchases, and financing. In the past, overall demand control was donethrough the allocation of production targets together with restictions on imports and limitson domestic consumption to the planned availability of vehicles. In addition, GOC hasexercised direct control over the allocadaon of the available vehicles through administratve

14/ Article 75, Regulations for the mklmntation of the Law of the PRC on Sino-Foreign Equ4y Joint

Venture Ent7ses; Aticle 20, Law of the PRC on SinowForeign Cooperauive Enterprises, as qwoted

in Shizong, Dong, Danian Zhang and MiltoR. Larson, Trade and Investment Opponwrities in China

The Current Commerca and Legal Framewoit The State Council allows joint ventwes in Chinaadditional mesu to acquire foeign exchange. These are:

a. Existing joint ventures are allowed to reinvest their local currecy profits into other ventures that

are strictly export oriented.b. New joint ventoues can ake the form of several enterprses, some of which will concentat their

sales on the domestic market while others of which will be export onented.c. Subject to the approval of the Foreig Exchange Commission, joint-venur products that are import

substitutes can be sold partly or completely in foreign exchange.d. Also, subject to administrative approval, joint ventures in deficit of foreign exchange can sell their

Renminbi to other joint ventues that tend to be in surplus (touris industies).e. During its initial years, a joint venure in a priority industry such as the automotive industry can

also receive govenment foreign exchange quotas.

15/ On the issue of infant industry and import competition, see 0. Havrylyshyn, 'Trade Policy and

Prductivity Gains in Developing Countries: A Survey of the LUtemture,' The World Bank Research

Observa, 5(1), Janr 1990.

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procedures such as budget allocations for social purchase,1§/ as well as by requirementsfor vehicle purchase permits and registration. These administrative procedures have theeffect of rationing automotive products that are in short supply. Additionally, high taxes,comprising between one quarter to one third of the final sale price of a car, are levied ontop of an already high price-level. For example, a purchaser of Shanghai Santana isrequired to pay, in addition to the retail price of Y 127,400, taxes totaling Y 46,370 thatcomprise the following: the purchase fee of Y 7,920; the social fee of Y 23,000 that goesinto the fund for road construction, environmental protection, and other servces relatedto cars; the special consumption tax of Y 15,000; and the capital fee of Y 450 charged toenterprises buying cars with working capital. These high taxes further discourage theownership of automotive products by buyers who are much more pri^e sensitive than thosewho are paying out of the government-allocated budget.

3.26 Contrasted with the measures restraining demand, GOC tried to stimulateslow market during austerity measures. Under the "rescue purchasing plan,"l7/ theState Council approved the People's Bank of China to provide Y 350 million in 1989 andY 1 billion in 1990 in loans to MOME. These loans were intended to buy about 10,000units that have been stockpiled as inventory in automotive joint-venture companies. Thepurchase vehicles were sold to govemment departments that 'urgently" needed them.However, this rescue plan was a stopgap measure, and the government adjusted down thepurchase volume as the situation improved with enterprises.

3.27 In recent years, because an increasing share of demand comes from theprivate sector, the demand level has gone up and the demand pattern has begun to shift.This is due to the rapid growth in the purchasing power of TVEs and the private sector andto GOC's measure to allow private individuals and enterprises to purchase automotivevehicles without permits. As a result, the share of government purchase decreased. Forexample, in 1992 private purchasers accounting for 20 percent of the domestic market andcentral government purchases had fallen dramatically to only 16 percent of the plannedproduction.11/ The remainder of the market being made up of other social purchaserssuch as other government agencies, stte-owned enterprises, schools, factories, andhospitals. In the coming years, however, the domestic market will increasingly be led bynongovernment consumers.

3.28 The increasing share of prvate ownership indicates that China has to facethe problems associated with motorization, and demand management policy needs to reflectchanging societal needs. International experience shows that typically an economy, in thecourse of its development, goes through several structual- changes in the demand for

16/ Govement agencies and SOEs ae required to have a budget for the purchase of automotive, whichis usually allocated by the Ministry of Finane. In addition, they are required to have permits forownership.

17/ COina Dafy, March 20, 1990.

I/ Cenal government purchases refer to purchases made through the Ministry of Materals andEquipmet and CNAIC.

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transport services toward increased private ownership of transport vehicles. The rate ofautomotive diffusion first speeds up when per capita incomes reach the $500 markj1IAnother benchmark for a structural change in automobile ownership comes at the point ofeconomic development at which automobile ownership reaches 50 to 100 cars per 1,000people, "when its economic efficiency destroys alternative means of transport likerailways" and the automobile becomes a necessity.2Q/ The increased level ofmotorization creates negative externalities such as pollution and congestion, and demandmanagement policy needs to address ways te control problems associated with them.

F. SECrOR MANAGEMENT

3.29 Administration of the automotive sector in China is very complex withloost!1y defined supervisory responsibility among CNAIC, provincial governments, centalgovernment ministries, and the automotive enterprise Group Corporations, all of whichdirectly report to SPC (Chart 3.1). The provincial automotive group corporations play thesecond-tier administration for part of the industry, while municipal or county governmentsalso get involved in second- or third-tier administration for small enterprises. Theinvolvement of many administrative agencies with diverse sectoral responsibilities oftenleads to multiple supervision and a tendency to overlook the strategic sector focus.

3.30 CNAIC is the only organization at the national level that is fully dedicatedto the automotive industry and remains a focal point in the sectoral administration, eventhough CNAIC's power has waxed and waned in tandem with centralization anddecentralization of economic decisionmaking processes. CNAIC still has a strong say innational regulatory decisions affecting the sector, is active in sectorat planning, overseesthe implementation of SPC schemes in some enterprises, and coordinates planning for somesegments of the industry (see Chapter 1). Three automotive firms (SAW, PAW, and theChina National Heavy Truck Corporation) that are under direct SPC control are, inpractice, supervised through CNAIC, because plans for these firms are communicated toand from SPC by CNAIC. Moreover, CNAIC is the main investor in the Nanjing MotorCorporation and the Autoparts and Accessory Corporation. Furthermore, CNAIC hasestablished three research and training facilities (in Tianjin, Chongqing, and Wuhan) anda wcAkly trade publication.

3.31 Beyond these fairly clear roles, however, CNAIC could manage to exertlimited influences over other sector agencies. For instance, Beijing Jeep, the ShanghaiAutomotive Industry Corporation, and Guangzhou Automotive Manufactunng, which areunder municipal government authority, must seek CNAIC approval of their plans beforesubmitting them to the State Council. Two corporations-for sales and service and formaterals and supplies-report to both CNAIC and other govemmental institutionsconcerned with the allocation of materials and goods.

12/ Ueno, Hiroya and Hiuomichi Muto, Me Automobile Industry in Japan,' in Kwzuo Sato (ed.), Industnyad Business in Japan, 1980.

2/ 'Ihe Fuhue of te Motor Car," Energy Ecnoit, Januay 1992.

Chart 3.1: CHNA: AUTOMOrIVE Y SECTOR SuPEvisoRY CONTROL

state pLxq '.s

zd oti e Sol ad llat4 otkwe 5 ~~~~~~~linitry of = nitry of Kinax ludnotrio

Authoriti e Corportio (FUIl) Corportion (BAM Coqirt1n Corporatio (C3AlCX Vdustry Aeroapac. Ar_aet fl

Tianjin china Urban ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ AiaigM

I -I~~~~~~~nutr at and Indst IInstitute, Invemn ainlAt

teral and Accessory Import ind reeab and mpany Industryal. orpoaiur,oa

i tjX I 11 1 Bdba~Suply I Corporato Zot Qality an SericICot ~ ~ ~ ~ ~ oroato I Company CenterI Corporation chima urbantrrie Nrnba BacheSae1 . L NtSd | Ch tz Chiu Autol Autooi Tcnlw{{{0Ci

lotIv tr1 Autt

component) ~ ~ ~~~ J Planta =Inf~~~~ompany tnre

try | ~~~~~~~~~~~57 eutoaotive Natiowde Iltei Satiode -11. Cot | e~~~~~~~~~~~~nterprl rch a rc Outl Sta$ sae a- Adteional

Outletsl Plztag

ICot I I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Bti

Autzowtiv-IC"os

c_t) | | ~~~~~~~P=c. Liike tAddttl 2tAstebttwe

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3.32 At the central government level, at least eight ministries are involved withautomotive production with the Ministry of Machinery Industry (MMI) and have the lion'sshare of sector production (see Table 1.2 in the Annex). A total of 1,427 enterprises(about half of the number of enterprises in the automotive industry) belong under thejurisdiction of MMlI, produce 75 percent of the industry output value, and employ 1 millionpeople. Other ministries that have jurisdiction over automotive production plants includethose who have transportation or construction responsibilities and may have genuine needsfor special vehicle producing capacity (for example, the Ministry of Communication, whichis responsible for transportation, and the Department of City Construction). The reasonfor the involvement of ministries other than MMI could be owing to the fact that theydiverted part of the production capacity that was initially built for other purposes toproduce automotive and components. For enterprises other than those directly under thecontrol of ministries, in practice, the supervision is carried out by provincial governments,CNAIC, and Group Corporations.

3.33 There are nine Group Corporations in the Chinese automotive industry, fourat the central level and five at the provincial level.21/ Their aggregate contribution tothe industry is half that of the total industry output. Their formal industrial organizationalstructure, however, is difficult to discern as different arms of the government make variousclaims on these corporations. The initial motive for creating such a group throughhorizontal linkages was to guarantee input supply, thus reacting to the reduction ofmandatory planning that had previously assured a producer of the input necessary to makeplanned output. A group is usually comprised of a core enterprise (for example, FAW forJiefang Group), 'close-link' enterprises that receive from the core enterprise either thechassis for their bus or truck production (or sometimes even fund for technologyrenovation), and 'loose-link' enterprises that are contractually related with the core bysupplying components and parts. There are altogether 206 close-link enterprises associatedwith the core enterprises.

3.34 The relationship between the core enterprise and the close-link enterprisesare not as close as the one observed in Japan or Korea because the ownership structure andthe supervisory links are ambiguously defined. For example, SAW, the core of DongfengGroup, includes into its own plan the production plans of the five close-link enterprises,which are located in five different provinces and make engines and vehicles. SAW alsocontrols their investment decisions and financial planning. It is the provincial and localgovernments to which the linked enterprises are responsible for their performance underthe contract responsibility system and owing to financial and tax obligations. Thisambiguity in the governance of enterprises is because core and linked enterprises arelegally independent entities, while provincial governments remain influential over resource

I/ They are Jiefag Automotive Group Corporation with FAW as the core plant, Dongfng (sometmscaled Aeolus) Automotive Group Corporation with SAW as the core plant, China National HeavyTnzck Corporaion with the core factry at Jinan, and China Auto Parts and Accesoiy Corption,at the central level. At the provincial level, they are Nanjing Automotive Industry Corporation, BeijingAutonotive lidustry Corporation, Shanghai Automotive Industry Corporation, and Tiazijin AutomotiveIdstry Corporation.

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allocation. This ambiguity restricts the effectiveness of the Group Corpo ation as anindustrial organization.

3.35 The share of control of each supemrision agencies varies with industrysegments: the CNAIC system (including central-level corporations), local governments(including provincial corporations and governments), and ministries. In 1989, out of 166enterprises, 19 were under the supervision of CNAIC; 133 were supervised by differentlocal government bureaus; and the remaining 14 enterprises were controlled by otherministries (Table 3.2). The share of production, however, under the control of eachsupervising agency varies with the industry segment. For example, the CNAIC systemremains strong by controlling up to 90 percent of the total national production in thetraditional mainstay of the industry-heavy and medium truck segments-while provincialgovernments advanced rapidly in newly opened markets such as minitrucks and passengercars. For highly fragmented bus and special vehicle segments, provincial and localgovernments control almost the entire market.

Table 3.2: E NuE AM IPRODucroN BY Su mERVNG ENmTY, 1989

Total no. ministries

Automobile of enter- CNAI Local /a Aerosuace Ordnance Machinery

Category prises No. S No. 2 No. 2 No. 2 No. 2

Trucks 64 1i 56 43 37 6 4 3 3 1 *

Heavy 18 6 84 9 15 - - 2 0.5 1 0.5

Medium 12 3 90 9 10 - - - - - -

Light 26 2 21 20 74 4 5 - - - _

Mini 8 - - 5 57 2 18 1 25 - -

Buses 19 4 * 11 85 2 5 2 10 - -

cars & Jeeps 9 2 6 7 94 - -Special Vehicles 74 2 3 72 97 - - - - - -

Total 166 19 44 133 51 8 3 _ 2 1 *

* Negligible.

/a The entepnsses under Local Authonties are under a number of local administve departments such

as Machinery Industry Bureau, Transportation Bureau, Urban Construction Bureau, AgnculturalMachinery Industry Bureau, Agricultural Machinery Products Bureau, Automobile Industry Bureau,etc.

3.36 As a result of the presence of multiple supervision agencies, the enterprisemanagement has tr deal with several agencies in its conduct of the business and could faceconflicting signals. With the limited exception of central corporations, enterprises reportto local finance bureaus under the contract responsibility system to pay tax obligations, toobtain credit, and to negotiate profit allocation. Enterprises also have to assure supportfor materials from central government agencies under the central allocation system. In

addition, for investment, enterprises have to obtain approval for the plan from a county ora provincial planning commission from CNAIC and Group Corporations for parts andcomponents to be supplied to the core assembly enterprise outside the province.

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Enterprises must also seek financing from local finance bureaus and corporations. Thisadministrative complexity breeds the incongruence of goals among supervising agenciesand the inefficiency of enterprise management.

G. LOCAmzATxON PROGRAMS

3.37 Concem over the scarcity of foreign exchange, as well as a desire tosubstitute local production for imports, has led to local content rules being applied toassemblers and major component producers. They are linked to production quotas for jointvenures so that higher domestic content is required before higher output is authonzed.For some firms, this has meant lowering quality standards to fulfill local content targets;for others, it has meant putting up with a lower output quota, which has kept the unit costof their vehicles high, by preventing full use of capacity.

3.38 To help enterprises reach high shares of local content, the government alsoprotects domestic producers from overseas competition and ensures the supply of inputs.First, import of the vehicle to be localized is forbidden. Second, the entire productionstructure (vehicle assembly and component production) is under government guarantees andcontrols. The government guarantees the availability of domestic raw materials, andprovides foreign exchange quotas for the raw materials and parts permitted to be purchasedabroad. Enterprises receive some raw materials at subsidized prices and some local bankfinancing at subsidized rates.

3.39 In the case of Shanghai Santana, the localization process went slowly in theearly years of operations, but has accelerated lately. In 1985, all parts were imported.The local content ratio was raised to 31 percent in 1989 and 53 percent in 1990, at themass-production level. This implies manufacturing an acceptable prototype and then massproducing it according to the same quality standards.22/ Currently, the local contentis 70 percent.

3.40 At a low production-volume, the unit cost of localized parts is high byinternational standards owing to inefficient producdon scale. Thus, increasing local contentinitially increases the cost of assembled vehicles. Only after the vehicle assembly linesreach large scales of production and requre large supplies of parts, does the unit cost ofparts go down substantially. In this regard, the success of the loclization programdepends in large part on the success of restructuring assembly industry on an efficientscale.

WV Before a filly localy made product is ma produced, the sample has to be ceitfied as meting therequired techiad standards. When tie sample has been accepted, the product is eatered n thecalculation of the localization rate at the saVple level. When the product is then mass prodced, it isentered in the localization rate at the mass-production level. Because of the delay to move a productfrom prototype to ms production, the localization rates at the sample level are typically higher thathe rates at the mass-producion level. For example, in the case of the Santana car, the loclition ratewas 70 percent in 1990 at the sample level, compared with 53 percent at the ma roducon level.

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H. FOREIGN DIRCr INVESTMENT POUCY

3.41 For external financing and transfer of production and managementtechnology, policy measures were establisheea to recruit multnadonal corporations (MNCs;,especlly in the passenger car segment. The objective of external financing andmanagement sharing has been achieved as all joint ventures are 'equated'-that is, theforeign investor has to bring at least 25 percent of the total capital, and managerialresponsibilities ae shared in proportion to the capital. To encourage such participation offoregn enterprises, the following incentives were provided: (a) tax holidays for threeyears and reduced income tax for an additional two years and (b) tariff reduction onimported parts.

3.42 In return for these incentives, joint ventures were required to meetlocalization targets and to balance foreign exchange expenditure with foreign exchangeeaniungs. Even though localization delayed full-scale production and hampered costminimization, on the side of the joint venture, it progressed at a fast pace (see Table 4.5in the Annex) and reached 70 percent for Shanghai Santana in 1992. The societal costsfor the locazatin and the recruitment of foreign investors were high because jointvenmres were protected from import of complete vehicles through foreign trade policy,given reserved market segments through entry policy, allowed for monopolistic pricingthrough pricing policy, supported with guaranteed purchases from the government duringthe period of austerity and slow sales. These measures essentially have ensuredprofitability regardless of performance and, moreover, sheltered recipients from economicdiscipline. The blind continuation of the policy can lead to MNCs' rent-seeking behaviorand can betray the initial objective of raising industrial efficiency and competitiveness withthe help of MNCs.

L ENTERPISE GOVERNANCE

3.43 As economic reform progresses, the current Contract Responsibility System(CRS) becomes less effective as the enterprise governance system. The enterprisegovernance system needs to increase the autonomy and the accountability of enterprisemanagement so that inefficiencies imbedded in Chinese enterprises can be addressed.

3.44 The CRS is an agreement in regard to performance and incentives betweenautomotive enterprises and the government. If the enterprises were to meet the financialperformance target specified in the contract, then a preagreed-upon share of profits couldbe retained after submitting a fixed percentage of profit as tax to the government. Thissystem was regarded as progress from the old system because it completely separated the

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fiscal contribution from profit retention.23/ It was designed to promote growth andimproae the economic performance of enterprises by holding them responsible forproduction capacity, investments, and technology development as well. The Ministry ofFinance and SPC are the counterparts for the agreement because the former is responsiblefor taxation and profit elements of the contract and the latter for operational aspects.Despite the limited success of the CRS system, it has failed to address the accountabilityof enterprise management because it is not neutral to enterprises and levies different taxrates from contract to contract.

3.45 Despite progress made through the CRS, Chinese automotive enterprises stillhave many inefficiencies as the operation of two leading enterprises, FAW and SAW,reveals in the area of (a) organizational structure, (b) management system, (c) culture,(d) skills, and (e) incentives.

3.46 (a) Organizational Structure. The organizational structure of both FAWand SAW is highly centrlized and follows functional lines. For example, one executiveproduction manager is in charge of all the production operations of the entire auto workswith 38 plants and several product lines and with responsibility for 50,000 employees.Similarly, the central personnel manager makes the decisions for all personnel in the AutoWorks, and all procurement is also handled by the central procurement group of about1,100 persons. This highly centralized organizational structure greatly stretches the spanof managerial control.

3.47 The centralized functional organization of the Auto Works is not appropriateto the large size of the Auto Works and the diversity of its product categories. The specialcharacteristics and requirements of specific plants and products are not well met in sucha system. Nor is this organizational structure well designed to separate out the well-performing units from ones that are less successful. A more divisional organizationalstructure organized by product groups would be more suitable in allowing for an optimalmanagement span and in converting product groups into profit centers.

3.48 (b) Management System. The centralized organizational structure mirrorsa hierarchical and rigid management style. Management at both FAW and SAW is dividedinto three levels. The first level comprises senior management who makes all decisionson production activities. The second level translates senior management's decisions intooperational plans, while the third level is responsible for production.

23/ In the past, the separation between tax contnbution and profit remittances was not always clear, mainlybecause the Ministry of Fmnnce was combining two functions. The Ministry intervened as both ownerof large public enterprises and tax collector for the State. In the early stages, when all the enterpriseprofits where submitted to the State, both contributions were merged. As early as 1978, a contractsystem was established, separating out retained earnings from government contributions, which werespecified in fixed amounts. However, no differentiation was made between fiscal and ownercontributions. In 1981, the fixed amounts required were replaced by peretges of profits. Iater,in 1984 when the income tax law was promulgated, the enterprises were subject to tax payments as apercentage of profits and to separate additional govermnent remittances.

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3.49 At the operational level, management autonomy is highly restricted. Each

plant sets targets for production, and the choice of input mix and techniques does not lie

with plant managers. The responsibility of the plant manager is to guarantee productionvolume, to ensure quality, and to meet cost standards. In practice, production volume is

the most important target to be met, and cost and quality considerations are secondary.For example, inventory management systems are motivated primarily by concern about

materials shortages; thus, excessive inventories are stockpiled without regard to the

economic costs of carrying inventories. As the industry aims to be internationally cost-

competitive, automotive enterprises will have to put in place flexible management systemsthat provide incentives for constant innovation to reduce costs and to hold managers

accountable to the performance of their enterprises.

3.50 (c) Culture. Flexible and performance-based management systems will also

require a corporate culture in which performance is judged against clearly stated objectivesand individual commitment and performance is rewarded. Presently, the remuneration of

employees is linked solely to experience and responsibility, and does not adequatelyrecognize individual performance; a worker's basic salary is determined by a grid of

experience and rank. Additional remuneration is also provided for managerial andtechnical responsibility. General incentive systems for managers and employees exist with

the growth of the wage and bonus bill linked to the performance of the enterprise. Wages

and bonuses are merged into one payment that reduces the visibility of the incentive.

Finally, although individualized income supplements are given to reward specificachievements in product quality, equipment maintenance and repair, and work safety, in

practice, it appears that the labor incentive system is better developed toward the

achievement of quantitative targets than toward eliciting quality and product improvements.

3.51 (d) Skils. Management orientation toward the fulfillment of rigid

production targets has also implied that both FAW and SAW presently lack some functions

that would be critical to their success in more competitive markets. These include strategicplanning, marketing, management information systems, and project development. Strategic

planning involves analysis of future trends, opportunities, undertaking of long-termcorporate planning, tracking competitor performance and initiatives, performing business

analysis, and undertaking new program planning. Current planning practices at FAW andSAW-production planning, plant planning, product planning-is not integrated and

consists largely of scheduling and control functions. The lack of effective managementinformation systems-in areas of marketing and sales and production and financial

management-also hinders the enterprises from developing strategic approaches, fully

utilizing productive capacity, reducing inventories, and assessing areas of cost reductionand quality improvement.

3.52 (e) Inentives. Finally, the organizational and management ethos of an

enterprise evolves to respond to the incentives and penalties offered by its environment.Current organizational and management structures in FAW and SAW reflect an economic

environment in which the senior managers are held accountable for the attainment of

production targets with allocated matedal inputs and in which the automotive enterpriseshave been shielded from all forms of competition. In such a noncompetitive environment,

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it is rational for enterprises to place primary consideration on the achievement ofproduction targets, thus relegating cost and quality considerations to secondary importance.

3.53 Many inefficiencies in the Chinese enterprises are rooted in the absence ofmanagement autonomy, owing to the multiple functions of regulation, supervision, andownership currently exercised by the overseeing government agencies. Autonomy wouldbe enhanced if the legal framework of ownership were put in place and the legal andeconomic entity of the enterprise were established. However, balancing autonomy withmanagement accountability needs more than simply setting up the ownership stucure inthe form of joint stocks because the financial market, in its current stage of development,is yet unable to wield the disciplining influence.

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4. PERSPECE ON A STRATEGY FORTHE AUTOMOTIVE IUSIRY

4.1 If the objective of GOC is to develop an internationally competitiveautomotive industry, GOC needs to assess the comparative advantages of the Chineseindustry today and its likely future development. It also has to give considerable thoughton the government's role in shaping the future of the industry because only balanced anddisciplined intervention would lead to the outcomes that government intervention intendedto achieve.

A. CoMPARATIVE ADVANTAGE

4.2 The comparative advantage of the Chinese automotive industry measuredwith ex-factory prices shows a dualistic picture with a highly uncompetitive passenger carsegment and a highly competitive commercial vehicle (truck and bus) segment.l/Domestically produced passenger cars are not cost competitive at this time compared withinternationaly produced vehicles of comparable quality and features, as ex-factory pricesrange from Y 100,000 to Y 125,000 for cars with engine sizes of 1.6 to 1.8 liters and withno microelectronic features. For example, Shanghai Volkswagen, the largest domesticproducer and arguably the most efficient one, recently announced as part of its t;ompetitivestrategy the plan to reduce the ex-factory price to Y 85,000, which is equivalent to$10,000 at the swap exchange rate or $14,000 at the official exchange rate. The borderprice of comparable cars would be about $7,000,2/ implying a cost differential of 33 to100 percent. On the other hand, the China-made five-ton medium Jiefang truck, which issold at Y 30,000 (equivalent to $3,500 to $5,000 depending on the exchange rate), is aboutone fifth of the Chevrolet Kodiak series with a similar carrying capacity.

1l Quality is another dmnion by which competitiveness should be measud. lbe quality of Chineseamotive products, especially trucb, s mny decades beind intemational standards. A senousdiscussion on compative advantage, therefore, needs to addre isues from the concept of value,which is defined to be the quality divided by the price.

2/ Shanghai Volkswagen informed the 1990 Bank mission on the automotive sector study that the Brazilianmanufater of Santma model quoted a retail price of $5,600 per car to a lare buyer in the MiddleEast. If 15 percent is added to cover ransportaton and insrae costs, the border price becomes$6,400. Thee remains a question on the export subsidy by Brazil, which is estimated by one accountto be as high as $1,000. (See Capital-Intensive Indu d in Newly Indusirkilizing Countries, The Caseof the Brallan Atoomobile and Steel Industrier, by Behard Fischer et al.) If this sbsidy is added,the economic price becomes $7,400. However, the issue of subsidy would bring out subsidies in Chinadue to relative prices and needs much more refined treatment than this sector repor intends. For thesake of discuwsion, $7,000 is used to take account of cost escalations and subsidies.

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4.3 The cost competitiveness could be explained in terms of (a) production scale,especially when it is below the minimum efficient scale (MES); (b) factor prices (rawmaterial, capital, and labor costs); (c) technology efficiency (learning curve, productionand product technology, and management); (d) short-term phenomena, such as capacityutilization and foreign exchange fluctuations; and (e) country specifics, such as workmorale and culture.

4.4 China has favorable cost differentials in terms of some inputs, especiallysteel and labor. Free-market prices in China for steel are lower than international pricesby 10 to 60 percent. Since nearly 9 percent of automotive inputs come from steel,3/ thiscost differential could amount to 5 percent (rable 4.1). A favorable differential in factorprice could be also expected in textiles and nonferrous metal inputs, which comprises 4.8percent of the total product cost. However, this cost advantage may be eroded somewhatif energy and electricity prices are set to reflect actual consumption of resources. Also,China will have to pay high factor prices for rubber and plastic, which contributes to 5.6percent of the product cost, owing to the backwardness of the domestic petrochemicalindustry; otherwise, China may have to import these inputs to avoid local costdisadvantage.

Table 4.1: RAw MATErAL PIuCE COMrARTSON

Free Market Price International Price(Y/ton) ($Iton) ($/ton)/a ($/ton)

Rubber tire 1,640 280 189 300Semifinished steel 1,168 200 134 469Flat-rolled steel 1,621 277 186 469Refined copper 15,893 2,719 1,827 2,339

4.5 China has a definite advantage in labor costs because the average hourlywage plus fringe benefits (bonuses, piece-rate wage, above-quota payment, subsidies, andovertime wage) is about $0.70 to $1.00 (according to a high estimate for Chinese workersin a joint-venture automotive producer), or about 20 to 30 times less than wages inadvanced countries. However, productivity lags behind; the most efficient producer,Sharnghai Volkswagen, reports annual production of 9.5 cars per worker in 1991, whichcompares poorly with 58 cars per worker in Toyota a decade ago.4/

3/ US.-iina Aomotive Indwsny Cooperadon Projedc, Te Univesity of Michigan, March 1989.

Michael Cusummano, She Japanae Aombile Indusry, TheHarvard University Press, 1985; MelvynFuss, Costs and Proaiity In Automobik Prodaion, Cambri: Cambid Univesity Press,1992.

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4.6 The capacity utilization rate has a significant effect on unit costs as well,since short-term variations of 25 percent would raise or lower unit costs by 6 and 10percent, respectively. This impact is equivalent to doubling the production scale. Untilthe mid-1980s, the higher capacity utilization was a source of Japanese cost advantage overthe United States; the utilization rates for Japan was consistently high, 0.95 to 1.01, whilethose for the United States were volatile from a low of 0.58 to a high of 0.90. Short-term

capacity fluctuation could occur in any country; however, a long-term trend of high

capacity utilization is the result of technology and management efficiency.

4.7 Some of the comparative advantages enjoyed by the Chinese automotiveindustry cannot compensate for the structural disadvantages in scale economies andtechnology efficiency. Virtually all automotive manufacturers other than two mediumtruck manufacturing enterprises operate with suboptimal scale. This scale disadvantage isevident not only in the old segments of the industry but also in new frontiers of the

industry-that is, the passenger car segment, in which the cost disadvantage due tosuboptimal scale is at least 20 to 30 percent. Raising efficiency in production technology,management, productivity, and capacity utilization is also a big challenge that the Chineseautomotive industry has to surmount to become internationaRy competitive. The Chineseautomotive industry, however, has a great potential with its growing domestic market andwith opportunities to accumulate learning by doing experiences that are essential to

efficiency and competitiveness. The development strategy of the Chinese automotiveindustry needs to address ways to resolve these structural impediments.

D. MNMUM EFcIET ScALE

4.8 Minimum efficient scale in automotive production varies from oneproduction process to another with changes in the production cost structure. Scale

economies are least in the labor-intensive final assembly process and greatest in capital-intensive upstream operations-forging, press, and machining. In automotivemanufacturing, upstream processes usually require heavy capital investment; for example,

the MES of the capital-intensive forging could reach 1 million units. In this process, cost

declines rapidly with increasing volume, by as much as 20 percent with every doubling ofproduction. Final assembly is definitely more labor-intensive than forging. Recent

production technology revolution has aimed to r,duce reliance on labor with sophisticatedrobotics, leading to increasing capital investment and MES. In paraUel with thisinvestment in equipment, production management has also become sophisticated, a

development that benefits scale economies at lower production volume through flexiblemanufacturing. Today's industry wisdom is that the MES for final assembly of passengercars is between 100,000 to 200,000 units per year.:J The scale economies are smallerfor final assembly, and process cost declines only by about 10 percent with the doublingof volume.61 For component and part manufacturing processes that lie between forging

S/ TIe aumofive idusy stdy done by Booz, Allen & Hamton for IFC, June 1992.

iI Nicholas Owen, Econonues of Scake, Competitiveness, and Trade Panerns Wihin the EwpeanComw_*y, Oxford: Caredn Press, 1983.

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and final assembly, the cost will decline by 10 percent as total volume increases from400,000 to 1 million units and no more beyond this volume.2/

4.9 The MES also varies with the product cost structure; scale economies areless in more labor-intensive truck assembly and greater in less labor-intensive passengercar assembly. The explanation is that components for trucks are heavier than those forcars, and truck producers have to accommodate a wider range of basic specifications(wheel base, engine, and transmission). The sheer weight of truck components requireslarger teams at each work station on the assembly line, resulting in longer work-cycletimes and lower line speeds. The variability of work content also contributes to reducingthe line speed. In industry practices, heavy trucks usualy offer more customizedengineenng than medium trucks, leading to more variability of work content and lowerscale economy. However, the difference in scale economy is mostly confined to theassembly process and for upstream production processes (forging, machining, and press).Truck manufacturing faces scale economies similar to those of passenger carnanufacturing.

4.10 For verticaly integrated automotive production, the total cost-volumerelationship is derived from a weighted average of scale economy for each productionprocess. In integrated manufacturing, about 25 percent of the total cost comes fromcapital-intensive processes, another 25 percent from labor-intensive processes, and theremainder from sourced components. The weighted average of the above process costsindicates that the MES for passenger car production, with 50 percet in-house value-added,is 250,000 units per year; the unit cost declines by 10 percent with every doubling ofvolume. For medium trucks, the MES is much lower than for passenger car and estimatedto be 50,000 to 100,000 units. The MES would be higher for light trucks and lower forheavy trucks as component weight and labor content change. Inteonal comparison ofprofitability of truck producers shows that no manufacturer producing under 20,000 unitsper year is profitable and that production cost declines by 9 percent with the increase ofproduction volume from 20,000 units to 35,000 units and further declines by the same withthe increase fron 35,000 to 100,000 units.#/

4.11 If this cost-volume relationship is applied to the Chinese automotiveindustry, the passenger car segment has a cost disadvantage of 20 to 30 percent comparedwith the international producers having the MES. This is based on the assumption that the300,000 car market, which is the goal of the Eighth FYP, is split by four producers, eachproducing 60,000 to 70,000 units (which approximates Shanghai Santana production for1992). This cost disadvantage could be an understatement, however, as there are alreadyeight producers in the market, and each one's share could be lower than the aboveestimate.

1/ Iid.

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4.12 The MES of automotive production clearly highlights the structural problemembedded in the Chinese automotive industry as most producers, except for two mediumtruck producers, do not have the MES. For example, in the passenger car segment, thereare eight producers for the market of a total of 250,000 cars in 1993. The largestproducer, Shanghai Volkswagen, plans to produce only 100,000 units of Santana modelin 1993, far below the MES. Passenger car producers have plans to expand theircapacities during the Eighth FYP, but none of them plans to expand the capacity beyond150,000 units per year during the Eighth FYP. This already constitutes overinvestmentfor the market because aggregate production capacity of 600,000 units already exceeds theproduction target of the FYP and may suffice until the end of this century, at which timethe market is forecasted to reach 700,000 units per year. The sector has structuralproblems because it requires a much larger market of 2 million (which seems impossiblewithin a decade) to accommodate eight producers with MES production while none couldbe an MES producer with the market size expected in near future. This structural problemsets a strong case for industral restructuring.

4.13 The commercial vehicle segment is not any better than the passenger carsegment because only two among numerous producers have MES today. The medium-truck segment will continue to be dominated by these two producers because both plan toexpand the capacity above 100,000 units per year. Challenges to this segment are inrasing quality and modemnizing technology. For the light-truck segment where the MESis larger than that for medium trucks, the market already, however, begins to mirror thestructural problem in the passenger car segment. There are 20 producers in the marketsize of 300,000 units in 1993; many of them produce under 10,000, a scale that will hardlyyield competitiveness even vith the low labor costs in China. Besides, the investmentplans of larger producers (the largest is 60,000 units per year) reveal that none would becomfortably operating above the MES. Thus, the light-truck segment faces the samedilemma as the passenger-car segment: too many producers or too small market. Heavytruck and bus production requires higher labor content and low MES; however, it isevident Oth with the scale of 1,000 units per year (153 bus producers have a scale below1,000, only four have above 2,000) production will be hardly economical (Table 4.2).

C. TEMOLOGICAL EFFICIENCY

4.14 Technological efficiency is the drivirg force behind the long-terminternational competitiveness of an industry and is shaped by technological absorption anddevelopment, industrial organization and management, and a developmental focus. ForGOC to formulate the medium and long-term development strategy of the automotiveindustry, it would offer valuable insights to review the general pattern of technological andindustrial organization that would characterize the development of the automotive industry,as experienced by latecomers to the world automotive industry as well as leading players(Table 4.3).

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Table 4.2: FRiAGmENTAION OF PRODUCTION IN TRUCKS AND BUSES

Total No. ofProduction plants Unit size Production

TrucksPickups 31,800 2 About 10,000 15,800

9 Below 4,000 16,000

Light 141,400 9 18,000-30,000 105,60016 Below 10,000 35,800

Medium 139,800 2 Above 50,000 111,20020 Below 5,000 28,600

Heavy 6,600 12 Below 3,000 6,600

Busessmall 22,300 4 Above 2,000 12,700

42 Below 1,000 9,600

Medium 7,100 3 Above 500 2,10033 Below 300 5,000

Large 1,600 2 Around 500 1,0008 Below 250 600

City 5,926 5 Above 500 2,00024 Below 300 3,900

Long-distance 11,542 3 900-1,100 2,92933 Below 600 8,613

Phased Development

4.15 The first phase represents the primitive stage in which a country does notown any significant technology capability and relies on import for the tranWsportatonrequirement. Even if there are attempts to develop indigenous industry, the level oftechnology is behind contempoary standards by two to three decades in the absence offoreign technology infusion. The domestic market is small, unsophisticated, and dominatedby government and military purchases. The pnces are very high compared with theincome level of the public; thus, automotive products are considered to be a luxury ratherthan a necessity.

4.16 In the second phase, the import of complete vehicles is substituted with thedomestic assembly of imported CKD and SKD kits, and the domestic industry begins itsattempts to catch up with worldwide rapid advances by employing imported foreign

Table 4.3: STYLsTc PRESENTATION OF TEIE FOuR STAGES OF THE DEVELOPMENT OF NDUSTRY

Technology Domestic Capability Product Markets Industrial Stmuture

Phase 1: Inmort Substituton in Isolation

Obsolet toehnology, typical- Enie vehiclc is made with Primitive, obsolete product Production for domestic Fragmented, dispased indus-

ly two to thee decades be. tocal capability. design, poor quality, high market, some imports of trial structure. Industry is

hind contemporary world costs of production, protected special-needs vehicles exist. not driven by cost considera-

standards. from iport competition by tions.import restrictions andlorgovernment subsidies.

Phase In Infusion of Foreign Technolocv: Develonment of Assembly Technoloav Caoabilgv

Foreign imports of technol- Domestic capability develops Product design and quality Production is for the domes- Scale economies for asumbly

ogy are infused in the domes- in thc assembly of CKD and improves but are still wett tic market, which is smaU operations are 40,000.

tic industry. Initial technol- SKD units. Domestic capa- belov world standards. In and protected. High levels of Industry leaders achieve

ogy hiports focus on devel- bility does not yet extend to particular, quality assurance, imports of technology, CKD economic scales of produc-

oping assembly capability, the technolgy for compo- safety standards and after- and SKD units and some tion. Vestiges of the frag-

nets and specialized matesi- sales service are not offered/ complete vehicles also exist. mented sector stil exist.

ats which are still imported. or are not reiable.

Phase m: Mass Production and Institution Buildina: Develooment of Production Technolopy Capability

Impo*s of technology extend Domestic ndustry masters Product is sinple, but of Domesic market expands With integrated manufactur-

to the compor.ts sector and production technology for contemporarydesign,perhaps with economic growth and ing, sealeeonomies inrease

upstream industries. existing model, producing a a few years behind the world rapidly falling prices as to 150,000-300,000. As

majority of the components maket. Frequent model domestie industry gains pro- salU pucers are competed

in-country. Quality, safety changes are neither required duction efficiency and out, industrial structure

and after-les service net- nor reonunended. Quality, realizes scale economies. becomes oligopolistic.works develop. Product safety and after-sales servicetchnology and some specia are integrated in the conceptpalts still imported. of the product.

Phase IV: Innovations in Product Desien: Develo=nent of Product Technoloev

Technology imports fall off Domestic industry develops Product quality is of world Industry is competitve in the Overhead costa of R&D and

as own technologicalcapabil- ability for product innova- standards. Frequent model world market and no longer product development inemase

ity extends to product tech- tion, development and mar- changes are possible and requires any protection. scale economies to 1-2 mil-

nology. keting. neeessary. lion. Oligopolistic structure.

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assembly technology. Break-even volume could be very low (20,000 to 40,000) becauseinitial domestic production is labor-intensive assembly. However, the costs in the industryremain high because the infusion of modem technology lacks depth and most componentsand parts have to be imported.

4.17 In the third phase of its development, the industry develops mass-productioncapability by mastering imported production technology or innovating new productionsystems. The product design remains simple, but production is carried out with highefficiency, high quality and low cost owing to technological absorption progressing to theautomotive parts and components sector. Economies of scale of this integrated productioncycle are much higher, reaching 200,000 to 300,000 units per year. Cost reductionsachieved by localization, management gains, and scale economies expand the domesticmarket through reduced costs. Basic model changes are still beyond domestic capabilityand are less vital in this phase than the next because buyers still regard price and reliabilityas the key variables. Cost and scale economies become important tools in competition, andan oligopolistic industry structure emerges due to market shake-outs or governmentintervention. In this phase, the industry perfects its production system by organizingsubcontractors and related industries around efficient automotive manufacturing.

4.18 The fourth and mature stage of development occurs when the industry finallyhas the capability to design and market its own products, and product innovation becomesthe key success factor in the competition. Frequent model changes become necessary asthe industry has to cater to an increasingly sophisticated buyer, and marketing comes tothe forefront of the competition. In the United States, it was in 1922 that GM institutedannual model changes as a marketing innovation. Since then, all leading players in theworld's automotive industry spend heavily in product development and marleting. Onlya few economies have actually reached this stage because this phase requires substantialcreative capability in technological and product development. The overhead costs ofR & D, product development, advertising, and distribution imply that economies of scalein the industry rise to 1 to 2 million.

Lessons From Experience

4.19 The first lesson that emerges is that the infusion of foreign technology hasbeen used in the modernization of the industry in all latecomer countries. In Japan, thefirst foreign technology infusion took place in the prewar era when Ford and GMassembled knock-down parts, untl they ceased operations in 1939 owing to restrictions onimports of knock-down parts and a deteriorating political relationship. The second roundof technology infusion occurred after the end of the Second World War, when MITIencouraged Japanese automotive producers to enter into formal tie-ups with European firmsto acquire the technology for passenger car production. Thus, in 1952, Nissan initiatedan agreement with Austin of England for assembly of CKD kits. In 1953, Isuzu and Hinoentered into agreements with Rootes and Renault, resectively. Although Japan soongraduated from the foreign technology in the early 1960s, technology tie-ups with Westernproducers provided Japanese firms with the springboard for moderniation. In Korea, itwas Ford (with Hyundai) and GM (with Daewoo) that provided the inital assembly

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technology for the modem automotive industry in the 1960s, and Mazda and Mitsubishijoined the list of foreign collaborators as Ford withdrew from the market. In Brazil, it wasFord and GM that started assembly from the 1920s and dominated the market until theBrazilian government initiatives were put into operation for nationalization.2/

4.20 Second, continued infusion of product and production technology has beenrequired for maintaining the technological level of the domestic industry in line with thefrontier of the world automotive technology. The strategies used for ensuring continuedtechnological upgrading, however, have varied across countries with significantimplications for subsequent industrial development. On the one hand, in Mexico andBrazil, the source of continued technological upgrading has been the presence of foreigncapital in the industry. Access to this critical input of new technologies, however, impliedthat the ownership of the assembly industry passed on to the multinationals; nevertheless,the domestic economy achieved significant benefits through the growth of the componentsindustry, technological dissemination, and export promotion through the distributionchannels of the parent multinational. On the other hand, in Japan and Korea, the strategyused was to rely on discrete imports of foreign technology with minimal foreignownership,1Q/ while at the same time developing indigenous technological capabilitythat soon eliminated the need for continuous imports of foreign technology. In either case,however, the benefits to the domestic economy have been far greater than in countries thatboth restricted foreign capital and were unable to develop local technological capacity, aswas, for example, the case of India and prereform China.

4.21 Third, in all countries that have developed successful automotive industries,the industry did not come of age until the industrial concentration ratios evolved to exploitthe delicate balance between scale economies, competition, and incentives to innovate.Typically, this has implied the existence of an oligopolistic set of vehicle assemblers ineach product category. In the United States, the concentration of production in the handsof a few large producers and the elimination of the smaller producers was completed bythe mid-1930s. The big three-GM, Ford, and Chrysler-have accounted for 95 percentof all automobiles built ever since. A similar pattem of concentration was observed ineach of the main European countries during the 1950s and 1960s and went even further ona European scale in the 1970s after the establishment of the European Community (EC).

2/ Nationaizaion in this sense means the establishment of manufacturing within Brazil, not a publictakeover of previously private enterpnses. 'Denationalization used later on means he process ofcontrol over private enterprises passing from Brazilians to foreigners. Both terms are commonly usedin Brazil. Russel Martin Moore, Mukinational Corporations and The Regfonalion of LatnAmeican Atomouive Indumty, New York: Amo Press, 1980, p. 122.

10/ In Japan, Ford has 22.59 percent equity of Mazda and Chrysler holds 10.3 perent of Mitsubishi.Nissan, Is1 and Hino had license agreements for the production of European passenger cars;however, the license relationship was severed in 7-12 years as Japanese producers progressedtechnologically. Toyota tried to establish tie-ups with Ford but had to take an idependent path as thetie-up did not maiaize due to the reluctance of the US firm. See 7he Japanese Awomobile Ind&ry,by Michael Cusumno, Harvard University Press, 1985, p. 116. In Korea, Mitsubishi Motors has a15 percent equi share of Hyundai Motor, Mazda and Ford hold 8 pert and 10 percent sbarsm ofKia. GM used to hold 50 percent of Daewoo Motor but plans to withdraw from Korea.

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By 1982, the six largest producers in Europe-Renault, Peugeot, Volkswagen, Fiat, Ford,and GM-built 80 percent of automotive products produced in Western Europe. Similarly,in Japan, 88 percent of the production comes from Toyota, Nissan, Honda, and Mazda.

4.22 Fourth, the complexity and scale of the production process in the automotiveindustry has implied that the organization and management of the production process itselfemerged as a key variable in competitiveness. In the United States, it was Ford thatrevolutionized the production system with the moving assembly line and began toconsolidate the industry by offering consumers automotive products at prices not imaginedbefore. In Japan, it was the production system based on just-in-time (1 and total qualitycontrol that propelled Toyota into excellence in terms of cost and quality worldwidej.JIn Korea, it was only after Korean producers mastered production technology andsuccessfully organized subcontracting networks that they were able to move into the exportmarket on the basis of cost competitiveness. In Brazil, the modern automotive industrybegan to be shaped only after the government initiatives of 'Program of Targets"established the domestic production system,l2/ by forcing foreign producers to link withthe domestic component industry. A recent study has concluded that the dramatic successof Japan in the 1970s and 1980s can be attributed largely to differences in managementtechniques and to the effectiveness of the Japanese system of productionorganization.JI/ The inability of US and European producers to comprehend thisvaluable lesson in the 1980s led to erosion of their competitive advantage to Japan despitetheir superior product technology. Whichever route was taken, establishing an efficientand internationally cost-competitive industry organization is an imperative phase for theadvancement of the industry.

4.23 Fifth, the nature of the "product' of the industry itself has changed from apiece of machinery to a complex package of tangible and intangible attributes that includequality, safety, and reliability. Thus, the success of a domestic industry can no longer beassured purely on technological sophistication but will depend on its ability to provide theentire product package. Thus, the domestic automotive industry also needs to develop anetwork of distribution and after-sales service centers as well as systems and institutionsfor ensuring quality control and safety standards. Lack of quality assurance can underminethe success of any automotive product, however sophisticated its technology.

4.24 The sixth, and final, major lesson that emerges is that some form ofcompetition has been critical in forcing the industry to make the tnition from assemblytechnology to production technology. In Mexico and Brazil, the source of this competitioncame from the export promotion policies adopted in the 1980s. In the period in the late

.11 See James P. Woack et al., 2Te Madne That Changed The Word, Mcmillan, 1990.

12/ In 1957, then Brazilian President Kubitaciek initiated a progrm by which foreign antomofiveassemblers were required to ra the local content to 90 percet in 1960 in rerm for protection of thedomestic mauket.

131 Melvyn Puss and Leoard Wavemun, Costs and PoduiWty in A_nkl 1rduo. TheChaUenge ofJqnese 4c , Camridge: Cambwid University Press, 1992.

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1960s and early 1970s when Mexico adopted an import-substitution strategy, the industrysoon lost momentum. In Japan and in Korea, the sources of competition varied with time.In keeping with their strategy of long-term development of the industry, the Japanese andKorean models allowed domestic producers time to learn and understand the importedtechnology, by protecting them from international competition. Vigorous competition inthe domestic market was preserved-even in this phase. As the industries matured, theyfaced competition in the international markets. The model of discrete imports oftechnology followed by a protected domestic market was also attempted by India, withresults considerably different from those achieved by Japan and Korea. The continuedpresence of vigorous domestic competition and the parallel development of technologicalcapability seem to have been the key success ingredients that distinguished the Japaneseand Korean models.

D. VERTICAL DINTEGRATION AND SUBCONTACG

4.25 The Chinese automotive industry in 1992 represents a hybrid combinationof the first phase of import substitution in isolation and the second phase of modernizationthrough imported technology. Despite the modernization drive of the 1980s, largesegments of the industry, especially those in the production of buses and trucks, continueto produce with obsolete technologies and uneconomic scales of production. Policies setby GOC since the 1980s of large investments and the import of foreign technology andcapital have, however, been successful in helping some other sections of the industry moveinto the second phase of the development. A few leading players have made the progressin mastenng assembly technology and deepening the absorption of the new technology withhigher localization content. But for most of the new joint ventures, the process oftechnological development is as yet in its early stages; thus, much retrains to beaccomplished to move the Chinese industry into the tiird phase of the development byestablishing efficient industry organization for production. This is a complex undertakingand encompasses technological knowledge, production organization, and enterprise andsectoral management systems. In the long run, only success in the development ofproduction systems will determine the possibilities of the Chinese industry to eventuallydevelop product technology capabilities.

4.26 The Chinese automotive enterprises need to be verfically disintegrated tobuild an efficient production base through networks of component and parts subcontractors.The development of a dynamic and efficient components industry is critical to the eventualhealth of the automotive industry in China. The components and inputs industry in China,however, is relatively underdeveloped and is emerging as the weakest link in China'saspirations to become a world-class automobile manufacturer.

4.27 This underdeveloped component industry is due in large part to the highvertical integration of major automotive producers. FAW still produces 70 percent of thevalue of its trucks in-house at a time when manufacturers worldwide are realiing theefficiency benefits from outsourcing and developing subcontracting networks. Nissan andToyota, for example, produce less than a quarter of the value of their automobiles

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in-house.14/ The economic scale production for parts and component manufacturing, anecessary condition for capital investment for quality and productivity, is hampered as thesubstantial portion of the market becomes captive by assemblers while each of them couldnot realize the economies of scale vith its own production volume. The verticalintegration of the enterprises has also left out the parts and components industry from thebenefit of infused technology. As a result, the component industry has remainedunderdeveloped with antiquated hardware and management technology.

4.28 The condition of the parts and components market in China, however, is notdissimilar to the situation faced by the Japanese automotive manufacturers in the 1950s andthe 1960s when passenger car producti&tn gained momentum in Japan. The response of theJapanese manufacturers at that time was to actively promote the creation of a network ofsubcontractors to meet the complex requirements for a modern parts and componentsindustry: The network had to be technologically contemporaneous to produce componentsfor the joint-venture producers; able to produce to consistently high quality standards; andable to supply on a reliable and timely basis. Additionally, in an industry that requiressome 10,000 parts to produce a car, the system of production organization should be suchthat all of the above be accomplished with limited management costs to the assembler.

4.29 The system of pyramidical subcontracfing evolved and perfected by theJapanese in the 1960s has shown itself able to meet the complex requirements of theautomotive supply chain more efficiently than all other cunent systems. In this system,the vehicle assembler enters into long-term contracts with a few subcontractors for thedelivery of subassemblies or complex components. These contractors are known as first-tier suppliers and accept responsibility for timely delivery and high-quality standards fortheir subassemblies. First-tier suppliers, in turn, maintain contractual relationships withsecond-tier suppliers of parts and components. There are also likely to be additional layersof third-tier and fourth-tier suppliers. For example, one Japanese manufacturer directlyprocured engine parts from only 25 primary suppliers, but the latter dealt with 912subcontractors, who in turn procured from 4,960 third-tier suppliers.15/

4.30 Shanghai Volkswagen is one major manufacturer that has actively tried toemulate the creation of a network of local components suppliers. Of the 70 percent oflocally produced components and parts for the Santana model, Shanghai Volkswagenproduces 18.5 percent in-house and buys the rest from its 196 carefully selected localsuppliers. These suppliers are typically other joint ventures, SOEs, army enterprises, andTVEs; they are subject to a quality assurance system that broadly follows the proceduresof the Shanghai Santana's licensor, Volkswagen, and thus are partally exposed to theinfused technology. Parts are usually single-sourced, but multisourcing also exists,providing additional pressures for meeting quality standards. The Shanghai municipal

14/ Kurt Hoffmand Ral pln*y, Driving Force: The GlobalReturing of Tedhnology Laborand Investnew In dt Amnobilk and Componen Indues, Bouder Westiew Press, 1988.

Ill Kurt Hoffmai and Rapiade Kplinsky, Driving Force: the Glb Rsmwrn of Technology, Laborand Invent in the Automobile and Componnt Indutra, Boulder: Westview Press, 1988.

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government also promotes the development of the local components industry with theproceeds of a tax (approximately 10 percent) on the retail price sale of all Santanas. Theproceeds of this special tax are put in a special fund used for loans to the componentmanufacturers; they are made avalable under the Shanghai Automotive IndustryCorporation for projects designed to make the manufacturers capable of supplying toShanghai Volkswagen under the localization program.l6/

4.31 Despite the beginnings made by Shanghai Santana in developing a networkof component suppliers, however, its efforts have not yet taken on the form of activenurturing, which is typical of the Japanese experience. The economy does not currentlyhave innovative suppliers with the financial, managerial, and technological capabilities toemerge as viable primary suppliers to the new joint ventures, taking responsibility for themuch higher standards of quality control, technological innovation, and reliable delivery.More active efforts will be required on the part of the government and other industryleaders for the development of the parts and components industry in China.

4.32 The development of the parts and components industry in China is alsoconstrained by weaknesses in upstream industries. For example, due to theunderdeveloped nature of pe.chemical and its by-product industries, a number of vitalproducts for the automotive industries are either not available locally or do not meet qualitystandards. Paint and sealers, for example, have poor resin. Rubber products, thoughpresently localized, do not meet intemational quality standards. Other problem areasinclude glass, certain grades of steel, electrical components, electronics, and energy. Glassis considered localized, but all raw materials for the production of glass have to beimported. While cold-rolled steel is available, zinc-coated corrosion-resistant steel posessome problem as the Baoshan steel mill does not produce it in adequate widths for use incars. Electrical connectors are not sophisticated, and the widespread use of electronics isstill a remote concept. Some initiatives are presently under way for the technologicalrenovation of some of these industries. For example, Chinese Capital Steel is thinking ofbuying a complete steel mill from California and Gennany, and a joint venture betweenPBG and Guangdong province is under discussion. However, more concerted action witlbe needed in developing upstream industries if the automotive industry is to developfurther.

E. RoLE oF GovERNwr INrRvENoN AN COMmmON

4.33 Governments impose restrictions on the economic systems of their owncountries in order to generate different outcomes, presumably more socially desirable, thanwould be the case in the absence of restrictions. The governments of the latecomers to theworld automotive industry devised an extensive set of public poLicies for the promotion ofthe industry. It should be noted from the latecomers' experiences at government

jk/ Initiy, a larger amount, in the ra of Y 28,000, was added to the price of oach car sold, with thenion that hdf of the funds so gathered would be uwe by tho centa govemment to fostrlocaliaion of parts in other regons, but this paut of the schae bhas not wo*ed well.

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intervention designed to promote the industry sometimes leads to opposite effects, andmore often, industry becomes efficiently shaped by market forces.

4.34 Brazil. To support the road-based transport strategy and counter the balanceof payment deficit owing to increasing automotive imports, the Brazilian governmentinitiated the Kubitschek plan in 1957,17/ basically a protectionist policy mixed withincentives to attract foreign investment. The plan imposed mandatory requirements to raisethe local content to 90 percent for commercial vehicles and 95 percent for passengervehicles by 1960. In return for this mandatory requirement, the producers were assuredof the domestic market with an import ban and were also given adequate and subsidizedaccess to foreign exchange required to import necessary components until localizationbecame fully implemented. This policy was aimed to force foreign-owned KD kitassemblers to link with domestic component producers, and the policy restricted vehicleassemblers from backward integration into the component segment of the industry. By1962, almost 200,000 vehicles were produced with a local content of 87 percent. By 1968,three Brazilian assembly firms withdrew from the market, and the assembly industry wascontrolled by foreign capital and consolidated with three top frins-VW, GM, and Ford-producing almost 80 percent of all vehicles. Limited competition existed, with only onemodel in each size range produced; thus, each producer had tended to carve out particularsegments of the market for itself. The prices were over 25 to 50 percent more expensivethan their foreign counterparts, even before quality differences were taken into account.

4.35 In the 1970s, after the first oil crisis, car imports were made illegal tocontrol the flow of the foreign currency. Shortly afterward, in an effort to promote export,the Brailian government introduced Befiex schemes under which enterprises entered intocontracts that allowed them to import (free of tariff but subject to approval from thegovernment) equipment and materials for up to one third of the value of their exports. Inaddition, there were generous export subsidies. Aided with these measures, exportsreached 100,000 units in 1979. Anticipation for future growth induced Fiat andVolkswagen to expand production capacity, leading to excess capacity and fierce domesticcompetition. This was the period of heavy cost-cutting and industry restructuring, andless-efficient manufacturers were weeded out. By 1980, output had passed the 1 millionmark and exports peaked at 212,000 units the next year. Prices were reduced during thiscompetition and became comparable with the intrational level, even though a lowvaluation of the Brazilian cruro was believed to contribute much to this competitiveness.

4.36 Since the mid-1980s, the industry suffered from poor macroeconomicperformance and hyperinflation, and it did not regain the vitality in production and export

17/ For the diacussion below an te Brmziliautootive indusy, the folowlg references wre usd:The BraziUan Motor Induwoy, Auomotive Spca Rept No. 8, by The Ecaonmist Intlligence Unit,1987; The Motor Industry and Markets of South America, Special Report No. 2096, by The EconomistIntelligence Unit, 1991; A Report on the Automodve Industy Sendnr held in New Delhi, India, byIFC, 1990; The World Motor 1udany, Special Report No. 2191, by Ihe Economist Indellnce Unit,1992; Capital-lntesive Indwstes in Newly IndutriaUzing Contries, The Case of the BrazilianAuomobie and Sted Indusia, by Bernbard Fischer et al., 1988; Mulonal Corporatio and theRegioalon ofLagin Am lwen Aomotve In6my, by Russell Mastn Moome, Amo Prs, 1980.

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that had peaked in 1980. The government, in its fight against inflation, introduced a newcurrency in 1986, froze the price and foreign exchange currency, and abolished mostinflation-indexed monetary corrections. Against the govenment's intention, this policy ledto illegal premiums on prices, widespread shortages of raw materials and skdlled labor, anda general increase in industdal costs. With the public enthusiastically policing retailprices, profits were squeezed to the point where some automotive companies began tosuspend deliveries of products. The producers were unable to meet their production targetbecause of shortages of materials and components. They were said to be losing 25,000vehicles a month for lack of parts and importing parts to keep production lines moving.There was confhict between foreign-owned assemblers wanting to import less-expensivecomponents and the domestically controlled component industry wanting to extend theprotection. One such notable example is the "law of informatics' that keeps the electronicsindustry to national companies and prohibits the imports of "national similars",ll/which retarded the application of microelectronics to the Brazilian automotive industry.This uneasy relationship between the assemblers and component suppliers was furtherexacerbated by the government policy in which the foreign assemblers were not allowedto integrate backward into the parts industry.

4.37 In the 1990s, the automotive industry continues to suffer frommacroeconomic mismanagement in general and price control in particular; however, theindustry perceives new challenges and flexibility in the new Brazilian trade policy. Thefailure of the New Brazil Plan in 1990, which was the prevailing economic reform policycombined with the introduction of another currency, led to a dramatic drop in car sales.Furthermore, price controls, which have been in effect since 1968 except for a short liftin 1990, led to a constant disruption of the supply of parts and constant strife with thegovernment. The strife between the foreign assemblers and the government reached itspeak when the government tried to block the Autolatina deal, a merger between VW andFord, by filing an antitrust suit on the grounds of possible monopolistic behavior resultingfrom the combined share of 60 percent of the domestic market. (Autolatina successfullydefended its deal.) In the midst of a difficult macroeconomic environment, the govemmentintroduced a new industial policy with the aim of modernizing domestic industry throughbroad trade liberaliation. This policy mitigates many policy distortions: Vehicle importsare freed and the import tariff will be reduced until 1994, the maximum tariff being35 percent in that year; CKD imports are now permitted, however regulation on CKD isexpected to come; the "law of similarity" has been weakened and manufacturers are ableto source components from overseas by paying taiffs, which will decline to 30 percent by1994; local-content requirements were reduced; and the "law of informatics" is beingphased out.

4.38 In hindsight of the results of past development, the Brazilian approach tobuild an indigenous automotive industry seems to have drawn mixed assessments. It usedto be regarded as a success story of infant industry development with the technologicaldevelopment based on foreign direct investment. Brazilian export of automotive vehicles

ID/ By the ̂ law of similarity,' a component could not be imported if a similar products was made inBrazil.

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was highly publicized as an example of the "Brazilian economic miracle." There is a studythat positively assessed the Brailian policy witi the view that the Brazilian policy ofimport substitution benefited society because the taxes from the automotive industry paidoff the subsidies given to the industry within the first five years of the policyinitiatives .19/ In contradiction to this view, however, there are skeptical views on theexport performance of the Brilian automotive industry and the role of foreignMNCs:2DI Favorable export performance is found to be owing to heavy exportsubsidies and to reflect intermittent business strategies rather than sablecompetitiveness. These export-promoting subsidies were found to exceed the compensationfor the export-retarding effects arising from the import substitution policy of thecomponents and the ovevaluation of cruzeiro.21/ The Brazilian automotive industryis considered to be most efficient when it emerged from fierce domestic competition in late1970s. In the past decade, the profitability and efficiency of the industry has sufferedowing to mismanagement of the macroeconomy and an uneven pricing policy betweenassemblers and component suppliers. But for the macroeconomic mismanagement andcorollary sector policy, the automotive industry could have a better chance of developinginternationally competitive producers. Rigidities began to be rectified, however, with thenew trade policy in the 1990s, opening the door for import competition.

4.39 Japan. The Japanese automotive industry was successful in developing animport substitution industry based on discrete technology imports and limited foreigncapital participation. Japan developed its automotive industry from the position ofproducing less than 1 percent of the world vehicles in 1945 to 28 percent in 1990,surpassing the United States as the largest production base in 1980.221 The root of thissuccess could be found in the govemment policy that promoted the automotive industry;however, domestic competition together with technological and managerial innovationsplayed a major role in shaping the industry.

4.40 Seeing the potential in the automotive industry to be the leading sectorthrough backward linkages, MMTI took policy initiatives to protect the domestic industryagainst opposition from other ministnes. (The Ministry of Transport and the Bank ofJapan argued that the postwar Japanese automotive industry did not have comparative

191 Helen Shapio, The Rok of Gowmment: Rem Seeking or Rent Redisbution? Automobile Firms anddhe Brailian State 1956-1968, Harvard Busess School. Within five yeas of the plan, total investmentin the autorotive assembly sector reahed $418 million. Tne subsidies on this investment came to $201million, or 48 cents per dollar of investment. The biggest subsidies were customs duty exemptions andthe rate at which payments on foreign financing was remitted. The policy was successful in inducingforeign investment for the automotive sector, which rached $201 million during the Kubitschek plan.

20/ Bemhard Fischer et al., Capital-Imensive Indsies in Newly nriaizing Counries: The Case ofrhe Brazilian Automobile and &eel lndutries, J.C.B. Mohr Tubingen, 1988.

2/ Ibid.

2J If production by the Japanese transplants in other countries is counted, the share by the Japanese firmsreaches 30 prcent of the world production in 1990 behind 33 percent produced by the US-based firms-GM, Ford, and Chyser-and their woldwide subsidiaries.

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advantages and favored a free-trade policy.) MlMI protected the domestic market with hightariffs and the domestic producers with prohibitions on foreign direct investment. Theincentives given to domestic producers included low-interest loans, preferential taxtreatment such as special depreciation allowances for capital investments, exemption ofimport duty for production equipment and tools, and export incentives such as deductionof export revenue from income. MITI also encouraged the transfer of foreign technologythrough license agreements.

4.41 Beside these policy measures, however, MII's policy initiatives were notwell received by the private sector, and MlTl had to scrap its developmental plans onseveral occasions. For example, in 1961, Japan already manufactured 810,000 units(which is impressive progress over a decade) reaching 5 percent of the world production,but not enough for 13 firms to produce with scale economies. In the same year, Mmtried to restructure the industry by requinng automotive producers to speialize in only onetype of vehicle (among minicars, sports cars, and other specialty vehicles) and automotiveproducts with engine sizes of greater than 0.5 liter. Except for Nissan and Toyota, allproducers strenuously objected, and MMI had to shelve the idea. In 1963, Mlll alsofailed to persuade Honda not to enter the automotive industry. As an alternative policy,MM attempted restructuring through mergers, the effort of which was pardally successfulwith only one merger between Nissan and Prince in 1965 and several tie-ups amongdomestic producers. Through these tie-ups, Toyota became the largest shareholder of Hinoand Daihatsu, and Nissan of Fuji Heavy Ihdustries. The effort to restructure the industrycontinued into the 1970s with the policy of libealizing foreign direct investment and theparticipation of US firms in the management of Japanese producers.2@/ However, thisdid not result in significant reduction in competition or an increase in scale because newlyaffihiated producers offered different product lines and most producers remainedindependent.

4.42 Contrasted with these mishaps in policy initiatives, MITl's policy ofprotecting domestic producers from foreign competition until they become internationallycompetitive is considered to be a successful measure. This protection was disciplined andwas not granted indefinitely because in 1961 MMI lifted import bans on trucks and buses,which comprised 70 percent of the total production and were considered to be ready forinternational competition. The small passenger-car segment, however, received protectionthroughout the 1960s and much of 1970s, until MITM reduced the import duty to 8 percent

23/ Chrysfer and Mitsubishi stated a joint venture in 1971. GM acquired 34.2 pert of Isuz equity in1971. Ford acquired 25 percent of Mazda equity in 1979. It is notewothy tat 1UZI, Mazda, andMitsubishi, all sgnificantly smaller than Toyota and Nissan, opted for joint veues with US fimnsraher than with Nissan and Toyota

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in 1972 and eliminated it in 1978.24/ Substituting for import competition, however,was the domestic competition among 11 domestic producers, 9 of which producedpassenger cars. Due to this intensified competition, the profitability of the Japaneseautomotive industry had declined since the mid- 1960s until they found export markets.

4.43 After the import substitution stage from postwar to the mid-1960s, theJapanese automotive industry entered into its export expansion period after the oil shockas the Japanese small cars found a market niche in the United States. The automotiveoutput growth and capacity expansion during 1973-80 was mainly for export.2j/ Asa result, the production capacity in Japan is almost twice domestic demand, placing greatpressure to pursue an aggressive export strategy. This export strategy met with resentmenton the side of trading partners as the Japanese share of the US market, for example, hadexpanded rapidly.21I As a result, Japan had to agree to "voluntary export restraints"and to constrain the export volume to remain below an agreed-upon volume, which wasinitially 1.65 million units per year but raised to 1.85 million units in 1984.27/ Thisexport restraint created an incentive for Japanese producers to invest in manufactunngfacilities in their major markets and accelerated the globalization of the Japaneseautomotive industry.

4.44 Implications for China. The developmental experiences of theaforementioned countries could not and should not be exactly duplicated as the eco. omicand political environment surrounding these countries are different between themselves andfrom that of today's China. For example, today's global economic environment is notpoltically and economically favorable for the replication of the Japanese strategy of exportexpansion. It is not politically favorable owing to the mounting pressures for trade balanceamong trading partners. It is not economically favorable because as the global automotivendustry enters into a stage of excess capacity, the market niches that would open

opportumities to newcomers (such as small ear segment to the Japanese producers after theoil shock) became hard to find. The technological environment has changed too as theeasy access to advanced technology at moderate costs that developing countries once

ZI Despite this elimaion of imt duty, Japan was accused of nontadff import barriers by trangpatns as cusoms officias wssted on nspectig each unported vehicles and would not check onesaple and grant a type certificate, as the United States and European countries did, unless sales of asingle model were of a volume comparable to domestic maks (a near impossibilty). Besides, onlyagents registnred in Japan, not foreign producers, were allowed to import vehicles. Strict standardsfor vehicle safety and emissions also necessitated expensive alterations on most cars sold in Japan,doubling their prce after taxes and shipping costs. Under increasing pressure from trading partners,Japan had to change this practice in 1983.

25/ During 1973-80, 98.3 percent of new demand came from exports. In contrast, during the importsubsitution period (1952-65), 90.9 percent of new demand cuae from the domestic market.

AI The share of Japanese producers in the US automotive marcet rose from 3.7 percent in 1970, to9.4 percent in 1975, and 22.6 percent in 1982.

_/ he agreed-upon period for the voluntary export restaint ws three years startig from 1981 andending in 1984. However, Japan unilateray extended this period for additional one year, raising thevolume to 2.3 million units.

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managed to have is no longer available, with technology being viewed as the source ofcompetitiveness.

4.45 Experience illustrates that the role of government intervention should bedisciplined and that market forces should be allowed to shape the industry as much aspossible. There are similarities between the development policies of the above twocountries, namely, to initially protect the domestic industry from the import competitionand to provide subsidies through credits and foreign exchange allocations. However, thesimilarities end here and the degree of government intervention varies. The Braziliangovernment direcdy controlled the pricing and sourcing of automotive components,microelectronic parts in particular, with the aim of promoting the domestic industry. Thisintervention retarded the industry's development since the distortion of relative prices leftautomotive assemblers with parts insufficient in quantity or quality for export. Undueprotection to the parts industry by forbidding the assemblers from diversifying into theparts segment, in addition to price controls, resulted in tension between assembler andparts industries at a time when the world trend is promoting harmonious collaborationbetween assemblers and part suppliers. Contrasted with the heavy-handed intervention ofthe Brailian government, the Japanese government left these details to market competitionand kept a few simple, basic policy measures-protection from import competition.

4.46 Government intervention should be also flexible. What could have beenright for the 1960s is not necessarily right for the 1990s; moreover, the government shouldconstantly measure its intervention against the yardstick of international and domesticcompetition. For example, the -law of informatics" would have affected the automotiveindustry less in the 1980s, when the application of microelectronics to automotive productsbecame the competitive edge among the world automotive producers. The Brazliangovernment should have assessed the cost and benefit of protecting domestic electronicsindustry and then redefined the scope of the protection in the changing competitiveenvironment.

F. mSss AND On'oR¶TuN

4.47 First, the government's policy framework for the automotive industry needsto be reformulated, as it is not consistent with developmental objectives. The currentstrategy seeks to achieve full domestic self-sufficiency. The govemment has, it believes,identified the various levels of demand for different vehicles over the next 10 years, andhas then "assigned" different segments of the market to different producers: luxury carsto Audi, mid-size sedans to Santana, compacts to Citroen, and so on. Joint ventures havebeen attracted to these segments by means of high levels of domestic protection, at tariffrates well over 100 percent. Moreover, producers are then exhorted to maximize localsourcing and given further incentives to do so, through tariffs and bans on imports ofparts.

4.48 Experience in many countries has demonstrated that, in this industry, astrategy based soley on Wort protection (the "inlfant industry* theory) will never lead toeficiency and international compediveness. Rather, import protection incus high social

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costs through excessive domestic prices, and creates a powerful interest group for the

maintenance of the protection. 7hus, the present Chinese strategy to develop a competitiveautomotive industry is doomed to failure unless key elements are changed. In sum, tdisstudy urges an international market orientation to the strategy for the automotive sector,aiming immediately for international cost competitiveness, and for the abandonment of

facilities that cannot achieve this level of competitiveness.

4.49 This said, it must be recognized that scale economies cannot be achieved

ovemight, especially in what is still a relatively small market. Thus, the immediateimplementation of free foreign trade would deny the opportunity for the domestic industry

to build a base, and for the economy to benefit from spill-over effects.

4.50 The way to reconcile these two factors at this stage of the industry's

development is to protect domestic producers for a stated and limited period of time.First, the7industry would be disciplined by increasing exposure to import competition over

time, by means of declining tariff and nontariff barriers. At the end of the protectionperiod, tariffs would have been reduced to average levels (15 to 20 percent), and nontariffbariers would have been eliminated entirely.

4.51 Second, and perhaps the most difficult issue for the government, production

capacity in the automotive industry needs to be concentrated in terms of the number of

final producers, and specalized, in terms of component manufacture. It seems impossible

to achieve economies of scale in the industry without eliminating large numbers of the

small, inefficient producers (although some of these could, no doubt, be converted to

component manufacturing). Two alternative approaches are the following: The firstapproach would be the "laissez-faire" way, that is simply removing protection, both foreign

and domestic, and letting the market determine the survivors. The second approach wouldoffer a more proactive role for the state in restructuring existing industry. Nevertheless,the bottom line is clear: If a competitive industry is to develop, a significantratonalization of the existing automotive industry is required, with large numbers of

existing assembly plants disappearing and with their workers finding alternativeemployment. Of course, government has the choice of protecting the present producers

forever, preventing exit, and accepting a high-cost, domestically oriented automotiveindustry. The government should only do so in the knowledge that this would be a subsidy

from the rest of society to the workers in those plants, and this is incompatible with

China's market economy approach or its desire to develop a world-class industry.

4.52 Third, strategy for the development of the Chinese automotive industry

should be formulated in the light of world trends in the industry. The current internationaltrend is toward globalization of manufacturing and sourcing. This is particularly true for

the component and parts industry where China needs a larger production volume than the

domestic market can support and thus access to foreign markets. This means that China

needs the right incentives and strategy for foreign direct investment, which would bnng

forth synergies between the domestic industry and foreign producers.

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5. POLICY RECOMMNATIONS

5.1 The 1990s will present the Chinese automotive industry with the greatestopportunities and challenges it has faced so far. Strategic and selective government actionwill be cntical in facilitating the transition. In our view, the government has two mainfunctions that it alone can perform: first, and most important, it must create a policyframework for the sector that would be conducive to addressing the issues described above;second, it must create an appropriate supporting institutional framework to assist theindustry to adjust to the new policies. These two functions are no different in this sectorthan in any other: The difference is that economies of scale make entry at a much moreexpensive scale, and past policies make the problem of exit significantly larger than inmany other subsectors of the economy.

A. BALANCING PROTECTON AND COMPEION

5.2 The challenge to government policy is to find the balance between providingthe domestic industry with just enough protection from imports to give the industry timeto move down the learning curve, while ensuring that some import competition-and thecertainty that protection will decline to low levels in the future-provide domesticproducers with incentives to learn and internalize new technologies, to continuously reducecosts, and to improve quality.

5.3 Therefore, GOC should announce its program, based on offering protectionthat is limited in time and scope. It is recommended that the customs tariff at the end ofthe protection period should not exceed 20 percent. This tariff should be the onlyinstrument to implement the trade policy, and all nontariff trade barriers (QRs) should beremoved, including import quotas, import licenses, and prohibition on foreign exchangepurchase. Similarly, all rights to import vehicles free of duty should be abolished.l/

5.4 The period of protection has to be determined after internal study, butexperience elsewhere has indicated that a period of five years after policy announcementshould be adequate, at the end of which only the 15 to 20 percent tariff would prevail. Alonger period would not necessarily guarantee the domestic industry's commitment tohigher efficiency, as it would be outside the typical planning and investment horizon.

1/ Announcing the program is importnt so that existng and potential competitors klow the ndes and willrespond with their investment sttegies in a competitive faion.

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B. CREATING INcENTfv TO INNOVATE

5.5 The creation of extemal sources of competition and pressures to innovatemust also be accompanied by an appropriate framework of domestic policy. The economicand regulatory environment and the incentives and attitudes of managers and techniciansin the automotive firms will be crucial factors in the development of the industry and thetransfer and application of modern technology. In this regard, three areas seem to be ofparticular importance.

5.6 GOC needs to provide clear leadersbl9 in supervisory agencies anddevelopmental strategy. A weakness in the present system of sector management is themultitude of first-tier supervisory agencies and the ambiguity of the relationship betweensupervisors and supervisees at the enterprise level. GOC needs to assign clear authorityand responsibility to a single agency, such as CNAIC, for developing and imposingnational priorities, particularly in the areas of creation of new capacity and technologydevelopment. (This also applies to some of the other issues with respect to the role ofgovernment, discussed in section C.) This is because in the present policy framework, anduntil the reform program in this sector has taken hold, there could otherwise be investmentdecisions that would be inappropriate in the medium term. Repetition of such investmentmistakes would only create increased pressures not to go forward with the reforms, on thegrounds of the loss of production facilities. Moreover, it is necessary to formulate a clearand detailed development strategy for the sector, and to spearhead the restructuring andadjustment program. Finally, the current overlapping responsibilities create excessive andrepetitive supervision and an environment that stifles enterprise management.

5.7 Domestic Competiton. GOC should eliminate impediments to domesticcompetition including interprovincial trade barriers, such as local procurement preferenceguidelines; government subsidies, such as on raw materials supplied through the Ministryof Internal Trade; government control on prices and distribution; and limited managerialautonomy and accountability.2/ Enterprises should be allowed the full 14 autonomiesgranted in the 'Regulations on the Transformation of the Operating Mechanism of SOEs."In particular, and subject to policies for the sector as a whole, decisions on productionvolume and parts sourcing should be left entirely to enterprises, as should decisions toinvest, once the new policy framework is in place. The Ministry of Internal Trade should

pay particular attention to competition in this industry, ensuring that purchases byprovincial and local governments and SOEs are based on quality and price, and not on tax

or financial relationships.

5.8 Enterprise Governance. The automotive industry poses particularchallenges in the area of governance, but its size also offers opportunity. The separationof regulation, ownership, and management should be addressed specifically in this sector.

The role of CNAIC should increasingly be one of regulaion and provision of information,rather than of direct ownership. The major enterprises in the industry should be formed

ZI Fo concret examples, see chptr 3.

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as joint stock companies. Given the need to stimulate competition over time, governmentshould not form a sector holding company in the automotive area. Rather, shares couldbe vested in portfolio holding companies and alz with local govemments and, perhaps,banks. These enterprises, given their overall and expected profitability, would seem to becandidates for listing on the domestic stock exchange. (indeed, one company, Gold Cup,has already be>. listed on the New York Stock Exchange.) Boards of directors should becreated for all sucn enterprises; and for the joint ventures, the foreign partners should begiven the leading role.

C. I'm ROLE OF GovERNMENr IN FACILiTATNG THE CREAnON OF

AN EFmCET INDUSRAL STRUCItRE

5.9 It is not the view of this report that the government can simply create theright policy framework and let the market do its work. Rather, the role of GOC shouldbe to facilitate the proper functioning of the market, through actions to assist economicagents to react to new market signals. Moreover, the market in China is as yetunderdeveloped, and may fail in the absence of government action. There are six areasof government intervention at we would consider appropriate and helpful.

5.10 Inefficient enterprises producing with obsolete technology and at anmeconomic scale should leave the industry. Since the market is extremely crowded andfragmented, small-scale inefficient producers should be forced to exit. There is simply notroom for 117 full producers and 459 assemblers. We can foresee two alternativeapproaches to this process of rationalization. Under the first, laissez-faire approach, COCwould develop minimum quality and safety codes for vehicles. Serious enforcement of thecodes, in conjunction with removal of import protection, would drive unsafe and poor-quality vehicles and their producers out of the market. A related, but more proactiveapproach, would be to set up minimum standards for production facilities (including size)and technology resources, administered in the form of production licenses. Producers withhopelessly inefficient production facilities or an excessively backward technology levelwould be made to exit entirely from the sector. Producers with salvageable facilities andtechnology could be allowed to merge with larger and more efficient producers.

5.11 A more direct approach to this would be for the government to establish atask force to draw up a set of criteria with which to review all current facilities. Thefacilities would then be classified into those that will survive, those that may besalvageable, and those that must be closed down. This approach would also require theprovision of funding to assist exit-including maintenance of welfare coverage andtransition financing-and diagnostic assistance to salvageable enterprises. Foreign technicalassistance could be sought in this restructuring diagnostic function.

5.12 While the first strategy is more suited to the market economy, it must berecognized that the Chinese market is as yet far from developed. In particular, there is adanger that if aU the smaU producers are permitted to continue to exist, the interest groupsassociated with these facdiities-itotably local governments-may seek to undermine the

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basic policy of developing competition, the basis for developing a sound industry in thefuture.

5.13 GOC should not encourage new entry to passenger and light-trucksegments at subeconomic dze. In the long run, competition would be the key determinantin shaping future industry concentraion; however, until competition has developed throughthe removal of tade barriers, the government should prohibit new entry at a capacity levelbelow 100,000 units per year. Indeed, there is a case for the government to prohibit entryat all. However, it would be inapproiate to discoucage a new, genuine joint venture thatwas based on clear knowledge of the future policy framework for the sector; indeed, thiscould speed up the transformation of the existing joint ventures into competitiveproduction.

5.14 For other segments, entry by joint ventures should be encouraged asthese segments have long been neglected in foreign investment. This applies especiallyto medium and heavy trucks, which are heavily concentrated in two producers in China.The total investment in bus and heavy-truck segments represents only 2.5 percent of thetotal during the Eighth FYP. These segments are also the most backward in theautomotive sector and thus could benefit from the infusion of advanced technology fromforeign sources. Por component and parts segment, entry by foreign component producersshould be also encouraged as the segment needs foreign technology and heavy investmentbecause of its high capital intensity. However, most of the joint ventures to date haveemphaszed partnership between the domestic and foreign partner, with the domesticpartner clearly regarded as the senior. There is a good case for encouraging some whollyowned foreign entrants, or joint ventures in which the foreign partner is senior, in orderto develop factories that will regard China as a production base, and the domestic marketas just one part of the market for the output of the enterpnse.

5.15 The development of the component sector should be a priority. Selectivedevelopment of the components sector is suggested at this stage. The government shouldcreate a leading group to pioritize major components that can be realistically targeted forlocalization. This must be based on an awareness that economies of scale for theproduction of some components are very high and that the inability of upstream industriesmay constrain the effective localiation of some other components. The existing foeignpartners should be invited to participate in such a task force, and provide guidance toChinese policymakers in international experience. Once the priority list was determined,it could form the basis for a targeted search for foreign parters in such industries,together with the search for partners in the areas noted in the previous paragraph.However, special incentive systems should not be adopted for such subsectors.

5.16 The development of subcontracting networks should be a priority. Themost important change in process technology in recent years has been the abandonment ofverticaly integrated production technology and the development of geographically close,but orniationaly separate, subcontracting. This is best chaactized in Toyotatechnology. It is recommended that the Chinese govemment should seek astance fromthose familiar with the development of this approach to create a framework for its

- 78 -

development in China. In paiular, this should be linked to the possible approach to theclosing down of many of the existing subeconomic assembly plants, for some of thisexperts could be converted into subcontating. This could be facilitated throughfinancial, informational, and managerial astance in meetng the standards required ofmodern components suppliers. In Japan, vehicle assemblers provided this type ofassistance to component suppliers to help them overcome initial production problems. InChina, given the managerial weaknL;ies of the assemblers themselves, stte-sponsoredresearch and consulting agencies may be more appropriate, with suitable foreign advice.The development of product and quality standards by an indusbywide agency would alsobe particularly useful at this stage, as it will help small entrepreneurs understand thequality standards expected of them. The designation of an agency to lead the developmentof the parts and components sector is recommended, but it is observed that this seems tobe an appropriate function for CNAIC.

5.17 EnterprIse Magemet. At the enteprise level, oganizational andmanagement systems must be realigned to encourage efficiency and innovation, given theirvertical interation and lack of accountability. The level of vertical integration should bereduced drastically and except for the manufacre of some, key components, all parts andcomponents should be subcontracted. Organizationally, they should be reganizd alongproduct divisions and each division should be an independent accounting entity.Managerially, the management systems should be decentralized, with tnsparentperformance evaluaion systems and close linlk between performance and pay. The autoworks also need to develop new skills in strategic planning, marketing, and distribution.A lot of training will be required both for workers and managers in acquiring these newskills. New systems of production management such as contemporary best-practicemanagement methods oa !1T inventory management and total quality control should bestudied and adopted.3/

5. 18 To identify such problems is straightforward, but implementation and reformdesign is more difficult. In particular, the question arises as to who should spearhead thesetechnical and o tional reforms. It is suggested that CNAIC should seek technicalassince to finance detailed restructuring studies to be carried out by CNAIC with thehelp of foreign and local consultants, for the two or ftree largest enterprises (for example,FAW, SAW, Nanjing). This should be don* once a new policy framework has beendesigned and adopted. This should be regarded as assistance to the industry in formulatinga plan to adapt to the new policy framework, but it would be for the enterprise and itsboard of directors, not for CNAIC, to decide on future steps for the enterprise and for themanagement of the enterprise to implement any such plan. This should thus be seen as anexercise in the sepamtion of government, ownership, and management.

3/ To keep up with increasg investnnt dends and fcial automy, enterpie' financingoperaions need to be improved as well. Interlinhkig the Chin auomov sctor with heintational finacial conmmity will be beneficial to both Chinese enpises and inteaioralinvetors. The is a role for GOC to play in enhancin his finanial itedining.

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D. LONG-TBRM GOALS-TIE DEVELOPMT OF PURODUCT TECHOLOGY

5.19 The ultmate transition to achieving product technology will depend on theextnt to which the interim transition to acquiring producdon capability has beenaccompanied ~by the development of inherent technological capability of the domestceconomy and the skdlls of fte domestic firms to make inroads in a competitive market.These factors underscore the importance of effective government policies in facilitating thedevelopment of domestic R & D capability and quality human resources that are requiredto ensure technological capabity, thus crating an environment of vigorous domestccompetition o ensure the reilience and adaptability of domestic enterprises.

E. CONCUWSION

5.20 The automotive industy cxemplifies all the industral policy questions facingthe government of China today: how fast and to what level to libealize imports; how tomake inefficient and uneconomic entprises viable; what to do with displaced workers;how to balance state intervention with market forces during China's transition toward themarket economy; and how far to let management go when a market-oriented corporategovernance system is yet to emerge; and how to guide the industry development withoutresorting to the instruments used in the planned economy. This study has atempted toprovide a range of suggestions to answer these questions, while recognizing that China isstiU in its transition towards a maket economy and that in scme cases further study hasto be recommended. The short- to medium-term answers to the chalenges facing theChinese automotive industry may change over time with changing macroonomicenvironment and deepening market reform. However, it cannot be too much emphaizedthat in the long run the Chinese automotive sector will have a most efficient industrialorganization when its development, dictated by intenational competition and stateparticipation in the sector, is eventually replaced by etrepreneurial ownership.

-81- -

STATISTICS

LIsT OF TABLES

TableNo. lWe

1.1 Number of Enterises, 1981-921.2 Number of Enterprises Under Each Deprtment1.3 Number of Enterprises in Each Province or Municipality, 19921.4 Number of Employees, 1982-92

2.1 Annual Vehicle Output2.2 Output of Major Plants2.3 Output Mix for Trucks and Passenger Vehicles, 1990 and 19922.4 Output of Passenger Cars and Jeeps, 19902.5 Bus Output, 19902.6 Provinces with Annual Output Above 10 000 Units, 1986/872.7 Output of Main Components2.8 Output Value of Provinces, 1983-922.9 Subsector Output Value2.10 Output Value of Autoparts and Components by Prwince, 1988 and 1990

Motor Vehicle Fleet

3.1 Motor Vehicle Fleet3.2 Growth of Motor Vehicle Fleet3.3 Motor Vehicle Fleet, 19893.4 Age of Motor Vehicles in Use (end of 1988)

4.1 Imports, 1980-894.2 Imports, 1986-884.3 Exports, 1980-894.4 Major Foreign Participation4.5 Local Content of Foreign Models Assembled in China

-82- ANNEX

TableNo. Title

Financial Indicators

5.1 Investment, Sales, Taxes, Profit and Otf .cr Financial Indicators, 1982-925.2 Net Value of IFixed Assets of Major Plants (End-1988)5.3 Taxes Prevailing for Automotive Enterprises5.4 Passenger Car Prices, 19925.5 Truck and Bus Prices, 1992

Highway Tafic

6.1 Highway Freight and Passenger Tzaffic Volume6.2 Highways Traffic Growth versus Total Trffic Growth6.3 Highway Expansion, 1980-896.4 Highway Expansion in Quantity and Quality

Materials, Energy and Euvfroment

7.1 China's National Output and Consumption of Steel7.2 Consumption of Steel, Iron, Coal and Power in the Automotive Sector7.3 Gasoline and Diesel Consumption by Motor VLicles

- 83 -

Table 1.1: NUMBER OF ENrRFROs, 1981-92(unit: plant)

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1992

M,)tor vtbiclesProduction 57 58 65 82 114 99 116 115 119 117 124

Conversion la 198 202 207 248 314 338 347 386 464 459 479

Motorcycles 26 26 34 38 47 50 55 81 65 62 72

Engines 34 34 50 58 63 58 63 63 63 64 63

Components 2,114 2,136 2,371 2,385 2,366 1,877 1,777 1,864 1,885 1,894 1,817

Total 2.429 2.456 W24 2.811 2.904 2.422 2.358 2.509 2.596 2.596 2.555

/a Converona pnts buid speca vehies and buses on purhased chasss.

Source: ChinabWa Aiao-Isn Yearbook, 98, p. 119; CNAIC data for 1988-92 figures.

Table 1.2: NUMBER OF ENTERP&uSES uNDER EACH DEPARMDNT, 196-90

Department 1986 1987 1988 1990

Ministry of Machinery Industry 1,357 1,402 1,393 1,427

Ministry of Communications 183 199 204 204

Ministry of Li8ht Industry 254 214 256 241

Department of City Construction 45 42 43 58

Ministry of Justice 54 59 54 64

Ministry of Rural Industry 213 142 190 202

Ministry of the Military 132 138 208 232

Ministry of Chemical Industry 17 9 7 8

Ocher Departments 167 153 154 160

Total 2.422 2.358 2.509 2.596

State owned n/a nia 1,374 -

Collective n/a n/a 1,115 -

Other ownership n/a n/a 20 -

Note: 'Otheownoednp' rnfe malny to Chiese-foign joit veurs or wholy foein owned.

Source: CNAIC.

- 84 -

Table 1.3: NUow= OF EINJszs DN EACH PROVINCE OR MUNICIPAUTY, 1.092

Area of ActivityProvince or V(ehice Vehicle Motor- AutoMurnicipality Production Conversion cycle Engine Parts Total

Beijing 8 25 0 1 80 114Tianjin 4 6 1 3 77 91Hebei 6 28 3 2 53 92Shanxi 3 4 1 2 47 57Inner Monoglia 2 6 0 0 29 37Liaoning 9 29 1 4 96 139Jilin 3 15 1 1 80 100Heilongjiang 4 15 1 1 72 92Shanghai 4 16 3 3 83 109Jiangsu 9 55 9 4 109 186Zhejiang 4 .'6 4 4 3 126Anhui 3 16 1 3 52 75Fujian 3 9 1 0 54 67Jiangxi 4 11 6 2 50 73Shandong 5 29 5 6 111 156Henan 4 17 8 2 50 81Hubei 6 35 3 2 118 164Hunan 6 30 3 6 100 145Guangdong 5 13 3 1 82 104Guangxi 3 5 3 3 42 56Sichuan 12 32 6 8 113 171Guizhou 3 17 3 4 37 64Yunnan 6 6 1 1 57 71Tibet 0 0 0 0 0 0Shaanxi 4 24 4 0 42 74Gansu 1 7 0 0 35 43Qinghai 1 5 0 1 24 31Ningxia 0 0 0 0 11 11Xinjiang 2 6 1 0 13 22

Soure: CNAIC.

- 85 -

Table 1.4: NumBE OF EwWYmB, S1962.92(in thousands)

1982 1983 1984 1985 1986 1987 1988 1989 1990 1992

Motor vehicleProduction 256 nla 300 391 386 421 465 483 468 559

Conwersion la 18 n/a 189 211 236 233 229 283 270 311

Motorcycles 15 n/a 40 44 52 78 112 106 97 135

Engines 36 nla 75 87 76 88 102 105 106 120

Component 478 n/a 609 674 518 528 749 593 605 723

Total 943 1.047 j1.213 11. 1.268 1.348 iahU I72 Lh66 1.849

/a Convasion plants build speil vehicla and buses on putohsed bhasis.

Souro: Cina Amldusuy Yearbok, 1988, p. 121; CNAIC data for 1988-92.

Table 2.1a: ANNUAL VEHICLE Ouwr, 1981-92(in thousands)

1981 1982 1983 1984 1985 1986 1987 19d8 1989 1990 1992

Total La 175.6 196.3 239.9 316.4 443.4 372.8 472.5 646.9 586.9 509.2 1,061.7

Truek Lk 108.3 121.8 137.1 179.8 236.9 220.7 299.4 364.0 S46.3 269.1 460.2Light n.a. n.a. n.a. 60.3 94.9 102.1 139.2 175.0 137.4 95.1 212.4Mediu.m n.a. n.a. n.a. 103.2 124.0 106.5 117.5 147.4 161.5 139.1 178.8Beavy 4.7 5.1 6.7 8.9 11.3 10.3 7.9 8.6 10.6 9.6 10.5Dump truek n.a. n.a. n.a. n.a. 12.2 12.1 15.5 9.1 9.4 n.a. n.a.Van Le n.a. n.a. n.a. 12.7 33.9 16.6 35.0 78.4 77.8 19.9 n.a.Cargo n.a. n.a. n.a. n.a. n.a. n.a. n.a. 33.0 36.8 n.a. n.a.Passenger n.a. n.a. n.a. n.a. n.a. n.a. n.a. 45.5 41.0 n.a. n.a.Car 3.4 4.0 6.0 6.0 5.2 12.3 20.9 36.8 35.5 4.Z 162.7Jeep Id 15.5 15.3 18.2 16.6 20.7 21.9 27.4 35.0 41.7 44.3 55.4BUJ .J n.a. n.a. 6.2 6.9 11.9 12.3 31.2 50.9 47.6 23.1 84.5Consverson /£ n.a. n.a. n.a. 118.3 102.1 80.0 96.8 134.1 I.a. n.a. n.a.Special n.a. n.a. n.a. n.a. 19.4 22.4 23.2 28.0 33.2 15.4 n.a.Cha.s.s 40.0 42.5 62.3 85.3 114.1 81.3 92.3 136.2 103.9 n.a. n.a.

Motorcycle 134.9 213.7 287.2 528.3 1,045.1 665.7 737.6 1,171.8 1,030.0 965.8 1,982.2 00Tractor (large) 52.8 40.3 37.0 39.7 45.0 28.6 37.1 47.2 45.4 31.8 n.a. ChTractor (sall) 210.0 290.3 487.7 688.6 822.5 772.6 1,070.0 1,335.7 1,077.6 834.7 n.a.

Totd outpu does not include nmoorcycs or tracts. There i double couning beueen chasis snd vehicles, buses and vans, trks and vans, covrsin andbusek and speoa vehicles and dump tuks; it is dminbatd, however in the totl outpuL

& The s fr ligfh, nm m, and beavy tucb do not add up to the total number of trubks becses they are fiom dft sources. Minitrs (cargo vans) arenot lted. Heavy an medium b fOr 19U-90 Iniludo heavy and mdm jeps.

LQ Vans inlde both passenger and cro vans.

4 Jmps ref to lightp jep in and ater 1986.

L2 Buses ic pa vanm, but for 1988-89, buses rfer only to laWe And mediu buses.

if Convrdions ilude spoeial veicks, bse, and dwnptrucks built on purchased chssis.

Sources: CNAIC. Total fipgur of al otor veIs, tucks, cas, and chass from 1975 to 1987 are abo available in Chia AW4industy Yearbook 1988. p. 127.

- 87- ANNEX

Table 2.1b: ANNUAL OuTUTr, 1968-92

1988 1989 1990 1992

Total 646,951 586,936 509,242 1,061,721

Domestic 593,941 544,300 463,95A 938,494

Trucks 358,196 332,647 261,709 441,107

Mini (pickup, van) 30,206 36,410 25,274 58,518

Light 173,308 128,195 87,881 194,114

Medium 147,395 161,381 139,119 178,728

Heavy 7,287 9,441 9,435 9,747

Cross-Country Trucks 36,384 42,304 44,719 63,373

Light 35,978 41,661 44,348 61,7'!

Medium 23 120 179 752

Heavy 383 523 192 874

Dump trucks 8,485 8,329 7,839 38,093

Light 2,949 1,811 1,239 4,469

Medium 4,847 5,662 5,115 28,619

Heavy 689 856 1,293 5,005

Mining ttucks 192 -

Buses 41,420 44,205 23,042 75,986

Mini (van) 11,536 20,174 550 7,269

Small 24,442 20,324 18,660 60,848

Medium 3,932 2,465 1,106 5,625

Large 1,510 1,242 2,522 1,964

others 204 280

Cars 7,623 5,537 6,235 67,716

Other 6,859 5,305 30,620 52,300

Chassis 134,974 103,193 89,795 199,_62

Cross-countryLight 4,378 7,003 :3,230 9,663

Medium 90 371 460 1,474

Heavy 291 161 216 291

TrucksMini 2,886 1,515 791 3,984

Light 47,059 33,331 21,919 44,484

Medium 54,474 41,351 26,998 48,604

Heavy 59125 5,237 4,699 8,008

Bus 20,588 14,065 20,978 81,720

Other 83 159 504 1,384

Table 2.1b: (cont'd)

1988 1989 19'0 1992

Imported CKD Assembly 53,010 42,636 45,288 123,227

Trucks 5,804 10,188 7,389 19,167Mini 2,751 342 0 200Light 1,700 9,249 7,229 18,238Medium 6 0 0 0Heavy 1,347 597 160 729

Dump trucks 654 1,053 805 485

Buses 9,502 654 106 3,565Mini 9,489 0 0 0Light 2 500 61 8,373Medium 3 24 1 110Large 8 130 44 82

Car 29,175 29,913 36,174 95,009

Other 6,615 125 34 1

Chassis 1,260 703 779 0

SouX8: CNAIC.

-89- ANNEX

Table 2.2: Ounur OF MAJoR PLANTs, 1984L90

(number of vehicles)

1984 1986 1988 1989 1990

M.ni TrucksTianjin Mini Auto a/a n|a 9,329 14,031 12,320

Jilir Light Auto n/a 4,411 14,134 5,700 3,212

Liuzhou Mini Auto 2,574 4.844 8,736 7,706 9,115

Harbin Aircraft n/a 1,015 10,054 7,319 3,750

Liaht TrucksShenyang Gold Cup n/a 22,178 34,510 34,708 10,626

Tianjin Auto 9,010 18,343 35,250 18,324 9,796

Beijing Auto No. 2 14,600 22,500 29,100 18,499 -Beijing Auto No. 1 4,750 11,805 23,649 20,170 -

Nanjing Auto 16,620 20,403 33,898 32,293 28,904

MeditDm-sized TrucksFirst A:;to Works 78,416 61,607 80,298 74,495 55,587

Second sento Works 70,173 87,592 111,331 117,121 74,407

Qinghai Auto 1,502 1,502 2,240 1,631 1,057

Heavy TrucksJinan Auto 7,947 7,600 6,741 7,701 6,239

Shanghai Heavy Auto 1,355 2,185 510 426 1,349

Sichuan Auto 451 403 1,157 1,852 1,903

BusesTianjin Bus Plant 1,085 2,506 5,107 2,408 2,723

Dandong Auto 1,256 1,581 1,282 1,383 1,139

Guangzhou Auto 726 1,532 759 652 705

Cars and JeepsBeijing Jeep 16,418 24,087 31,002 39,130 37,876

Shanghai Santana 0 8,400 15,550 15,688 18,537

Guangzhou Peugot nla nla 5,354 5,880 5,660

Wuhan Light Auto 6,132 602 2,861 735 729

Source: CNAIC.

-90- ANNEX

Table 2.3: OUnTfr MIX FOR TRUCKS AND PASSENCER VEmCLES, 199O AND 1992

1990 _ 1992Share Share

of Vehicle of VehicleVehicle Number Category (2) Number Category (2)

Trucks:- Heavy 9,595 3.6 10,476 2.2- Medium 139,119 51.7 178,278 38.7- Light 95,110 35.3 212,352 46.1- Mini 25,274 9.4 58;718 12.7

Total Trucks 269.098 100.0 460.274 100.0

PasssnkorVehicles:

Bus 23,148 21.0 84,551 27.9Car 42,409 38.4 162,725 53.8Jeep 44,719 04.6 55,378 18.3

Total PassenferVehicles 110.276 100.0 302.654 100.0

Specialized and othervehicles 39,234 100.0 -99,187 100.0

Chassis 90,574 100.0 19,612 100.0

Total All Vehicles 509.242 1.061.721

-91- AN=

Table 2.4: Our OF PASEGER CARs AND JEErs, 190

Jeeps. Domestic DesianBeijing Beijing Jeep Co. 31,754Hebel Baoting Auto 418Liaoning Shenyan Air 1a"iufacture 1,306Hebei Baoting Great Wall Co. 300Hubei Wuhan Light Auto 639Jiangsu No. 4 State-owned Machine Plant 459Fujian PLA No. 7427 Plant 241Hunan PLA No. 7319 Plant 164Jiangsi Jiangxi Fire Engine Plant 575Jiangxi Fuji Auto 1,654Sichuan Hua Tuen 1,893Sichuan Chendu Light Conversion 1,579Sichuan PLA No. 7438 135Sichuan Golden Horse 707Xinjiang Xinjiang Auto Plant 140

Subtotal 41.964

Jeep. Foresian DesiznBeijing Beijing Jeep Co. 6,106

Subtotal 6.106

Car. Domestic DesiRnShanghai Shanghai Automobile 6,072

Subtotal 6.072

Car. Foreian DesianTianjin Tianjin Daihatsu Auto 2,920Shanghai Shanghai Volkswagen 18,537Liaoning First Auto Works 4,200Guangdong Guangzhou Peugot Auto 3,016

Subtotal 28.673

Total 82.816

- 92- -X

Table 2.' Bus Ounwu, 1990

T2pe of busProvince or Specializedmunicipe'tty large Large Medium Small mini Total

Beijing 196 - 465 2,820 - 3,480Tianjin 70 - 138 - - 208Hebei - - 348 1,576 - 19924Shanxi - - 205 50 - 255Inner Mongolia - 19 88 - - 107Liaoning 168 24 1,392 3 - 1,587Jilin 76 11 63, - - 724Heilongjiang - 582 779 41 - 1,402Shanghai 612 6 643 716 - 1,977Jiangsu 44 7 769 3,972 81 4,873Zhejiang 35 - 397 146 8 886Anhui 32 20 451 221 - 724Fujian - - 183 86 - 269Jiangxi 24 - 817 576 - 1,417Shandong - 330 818 579 - 1,727Henan 27 341 162 1,023 - 1,553Hubei 256 4 909 603 - 1,772Hunan 39 14 836 1,498 - 2,387Guangdong 88 - 1,203 1,204 - 2,495Guar.gxi - 19 589 351 - 959Sichuan 56 51 1,248 2,488 - 3,843Guizhou - - 194 989 - 1,183Yunnan 20 - 251 874 - 1,145Tibet - - - - - -Shaanxi 19 147 496 446 - 1,108Gansu - - 605 132 - 737Qinghai - - 149 15 - 164Ninxia - - - - - -Xinjiang - 18 268 5 - 291

Total 1.761 1.593 15.040 20.714 89 39.197

- 93 - ANNEX

Table 2.6: P9OVINCS Wm AMUAL OMW ABOVE 10900 UNR, 19669(thousand v*hcles)

Province Total Truck Jeep Car Conversion fk Cha8sis CRD

1986National Total L 372.8 213.9 23.7 2.2 37.0 71.8 25.1

Beijing 59.6 33.4 20.7 - 1.0 2.9 1.6

Hubei 91.0 53.9 0.5 - 3.1 33.2 0.3

Jilin 67.0 44.3 - - 2.5 18.2 2.0

Jiangsu 22.3 17.3 0.9 - 0.6 3.3 0.2

Liaoning 29.6 19.2 - - 8.1 1.9 0.4

Shandong 10.7 4.6 - - 0.3 4.4 1.3

Shanghai 15.1 2.1 - - 3.1 1.2 8.7

Sichuan 10.3 4.9 - - 0.1 1.2 4.1

Tianjin 21.5 16.5 - - 2.3 0.7 2.0

1987National Total la 472.5 288.1 27.8 4.0 29.6 92.1 30.9

Beijing 73.7 30.5 22.1 - 3.0 15.1 3.0

Guangxi 12.7 11.4 - - 0.7 - 0.6

Heilongjiang 13.4 12.0 - - 0.1 1.30 -

Hubei 111.0 64.3 1.0 - 4.7 41.00 -

Jiangsu 31.4 23.8 0.9 - 2.0 4.50 0.2

Jilin 71.7 58.5 - - 0.1 13.10 -

Liaoning 38.6 27.5 - - 9.7 0.90 0.5

Shanghai 20.1 2.6 - 4.0 1.0 1.50 11.0

Sichuan 15.9 8.2 0.1 - 0.2 1.70 5.7

Tianjin 30.2 21.8 - - 2.6 2.20 3.6

1988National Total LA 647.0 358.2 36.4 7.6 56.8 135.0 53.0

Beijing 90.4 32.8 25.1 - 5.2 22.8 4.5

Heilongjiang 25.7 23.4 - 0.1 0.1 2.2 -

Guangxi 14.6 12.3 - 0.1 1.8 - 0.4

Hubei 126.7 70.5 - 1.6 7.5 47.0 -

Jiangsu 41.5 27.2 1.7 0.2 3.9 8.5 -

Jiangxi 11.3 5.2 3.8 - 0.2 0.4 1.7

Jilin 98.7 66.5 - - 11.3 20.5 0.4

Liaoning 57.2 41.4 1.4 0.1 13.3 1.0 -

Shandong 14.5 8.8 - - 0.5 3.9 1.3

Shanghai 26.1 3.2 - 5.5 0.3 1.5 15.6

Sichuan 27.9 9.3 0.8 - 3.8 4.0 10.0Tianjin 45.3 25.1 - - 3.8 4.2 12.1

Yunnan 11.6 8.4 0.6 - 0.7 1.9 -

Zhejiang 10.1 4.8 - - - 5.3 -

- 94 - ANNEX

Table 2.6: (cont'd)

Province Total Truck Jeep Car Conversion /b Chassis CKD

1989National Total /a 586.9 335.4 42.3 5.5 57.8 103.2 42.6

Beijing 85.2 20.9 32.5 - 6.0 19.1 6.6Guangxi 13.8 12.4 - - 0.9 0.1 0.3Heilongjiang 13.3 12.1 - - 0.1 1.2 -Hubei 126.7 79.3 0.4 - 5.4 41.6 -Jiangsu 3.1 25.8 1.3 - 5.0 7.9 0.1Jilin 84.2 70.4 - - 1.8 10.1 1.9Liaoning 49.3 32.4 2.3 - 12.3 1.8 0.6Shandong 13.5 8.4 - - 0.3 3.7 1.1Shanghai 24.8 1.9 - 5.5 0.7 1.0 15.7Sichuan 27.9 14.0 0.8 - 6.9 2.7 3.6Tianjin 39.2 22.6 - - 13.7 1.7 1.3Yunnan 11.7 9.4 0.4 - 0.9 1.1 -

/a The output of the provinces listed does not add up to totl, as some provinces are iot listed since they makevery few.

/b Conversion includes dumping buck, bus and special velicle, as no sepuate figures an available./c Vehicles assembled from imported kIts (completely nocked-dowvn).

Source: China AWo-Indushy Yearbook, 1988 (pp. 128-129); CNAIC.

Table 2.7: OUTPuT OF MAIN ComFDwnI

National Total Under Ministry of Macbine BuildinmOutput Output Output as

('000 units) Enterprises ('000 units) Enterprises I of National

Engine 687 63 362 27 53Carburator 1,270 27 994 16 78Clutch a"sembly 163 16 133 10 82Transmission assembly 289 45 259 34 90Steering assembly 413 43 331 28 80Brake disc 35 13 16 6 45Brake drums 1,510 60 1,083 34 72Master cylinder 446 29 200 12 45Starter 1,442 46 1,293 33 90Distributor 1,320 18 890 11 67Lighting assembly 7,154 46 4,069 25 57Meter 2,380 33 1,140 20 48Autobody 54 40 35 19 65

Sourc: CNAIC (as conmwnictedto th msson in 1990).

Table 2.8: OurpUr VALuE BY PROVINCE, 1983-92(Y million, 1980 constant value)

1983 1984 1985 1986 1987 1988 1989 1990 199 1 1a 1992L/

National Total 12.036 16.454 23.534 18.454 23.368 32.462 34.712 34.239 46.808 103.451

Anhui 172 265 369 202 255 377 402 347 442 1,059

Beijing 1,127 1,399 1,806 1,866 2,146 2,609 2,764 3,212 4,994 9,410

Fujian 65 132 201 134 164 285 284 229 295 835

Guangxi 94 171 321 257 414 509 632 694 917 2,317

Guizhou 88 182 375 126 166 248 327 322 427 1,414

Hebei 182 345 442 330 376 708 796 908 1,147 2,743

Heilougjiang 354 472 623 404 621 875 797 471 576 1,320

Henan 153 341 339 207 335 561 488 608 786 1,527

Hubei 2,603 3,236 4,106 3,615 4,345 5,264 5,539 5,160 6,896 9,869

Hunan 353 496 719 648 753 1,063 1,273 1,137 1,480 1,527

Gansu 75 101 186 105 100 lii 131 135 178 241

Guangdong 190 253 463 225 350 516 795 985 1,341 4,621

Inner Mongolia 34 45 66 43 40 68 89 125 176 350

Jiangsu 702 989 1,450 1,178 1,717 2,331 2,454 2,678 3,282 9,747 WA

Jiangxi 195 245 503 435 481 781 828 798 1,049 2,394

Jilin 1,419 1,823 2,199 1,654 2,550 3,527 3,303 3,393 3,979 8,150

Liaom.ng 843 1,280 2,209 1,501 1,879 2,578 2,761 2,069 2,958 5,999

Ningxia 11 15 128 11 8 12 19 16 19 23

Qinghai 59 100 147 103 119 141 128 83 128 188

Shaanxi 156 206 322 288 354 538 590 514 664 1,318

Shandong 669 816 1,294 963 952 1,557 2,979 1,905 2,241 4,698

Shanl 68 117 160 106 114 177 153 139 183 390

Shanghai 1,003 1,153 1,647 1,276 1,448 1,864 2,011 2,134 4,202 11,812

Sichuan 567 1,037 1,394 1,210 1,598 2,704 3,086 3,361 4,729 9,614

Tianjin 388 505 907 768 982 1,535 1,469 1,341 1,767 5,165

Xinjiang 76 107 133 87 146 191 198 214 281 463

Yunnan 111 230 346 210 303 464 437 346 511 1,202

Zhejiang 279 395 678 503 652 869 976 906 1,152 2,695

fa In 1990 constant vale

Sources Chn Auto-Indusuy Yearbook, 1988, p. 122; CNAIC (for 1988, 1989).

-96 - ANNEX

Table 2.9: SuBsECroR OurruT VALuE, -986690(Y nmllon, 1980 constant value)

Subsector 1986 1987 1988 1989 1990

Auto production LS 6,457.7 11,564.6 15,313.1 16,086.2 16,212.80- truck subsector n.s. n.a. 13,748.7 n.a. n.a.- bus subsector n.a. n.e. 788.2 n.a. n.a.- car subsector n.a. n.a. 692.2 n.a. n.a.Conversion 3,306.9 4,024.8 5,400.9 5,660.2 5,153.15Engine ,0O11.9 1,263.0 1,931.5 2,229.7 2,038.10Parts 4,841.2 5,496.7 7,719.3 8,594.7 8,507.00Motorcycle 836.7 1,018.7 2,097.0 2,142.0 23,280.60

TotAl 18.454.3 23.367.8 32.461.8 34.712.8 34.239.09

La Diggaopd figues for 1988 vehic pduchton an on a difennt bass tga ons, and do not add upexacdy to tota.

Source: CNAIC dat.

Tabl. LIS: Ouwr VAUJ iro AumPArU AND

COMFONEnS BY PtOVINC, 18 AND 1990(Y mIlion, 1980 comtant value)

Province 1988 1990

Anhui 123.0 168.9Beijing 723.4 656.5Fujian 83.7 135.4Guangdong 193.9 227.2Guangxi 47.4 65.0Guizhou 70.6 127.4Gansu 69.9 68.7Hebei 205.5 277.2Heilongjiang 178.5 129.3Henan 137.9 182.2Hubei 1,044.6 1,175.4Hunan 364.1 437Hubei 1,044.6 -Inner Mongolia 36.2 94.6Jiangsu 438.6 543.6Jiangxi 163.0 157Jilin 330.8 357.6Liaoning 424.0 468.4Ningxia 12.3 15.9Qinghai 31.9 28.8Shaanxi 124.7 170.7Shanxi 68.7 80.1Shadong 370.3 503.7Shanghai 515.9 591.6Sichuan 543.1 754.0Tianjin 574.1 444.4Tibet -Xinjiug 12.2 2.9Yunnan 102.9 90.8Zhejiang 461.8 522.9

Total .,452.7 8.507

Sourco CNAIC.

Table 3.1: MoToR VEHICLE FLEET, 1981489(thousand vehicles)

1981 1982 1983 1984 1985 1986 1987 1988 1989

r nt L 1,612.8 1,753.1 1,887.1 2,075.2 2,426.1 2,667.7 3,015.0 3,378.0 3,294.1Passenger 455.4 498.0 539.6 632.3 877.6 1,056.8 1,211.0 1,405.0 1,586.3-Regular bus Lb a.a. n.a. n.a. n.s. n.a. n.a. n.a. n.a. 42?.9-Car/other n.s. n.s. n.a. n.a. n.a. n.a. n.a. n.a. 1,165.4special 144.9 148.1 154.1 157.7 184.8 188.0 154.0 163.9 196.9Motorcycle 244.7 320.0 405.6 599.0 947.5 1,485.0 1,358.0 3,024.0 n.a.Transport tractor n.a. n.s. n.a. n.a. 1,790.9 2,295.3 3,747.4 3,916.0 n.a.Trailer 259.9 302.6 350.2 435.9 454.2 460.0 426.1 447.0 474.5

Subtotal le 2.213.1 2.399.2 2.580.8 2.865.2 3.488.5 3,912.5 4.380.0 4.946.9 5.477.3

ltucK- Un.a. n.a. n.a. n.a. 264.8 312.3 349.1 448.0 525.0Passenger a.a. n.a. n.a. n.e. 19.3 34.4 73.4 152.9 202.8-Regular bus lb n.U. n.a. n.e. n.a. n.a. n.a 1.5 2.0 n.a.-Carlother n.e. n.a. n.a. n.&. n.a. n.a. 71.9 150.9 n.a.special a.a. n.a. n.e. n.s. 0.7 0.4 0.3 0.7 3.4Motorcycle n.e. n.s. n.a. n.a 518.4 888.1 1,009.4 2,219.2 n.e.Transporr tractor n.a n.a. n.a. n.a. 1,260.5 1,750.5 2,619.3 2,983.2 n.e.Trailer n.a. n.a. n.a. n.a. n.a. n.4. n.a. 123.0 n.a.

Subtotal n.a. n.a. n.a. n.a. 284.9 347.1 422.9 601.7 731.2

Total Pleetwrucx it) 1,612.8 1,753.1 1,887.1 2,075.2 2,690.9 2,980.0 3,363.7 3,825.8 4,219.1Passenger (2) 455.4 498.0 539.6 532.3 897.0 1,091.2 1,284.4 1,558.3 1,789.1-Begqlar bus lb 212.2 212.3 220.2 240.2 383.8 330.1 289.1 321.6 420.9-Carlother 243.2 285.7 319.3 392.1 513.1 761.1 995.3 1,236.7 1,165.4

8ecial (!3) 144.9 148.1 154.1 157.7 185.5 188.1 154.3 164.7 200.3tiotor¢yle (4) 244.7 320.0 405.6 598.9 1,465.9 2,372.6 2,367.8 5,243.2 n.a.Transport tractor (5) n.a. n.a. n.a. n.e. 3,051.4 4,045.8 6,366.6 6,899.2 n.a.Trailer (6) p 9.9 302.6 350.2 435.9 454.2 459.9 426.1 570.4 474.5

Total: (1)(2)(3) 2,213.1 2,399.2 2,580.8 2,865.1 3,773.3 4,259.3 4,802.3 5,548.8 6,208.5Total (1) (2) (3)(4) 2,457.7 2,719.1 2,986.4 3,444.1 5,239.2 6,631.9 7,170.1 10,792.0 n.a.Total: (1)(2)(3)(4)

( ) 2,457.7 2,719.1 2,986.4 3,464.1 8,290.6 10,677.7 13,536.7 17,691.2 n.a.Total: (1)(2)(3)(4)

(5),(6) 2,717.6 3,021.7 3,336.6 3,899.9 8,744.8 11,137.6 13,962.8 18,261.6 n.a.

venmnt vehicles are owned by publc sector organizao such as state farms, factories, companies, schools, government agencis, etc., or un by highwaytransportation departmnts.

lb A regular bus has a seating cap¢city of around 40 or more.t Subtotals include only truks, passenger and special vehicles.d Privte vehiclesareownedbyprivate, colleciveand foreign entprises as well as inaividuals.

Sources: CNAIC; China Statics Yearbook, 1988, 1989; US-China Automotve Indusby Cooperation Project (University of Michigan, Match 1989); AutomotiveIndutry of China (China Atomotive Technology and Research Centr), 1989, p. 22. p

Table 3.2: GROWTH OF MOTOR VEHICLE FLEET, 198289(Annual Percentage Increase)

1982 1983 1984 1985 1986 1987 1988 1989 Average

Government /aTruck 8.7 7.6 10.0 16.9 10.0 13.0 12.0 9.4 10.9Passenger 9.4 8.4 17.2 38.8 20.4 14.6 16.0 12.9 17.2-Regular bus /b n.a n.a. n.a. n.e n n.a. n.a. n.s. n.a. n.a.-Car/other n.a n.a. n.a. n.a. n.a. n.&. n.a. n.a. n.a.Special 2.2 4.1 2.3 17.2 i.7 -18.1 6.4 20.1 4.5Motorcycle 30.8 26.8 47.7 58.2 56.7 -8.6 122.7 n.a. 47.7Transport tractor n.a. n.a. n.a. n.a. 28.2 63.3 4.5 n.a. n.a.Trailer 16.4 15.7 24.5 4.2 1.3 -7.4 4.9 6.2 1.2

Subtotal la 8.4 7.6 11.0 21.8 12.2 11.9 12.9 10.7 11.9

Private IdTruck n.e. n.a. n.a. n.a. 17.9 11.8 28.3 17.2 18.8Passenger n.e. n.a. n.a. n.a. 77.7 113.6 108.2 32.6 83.1-Regular bus lbn nn.. nne. n.. n.e. n.a. n.a. n.a. n.a. n.a.-Carlother n.a. n.a. n.e. n.&* n.e. n.a. n.e. n.a. n.a.Special n.a. n.a. n.a. n.a. -36.0 -30.2 138.1 356.6 107.4Motorcycle n.s. n.e. n.a. n.e. 71.3 13.7 119.9 n.e. 68.3Transport tractor n.e. n.a. n.a. n.a. 38.9 49.6 13.9 n.a. 34.1Trailer n.a. n.e. n.e. n.a. n.a. n.a. n.a. n.e. n.a.

Subtotal no&* n.a. n.a. n.s. 21.8 21.8 42.3 21.5 26.9

Total FleetTruck (1 8.7 7.16 10.0 29.7 10.7 12.9 13.7 10.3 13.0Passenger (2) 9.3 8.4 17.2 41.9 21.7 17.7 21.3 14.8 19.0-Regular bus lbk - 3.8 9.1 59.8 -14.0 -12.4 11.3 30.9 11.0-Car/other 17.5 11.8 22.8 30.9 48.3 30.8 24.3 -5.8 22.6special (3) 2.3 4.1 2.3 17.6 1.4 -18.0 6.7 21.6 4.8Motorcycle (4) 30.8 26.8 47.7 144.8 61.9 -0.2 121.4 n.a. 61.9Transport tractor (5) n.a. n.a. n.s. n.a. 32.6 57.4 8.4 n.a. 32.8Trailer (6) 16.4 15.7 24.5 4.2 1.3 -7.3 33.9 -16.8 9.0

Total: (1)(2)(3) 8.4 7.6 11.0 31.7 12.9 12.7 15.5 11.9 14.0Total: (1)(2)(3)(4) 10.6 9.8 16.0 51.2 26.6 8.1 50.5 n.a. 24.7Total: (1)(2)(3)(4)(5) 10.6 9.8 16.0 139.3 28.8 26.8 30.7 n.e. 37.4Total: (1)(2)(3)(4)(5)(6) 11.2 10.4 16.9 124.2 27.4 25.4 30.8 n.a. 35.2

LA Government vehicles are owned by public sector organizations such as state farms, factories, companies, schools, government agencies,etc., or run by highway transportation departments.

lb A regular bus has a seating capacity of around 40 or more.I Subtotals include only trucks, passenger and special vehicles.Id Private vehicles are owned by private, collective and foreign enterprises as well as individuals.

Sources: CNAIC; China Statistics Yearbook, 1988. 1989; US-China Automotive Industry Cooperation Project (University of Michigan,March 1989); Automotive Industry of China (China Automotive Technology and Research Center), 1989, p. 22

-100- ANNEX

Table 3.3: MOTOR VifiCLz EqQrr, 1969(1,000 wits)

Vehicle Type J& Unite

Truck - assoline ensine 3,068.4Chinese 2,986.4Toyota (Japan) 52.4Nissan (Japan) 2.8Isuzu (Japan) 15.4Mitsubishi (Japan) 8.8USSR 2.7

Truck - diesel mpine 831.0Chinese 582.4gino (Japan) 38.7_8uzu (Japan) 77.5Nissan (Japan) 8.3Mitsubishi (Japan) 32.2Toyota (Japan) 4.8Other foreign 87.1

Car 757.2Shan8hai 64.8W Santana 3904Audi 1.1Tianj in 18. 1Tianjin Charade 1.6Guangzhou-Peugot 9.7Volga (USSR) 47.4Fiat 21.6Benz 6.0Toyota (Japan) 98.3Mazda (Japan) 15.8Datsun (Japan) 6.7Mitsubishi (Japan) 15.7Isuzu (Japan) 14.8Other 396.3

Light Jam 357.8Beijing 339.6Toyota (Japan) 9.9Mitsubishi (Japan) 5.2Lada (USSR) 3.0

Passenger Van 204.9Tianjin-Dihatsu 30.4Other (Chinese) 174.5

- 101 -

Table 3.3: (cont'd)

Vehicle Type /a Units

C*riLgan 14.1Chinese 4.5Dalhatsu (Japan) 9.6

tjgtg PekulD 41.3Toyota (Japan) 41.3

Bus (conversion on chassls) /b 272.8

Total s5.47.S

NotorcXclo 2,936.6

La iTh model sames nWdae h source of veiadol desi but not A*whe dovehicle ws impoed or assembled in China.

Lk CNAIC d does not have impe buss.

Source: CNAIC dat.

-102 - ANNX

Table 3.4: AGE OF MOTOR V CLS IN USE (}ND OF 1988)

Buses and Trucks Passenaer Cars & Jeess Total VehiclesAge Number Age Group Number Age Group Number Age Group

(Years) ('000) (percentage) ( 000) (percentage) ('000) (percentage)

0-2 1,069 24.1 124 23.1 1,193 24.0

2-4 991 22.4 134 25.0 1,125 22.6

4-6 768 17.3 105 19.6 873 17.6

6-8 578 13.0 72 13.4 65 13.1

8-10 323 7.3 44 8.2 367 7.4

10-12 188 4.2 12 2.2 200 4.0

12-15 223 5.0 27 5.0 250 5.0

15-20 232 5.2 18 3.4 250 5.0

20-25 49 1.1 1 0.2 50 1.0

25+ 10 0.2 100.2

Souce: Anne Hope, Csina's Motor Indsy: Risk and Opponwakks to 2000, Specia Report No. 2008,a1don Eonomist Inteigic. Unit, 1989)

- 103- ANN

Table 4.1: ImplsRn, 1980-89

1980 1981 1982 1983 1964 1985 1986 1987 1988 1989

Number

Truck 26,101 2- 770 7,730 8,445 28,047 111,492 64,570 17,554 17,557 16,911

Car 19,570 1,401 1,101 5,806 21,651 105,775 48,276 30,536 33,140 24,440

Other 5,412 19,404 7,246 10,905 39,045 136,725 37,206 40,892 43,999 43,224

Total 51.083 41.575 16.077 25f146 88,743 353.992 150.052 80.982 94.696 84.575

Value(S Sillion)

Vehicles 202 269 164 297 681 2,649 1,678 954 n/a 926

Parts La 63 36 61 136 167 288 277 260 n/a 404

Total 265 305 225 433 1.048 2.937 1.955 1.214 1.066 1,330

/a Parts do not include CKsD or chasis with engine, which am included in oomplete vehicles.

Sources: For 1988, ChinaAzo-4ndasoy Yearbook, 1988, p. 529; for 1980-87, Clxna Staiuacs Yearbook, 1989,p. 643; for 1989, CNAIC.

-104- ANNEX

Table 4.2: ImPoT, 198648

1986 19879 198 1989Value Va

Units (O mllion) Units ($ millIon) Unlts (O millon) Units

Passeast VehclesCar 4,276 225 30,536 140 33,140 191 24,440

Jeep 7,027 42 3,093 21 9,8S2 61 5,032

MIAibus 2,022 13 1,646 1S 3,436 46 3,042

MeaduD bue 3,058 24 310 6 3,091 46 3,240

Large bus 1,669 56 278 14 724 41 376

Other 4,266 13 615 3 21,913 184 30,501

1:EskPickup 5,575 30 1,569 13 n/- an/ n/a

Truck 73,503 1,054 24,523 384 17,557 300 16,911

Saecial VelesPire engine 18 1 217 5 36 9 41

Crane 468 39 110 13 130 19 210

Platfomn 10 1 11 0.2 27 1 12

Fuel task 16 2 2 0.1 50 3 30

other 2,657 134 1,264 96 487 63 644

!arts and Ca"t IChassis with engios 1,48? 41 3,008 86 1,234 52 1,339

Auto body 1,825 6 9,016 13 24,237 54 14,088

CKD I& lb 21,800 159 21,253 191 n/a

fthr n/a 272 n/a 246 n/a a/a n/a

i 1 tOtOst l.9S $J8.9812 24j 112.930 J 85.818

a Mme auto body Is not inludd in total number of veiles lpoitd, while chas wth ein and CKD arn

inchded.

& CKD impost of 1966 and 1989 i luded in compted vWhicles.

Sourm Ch. Aa -bsdwu rywtoo, 1988, p. 530 (*r 1986187);n Sa Yowbook, 1969, p. 643 (for 1988); CNAIC (for 1989).

'10Q5-

Table 4.3: EXPORTS, 1980489

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

NumberTruck 79 460 119 1,484 2,401 1,085 500 4,049 805 1,268Jeep 18 226 65 123 374 157 295 770 58 302Bus n/a n/a n/a n/a n/a 1 n/a n/a 14 143

ValueVehicles n/a 4 n/a 11 26 17 26 35 25 32Parts n/a 10 n/a 11 6 5 14 16 38 51

Total 1 14 2 22 32 22 40 a 63 84

Souroe: China Auo-Indwhy Yearook, 1988, p. 531 (for 198047); ChIa Saistk Yearbook, 1989, p. 641(for 1988); CNAIC (for 1988/89).

-106- ANNEX

Table 4.4: IoMRT OF TUNOLOGES AND EQUwm, 198247

Location or Project(s) Number of Value Share ofNature of Company Affiliation Began Projects (Y illion) Total (Z)

Technical ConsultinRand Training

Rubber Research Inst. chemical Mnaistry 1985 1 1.0Agricultural Machinery Inst. Machinery Ministry 1984-85 13 0.4Design Institute Machinery Ministry 1986 1 n.s.Computer application Machinery Ministry 1986 1 1.2Auto plant cNAic 1984-86 5 7.1

9.7 2.5Testina Etluieant and

TechnolotiesTesting station Shenyang 1986 1 2.1Research institute Machinery Ministry 1986 3 5.2Auto repair Jilin 1985 1 0.2Auto repair Jiangzi 1987 1 0.5Transport research Shanxi 1986 2 2.6Auto parts Tianjin 1985 1 0.1Auto parts xiamen 1986 2 0.3Auto plant Beijing 1986 1 4.6Auto plant Dalian 1985 1 0.2Piston plant Fujian 1986 1 0.2motor plant Ringpu, Zhejiang 1984 1 0.1Engine parts Shandong 1986 1 0.3Auto plant ShenyaD 1985-86 2 3.2

19.6 5.1

Engine ProductloaTechnologies aid Eouiument

Heavy machinery Xuzhou$ Jiangsu 198S 10 37.4Auto parts Llaonin 1986 3 17.7Engine plant Beljing 1985 1 0.1Engine plant Guishou 1985 1 n.a.Auto plant Hebei 1985 7 20.3Tractor plant Henan 1985 1 0.7Engine plant Hubei 1987 1 2.4Engine plant Hunan 1984-86 4 8.3Engine plant Jiangsu 1982-85 2 3.7Engine plant lisoning 1986-87 2 7.0Engiae plant Nantong, Jiangeu 1987 1 0.2Mini-engine plant Shandong 1985 1 0.3Eng'-- plant Shanghal 1984-86 4 0.9Engine plant Shanyang 1984 5 0.3Engine plant Tianjin 1985-86 4 2.3Fuel pump plant Shandong 1982-87 8 9.3Fuel pump plant lantong, Jiangsu 1985 2 0.2Machine plant Sichuan 1984 1 0.3Diesel engine China National Ship

Industry Company 1983 1 1.1112.4 29.1

Transmission ProductionEquiDment and Technolonv

Gear plant Beijing 1986 2 20.6Gear plaat FuJian 1985 1 0.3Gear plant Guangxci 1984 1 2.0Gear plant Hebei 1986 3 1.3Gear plaut Jiangsu 1985 11 22.6Gear plant Inner Mongolia 1987 1 3.5Gear plant Shenyang 1986 3 15.3Engine plant Beijing 1986 1 1.5

67.2 17.4

-107- ANNEX

Table 4.4: (cont'd)

Location or Project(s) Number of Value Share ofNature of Company Affiliation Began Projects (Y million) Total (Z)

Exhaust System ProductionAuto parts CNAIC, Shandong 1986 2 8.0 2.1

Steering System ProductionAuto plant Beijing 1986 1 2.1 0.5

Misc. Auto Psrts ProductionTechnolcaies and Eauisment

Auto parts Qingdao 1986 2 5.6Atto radiator Beijing 1986 1 2.2Auto plant Qingdao 1986 1 3.9Auto accessories Hubei 1985 4 3.3Auto clocks Jilin 1987 2 16.2

31.2 8.1

Repair Service EquipmentAuto repair Dalia 1986 1 1.9Auto repair Beihai 1987 1 1.0Imported auto repair Fuzhou 1985 1 0.1Auto repair Gansu 1987 1 1.2Imported auto repair Guangdong 1984-87 5 1.7Auto repair Guangxi 1983-85 2 1.8Imported auto repair Gulzbou 1985 1 0.4Auto body Hebei 1985 1 3.1Auto repair Shandong 1985 1 0.2

11.4 3.0Auto Body. Paintina Equipment

and TechnologyAuto plant Beijing 1986 2 3.4Autr plant Shenyang 1984 3 1.9

5.3 1.4

Welding Equipmentand Technologv

Trailer plant Shenyang 1985 1 0.3Auto plant Jiangxi 1986 1 0.1Auto plant Liaoning 1986 1 0.5Tractor plant Niugpu, Zhejiang 1984 1 0.0 /a

0.9 0.2

Mouldint Desisn and ProductionAuto plant Beijing 1986 1 10.0Moulding plant Shan8hai 1986 1 0.3

10.3 2.7

Auto AssemblinR Technolonvand Equipment

Auto plant Dalian 1985 1 0.5Auto plant Tianjin 1986 1 10.6Special vehicle plant Qingdao 1987 1 14.5

25.6 6.6

Motorcycle ProductionMotorcycle plant 2hejiang 1985 2 3.2Motorcycle plant Beihai, Guangxi 1985 1 5.4 2.2

Tractor ProductionTractor plant Henan 1985-87 2 74.3 19.2

Total Number and Value 167 386.7 100.0

/a Y 20,000.

Source: CNAIC.

Table 4.5a: MAJOR FOREIGN PARTICIPATION IN COMPLETE VEHICLE PRODUCTION

Product and Annual ValuePartners Output Targets Year Contract (Approx.) Location

Terex UK (33.72) 30-77 ton dump trucks 1987 20-year joint venture Y 166 M Baotou, InnerMongoliaInner Mongolia No. 2Machinery Co. (76.32)

Aveling Barford UK 27 ton dump trucks 1986 7-year coproduction $6 M BeijingBeijing Dump Truck Plant

Tokyo Umpanki, Japan 1-10 ton forklifts 1986 technology transfer n.a. Hefei, AnhuiChina !achinery and Equip. Baoji, SbaanxlImport lExport corp.

Hino Motor, Japan 35-seat buses 1986 technology transfer n.a. ShenyangChina Shenyang 1,000 by 1990Aircraft Corp.

Daihatsu Motor, Japan Charade, 993 cc cars 1986 7-year license n.a. TlaujinTianjin Auto Industry Corp.

Mitsubishi Motors, Ja a 800 cc light coumercial 1986 coproduction Y 2 B LiuzhouCNAIC Liuzhou Auto mnustry vehicles, 10,000 by 1989Corp.

Isuu Motors Japan ELF model pickup 1984 joint venture n.a. ClongqingC guto Industry Corp. 1,000 units

Isuzu Motors Ltd , and smanl trucks; 1983 technology transfer n.a. NanjingTito Coumerciai Co. 600 unitsNanj lag Auto Plant

Fiat Group Iveco S-series light 1986 technology transfer Y 1.55 B NanjingNanjing Auto Plant trucks; 60,000 units

VoLksvaaen Santana passenger car 1982 joint venture n.a. ShanghaiSEMqgalAuto Comp.an1sighi Automo0tve Industry

Corp., CHAICPerkins Engines diesel engines 1982 cooPeration and n.a. BeijingBeijing Jeep Corporation proauction agreement

AMC-Chrysler (312) Jeep Cherokee 1984 joint venture $51 M BeijingBeijing Jeep Corporation (originalcapital)

Peugot Automoble; pasenger cars, light, joint venture $79.5 M GuangzhouCITIC, G:anuztouy auq trucks

AuoHa, Ir andBanque International de Paris

Hong Kong Shortridge light trucks, 30,000 p.a. joint venture $145 M BeijingCITIC, Beijing No. 2 from 1990, using Beijimng

Jo. 2 cbassts and Isuzusigned light trucks

Volkswagen passenger care 1990 loint venture, factory n.a. ChangchunChina First Auto Works pransferred from

Westmoreland, Pennsylvania

Sources: CNAIC, Beijing Jeep Co., Nanjing Auto Works.

-109- A

Table 4.5b: MAJOR FOREIGN PARTICIPATION IN COMPONENT PRODUCrION

Companies Involved Products Type of Transaction

A. Truck Comvonents

ZF, Germany power steering licenseSichuan Auto Worksand other plants

NSK. Japan variable section leaf technology transferspring technology

AP, UK clutch licenseFirst Auto Works

Wabco, Germany truck brake technology technology transferChinese plants

Armstrong, UK hydraulic dampers and licenseChinese plants struts

Mlitsubishi, Japan truck cab technology transferFirst Auto Works

Tatra, Czechoslovakia Tatra 815 trucks assembling contractSingtai ChangzhengAuto Factory

Nissan, Japan truck cab technology transferSecond Auto Works

Steyr, Austria technology and equipment technology transferCNHTC

B. Engines

Berliet, France military and civilian licenseChinese plants medium/heavy trucks

KHD, Germany air cooled Deutz diesel licensefor heavy trucks/buses

Cummins, USA diesel engines for licenseCNHTC, Second heavy trucks and busesAuto Works

-110 - ANNEX

Companies Involved Product Type of Transaction

Man, Germany diesel engines Romanian licensefrom Man

Steyr, Austria range of modern diesels licenseCNHTC

Fiat, Italy SOFIM diesels for light licenseNanjing Auto Corporation trucks

GM, USA ex-Flint complete engine license and sale ofBeijing Engine Corporation plant plant

Chrysler, USA ex-Trenton complete license and sale ofFirst Auto Works engine plant plant

Peugot, France 1.9 liter engine licensefor GPAC504/505 range

Daihatsu, Japan 2 small engines licenseTianjin AutomotiveIndustry Corp.

Suzuki, Japan small engines license

C. Gears

ZF, Germany multi-ratio mechanical technology transferSichuan Gear Factory transmission

GM and Diesel-Allison, USA mechanical/hydraulic technology transferSichuan Gear Factory transmission

Eaton, USA heavy truck transmission technology transferXian Gear Plant

D. Electric Parts

Bosch, Germany alternators, starter licensemotors, ignition systems(including distributors),small electric motors anddiesel injectors

Nippondenso, Japan ignition systems license

Hella, Germany lighting units license

VDO, Germany instruments license

-111- ANNEX

Companies Involved Product Type of Transaction

E. Foundries andOther Areas

Ashland, USA core-box and resin bonded technology transferGF, Switzerland sand technology

British Casting and Iron foundry quality control technology transferResearch Association

GKN, UK forging technology technology transferFirst Auto Works

Haden-Drysis, UK and France metal pre-treatment technology transferpainting and technology

F. Technologv ConsultinaServices

Ricardo Consultants, UK engine design updating consulting contract

Mira, UK comprehensive vehicle consulting contracttesting facilities

Source: Anne Hope, China's Motor Indury, 1988, Special Report No. 2008 (London: Economist IntefligenceUnit, 1989), pp. 188-192.

- 112- ANNEX

Table 4.6: LOCAL CONTET OF FOREIGN MoDELs AsMLED iN CHNA, 1989-90

Local Content. 1989 Local Content. 1990Enterprise Product Rate (X) Type Rate (2)

Beijing Jeep Co. Jeep 35.51 simple parts 43.51

Shanghai Volkswagen Santana Car 31.0 autobody 11S 60.09engine '2transmission .022chassis 2.0Sother 142

First Auto Works Audi 100 Car 7.9 autobody 1S 13.66engine .5Schassis 1.4Zother 52

Tianjin Auto Co. Charade Car 40.7 autobody 40.70

Guangzhou Peugot Co. Peugot 505 12.7 simple parts 31.00

Nanjing Auto Co. Chassis 11.6 simple partsVan 15.6 simple partsIVECO truck 15.6 15.60

Heavy Auto Ind. Corp. Truck 60.0 n.a. 65.00

Source: CNAIC, Cina Auto-Indus" Yearbook 1991.

- 113 - ANNEX

Table 5.1: INvEmEN, SALE, TAXE, PRoFTr ANDOTR FINANCIAL INDICATORS, 1982-92

1982 1983 1984 1985 1986 1987 1988 1989 1990 1992

(Y million)Infvestment 413 556 950 2,144 2,095 3,099 4,129 3,788 4,130 10,275

Total OriginalValue of FixedAssets 8,772 9,771 11,746 14,926 15,254 17,888 21,930 25,558 28,034 46,032

Original value ofFixed Assetefor Production 6,954 7,779 9,210 11,590 11,781 13,674 16,874 19,543 21,542 n.a.

Net Value ofFixed Assets 5,766 6,313 7,498 9,618 9,726 11,410 14,117 16,574 17,995 31,015

Working Capital 4,109 4,621 5,674 8,219 9,944 10,978 13,009 17,684 20,954 54,846

Sales 8,738 12,257 17,118 25,921 19,700 27,409 41,300 43,364 44,192 118,741

Sales Tax 439 531 763 1,596 939 1,232 1,811 1,940 1,872 4,552

Profit /a 1,124 1,854 2,857 4,743 2,399 2,797 4,284 3,646 2,405 8,781

Remitted toGovernment

= Y million 916 1,117 1,555 1,988 1,444 1,344 1,367 1,004 1,151 1,842

=Z 82 60 54 42 60 48 32 27 48 21

Retained byEnterprises

- Y million 208 737 1,302 2,755 955 1,453 2,917 2,642 1,254 6,939

- 2 19 40 46 58 40 52 68 73 52 79

Ratio of Profits to:-Capital (2) 9 13 16 21 10 10 12 8 5 9

- Fixed asets (S) 13 19 24 32 16 16 20 14 8 19

- Sales (2) 13 15 17 18 12 10 10 8 5 7

/a Profit refers to profit akea saks tax but before income tax

Souroe: China AWo-bIdwsq Yearbook, 1988, pp. 1404154; CNAIC (for 1988-92).

- 114- ANNEX

Table 5.2: NET VALUE OF FAXED ASSETS OF MAJOR PLANTS (END-1988)

Net ValuePlant (Y million)

Mini TrucksTianjin Mini Auto 85.87Jilin Light Auto 196.43Liuzhou Mini Auto 65.58Harbin Aircraft 150.55

Light TrucksShenyang Gold Cup 334.66Tianjin Auto 36.44Beijing Auto No. 2 5.47Beijing Auto No. 1 118.62Nanjing Auto 163.94

Medium TrucksFAW 669.83SAW 2,047.22Qinghai Auto 17.87

Heavy TrucksJinan Auto 117.85Shanghai Heavy Auto 9.81Sichuan Auto 70.61

BusesTianjin Bus Plant 23.86Dandong Auto 55.68Guangzhou Auto 25.82

Jeeps/CarsBeijing Jeep 78.41Shanghai Volkswagen 61.20Guangzhou Peugot 82.76Wuhan Light Auto 29.38

EnginesBeijing Internal Combustion Engine Plant 116.11Changsha Auto Engine 20.09Tianjin Auto Engine 15.15Yangzhou Diesel Engine 20.84Hanghzhou Diesel Engine 33.84Vifan Diesel Engine (Shandong Province) 158.77Dalian Diesel Engine 35.03

TransmissionsBeijing Gear 45.58Yijian Gear (Sichuan) 42.53Tansan Gear (Hebei) 42.62

Auto Electric PartsChangsha Auto Electrics 24.2Shanghai Auto Electric Motor 9.2Nanjing Spark Plug 27.32

Source: CNAIC.

- 115- AX

Table 5.3: TAES PREvAILiNG FOR AuTOMOTIE ENTERRISES

EffectiveType of Tax Year Rate

National Taxes, Fees andContribution to Funds

Income La 1983 55.0X of incomeValue added la 1984 14.02 of value addedSales 1984 3-52 of salesCity construction 1985 5-72 of value added/productEducation 1986 1.02 of value added/productReal estate 1986 1.2S of original value of real estateReal estate 1986 12.02 of rentVehicle 1986 n/aInvoice 1988 0.1-0.52 of contract valueInvoice 1988 Y 5.00 x number of account booksElectro power construction fund 1987 Y 0.01 x number of kw hours usedTransport subsidy for coal usedfor electro power 1987 Y 0.047 x number of kw hours used

Land use 1988 rate x number of square metersEnergy traffic construction fund 1983 15.02 of profit retained by enterpriseBudget adjustment fund 1989 10.02 of profit retained by enterpriseOil burning 1982 Y 70.0 x tons of oil usedBonus 1985 30-3002 of bonus paid in excess of limit

Local Taxes. Fees and Contributionto Funds

Price adjustment fund 1989 12 of sales (Jiangst Province)Food price project fund 1989 12 of sales (Jiangsu Province)Capital use fee 1989 2.12 of current capital on top of 11.342 interestUnused fixed asset fee:

- Year 1 1989 9.02 of net value of assets (Beijing)- Year 2 1989 10.02 of net value of assets (Beijing)- Year 3 1989 20.02 of net value of assets (Beijing)Factory contracting risk fund 1989 22 of contracted profit (Beijing)Food grain subsidy fund 1989 Y 15.00 x No. of employees (Shaanxi, Shanxi)

Compulsory Buyina of BondsState key project bonds 1987 152 investmentElectric power bonds 1987 Y 1.00 x kw hours of increased use of power

Taxes Withheld from Vehicle BuyersVehicle purchase surcharge 1986 102 of price (302 in Beijing)Sedan car consumer tax 1989 Y 20,000 per car

National Taxes on CapitalConstruction

Construction 1983 10-302 of Investment realizedSewage system fee 1983 Y 2.40 x square meterEnvironment effect fee 1989 Y 15-35 x square meterQuality control fee 1980 0.152 of building costIncreased volume of power supply 1989 Y 470 x kws ampereIncreased volume of water supply 1989 Y 500 x ton

Local Fees for Capital Construction(Jilin Province Only)

City district development 1986 Y 25 x square meter (factory)Y 60 x square meter (worker housing)

Real estate registration 1989 Y 1 x square meterShopping center development 1980 72 of building costAir raid construction 1980 0.42 of building cost

-116- ANNEX

Table 5.3: (cont'd)

EffectiveType of Tax Year Rate

Taxes for Joint Venture Enterpriseswith Cbinese and Forelin Capital

Unified industry and coamerce 1983 4.52 of sales of vehiclesUnified industry and comnerce 1983 5.02 sales of locally made partsUnified industry and coeerce 1983 3.02 of sales of imported partsUnified industry and commerce 1983 3.0S of income from repair serviceShanghai local additional 1983 1.02 of sales (Shanghai only)National income Lb 1980 30.02 of profitLocal income lb 1980 3.0 2 of profitVehicle 1986 n.a.Real estate 1986 1.22 of original value of assetsReal estate 1986 12.02 of rentInvoice 1988 0.1-0.5Z of contract valueInvoice 1988 Y 5.00 x number of account booksForeign employees - income 1980 (as per related las)

La These two do not apply to enterprises which hand in their profit according to a contract wi the revenue department./b For ventures in coastal open cities, the income taxes are reduced by 20 percet For ventures with foreign capital over

$30 million, the income taxes are reduced by 50 percent. For ventures with a term of over 10 years, income tax isexempted in the first 2 years, in the nex 3 years income tax is reduced by 50 percent, and there is no local income taxfor the first five years.

- 117 - ANNE

Table 5.4: PA&SEGER CAR PIUcES, 1992

Shanghai Beijing Guangzhou FAW TianjinSantana Jeep Peugot Audi Charade

Ex Works PriceYuan ('000) 61.2 55.6 65.6 94.0 42.2Plus $ ('000) 9.1 10.6 11.0 17.0 3.5

Retail PriceYuan ('000) 71.2 65.9 77.1 110.9 47.6Plus $ ('000) 9.1 10.6 11.0 17.0 3.5

Yuan only ('000) L 127.4 131.6 145.5 215.9 69.1

Taxes and Fees (Y'000)Purchase fee 7.9 7.7 8.9 13.9 5.2Social fee lb 23.0 15.0 20.0 20.0 '.7Consumer tax lb 15.0 10.0 15.0 15.0 2.0Capital fee La 0.5 0.3 0.5 0.5 0.1

Yuan Price/Taxes and Fees 173.8 164.6 189.9 265.3 78.1

/a A buyer who does not have dollars may pay all in yuan but the dollar portion is not convered into yuanaccording to the official rate of Y 4.70 to $1, but instead at the swap rate.

/b Social fee and consumer tax are withheld by the sellers. The social fee goes to road constuction,environmental protection and other services related to cars.

/c The capital fee is charged to entexprises buying cars with working capital. The fee is intended todiscourage them from buying cars and encourage them to use the money for production.

- 1- AN NEX

Table 5.5: T1RUCK AND Bus PRUCES, 1992

Ex-factory MarketType (Y) (Y)

Mini truckDaihatsu van (TJ11O) 31,000 37,000

Light truckYejin (NJ1041M) 23,600 27,600

Medium truckJiefang (CA101) 29,800 34,400Donfeng (EQF140-1) 31,400 42,100

Heavy truckHuanghe (JN162) 92,500 99,000

TrailerHanyang (25 ton) 150,000 172,000

Beijing (BJ632A,16 seats) 32,500 41,000

Huanghai (DD680G,61 seats) 92,400 96,800

Source: CNAIC.

- 119- ANNEX

Table 5.6: DoMEsTc VEHICLE MARET, 1984-87

1984 1985 1986 1987Number Number Number Number

Purchasing of Share of Share of Share of ShareOrganizations Vehicles (2) Vehicles (2) Vehicles (2) Vehicles (2)

AgricultureForestry, Fishery,Animal Husbandry 8,750 2.9 8,046 2.5 8,748 2.6 14,265 3.3

Industry 58,152 19.5 57,061 17.8 39,782 11.7 26,624 6.1Construction 9,065 3.0 4,198 1.3 11,055 3.3 9,452 2.2Transportation 21,268 7.1 35,495 11.1 21,628 6.4 22,929 5.2Education, Health,Science 2,313 0.8 4,838 1.5 4,320 1.3 4,100 0.9Export 2,477 0.8 2,489 0.8 1,279 0.4 4,182 1.0Marketing 119,019 4.0 132,855 41.5 145,279 42.8 223,283 51.0State Inventory 2,362 0.8 3,710 1.2 6,215 1.8 1,154 0.3Other buyers 74,406 25.0 71,156 22.2 101,217 29.8 131,830 30.1

Total 297.812 100.0 319.848 100.0 339.523 100.0 437.81 100.0

Source: CNAIC.

- 120- ANNfX

Table 6.1: HIGHWAY FRIG}T AND PASENGER TRAIC VOLUME

PassengersPreifht Freiaht Kauiv. Total

Year Volume Growth Volume Volume Growth Volume GrowthLa (2) Lb Le (2) La (2)

1980 76.4 3 73.0 18.3 21 94.7 61981 78.0 2 83.9 21.0 15 99.0 51982 94.9 22 96.4 24.1 15 119.0 201983 108.4 14 110.6 27.7 15 136.1 141984 153.6 42 133.7 33.4 21 187.0 371985 169.3 10 172.5 43.1 29 212.4 141986 211.8 25 198.2 49.6 15 261.4 231987 266.0 26 219.0 54.8 10 320.8 231988 322.0 21 252.8 63.2 15 385.2 201989 337.5 5 266.2 66.6 5 404.1 51990 335.0 -0.5 262.0 65.5 -1.6 401.3 -0.7

la In billion ton kn.

/b In billion passenger mn.

L Freight equivalent of passenger traffic is expressed in billion ton kn, and calculated based on an average passenger seatcapacity of 18 per bus and an average fieight capaoity of 4.5 tons per truck (passenger traffic *4.5/18).

Source: China Smattsal Yearbook, 1989, pp. 414, 420. CNAIC (for 1989).

Table 6.2: IGHWAY TRAIC GRowH ESUS TOTAL 1tAIC GROWTH

19&0 1981 1982 1983 1984 1983 1986 1987 19" 1989 1990

Paasenoer

Totai (bln km) 228.1 250.0 274.3 309.5 362.1 443.7 489.7 541.6 620.7 607.3 562.0Grorth (M) 15.9 9.6 9.7 12.8 17.0 22.5 10.4 10.6 14.6 -2.2 -7.5

Hiw.y (bin km) 73.0 3.9 96.4 110.6 133.7 172.5 198.2 219.0 252.8 266.2 -262.0G rewh (2) 21.1 '14.9 14.9 14.7 20.9 29.0 14.9 1O.S 15.4 5.3 -1.6

Carom TrafficWtONS' (bln Km) 1,202.6 1,214.3 1,304.9 1,405.4 1,569.4 1,812.6 2,014.8 2,222.8 2,382.5 2,559.1 2,620.7

Growth (z) 5.6 1.0 7.5 7.7 11.7 15.5 11.2 10.3 7.2 7.4 0.06Hithway (blu km) 76.4 78.0 94.9 109.4 153.6 169.3 211.6 266.0 322.0 337.5 335.s

Growth (Z) 2.6 2.1 21.7 14.2 41.7 10.2 25.1 25.6 21.1 4.8 -0.5Ainual Average Growth Rat sa MjPassen r Traffic

Traffict 15 191985-89 8 121979-89 12 16

CaR%Traffic87 .' 8 151985-89 9 19i979-89 9 17

Note: Total traffic includes railway, highway, waterway and airway.

Sources: China Stansrcal Yearbook, 1989, pp. 414, 420; CNAIC data.

- 121- ANNX

Table 6.3: HIGHWAY ExPANSION, 1980-90

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Highway LenEth

Total length of

highway

('000 km) 888.2 897.5 906.1 916.1 926.7 942.4 962.7 982.2 995.6 1,014.3 1,028.4

Rate of

expansion (2) 1.0 1.0 1.0 1.0 1.2 1.7 2.2 2.0 1.8 1.5 1.4

Average expansion rate

1980-89: 1.42

1985-89: 1.82

Sources: China Skadstcal Yearbook, 1989, p. 394; China Aso-Indwtry Yearbook, 1988, p. 778; CNAIC.

Table 6.4: HIGHWAY EXPANSION IN QUANTIrY AND QUALrlY, 1984-90(thousand km)

Average Rateof Expansion

1984 1985 1986 1987 1988 1989 1990 1984-90

Total 926.7 942.4 962.8 982.2 999.6 1,014.3 1,028.35- Growth (1) n.a. 1.7 2.2 2.0 1.8 1.5 1.4 1.9

Paved highway 725.0 750.3 780.4 810.7 842.3 862.5 883.5- Growth (Z) n.a. 3.5 4.0 3.9 3.9 2.4 2.4 3.5

Share of paved highwayin total (Z) 78.2 79.6 81.1 82.5 84.3 85.0 85.9

lop and secondary top grade /a n.a. 195.3 203.8 216.0 230.8 244.3 250.0- Growth (1) n.a. n.a. 4.4 6.0 6.8 5.9 6.4 5.8

Medium grade lb n.a. 280.6 292.6 303.5 312.8 316.7 320.0- Growth (1) n.a. n.a. 4.3 3.7 3.1 1.2 1.0 3.1

Low grade lc n.a. 274.4 284.0 291.2 298.6 301.4 303.4- Growth (Z) n.a. n.a. 3.5 2.5 2.6 0.9 1.0 2.4

/a Paved with concrete and/or asphalt with two or more laes m each direction.

hb Paved with asphalt with one lne m each direction.

Lc Paved with asphalt and gmvel with one lane in each direction.

Soure: China Statistical Yearbook 1985-89, CNAIC (for 1989).

- 123- ANNEX

Table 7.1: CHiNA'S NAToNAL OurruT Am CoNSUMrro- OF STEEL(million tons)

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

Output 32.1 30.0 33.2 40.3 46.5 55.0 59.0 56.3 56.5 58.2

Rate of increase (X) -3.0 -6.4 10.4 21.6 15.4 18.1 7.3 -4.6 0.3 3.1

Consumption 28.3 26.1 31.9 35.2 43.2 49.8 51.9 56.3 58.0 53.6

Rate of increase (1) 3.2 -7.6 22.4 10.1 22.9 15.3 4.2 8.5 3.0 -7.6

Surplus/Shortage 3.8 3.9 1.2 5.2 3.3 5.1 7.0 -0.1 -1.6 4.6

Import n.a. n.a. n.a. n.a. 12.3 20.0 18.4 12.4 9.1 n.a.

Export n.a. n.a. n.a. n.a. 0.2 0.i 0.2 0.4 0.8 n.a.

Sources: China Statistical Yearbook, 1989, p. 374; CNAIC.

Table 7.2: CONSUMPTION OF STEEL, IRON, COAL AND POWER INTEE AUTOMOTIVE SECrOR

(million tons)

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

Steel:Sector Consumption 1.1 0.9 1.1 1.4 1.8 2.2 1.9 2.2 2.7 2.4

National output 37.1 35.6 37.1 40.0 43.5 46.7 52.2 56.3 59.4 58.2

Iron:Sector Consumption 0.3 0.2 0.3 0.3 0.4 0.5 0.4 0.4 0.5 0.5

National output 38.0 34.0 36.0 37.0 40.0 44.0 51.0 55.0 57.0 58.9

Coal:Sector Consumption 1.5 1.5 1.6 1.8 2.3 3.2 3.1 3.4 3.9 3.1

National output 620.0 622.0 666.0 715.0 789.0 850.0 e94.0 928.0 980.0 n.a.

Electricity laSector Consumption 1.7 1.5 1.7 2.0 2.5 3.2 3.2 3.5 3.9 3.3

National output La 300.6 309.3 327.7 351.4 377.0 410.7 449.5 497.3 545.2 n.a.

/a billion kW per hour.

Sources: Automotive Ind&sty of China, China Automotive Technology Research Center (1989), p. 11; CNAIC (1989);

Chira Ato-hnduby Yearbook, (for 1988), p. 771.

Table 7.3: GASOLNE Am DIESEL CONSumPION BY MOTOR VEHCLES(million tons)

1980 1981 1982 1983 1984 1985 1986 1987 1988

GasolineAutomobile consumption 8.3 9.1 9.8 10.5 11.3 12.8 14.8 15.6 17.1

National consumption n.a. n.a. n.a. n.a. n.a. 14.0 15.0 16.2 n.a.

National output 10.5 11.1 11.1 12.6 13.5 14.4 16.5 17.1 18.8

DieselAutomobile consumption 1.2 1.3 1.5 1.6 1.9 2.2 2.8 3.3 3.8

National consumption n.a. n.a. n.a. n.a. n.a. 19.4 21.2 23.1 n.a.

National output 18.3 17.8 17.5 19.0 19.5 19.9 22.0 23.4 24.6

Source: Autowidve Induty of China, China Automotive Technology Researh Center, 1989, p. 33.

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