Report No. 121 34-CHA China Industrial Organization and Efficiency Case Study: The Automotive Sector December 31, 1993 industry and Energy Operations Division China and Mongolia Department East Asia and Pacific Regional Office FOR OFFICIAL USE ONLY MICROGRAPHICS Report No: 12134 CN Type! SEC Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be 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 5.80 Y 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 ........................................... v ExecutiveSummr ........... . ....................... vii 1 Developmer&A of Automotive Industry in Cktaa .................. 1 A. Rationale for Automotive Sector Work ...................... 1 B. Development of the Automotive Industry in China ............... 4 First Phase: Beginnings of the Domestic Industry ............. 4 Second Phase: Modemization Drive ...................... 5 China Natior.al Automotive Industry Corporation .............. 5 Pilr Industry ........... ........................ 7 Large Investments ................................. 7 infu-ion of Foreign Technology and Capital ................. 8 C. Currer t Industry Trends. 9 High Growth and Product Mix Change .................... 9 Import Substitution ....... 11 Fragmentation and Dispersion .......................... 13 Dualistic Industry and Emerging Leaders ................... 13 D. Looking Ahead: Developmental Objectives ................... 18 2 TrennaionaTedandDometlc Demand .................... 20 A. Trends in the World Industry ............. ............... 20 B. DomesticDemand ................................... 27 Freight Vehicles .......... ........................ 27 Passenger Vehicles ................................ 28 Projections of Domestic Demand ........................ 30 Implications of Domestic Demand Projections ................ 31 3 Policy Framework and Its Impact on the Automotive Industry .... .... 36 A. Entry Policy . ..................................... 36 B. Exit Policy . ...................................... 38 C. CompetitionPolicy . .................................. 38 D. Foreign Trade Policy ................ ................. 41 E. Demand Management ................................ 43 F. Sector Management ................. 45 G. Localization Programs ................. 49 This document has a resticted distrton and may be used by recpien only in the pof thr offcial duties Its contents may not otbwie be disclosed witbout World Bafik __ H. Foreign Direct Investment Policy ....................... .. 50 I. Enterfise Govenance ................................ 50 4 Perspectives on a Strategy for the Automotive Industry ............ 54 A. Comparative Advantage ............ .. ................. 54 B. Mniimum Efficient Scale .............................. 56 C. TechnologcaEfficiency ............................... 58 Phased Development .............. ................. 59 Less o From Experience ........... .. ............... 61 D. VerticalDisntegration and Subcontracting ....... .. ........... 64 E. Role of Govemment Intervention and Competition ..... .. ........ 66 F. Issues and Opportunities ...... ......................... 72 5 PolicRecommendations ................................ 74 A. BaIancing Proection and Competition ............ .. ......... 74 B. Creating ncentives t Innovate ....... .................. 75 C. The Role of Government in Facilitating the Creation of an Efficient Industia Structe ................ .................. 76 D. Long-Term Goals-The Development of Product Technology ... ..... 78 E. Conclusion ................... .................... 79 ArEX StatiCS . ................... ...................... 81 BOX 1.1 Leading Players in the Automotive Industry ................... 17 2.1 Tariffs on Autos in Selected Countries ...................... 23 TAnuM 1.1 Eighth Five-Year Plan Investment in the Automotive Sector .... ..... 8 1.2 ChineseAuomotivebyType, 1955-92 ...................... 10 1.3 Annual Production Targets of the Eighth Five-Year Plan .... ....... 10 1.4 ProductionPlan, 1993 ................................ 11 1.5 Production and Imports of Automotives, 1980-91 ................. 12 1.6 Share of Knock-Down Parts in Imports ...................... 13 1.7 Enterprises in Chinese Automotive Industry, 1980-90 ............. 14 1.8 Distribution of Automotive Assembler by Production Capacity ... .... 14 1.9 Geographical Diprsion of Production Capacity ................ 15 1.10 Passenger Car Prices ................................. 17 1.11 Truck and Bus Prices (1990) .18 -'Il- 2.1 Desired Stock of Vehicles Projeed for the Year 2000 ............ 30 2.2 Annual Demand for Vehicles, 1995 and 2000 . ................. 31 2.3 Output-Demand Deficit Projections by Type of Vehicle: Unconstined Scentio .. .............................. 32 2.4 Increase in Highway Capacity Over the Eighth Five-Year Plan Period ... 33 2.5 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 . .59 4.3 Stylistc Presentation of the Four Stages of the Development of Industry . 60 CHMTS 3.1 China: AutomotiveIndustrySupervisoryControl ............... 46 PREFACE This report is based on the findings of three missions that viited China between Sepeiber 1990 and December 1992. The report was prepared by Jae-Hak Kim C(ask Manager). Peter Harrold (Lead Economist) made contributions to the Executive Summary. Jyoti Shukla (Consultant, Economist) contributed to Chapter 2 and assisted in drftng the report. The report draws extensively on the findings of members of the earlier missions: Sally Zeijlon (Economist), Harbaksh Sethi (Senior Advisor, Engieering and Steel Industries), irtcolas Mathieu (Senior Economist), Wang Yuan (Economic Officer), Arnaud Domel (Economist), Jerry Saunders (Consultant), Bor-Ruey Fu (Consultant), and T. subramanian (under a UNDP-World Bank training program). Yongmiao Zhang at the Resident Mission in Beijing and Li (Local Consultant) also provided invaluable information. The missions received invaluable support from representatives of the Chinese automotive industry. The CNAIC countrpart team was led by Mr. Zhang Zheng, General Manag,er, Strategy PoLhcy and Computer Dvision, and included Messrs. Yijian Zhou, Wu Dongling, Zhu Shui Yu, and others too numerous to list. Assistance was also received from the First Auto Works, Second Auto Works, the Shanghai Automotive Industry Corporation, the Beijing Jeep Company, Nanjing Motor Company, China National Heavy Duty Truck Corporation. The mission also met with govemment officials in Shanghai and Beijing. - ',ii - EXECUTIVE SUMMARY INMODUCnON L. The process of economic reform and decentralization has raised new challenges for China in the areas of industrial strategy and organization. While the role of the state in resource allocation and investment planning has been declining, the market forces 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 policy towards particular industries, and in deciding wheni and in what ways to ease transitional difficulties hindering the development of such industnes. Moreover, in the current state of the reform program, there are also questions about what instruments the government should use to effectively shape the future of the industry and at the same time to advance further development of market forces. iu. The automotive industry is perhaps the sector that best exemplifies these issues for two primary reasons. First, this industry is capital-intensive with particularly large ec cnomies of scale. We have thus observed in many countries, including developed countries, that the state has had a significant role in developing industry, either in its early stage of development or in its restructuring. Second, from the standpoint of economic strategy, the automotive industry is important for its industrial, macroeconomic, and social impact. This industry has the potential for becoming a leading sector through enormous backward and forward linkages; it is inextricably linked to national transport strategy and to the integration of the domestic market; and it has many externalities such as pollution and urban xongestion. iii. The Chinese automotive industry has now become a significant contributor to industral output, having reached 1 million units of vehicle production in 1992. The Chinese automotive industry rnks twelfth in world production, approaching that of Brazil. A substantial part of this production came from the commercial vehicle segment, making China the world's fifth largest producer. The passenger car segisent, which contributed modestly with about 160,000 units, however, is growing rapidly already, and has great potential for additional expansion. This level of production is the result of the rapid growth in the 1980s-18.7 percent per annum-and an acceleration in the '990s. Vehicle output has nearly doubled during the last three years. Nevertheless, given the size of China's economy and its current rate of income growth, a redoubling of the subsector is surely expected during the rest of this decade. iv. This report intends to examine these challenges facing the government of China in formulating industrial policy and strategy, using the automotive industry as an example. Although the report's recommendations focus on how to address these issues in - viii - the context of this particular industry, these considerations should equally apply to other subsectors. The study of this subsector is significant because the industry is at a relatively early 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 development in China over the rest of this decade, and beyond. Fiially, it is fitting because our examination of the present strategy has revealed serious problems that need to be addressed with some urgency. v. The report first reviews the deveiopment of the automotive industry in China in 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 presents policy 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 only slowly until the early 1980s. 'his level of development was owing to the government's transport stratgjl that emphasized railroads for long-haul freight transport and the use of nonmotorized vehicles, particularly bicycles, for short-distance passenger traffic. In its early years, the automotive industry thus focused primarily on the production of trucks and buses. The industry remained technologically backward, as it was isolated from the rest of the world at a time when many technological breakthroughs were taking place. vii. Since the early 1980s, however, the character of the automotive industry has changed dramaticaly, with the infusion of foreign technology and large investments to modernize the industry. Several major joint ventures have been set up with intemational producers-for example, Volkswagen, Citroen, and Peugeot for the production of passenger cars and Chrysler for the production of the Jeep. Licensed production of light trucks with Iveco and Is w technology and of heavy trucks with technology from Steyr and Cummins has also started. viii. As a result of large investments, the industry has changed in size, product mix, and quality. Vehicle production increased fourfold in the last five years to reach the one million mark in 1992, already exceeding the production target of the Eighth Five-Year Plan (1991-95). The product mix has changed, with the passenger car and light-truck segments showing high rates of growth. International collaboration has also radically improved the product quality of passenger cars and light trucks, although the dominant medium-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 automotive industry to supply almost 90 percent of the market in recent years. Imported vehicles as a percentage of domestic sales declined from a high of 44 percent in 1985 to 12 percent in 1991. The reversal in the position of imports is particularly significant for passenger cars. Imports of 27,600 passenger cars in 1992 represented only Lo percent of domestic production, in contrast to the situation in 1985 when domestic demand was larI -ly met -ix - with imports. However, the 1993 import spree of sedan cars tipped up the import share slightly to 20 percent in the first three quarters. x. The development of the industry has seen two pattems emerge in recent years. 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, the decentralization 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 medium trucks 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 automotive industry 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 are finished in 1995, the Big Muree collectively will bhve an estimated 64 percent of domestic prodoctin caacity, the Uttfle Mree, 28 percent; and the Mini Two, 8 percent. x recent years, causing the leading players to suffer from overcapacity. The consequent intense competition made production technology the key to success and enabled thie maintenance of profits, forcing the industry to seek globalization of manufacturing through exchange of goods, capital, and technology for low-ost sourcing. xiv. The Chinese domestic market has also changed, with a diversified pattemn of ownership emerging on the demand side. Until recently, private ownership was discouraged in China. As a consequence, in 1985, 95 percent of the vehicle fleet was owned by the government or state-owned enterprises (SOEs). In the lasc few years, however, controls over vehicle ownership have been relaxed. With increased incomes and more 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 most modern 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 development of the highway sector has acted as a constraint to the development of competition in the domestic market. The current investment strategy of the central government in the transport sector places particular importance on the development of a set of integrated highways across the country designed to pernit a much more rapid and flexible movement of goods and people. xvi. The entry of these new categories of consumers, coupled with improved infrastructure for vehicles, can be expected to lead to a rapid expansion of the domestic market for vehicles, and to continued changes in its product mix. Two Sino-Foreign joint studies of the Chinese market indicate **at domestic demand could increase to about 2 nillion vehicles per year by the end of the century,2/ unless constained by the government. The demand for small passenger vehicles will rise faster than the demand for freight 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, the demand for light trucls will far outpace the demand for medium trucks, owing to the increased demand for short-haul, light-freight traffic. Therefore, m examining policies in the 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 in China still faces several systemic and structural problems that must be resolved before it can achieve international standards of costs and quality. Production costs of most Chinese automottves, especally in the passenger car segment, continue to be much higher than world standards. Shanghai Volkswagen, arguably the most dynamic and efficient enterprise in the industry, reports an ex-factory price for the Santana of Y 104,000 or approximately $20,000 at the official exchange rate, almost twice comparable intenational ZI CMina'ssomoive Inday: Dewopmem Sroe8y Towads 2 by the Joit Committee_ of Chin and J ane Experts, 1987 and Deweopnen Staemfor the 2)wqpoiason Se&or to 2000, A Joint Sttdy tby Cainese and Genran Expes. - xi- 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, and reliability 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 historical legacy of fragmentation and the geographic dispersion of production capacity. The industrial structure has thus not yet evolved to support an efficient and modern production system. For the cunrent market size of barely 1 million umits per year, the industry is extremely 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 (often called converters) that produce vehicles with procured chassis. In 1990, only 10 enterprises out of the 117 had production capacity over 10,000 units per year. The industry is also extremely dispersed geographically and almost every province has production facilities. Despite recent government policies aimed at establishing large-scale capacity, none of the major producers has as yet been able to produce at an economic level, and the achievement of scale production does not seem to be in sight. xix. Second, the automotive industry is extremely sheltered from all sources of competition-import, export, and domestic-and proteted fiom market discipline. High tariffs and quantitative restictions (QRs) make imports very difficult and limited. Moreover, internal trade barriers still remain high, as evidenced by the lage numbers of assembly plants of uneconomic size that continue to succeed. The Bank mission found many examples of restrictions effected rough local procurenwent preferences and instructions, and intemal import barriers. This protection (a) allows inefficient domestic enterpises to survive indefinitely despite their high costs and poor quality and (b) delays rationalization of the industry towards intemational competitiveness. It is therefore no surprise 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 entirely focused on achieving domestic self-sufficiency rather than international competitiveness. xx. Third, this industrial orgnation has had the result that significant portions of the industry have not been touched by mornizaton, particularly in the parts and components segments, as well as the medium- and large-truck and bus segments. Even in 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 the larger plants s7zh as Shanghai VW, is based on relatively old models. The technological limitation in the parts and components setor and upstream industies forces the industry ta continue its reliance on imported components. xxi. Fourth, at the sectoral level, the policy regime and administaton are complicated and inapprriate to the needs of a modern high-technology industry. A myriad of regulatory agencies have complex and sometimes overlapping supervisory responsibilities over enterpdses, restricting enterprise autonomy and flexibility. Yet, industrywide regulo functions with significant positive extenalities, such as the maintenance of quality, sa*, and environmental standards, are inadequatdy performed. - xii- In addition, the government has not addrssed in any serious way the center-lkcal conflict in this area. The government needs to establish clear policies and guidelines to prevent the 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 ways that are m -ark conarast to what has been found to be most effective internationally. The most efficient producers outsource component manufacture as much as possible, and management is organized along product lines, with each layer of management subject to results measurement. In contrast, Chinese manufactiumes are highly vertically integrated with large production lines. Management is organized along functional lines and in a centralized organizational structure. When this is coupled with a hierarchical management system, it leads to a situation with no clear delineation of accountability. The enterprises also typically lack crucial skills of strategic planning, product development, marketing, and distribution. Quality assurance systems both within the enterprnses and at the industry level are underdeveloped. Finally, Chinese automotive producers do not sell direcdy to customers and lack the elaborate marketing and distribution networls that are a vital part of comipetition among the intemational players. As a result, Chinese producers receive ittle 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 with chronic supply shortages, it will not fit the market economy. ssuEs A OPPoRTuNrn3s xxixm. First, the goveanment's policy framework for the automotive industry needs to be reformulated, as it is not consistent with developmental objectives. The cmrent sWategy 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, and has then "assigned" different segments of the market to different producers: luxury cars to Audi, mid-size sedans to Santana, compacts to Citroen, and so forth. Joint ventures have been attacted to these segments by means of high levels of domestic protection, at tariff rates well over 100 percent. Moreo"er, producers are then exhorted to maxmize local sourcing and given further incentives to do so, through tariffs and bans on imports of parts. xxiv. perience in many counties has demonstrated that, in dts industy, a strategy based soley on Import protection (the "i?fant industry" theory) will never lead to efficincy and intemadonal competiens. Rather, import protection incurs high social costs through excessive domestic prices, and creates a powerful interest group for the maintenance of the protection. Thus, the present Chinese strategy to develop a competi auomotive ndustry is doomed to failre unss key elements are changed. Rather, an intenational market orientation to the strategy for the automotive sector is crucial-that is a stategy that aims for international cost competitiveness at the eariest dme, and the abandonment of facilities that cannot achive this level of competitveness. xxv. This said, it must be recognized that scale economies cannot be achieved overnight, especially in what is stl a relatively small market. Thus, the sudden - xiii - engagement in 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. xxvi. 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. The industry would be disciplined by increasing exposure to import competition over time, by means of declining tariff and nontariff barriers. At the end of the procdon period, tariffs would have been reduced to average levels (15 to 20 percent), and nontariff barriers would have been eliminated entirely. xxvii. Second, and perhaps the most difficult issue for the govemment, production capacity in the automotive industry needs to be concentrated in terms of the number of final producers, and speialized in terms of component manuacture. It seems impossible to achieve economies of scale in the industry without the elimination of great numbers of the small, inefficient prducers (although some of these could, no doubt, be converted to component manufturing). This could be accomplished by the following two alternaive approaches: The first approach would be the 'laissez-faire' way, that is, simply removing protection, both foreign and domestic, and letting the market determine the survivors. The aternative approch would offer a more proactive role for the state in restructuring existing industry. Nevertheless, the bottom line is lear. Significant rationaon othe existing automotive industv-; is necesary; many of the present assembly plants will have to disappear, and their workers found altnative employment, if a competitive industry is to develop. Of course, govremment has the choice of protecting the present producers forever, preventing exit, and acceptng a high-cost, domestically oriented automotive industry. It should only do so, however, with the kmowledge that this would be a subsidy from the rest of society to the workers in those plants; this is not compatible with China's market economy apprcach or its desire to develop a world-class industry. xxviii. Third, the strategy for the dcvelopment of the Chinese automotive industry should be formulated in the light of world trends in the industry. The current inteaional trend is toward globaliation of manufacturing and sourcing. This is particularly true for the component and parts industry; in this case, China needs a larger production volume than the domestic marlet can support and thus access to forign market. This means that China needs the right incentives and stteg for foreign direct investment, which would bring 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 greatest opporuities and challenges it has faed so far. Strategic and selecdve government action will be critica in facilitafing the transition. The government has, in our view, two main functions that it alone can perform: First, and most importan, it must create the nght sectoral policy framework-one that would be conducive to addring the issues desibed above. Second, it must create an appropriate supporting insftiutional framework to assist the industry to adjust to the new policies. These two functions are no different in this sector than in any otber. The difference is that economies of scale make entry much more - xiv - expensive and that past policies male the problem of exit significantly larger an in many other subsectors of the economy. A. Balncing Protection and Competition xxx. The challenge to government policy is to find the balance between providing the domestic industry with just enough protection from imports to give it time to move down the learning curve, while ensuring that some import competition-and the sure knowledge that protection will decline to low levels in the future-provide domestic producers with the incentives to learn and internalize new technologies, to continuously reduce costs, and to improve quality. xxxi. Therefore, the government of China should announce its program, based on offering protection that is limited in time and scope.j/ It is recommended that the customs tariff at the end of the protecdon period should not exceed 20 percent. This tariff should 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 on forein exchange purchase. Similarly, all rights to import vehicles free of duty should be abolished. xxxii. Although the protection period should be determined after internal study, experience elsewhere has indicated that a period of five years after policy announcement should be adequate, at the end of which only the 15 to 20 percent tariff would prevail. A longer period would not necessarily guarantee the domestic industry's commitment to higher 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 innovate must also be accompanied by an appropriate hamework of domestic policy. The economic and regulatoy enviroment and the incentives and attitudes of managers and technicians in the automotive firms will be crucial factors in the development of the industry and in the transfer and application of modern technology. In this regard, three areas seem to be of particular importance. xxxiv. Clear ladersip In supervisory agencies and sectoral developmental strategy. 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 and supevisees at the enterprise level. The government of China needs to assign clear authority and responsibility to a single agency, such as CNAIC, for developing and imposing national priorities, particularly in the areas of creation of new capacity and technology development. (niis also applies to some of the othe issues with respect to the role 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 will rpodwith their investment strateies in a com4etitie fasion. - xv - 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 go forward 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 automotive sector, and to spearhead the restructuring and adjustment program. Finally, the current overlapping responsibilities create excessive and repetitive supervision, and an environment that 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 sector as 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. The Ministry 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. - xvi - underdeveloped, and may fail in the absence of government action. There are six areas of government intervention that we would consider appropriate and helpful. xxxviii. Inefficient enterprises producing with obsolete technology and at an uneconomic scale should leave the Industry. Because the market is extremely crowded and fragmented, small-scale inefficient producers should be forced to exit. There is simply not room for 117 full producers and 459 assemblers. As noted earlier, we can foresee two alternative approaches to this process of rationaliation. Under the first, laissez-faire approach, the government would develop minimum quality and safety codes for vehicles. Serious enforcement of the codes, in conjunction with removal of import protection, would drive 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 production facilities (ncluding size) and technology resources, administered in the form of production licenses. Producers with hopelessly inefficient production facilities, or an excessively backward technology level, would be made to exit entirely from the sector. Producers with salvageable facilities and technology could be allowed to merge with larger and more efficient producers. xxxix. A more direct approach to this would be for the government of China to establish 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 to assist exit-including maintenance of welfare coverage and transition financing-and diagnostic assistance to salvageable enterprises. Foreign technical assistance could be sought in this restrucwing diagnostic function. xl. While the first strategy is more suited to the market economy, it must be recognized that the Chinese market is as yet far from developed. In particular, there is a danger that if all the small producers are permitted to continue to exist, the interest groups associated with these facilities-notably local governments-may seek to undermine the basic policy of developing competition, the basis for developing a sound industry in the future. 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 key determinant in aping future industry concentration; however, until competition has developed through the removal of trade barriers, the government should prohibit new entry at a capacity level belew 100,000 units per year. Indeed, there is a case for the government to prohibit entry at all. However, it would not be appropriate to discourage a new, genuine joint venture that was based on clear knowledge of the future policy framework for the sector, indeed, this could speed up the transformatior. of the existing joint venures into competitive production. xii. For other seegments, entry by joint ventures should be encouraged as these segments have long been neglected In foreign Investment. This applies especially to 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 the total during the Eighth Five-Year Plan. These segments are also the most backward in the automotive sector and thus could benefit from the infusion of advanced technology from foreign sources. For the component and parts segment, entry by foreign component producers should be also encouraged as the segment needs foreign technology and heavy investment because of its high capital intensity. However, most of the joint ventures to date have emphasized partnership between the domestic and foreign partner, with the domestic partner clearly regarded as the senior. There is a good case for encouraging some wholly owned foreign entrants, or joint ventures in which the foreign partner is senior. These arrangements would aBow for the development of factories that will regard China as a production base, and the domestic market as just one part of the market for the output of the enterprise. xliii. The development of the component sector should be a priority. Selective development of the components sector is suggested at this stage. The government should create a leading group to prioritize major components that can be realistically targeted for localization. This must be based on an awareness that economies of scale for the production of some components are very high and that the inability of upstream industries may constrain the effective localiztion of some other components. The existing foreign partners should be invited to participate in such a task force and to provide guidance to Chinese 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. The most important change in process technology in recent years has been the abandonment of vertically integrated production technology and the development of geographicaly close, but organizationally separate, subcontracting. This is best characterized by Toyota's technology. It is recommended that the Chinese government seek assistance from those familiar with the development of this approach to create a framework for its development in China. In particular, this should be possibly linked to the closing down of many of the existing subeconomic assembly plants, for some of this expertise could be converted into subcontracting. This could be facilitated through financial, informational, and managerial assistance in meeting the standards required of modern components suppliers. In Japan, vehicle assemblers provided this type of assistance to components suppliers to help them overcome initial production problems. In China, given the managerial weaknesses of the assemblers themselves, state-sponsored research and consulting agencies may be more approprate, with suitable foreign advice. The development of product and quality standards 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.or is recommended, but it is observed that this seems to be an appr3piate function for CNAIC. - xviii - xlv. Enterprise Management. At the enterprise level, organizational and management systems must be realigned to encourage efficiency and innovation, given their vertical integration and lack of accountability. The level of vertcal integration should be reduced drastically and except for the manuf.cture of some key components, all parts and components should be subcontracted. Organizationally, they should be reorganized along product divisions and each division should be an independent accounting entity. Managenally, the management systems should be decentrazed, with transparent performance evaluation systems and close links between parformance and pay. The auto works 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 these new skills. New systems of production management such as contemporary best-practice management methods of just-in-time inventory management and total quality control should be studied and adopted. xlvi. To identify such problems is straightforward, but implementation and reform design is more difficult. In particular, the question arises as to who should spearhead these technical and organizational reforms. It is suggested that CNAIC should seek technical assistance to finance detailed restructuring studies to be carried out by this organization with the help of foreign and local consultants, for the two or three largest enterprises (such as FAW, SAW, Nanjing). This should be done once a new policy framework has been designed and adopted. This should be regarded as assistance to the industry in formulating a plan to adapt to the new policy framework, but it would be for the enterprise and its board of directors, not for CNAIC, to decide on fuure steps for the enterpise, and for the management of the enterprise to implement any such plan. This should thus be seen as an exercise 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 competitive environment will depend in large part on the success on developing inherent product technology capability. This underscores the importance of effective government policies in facilitating the development of domestic research and development capability and human resources. They will ensure resilient and adaptable domestic industry under the continually changing internatonal market. CONCusON xlviii. The automotive industry exemplifies all the industrial policy questions facing the govemment of China today: how fast and to what level to liberalize imports; how to make inefficient and uneconomic enterpnses viable; what to do with displaced workers; how to balance state intervention with market forces during China's transition toward the market economy; and how far to let management go when a market-oriented corporate govenance system is yet to emerge; and how to guide the industry development without resorting to the instruments used in the planned economy. This study has attempted to provide a range of suggestions to answer these questions, while recognizing that China is still in its transition towards a market economy and that in some cases further study has to be recommended. The short- to medium-term answers to the challenges facing the Chinese automotive industry may change over time with changing macroeconomic - Xix - envirment and deepning market reform. However, it cannot be too much emphasized that m the long run the Chinese automotive sector will have a most efficien, industrial oganization when its development, dictated by intenaonal compedtion and state parttcipation 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 contributor to industrial output, having reached 1 million units of vehicle production in 1992. This output ranks the Chinese automotive industry twelfth in world production, approaching that of Brazil. A substantial part of this production came from the commercil vehicle segment, of which China is the world's fifth largest producer. The passenger-car segment contributed modesdy with about 160,000 units; this segment is growing most rapidly and has the greatest potential for additional expansion. This level of production is the result of 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 size of China's economy and current income growth rates, a redoubling of the subsector is confidently expected during the rest of this decade. 1.2 The process of economic reform and decentralization has raised new challenges for China in the areas of industrial strategy and organization. While the role of the state in resource allocation and investnent planning has been declining, the market forces 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 policy toward particular industies, and in deciding when and in what ways to ease transitional difficulties hindering the development of such industries. Moreover, in the cufrent state of the reform program, there are also questions about what instruments the govemment should use to effectively shape the future of the industry and at the same time to advance further 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 have thus observed in many countries, including developed countries, that the state bas had a significant role in developing industry, either in its early stage of development or in restructuing. Second, from the standpoint of economic stategy, the automotive industry is important for its industrial, macroeconomic, and social impact This industry has the potential for becoming a leading sector thrDugh enormous backward and forward linkges; it is inextricably linked to national transport strategy and the integration of the domestic market; and, it has many externalities such as pollution and urban congestion. 1.4 With the backward linkages, the Chinese automotive industry could act as an engine of growth for the related industies that supply it with raw matials, intermdiat goods, and machinery. For example, the automotive industry consumed 2.6 nmllion tons of ste and iron in 1990, about 4.5 percent of China's national output -2 - Experience in the United States and more reently in Brazil, however, indicates that the automotive industry has far greater impact on the growth and transformation of related industries. In the United States, 22 percent of primary iron and steel, 9 percent of rubber and plastic, 16 percent of electrical machinery, 17 percent of fabricated metal, and 6 percent of nonferrous metal were supplied to the automotive industry as first-tier intermediate goods or raw materials. In Brazil, where the automotive industry constitutes only 6 percent of manufacturing production and 3 percent of industrial employment, it absorbs 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 from the development of the automotive industry with every $1 of value-added in the automotive industry 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 greater with $1 in the United States generating $7.63 in value of output and 3.5 jobs in forward industries.4/ This is created in dealerships, repair facilities, and gas stations, as well as in the financial intermedianes and insurance companies that broaden the market by providing financing and risk sharing. Therefore, the automotive industry has proven to be an effective vehicle for industialization in many countries, and GOC needs to make a concerted 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 strategy because road tLansport is becoming more efficient in handling goods for short to medium distances relative to other modes of transportation. Even though there is concern regarding road capacity in China,5/ road transport has been increasingly used in recent years to the extent that in 1988 this mode of transport canied 75 percent of goods in total tonnages and 19 percent in total ton-kilometers, increasing its share over the years from 70 percent and 9 percent in 1980, respectively. In this context, an important element of the strategy toward national market integration is that of ensuring an adequate supply of types of vehicles that are consistent with the transport strategy, thereby removing a major physical constraint to internal trade. I/ Karmokolias, Yannis, Aomove Indony, Tend and Prope for Iwsnet in Devlping Coun*e, IFC Discussion Paper No. 7, 1990. 2/ The definition of the term amotive industry3 is at the three-digit level d includes fnal asembly and 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 mileages per capits is only 0.91 mder per person and ane of the lowest in the vwrd-the compartive fige for the United States is 26.1 meters; Frnce, 14.6 meters; India, 2.2 meters. See China's Road Sratgy In Yer 2aao, by the Sino- n Joint Study Team, 1990 - 3 - 1.7 The development of the automotive industry and the resulting increase in the use of automotive vehicles in urban areas yield negative externalities that cannot be ignored in 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 total nitrogen oxide emissions, and 75 percent of total hydrocarbon emissions in Beijing.6I These levels of pollution compare with OECD countries respectively at 66 percent, 47 percent. and 39 percent enjoying a significantly higher level of motorization.2/ This problem w continue to worsen as the number of automotive fleets continue to grow and the 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 firther degradation of air. 1.8 Traffic congestion is already becoming a major problem in large Chinese cities with inner-city taffic rarely exceeding 15 kilometers per hour (kn/h) and slowing down to 8 km/h in peak hours. In some cities, bicycle speeds are often observed to be higher than other automotive modes, especially public transport.1/ The experience of many cities in the rapidly growing economies of Asia indicates that traffic congesdon could become even worse, with increased levels of motorization and associated economic costs already amounting to as much as 1 percent of gross national product (GNP).2/ This datum suggests that GOC should identify the desirable level of automobility and possibly constrain the growth of the automotive fleet in line with urban development stategy. 1.9 This report intends to examine these challenges facing GOC in formulating industial policy and strategy by using the automotive industry as an example. Although the report's recommendations focus on how to address these issues in the context of this particular industry, these considerations should be equally applicable to other subsectors. This seems an appropriate subsector to study because the industry is at a relatively early 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 pattern of economic development in China over the rest of this decade, and beyond. Finally, it is fittng because examination of the current strategy has revealed senous problems that need to be addressed with some urgency. £I Ma Ra et al., Vd ei Emission Poluant Control and Tedical Measww in haina, Te Hhway Researwch Insfiite Ministy of Comation, PRC, 1990. 2/ Asif Faiz, Kumates Sinba, Michal Walsh, and Amiy Varma, Auomote Air Poudtion, The Wodd Bank Working Papr, 1990. I/ Urban hanspor in Ausl. An Operational Staegy for the 1990s, The World Bank Yellow Cover Dra. 9/ Op. cit., p. 21. In Bangkok, for example, traffic often oomre to a complte stanstl. Peak hour traffic speeds im central Ban*ok aved 2 kilometers per hour in 1990 before mpro to 9 kilometers per hour in 1993. - 4 - B. DEVEOPMENr OF THE AUTOMOTIVE INDUSIRY IN CHNA 1.10 The development of the Chinese automotive industry can be broken down into two phases that are distinctly contrasted with respect to prevailing economic rationale, sector objectives, te^'hnology development, product emphasis, and growth rate. The first phase-from 1950 t, 1980-established the foundation of the industry. The prevailing economic rationale was self-sufficiency, and the industry mainly relied on indigenous technology, 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 to supplement railroad transport. The second phase-since 1980-has marked the modernization of the industry under the umbrella of the open-door policy and economic reform. The Chinese automotive industry launched policy initiatives to foster industry development and actively recruited foreign technology and capital, which resulted in impressive growth and founded the modem passenger car industry. The following sections outline GOC's strategy toward the adtomotive industry in both phases and trace the growth and development of the industry. First Phase: Beinnin of the Domestic Industry 1.11 The Chinese automotive industry was first established in 1953, when GOC broke ground for the First Auto Works (PAW) in Changchun, Jin Province. FAW was designed to produce 30,000 five-ton trucks annually and comprised several plants to produce parts for a single truck design. Technology, equipment, and training were acquired from the Soviet Union, and the first -Riefang' trucks rolled off the assembly line in 1956.1W/ The successful launching of FAW gave government planners the confidence to expand shortly afterwards into other segments of the industry. As part of the "Great Leap Forward," initiated in 1958, GOC diversified the automotive industry into the production of light trucks (at Nanjing), heavy trucks (Jinan), and passenger cars (Changchun and Shanghai). Later, in the early 1960s, GOC further expanded the sector by beginning to produce buses on the "Jiefang' truck chassis in plants scattered around the country. 1.12 In 1965, another large project for the Second Auto Works (SAW) was initiated at Shiyan, Hubei Province, initially for the production of medium-size trucks. The decision on this remote location was primarily dominated by military and political consideration to shelter the heavy industry from possible foreign intrusion and to develop inland and coastal areas equitably. Owing to the then souring relationship with the former Soviet Union, GOC set out to construct this project solely with indigenous technical capability. As a result, GOC soon had to struggle with technical difficulties and limited resources; consequently, SAW could begin to produce vehicles only a decade later. It was only in 1980 that SAW reached full capacity production of the "Dongfeng" truck, which helped 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 technology importd in 1953 was itslf a dedvative of the America truck desipns of the 1920s. - 5 - 1.13 During this phase, the automotive industry predominantly produced trucks. Passenger cars (sedans only) manufactured with domestic technology comprised less than 1 percent of total vehicle production. This was in line with the automotive indu'try's development objective of supporting the transport strategy by providing a vehicle fleet to share cargo demand with the railroad transport system. 1.14 Absent was any sectoral policy to deliberately exploit economies of scale and locational advantages, which resulted in the dispersion of capacity across the nation. The spatial 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 the market,U/ the size of which would be hardly enough for one efficient plant. The spatial dispersion of capacity across the country also impeded the diffusion of technological knowledge and contributed to the backwardness of the Chinese automotive industry. This dispersion and fragmentation of capacity was due in large part to: the tendency of provincial and I-:A governments to establish their own industrial bases; the reluctance to transfer resources at the arbitrary prices posted by the central authorities; and conflicting objectives among central and local governments. The lack of proper and timely sector policy left an indelible imprint on the Chinese automotive industry. The industry today has yet to go through the ordeal of restructunng before shedding its past legacy and attaining an efficient scale of production. Second Phase: Modernization Drive 1.15 Since 1980, the second phase of the Chinese automotive industry experienced significant changes that lead to the modernization of the industry, which were spurred by economic reform and reinforced by a proactive sector policy. GOC's intention to make the automotive industry a "pillar industry" was made public and repeatedly confirmed: The China National Automotive Industry Corporation (CNAIC) was created to raise the effectiveness of industrial organization; large investment projects were initiated and implemented; and foreign collaboration in technology and capital was actively sought. As a result of policy changes, the industry showed rapid growth, breaking new records in vehicle production, expanding its product lines into newly found market niches, and reaching the 1 million mark in 1992. The outlook for the automobile industry remains promising. China National Automotive Industry Corporation 1.16 For the Chinese automotive industry, the establishment of the China National Automotive Industry Corporation (CNAIC) in 1982 marks one of the most visible and significant organizational changes. CNAIC was established to address the compartmentalization of the planning bureaucracies (central ministries, provincial governments, 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. - 6 - rather than traditional planning bureaucracy boundaries. Five companies were each concerned primarily with production of finished vehicles with one or more of the major plants 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 the liefang chassis. Three companies specalized in parts production, marketing services, and foreign trade. The CNAIC system grew rapidly. At its heyday of power in 1983, 291 enterpises under 10 ministries and 27 of 29 provinces participated in the system; the enterprses 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 of decisionmaling authonty among CNAIC, its subsidiary companies, and the established ministerial and provincial bureaucracies was not made clear. Officially, CNAIC was supposed to become an independent economic entity under the "guidance' of a centralized plan. CNAIC was not intended to be a state administrative organ mandatorily subject to and involved with the planning and resource allocation system, which is a source of power in the planned economy.l2/ In reality, however, CNAIC seems to have replaced the cental administrative bureau that had oversight authority over the automotive industry by getting involved with planning and overseeing the implementation planning efforts of the State Plar.niing Commission (SPC) in some enterprises. Yet, CNAIC did not gain effective control over aU participating compaimes because its plan sometimes conflicted with the interests of those provincial governments that retained nominal ownership of the production plants themselves and were responsible for physically providing resources that were often in short supply. CNAIC remained influential, however, through its easy access to SPC. CNAIC also continued the effort to centralize the decisionmaking process, especially for the medium- to long-term panning of the industry, by tightly monitoring the investment projects inifiated by provincial governments. 1.18 Counter to this centraliation effort was the trend of economic reform toward the devolution of central authority to provincial governments and enterprises, and eventualy to the market, resulting in the waning of CNAIC control over the industry. In 1987, CNAIC was disbanded and reformed to act as a federation of nationwide automotive enterpises, becoming far less powerfil until regaining in 1989 some of its authority and control over investment decisions. Since then, CNAIC remains active in its facilitative role by rendering support services to the enterprises, by coordinating research and development (R & D) and technology transfer among enterprises, and by carrying out limited administrative functions on the issues delegated from the State Council. It also maintains a supervisory role at the Technology Institute and Research and Quality Centers and reains major ownership of the Auto Parts and Accessory Corporation, the Nanjing Motor Corporaion, and the Automotive Industry Imports and Export Company. Even though the authonty of CNAIC waxed and waned in tandem with GOC's approach to sector management (centralization, decentralization, and recentraliation), CNAIC remains influential in the industry in its advisory role to SPC and continues to be useful to GOC as the only organization fully focused on the automotive industry. 12! Zgguo Jixe, 1988. -7- Pillar Industry 1.19 In recognition of the potential role of the automotive industry in fostering economic integration and growth, GOC accorded -pillar industry- status to the automotive sector in the outline of the Seventh Five-Year Plan (FYP, 1986-90).j/ This status provided a strong stimulus for the development of the domestic industry, entitling it to financial benefits such as soft loans, a preferential tax regime (e.g., the abolition of the special consumption tax), easy access to foreign exchange and simplified administrative procedures for several activities (e.g., obtaining construction permits, hiring or firing workers, foreign travel of employees, and increased share of R&D activities undertaken by state-controlled institutes). Whether the government policy of preferential treatment was effective in attaining the development objectives needs to be discussed; however, promulgating the pillar status itself instilled confidence into the industry and investment projects. Lare Investments 1.20 During the Seventh and Eighth FYP (1991-95) periods, large investments have been initiated and implemented for the automotive industry. The Seventh FYP alocated Y 11.7 billion to the CNAIC system.l4/ An additional $460 million of foreign capital was utilized in the industry,l5/ 60 percent of which was derived from mixed 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 modern Chinese passenger car industry at Shanghai-Volkswagen (SVW), Tianjin-Daihatsu, and Beijing-Jeep.16/ In parallel with new passenger car projects, the Seventh FYP continued to support the truck segment with seven projects designed to develop the production capacity and to upgrade the technology of heavy and light trucks. The implementation of most of the truck projects, however, was delayed, and these were carried .er to the Eighth FYP. 13/ Electronics, machine tool, and cement industies are other industr desgnated for the pillar-industry stats. 14/ The CNAIC system does not include automotive investments by the Ministry of Aerospace and the Ministy of Ordnamce Industry, which ae planed sepately. 15/ This amount does not include the FAW-VW or SAW-Citroen joint ventures, for which contracts were signed in the final months of the Seventh FYP period. Note also that direct foreign investment is not included in the total investment made during the Seventh FYP as recorded in China, because the foreig funds were used to import eqipment and mateals and tbus are not contsued as competig for domestic resource allocaions. 16/ Beijing-Jeep p-oduces a multpurpose vehicle, which i8 used both for passenger and as a light cargo vehicle. It is also used as a military vehicle in China. - 8 - 1.22 The Eighth FYP quadrupled the total allocated investment in the automotive sector to Y 46 billion, and reinforced the emphasis on the passenger car segment with two thirds of the planned investment in the Eighth FYP allocated to that segment. Two major projects for passenger-car production-Volkcwagen-FAW and Citroen-SAW-started production during the early years of the Eighth FYP. In addition, the Eighth FYP highlighted the light-truck segment and also began to recognize the importance of upstream segments-both parts and components-and related industry-as prerequisites for raising the local content. This was accomplished by setting aside a significant share of the investment. Table 1.1 provides a detailed breakdown of the Eighth FYP investments in the automotive sector. Table 1.1: EIG FIVE-YEAR PLAN INVESrM IN THE AuTooTIv SEcrOR Y billion Carryover from Seventh FYP 4.40 Paseenaer Car Proiects Cars 13.90 Parts and components 10.60 Tianjin engine 1.60 Forming complete set 2.50 Minicar projects 1.64 Subtotal 30.24 Heavy-duty truck 0.28 Light-duty truck 6.45 Bus 0.86 Die and mold 1.60 R & D and training 0.88 Other 1.50 Total 46.00 Infusion of Foreign Technology and Capital 1.23 Another major force shaping the development of the Chinese automotive industry during the last decade has been GOC's active recruitment of foreign collaboration. Foreign collaboration has brought about capital, technology, and management practices that have become the driving force behind the modernization of the industry. By the end of 1990, the Chinese automotive industry had received about $460 million of foreign investment; even lager investment-$6.85 billion-is anticipated in the Eighth FYP. In the earlier years of the industry's development, the prevalent form of foreign collaboration was that of acquiring only hard technology through license agreements. Facing a large need for investment capital, however, the govemment in recent years encouraged the - 9 - bundling of capital with technology and management partcipation-in the form of the joint venture-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-venture projects 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; and technology transfer agreements with Cummins and Steyr. Collaboration agreements have also been concluded recently for the production of minicars between Chongqing and Suzuld and between Guizhou and Fuji. Most of the technology transfer agreements have been concluded with European firms. American firms have only a marginal presence in the assembly industry. Japanese finns also remained relatively passive in spite of their active role in the world automotive industry, but recently initiated two major joint-venture agreements for the manufacture of minicars. 1.25 There is also considerable, if not enough, foreign participation in the automotive components sector. Table 4.4 in the Annex gives a list of some of the key projects 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 automotive sector in China has made significant strides by achieving high growth of the industry, substituting imports, establishing domestic bases for the passenger car industry and diversifying into light trucks. 1.27 Since the early 1980s, the annual output of vehicles has increased more than four times, rising from 222,300 in 1980 to touch the 1 million mark in 1992 (Tble 1.2) ./ This rapid increase in production is attributable to new projects and better performance from existing projects on the sWpply side and the rapid growth in the Chinese economy on the demand side, especally in the light industry, township and village enterprise (rVE), and collecdves sectors. The 1992 total production of the Chinese automodve industry is equivalent to the total automotive production in Bzil (960,115 units) and Mexico (989,373 units) in 1991 and the Republic of Korea (1,083,655) in 1988,J1 even though passenger car production in these economies is much higher than in China: 745,274 units in Brazil in 1991; 720,384 in Mexico in 1991; and 872,074 in Koea 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 United Stes, Inc. - 10- 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 1.8 1980 222.2 135.5 5.4 1985 443.4 236.9 5.2 1986 372.8 218.9 10.8 1987 472.5 299.4 17.9 1988 647.0 364.0 36.8 1989 586.9 342.9 35.5 1990 509.2 269.1 42.4 1991 709.0 370.0 80.0 1992 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 of the 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 300.000 High-level car (2.5-4 liters) 20,000 Medium-level car (1.6-2.5 liters) 155,000 Poapular car (1-1.6 liters) 75,000 Minicar (30 passengers) 50 70 Source: CNAIC. are levied as a policy instrument designed to encourage localization.12/ The level of tariffs on imported components is reduced as an enterprise achieves higher localization rates. With a localization content of 40 percent, the tariff level is reduced to 80 to 100 percent. Localization programs are also encouraged by simplified administrative procedures when an enterprise achieves a threshold level of domestic content. Enterprises with a 40 percent localization content can import CKD parts without license and, with a 60 percent localization content, enterprises are not subject to production quotas from SPC.13/ 3.22 Another incentive for raising domestic value-added comes from the restricted availability of foreign exchange. Joint ventures are required to balance expenditures for imported 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 measured as the ratio between the value of locally made components at imported CKD base-year prices to the value of the car at the same base-year price. Thus, it is a quantity index weighted with base-year prices, in which the base year is the year during which the vehicle was completely assembled with i-poRd parts. 13/ An automotive component is considered locally produced if less than 40 percent of its components are imported. Thus, a car with 60 percent localization could in theory have as little as 36 percent local content - 43 - a solution to this limited access to foreign exchange. However, during early years of operation, enterprses find it very difficult to match export earnings to foreign exchange expenditures for raw materials and intermediate goods. As a result, automotive enterprises are sometimes allowed to undertake measures such as selling vebicles partly or completely in foreign exchange, or perhaps requesting government foreign exchange quotas.4JA 3.23 The import tariff and nontariff barriers may create a bias against exports because domestic producers find it easier to sell at high prices on the domestic market than at low prices on the foreign markets. In an attempt to offset this bias and to promote exports, the government has established a number of favorable measures: financing facilities, bonded warehouses, direct exporting privileges, and the right to retain foreign exchange. Although these measures are helpful, price and product quality remain in most segments as major obstacles to export. 3.24 While there is some reason to protect an industry at the outset, any prolongation 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 barriers would be necessary if China reenters the GAIT agreement. Thus, a new trade policy that exposes 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 the government policy instruments and practices such as administrative procedures, taxation, government purchases, and financing. In the past, overall demand control was done through the allocation of production targets together with restictions on imports and limits on domestic consumption to the planned availability of vehicles. In addition, GOC has exercised 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 China additional 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. - 44 - procedures such as budget allocations for social purchase,1§/ as well as by requirements for vehicle purchase permits and registration. These administrative procedures have the effect 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 on top of an already high price-level. For example, a purchaser of Shanghai Santana is required to pay, in addition to the retail price of Y 127,400, taxes totaling Y 46,370 that comprise the following: the purchase fee of Y 7,920; the social fee of Y 23,000 that goes into the fund for road construction, environmental protection, and other servces related to cars; the special consumption tax of Y 15,000; and the capital fee of Y 450 charged to enterprises buying cars with working capital. These high taxes further discourage the ownership of automotive products by buyers who are much more pri^e sensitive than those who are paying out of the government-allocated budget. 3.26 Contrasted with the measures restraining demand, GOC tried to stimulate slow market during austerity measures. Under the "rescue purchasing plan,"l7/ the State Council approved the People's Bank of China to provide Y 350 million in 1989 and Y 1 billion in 1990 in loans to MOME. These loans were intended to buy about 10,000 units that have been stockpiled as inventory in automotive joint-venture companies. The purchase vehicles were sold to govemment departments that 'urgently" needed them. However, this rescue plan was a stopgap measure, and the government adjusted down the purchase volume as the situation improved with enterprises. 3.27 In recent years, because an increasing share of demand comes from the private 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 and to GOC's measure to allow private individuals and enterprises to purchase automotive vehicles without permits. As a result, the share of government purchase decreased. For example, in 1992 private purchasers accounting for 20 percent of the domestic market and central government purchases had fallen dramatically to only 16 percent of the planned production.11/ The remainder of the market being made up of other social purchasers such as other government agencies, stte-owned enterprises, schools, factories, and hospitals. In the coming years, however, the domestic market will increasingly be led by nongovernment consumers. 3.28 The increasing share of prvate ownership indicates that China has to face the problems associated with motorization, and demand management policy needs to reflect changing societal needs. International experience shows that typically an economy, in the course 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, which is usually allocated by the Ministry of Finane. In addition, they are required to have permits for ownership. 17/ COina Dafy, March 20, 1990. I/ Cenal government purchases refer to purchases made through the Ministry of Materals and Equipmet and CNAIC. - 45 - transport services toward increased private ownership of transport vehicles. The rate of automotive diffusion first speeds up when per capita incomes reach the $500 markj1I Another benchmark for a structural change in automobile ownership comes at the point of economic development at which automobile ownership reaches 50 to 100 cars per 1,000 people, "when its economic efficiency destroys alternative means of transport like railways" and the automobile becomes a necessity.2Q/ The increased level of motorization creates negative externalities such as pollution and congestion, and demand management 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 with loost!1y defined supervisory responsibility among CNAIC, provincial governments, cental government ministries, and the automotive enterprise Group Corporations, all of which directly report to SPC (Chart 3.1). The provincial automotive group corporations play the second-tier administration for part of the industry, while municipal or county governments also get involved in second- or third-tier administration for small enterprises. The involvement of many administrative agencies with diverse sectoral responsibilities often leads 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 dedicated to the automotive industry and remains a focal point in the sectoral administration, even though CNAIC's power has waxed and waned in tandem with centralization and decentralization of economic decisionmaking processes. CNAIC still has a strong say in national regulatory decisions affecting the sector, is active in sectorat planning, oversees the implementation of SPC schemes in some enterprises, and coordinates planning for some segments of the industry (see Chapter 1). Three automotive firms (SAW, PAW, and the China National Heavy Truck Corporation) that are under direct SPC control are, in practice, supervised through CNAIC, because plans for these firms are communicated to and from SPC by CNAIC. Moreover, CNAIC is the main investor in the Nanjing Motor Corporation and the Autoparts and Accessory Corporation. Furthermore, CNAIC has established three research and training facilities (in Tianjin, Chongqing, and Wuhan) and a wcAkly trade publication. 3.31 Beyond these fairly clear roles, however, CNAIC could manage to exert limited influences over other sector agencies. For instance, Beijing Jeep, the Shanghai Automotive Industry Corporation, and Guangzhou Automotive Manufactunng, which are under municipal government authority, must seek CNAIC approval of their plans before submitting them to the State Council. Two corporations-for sales and service and for materals and supplies-report to both CNAIC and other govemmental institutions concerned with the allocation of materials and goods. 12/ Ueno, Hiroya and Hiuomichi Muto, Me Automobile Industry in Japan,' in Kwzuo Sato (ed.), Industny ad 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 Seric ICot ~ ~ ~ ~ ~ oroato I Company CenterI Corporation chima urbantrrie Nrnba BacheSae 1 . 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 2t Astebttwe rite - 47 - 3.32 At the central government level, at least eight ministries are involved with automotive production with the Ministry of Machinery Industry (MMI) and have the lion's share 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 the jurisdiction of MMlI, produce 75 percent of the industry output value, and employ 1 million people. Other ministries that have jurisdiction over automotive production plants include those who have transportation or construction responsibilities and may have genuine needs for special vehicle producing capacity (for example, the Ministry of Communication, which is responsible for transportation, and the Department of City Construction). The reason for the involvement of ministries other than MMI could be owing to the fact that they diverted part of the production capacity that was initially built for other purposes to produce automotive and components. For enterprises other than those directly under the control 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, four at the central level and five at the provincial level.21/ Their aggregate contribution to the industry is half that of the total industry output. Their formal industrial organizational structure, however, is difficult to discern as different arms of the government make various claims on these corporations. The initial motive for creating such a group through horizontal linkages was to guarantee input supply, thus reacting to the reduction of mandatory planning that had previously assured a producer of the input necessary to make planned output. A group is usually comprised of a core enterprise (for example, FAW for Jiefang Group), 'close-link' enterprises that receive from the core enterprise either the chassis for their bus or truck production (or sometimes even fund for technology renovation), and 'loose-link' enterprises that are contractually related with the core by supplying components and parts. There are altogether 206 close-link enterprises associated with the core enterprises. 3.34 The relationship between the core enterprise and the close-link enterprises are not as close as the one observed in Japan or Korea because the ownership structure and the supervisory links are ambiguously defined. For example, SAW, the core of Dongfeng Group, 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 also controls their investment decisions and financial planning. It is the provincial and local governments to which the linked enterprises are responsible for their performance under the contract responsibility system and owing to financial and tax obligations. This ambiguity in the governance of enterprises is because core and linked enterprises are legally independent entities, while provincial governments remain influential over resource I/ They are Jiefag Automotive Group Corporation with FAW as the core plant, Dongfng (sometms caled Aeolus) Automotive Group Corporation with SAW as the core plant, China National Heavy Tnzck 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, Beijing Autonotive lidustry Corporation, Shanghai Automotive Industry Corporation, and Tiazijin Automotive Idstry Corporation. - 48 - allocation. This ambiguity restricts the effectiveness of the Group Corpo ation as an industrial organization. 3.35 The share of control of each supemrision agencies varies with industry segments: the CNAIC system (including central-level corporations), local governments (including provincial corporations and governments), and ministries. In 1989, out of 166 enterprises, 19 were under the supervision of CNAIC; 133 were supervised by different local government bureaus; and the remaining 14 enterprises were controlled by other ministries (Table 3.2). The share of production, however, under the control of each supervising agency varies with the industry segment. For example, the CNAIC system remains strong by controlling up to 90 percent of the total national production in the traditional mainstay of the industry-heavy and medium truck segments-while provincial governments advanced rapidly in newly opened markets such as minitrucks and passenger cars. For highly fragmented bus and special vehicle segments, provincial and local governments 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, Agncultural Machinery Industry Bureau, Agricultural Machinery Products Bureau, Automobile Industry Bureau, etc. 3.36 As a result of the presence of multiple supervision agencies, the enterprise management has tr deal with several agencies in its conduct of the business and could face conflicting signals. With the limited exception of central corporations, enterprises report to local finance bureaus under the contract responsibility system to pay tax obligations, to obtain credit, and to negotiate profit allocation. Enterprises also have to assure support for 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 or a provincial planning commission from CNAIC and Group Corporations for parts and components to be supplied to the core assembly enterprise outside the province. - 49 - Enterprises must also seek financing from local finance bureaus and corporations. This administrative complexity breeds the incongruence of goals among supervising agencies and the inefficiency of enterprise management. G. LOCAmzATxON PROGRAMS 3.37 Concem over the scarcity of foreign exchange, as well as a desire to substitute local production for imports, has led to local content rules being applied to assemblers and major component producers. They are linked to production quotas for joint venures 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 cost of their vehicles high, by preventing full use of capacity. 3.38 To help enterprises reach high shares of local content, the government also protects domestic producers from overseas competition and ensures the supply of inputs. First, import of the vehicle to be localized is forbidden. Second, the entire production structure (vehicle assembly and component production) is under government guarantees and controls. The government guarantees the availability of domestic raw materials, and provides foreign exchange quotas for the raw materials and parts permitted to be purchased abroad. Enterprises receive some raw materials at subsidized prices and some local bank financing at subsidized rates. 3.39 In the case of Shanghai Santana, the localization process went slowly in the early 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 the mass-production level. This implies manufacturing an acceptable prototype and then mass producing it according to the same quality standards.22/ Currently, the local content is 70 percent. 3.40 At a low production-volume, the unit cost of localized parts is high by international standards owing to inefficient producdon scale. Thus, increasing local content initially increases the cost of assembled vehicles. Only after the vehicle assembly lines reach large scales of production and requre large supplies of parts, does the unit cost of parts go down substantially. In this regard, the success of the loclization program depends in large part on the success of restructuring assembly industry on an efficient scale. WV Before a filly localy made product is ma produced, the sample has to be ceitfied as meting the required techiad standards. When tie sample has been accepted, the product is eatered n the calculation of the localization rate at the saVple level. When the product is then mass prodced, it is entered in the localization rate at the mass-production level. Because of the delay to move a product from prototype to ms production, the localization rates at the sample level are typically higher tha the rates at the mass-producion level. For example, in the case of the Santana car, the loclition rate was 70 percent in 1990 at the sample level, compared with 53 percent at the ma roducon level. - 50 - H. FOREIGN DIRCr INVESTMENT POUCY 3.41 For external financing and transfer of production and management technology, policy measures were establisheea to recruit multnadonal corporations (MNCs;, especlly in the passenger car segment. The objective of external financing and management sharing has been achieved as all joint ventures are 'equated'-that is, the foreign investor has to bring at least 25 percent of the total capital, and managerial responsibilities ae shared in proportion to the capital. To encourage such participation of foregn enterprises, the following incentives were provided: (a) tax holidays for three years and reduced income tax for an additional two years and (b) tariff reduction on imported parts. 3.42 In return for these incentives, joint ventures were required to meet localization targets and to balance foreign exchange expenditure with foreign exchange eaniungs. Even though localization delayed full-scale production and hampered cost minimization, on the side of the joint venture, it progressed at a fast pace (see Table 4.5 in the Annex) and reached 70 percent for Shanghai Santana in 1992. The societal costs for the locazatin and the recruitment of foreign investors were high because joint venmres were protected from import of complete vehicles through foreign trade policy, given reserved market segments through entry policy, allowed for monopolistic pricing through pricing policy, supported with guaranteed purchases from the government during the period of austerity and slow sales. These measures essentially have ensured profitability regardless of performance and, moreover, sheltered recipients from economic discipline. The blind continuation of the policy can lead to MNCs' rent-seeking behavior and can betray the initial objective of raising industrial efficiency and competitiveness with the 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 enterprise governance system needs to increase the autonomy and the accountability of enterprise management so that inefficiencies imbedded in Chinese enterprises can be addressed. 3.44 The CRS is an agreement in regard to performance and incentives between automotive enterprises and the government. If the enterprises were to meet the financial performance target specified in the contract, then a preagreed-upon share of profits could be retained after submitting a fixed percentage of profit as tax to the government. This system was regarded as progress from the old system because it completely separated the - 51 - fiscal contribution from profit retention.23/ It was designed to promote growth and improae the economic performance of enterprises by holding them responsible for production capacity, investments, and technology development as well. The Ministry of Finance and SPC are the counterparts for the agreement because the former is responsible for 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 accountability of enterprise management because it is not neutral to enterprises and levies different tax rates from contract to contract. 3.45 Despite progress made through the CRS, Chinese automotive enterprises still have 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 FAW and SAW is highly centrlized and follows functional lines. For example, one executive production manager is in charge of all the production operations of the entire auto works with 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 Auto Works, and all procurement is also handled by the central procurement group of about 1,100 persons. This highly centralized organizational structure greatly stretches the span of managerial control. 3.47 The centralized functional organization of the Auto Works is not appropriate to the large size of the Auto Works and the diversity of its product categories. The special characteristics and requirements of specific plants and products are not well met in such a system. Nor is this organizational structure well designed to separate out the well- performing units from ones that are less successful. A more divisional organizational structure organized by product groups would be more suitable in allowing for an optimal management span and in converting product groups into profit centers. 3.48 (b) Management System. The centralized organizational structure mirrors a hierarchical and rigid management style. Management at both FAW and SAW is divided into three levels. The first level comprises senior management who makes all decisions on production activities. The second level translates senior management's decisions into operational 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, mainly because the Ministry of Fmnnce was combining two functions. The Ministry intervened as both owner of large public enterprises and tax collector for the State. In the early stages, when all the enterprise profits where submitted to the State, both contributions were merged. As early as 1978, a contract system was established, separating out retained earnings from government contributions, which were specified in fixed amounts. However, no differentiation was made between fiscal and owner contributions. 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 a percentage of profits and to separate additional govermnent remittances. - 52 - 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 production volume, 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 systems that 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 objectives and individual commitment and performance is rewarded. Presently, the remuneration of employees is linked solely to experience and responsibility, and does not adequately recognize individual performance; a worker's basic salary is determined by a grid of experience and rank. Additional remuneration is also provided for managerial and technical 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 specific achievements 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 strategic planning, marketing, management information systems, and project development. Strategic planning involves analysis of future trends, opportunities, undertaking of long-term corporate planning, tracking competitor performance and initiatives, performing business analysis, and undertaking new program planning. Current planning practices at FAW and SAW-production planning, plant planning, product planning-is not integrated and consists largely of scheduling and control functions. The lack of effective management information 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 reduction and 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 enterprises have been shielded from all forms of competition. In such a noncompetitive environment, - 53 - it is rational for enterprises to place primary consideration on the achievement of production targets, thus relegating cost and quality considerations to secondary importance. 3.53 Many inefficiencies in the Chinese enterprises are rooted in the absence of management autonomy, owing to the multiple functions of regulation, supervision, and ownership currently exercised by the overseeing government agencies. Autonomy would be enhanced if the legal framework of ownership were put in place and the legal and economic entity of the enterprise were established. However, balancing autonomy with management accountability needs more than simply setting up the ownership stucure in the form of joint stocks because the financial market, in its current stage of development, is yet unable to wield the disciplining influence. - 54 - 4. PERSPECE ON A STRATEGY FOR THE AUTOMOTIVE IUSIRY 4.1 If the objective of GOC is to develop an internationally competitive automotive industry, GOC needs to assess the comparative advantages of the Chinese industry today and its likely future development. It also has to give considerable thought on the government's role in shaping the future of the industry because only balanced and disciplined intervention would lead to the outcomes that government intervention intended to achieve. A. CoMPARATIVE ADVANTAGE 4.2 The comparative advantage of the Chinese automotive industry measured with ex-factory prices shows a dualistic picture with a highly uncompetitive passenger car segment and a highly competitive commercial vehicle (truck and bus) segment.l/ Domestically produced passenger cars are not cost competitive at this time compared with internationaly produced vehicles of comparable quality and features, as ex-factory prices range from Y 100,000 to Y 125,000 for cars with engine sizes of 1.6 to 1.8 liters and with no microelectronic features. For example, Shanghai Volkswagen, the largest domestic producer and arguably the most efficient one, recently announced as part of its t;ompetitive strategy 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 border price of comparable cars would be about $7,000,2/ implying a cost differential of 33 to 100 percent. On the other hand, the China-made five-ton medium Jiefang truck, which is sold at Y 30,000 (equivalent to $3,500 to $5,000 depending on the exchange rate), is about one 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 Chinese amotive products, especially trucb, s mny decades beind intemational standards. A senous discussion 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 Brazilian manufater of Santma model quoted a retail price of $5,600 per car to a lare buyer in the Middle East. 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 account to be as high as $1,000. (See Capital-Intensive Indu d in Newly Indusirkilizing Countries, The Case of 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 China due to relative prices and needs much more refined treatment than this sector repor intends. For the sake of discuwsion, $7,000 is used to take account of cost escalations and subsidies. - 55 - 4.3 The cost competitiveness could be explained in terms of (a) production scale, especially when it is below the minimum efficient scale (MES); (b) factor prices (raw material, capital, and labor costs); (c) technology efficiency (learning curve, production and product technology, and management); (d) short-term phenomena, such as capacity utilization and foreign exchange fluctuations; and (e) country specifics, such as work morale and culture. 4.4 China has favorable cost differentials in terms of some inputs, especially steel and labor. Free-market prices in China for steel are lower than international prices by 10 to 60 percent. Since nearly 9 percent of automotive inputs come from steel,3/ this cost differential could amount to 5 percent (rable 4.1). A favorable differential in factor price could be also expected in textiles and nonferrous metal inputs, which comprises 4.8 percent of the total product cost. However, this cost advantage may be eroded somewhat if energy and electricity prices are set to reflect actual consumption of resources. Also, China will have to pay high factor prices for rubber and plastic, which contributes to 5.6 percent of the product cost, owing to the backwardness of the domestic petrochemical industry; otherwise, China may have to import these inputs to avoid local cost disadvantage. Table 4.1: RAw MATErAL PIuCE COMrARTSON Free Market Price International Price (Y/ton) ($Iton) ($/ton)/a ($/ton) Rubber tire 1,640 280 189 300 Semifinished steel 1,168 200 134 469 Flat-rolled steel 1,621 277 186 469 Refined copper 15,893 2,719 1,827 2,339 4.5 China has a definite advantage in labor costs because the average hourly wage plus fringe benefits (bonuses, piece-rate wage, above-quota payment, subsidies, and overtime wage) is about $0.70 to $1.00 (according to a high estimate for Chinese workers in a joint-venture automotive producer), or about 20 to 30 times less than wages in advanced countries. However, productivity lags behind; the most efficient producer, Sharnghai Volkswagen, reports annual production of 9.5 cars per worker in 1991, which compares 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; Melvyn Fuss, Costs and Proaiity In Automobik Prodaion, Cambri: Cambid Univesity Press, 1992. - 56 - 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 10 percent, respectively. This impact is equivalent to doubling the production scale. Until the mid-1980s, the higher capacity utilization was a source of Japanese cost advantage over the United States; the utilization rates for Japan was consistently high, 0.95 to 1.01, while those 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 automotive industry cannot compensate for the structural disadvantages in scale economies and technology efficiency. Virtually all automotive manufacturers other than two medium truck manufacturing enterprises operate with suboptimal scale. This scale disadvantage is evident 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 to suboptimal 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 Chinese automotive industry has to surmount to become internationaRy competitive. The Chinese automotive industry, however, has a great potential with its growing domestic market and with opportunities to accumulate learning by doing experiences that are essential to efficiency and competitiveness. The development strategy of the Chinese automotive industry needs to address ways to resolve these structural impediments. D. MNMUM EFcIET ScALE 4.8 Minimum efficient scale in automotive production varies from one production 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 automotive manufacturing, 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 of production. Final assembly is definitely more labor-intensive than forging. Recent production technology revolution has aimed to r,duce reliance on labor with sophisticated robotics, leading to increasing capital investment and MES. In paraUel with this investment in equipment, production management has also become sophisticated, a development that benefits scale economies at lower production volume through flexible manufacturing. Today's industry wisdom is that the MES for final assembly of passenger cars is between 100,000 to 200,000 units per year.:J The scale economies are smaller for final assembly, and process cost declines only by about 10 percent with the doubling of 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 Ewpean Comw_*y, Oxford: Caredn Press, 1983. - 57 - and final assembly, the cost will decline by 10 percent as total volume increases from 400,000 to 1 million units and no more beyond this volume.2/ 4.9 The MES also varies with the product cost structure; scale economies are less in more labor-intensive truck assembly and greater in less labor-intensive passenger car assembly. The explanation is that components for trucks are heavier than those for cars, and truck producers have to accommodate a wider range of basic specifications (wheel base, engine, and transmission). The sheer weight of truck components requires larger teams at each work station on the assembly line, resulting in longer work-cycle times and lower line speeds. The variability of work content also contributes to reducing the line speed. In industry practices, heavy trucks usualy offer more customized engineenng than medium trucks, leading to more variability of work content and lower scale economy. However, the difference in scale economy is mostly confined to the assembly process and for upstream production processes (forging, machining, and press). Truck manufacturing faces scale economies similar to those of passenger car nanufacturing. 4.10 For verticaly integrated automotive production, the total cost-volume relationship is derived from a weighted average of scale economy for each production process. In integrated manufacturing, about 25 percent of the total cost comes from capital-intensive processes, another 25 percent from labor-intensive processes, and the remainder from sourced components. The weighted average of the above process costs indicates 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 of volume. For medium trucks, the MES is much lower than for passenger car and estimated to be 50,000 to 100,000 units. The MES would be higher for light trucks and lower for heavy trucks as component weight and labor content change. Inteonal comparison of profitability of truck producers shows that no manufacturer producing under 20,000 units per year is profitable and that production cost declines by 9 percent with the increase of production volume from 20,000 units to 35,000 units and further declines by the same with the increase fron 35,000 to 100,000 units.#/ 4.11 If this cost-volume relationship is applied to the Chinese automotive industry, the passenger car segment has a cost disadvantage of 20 to 30 percent compared with the international producers having the MES. This is based on the assumption that the 300,000 car market, which is the goal of the Eighth FYP, is split by four producers, each producing 60,000 to 70,000 units (which approximates Shanghai Santana production for 1992). This cost disadvantage could be an understatement, however, as there are already eight producers in the market, and each one's share could be lower than the above estimate. 21 1/ Iid. - 58 - 4.12 The MES of automotive production clearly highlights the structural problem embedded in the Chinese automotive industry as most producers, except for two medium truck producers, do not have the MES. For example, in the passenger car segment, there are eight producers for the market of a total of 250,000 cars in 1993. The largest producer, Shanghai Volkswagen, plans to produce only 100,000 units of Santana model in 1993, far below the MES. Passenger car producers have plans to expand their capacities during the Eighth FYP, but none of them plans to expand the capacity beyond 150,000 units per year during the Eighth FYP. This already constitutes overinvestment for the market because aggregate production capacity of 600,000 units already exceeds the production target of the FYP and may suffice until the end of this century, at which time the market is forecasted to reach 700,000 units per year. The sector has structural problems because it requires a much larger market of 2 million (which seems impossible within a decade) to accommodate eight producers with MES production while none could be an MES producer with the market size expected in near future. This structural problem sets a strong case for industral restructuring. 4.13 The commercial vehicle segment is not any better than the passenger car segment 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 to expand the capacity above 100,000 units per year. Challenges to this segment are in rasing quality and modemnizing technology. For the light-truck segment where the MES is larger than that for medium trucks, the market already, however, begins to mirror the structural problem in the passenger car segment. There are 20 producers in the market size of 300,000 units in 1993; many of them produce under 10,000, a scale that will hardly yield competitiveness even vith the low labor costs in China. Besides, the investment plans of larger producers (the largest is 60,000 units per year) reveal that none would be comfortably operating above the MES. Thus, the light-truck segment faces the same dilemma as the passenger-car segment: too many producers or too small market. Heavy truck and bus production requires higher labor content and low MES; however, it is evident Oth with the scale of 1,000 units per year (153 bus producers have a scale below 1,000, 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-term international competitiveness of an industry and is shaped by technological absorption and development, industrial organization and management, and a developmental focus. For GOC to formulate the medium and long-term development strategy of the automotive industry, it would offer valuable insights to review the general pattern of technological and industrial 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). - 59 - Table 4.2: FRiAGmENTAION OF PRODUCTION IN TRUCKS AND BUSES Total No. of Production plants Unit size Production Trucks Pickups 31,800 2 About 10,000 15,800 9 Below 4,000 16,000 Light 141,400 9 18,000-30,000 105,600 16 Below 10,000 35,800 Medium 139,800 2 Above 50,000 111,200 20 Below 5,000 28,600 Heavy 6,600 12 Below 3,000 6,600 Buses small 22,300 4 Above 2,000 12,700 42 Below 1,000 9,600 Medium 7,100 3 Above 500 2,100 33 Below 300 5,000 Large 1,600 2 Around 500 1,000 8 Below 250 600 City 5,926 5 Above 500 2,000 24 Below 300 3,900 Long-distance 11,542 3 900-1,100 2,929 33 Below 600 8,613 Phased Development 4.15 The first phase represents the primitive stage in which a country does not own any significant technology capability and relies on import for the tranWsportaton requirement. Even if there are attempts to develop indigenous industry, the level of technology is behind contempoary standards by two to three decades in the absence of foreign technology infusion. The domestic market is small, unsophisticated, and dominated by government and military purchases. The pnces are very high compared with the income level of the public; thus, automotive products are considered to be a luxury rather than a necessity. 4.16 In the second phase, the import of complete vehicles is substituted with the domestic assembly of imported CKD and SKD kits, and the domestic industry begins its attempts 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 andlor government 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 service tchnology and some specia are integrated in the concept palts 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. - 61 - assembly technology. Break-even volume could be very low (20,000 to 40,000) because initial domestic production is labor-intensive assembly. However, the costs in the industry remain high because the infusion of modem technology lacks depth and most components and parts have to be imported. 4.17 In the third phase of its development, the industry develops mass-production capability by mastering imported production technology or innovating new production systems. The product design remains simple, but production is carried out with high efficiency, high quality and low cost owing to technological absorption progressing to the automotive parts and components sector. Economies of scale of this integrated production cycle are much higher, reaching 200,000 to 300,000 units per year. Cost reductions achieved by localization, management gains, and scale economies expand the domestic market through reduced costs. Basic model changes are still beyond domestic capability and are less vital in this phase than the next because buyers still regard price and reliability as the key variables. Cost and scale economies become important tools in competition, and an oligopolistic industry structure emerges due to market shake-outs or government intervention. In this phase, the industry perfects its production system by organizing subcontractors and related industries around efficient automotive manufacturing. 4.18 The fourth and mature stage of development occurs when the industry finally has the capability to design and market its own products, and product innovation becomes the key success factor in the competition. Frequent model changes become necessary as the industry has to cater to an increasingly sophisticated buyer, and marketing comes to the forefront of the competition. In the United States, it was in 1922 that GM instituted annual model changes as a marketing innovation. Since then, all leading players in the world's automotive industry spend heavily in product development and marleting. Only a few economies have actually reached this stage because this phase requires substantial creative capability in technological and product development. The overhead costs of R & D, product development, advertising, and distribution imply that economies of scale in 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 has been used in the modernization of the industry in all latecomer countries. In Japan, the first foreign technology infusion took place in the prewar era when Ford and GM assembled knock-down parts, untl they ceased operations in 1939 owing to restrictions on imports of knock-down parts and a deteriorating political relationship. The second round of technology infusion occurred after the end of the Second World War, when MITI encouraged Japanese automotive producers to enter into formal tie-ups with European firms to acquire the technology for passenger car production. Thus, in 1952, Nissan initiated an agreement with Austin of England for assembly of CKD kits. In 1953, Isuzu and Hino entered into agreements with Rootes and Renault, resectively. Although Japan soon graduated from the foreign technology in the early 1960s, technology tie-ups with Western producers provided Japanese firms with the springboard for moderniation. In Korea, it was Ford (with Hyundai) and GM (with Daewoo) that provided the inital assembly - 62 - technology for the modem automotive industry in the 1960s, and Mazda and Mitsubishi joined the list of foreign collaborators as Ford withdrew from the market. In Brazil, it was Ford and GM that started assembly from the 1920s and dominated the market until the Brazilian government initiatives were put into operation for nationalization.2/ 4.20 Second, continued infusion of product and production technology has been required for maintaining the technological level of the domestic industry in line with the frontier of the world automotive technology. The strategies used for ensuring continued technological upgrading, however, have varied across countries with significant implications for subsequent industrial development. On the one hand, in Mexico and Brazil, the source of continued technological upgrading has been the presence of foreign capital in the industry. Access to this critical input of new technologies, however, implied that the ownership of the assembly industry passed on to the multinationals; nevertheless, the domestic economy achieved significant benefits through the growth of the components industry, technological dissemination, and export promotion through the distribution channels of the parent multinational. On the other hand, in Japan and Korea, the strategy used was to rely on discrete imports of foreign technology with minimal foreign ownership,1Q/ while at the same time developing indigenous technological capability that 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 that both restricted foreign capital and were unable to develop local technological capacity, as was, 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 exploit the delicate balance between scale economies, competition, and incentives to innovate. Typically, this has implied the existence of an oligopolistic set of vehicle assemblers in each product category. In the United States, the concentration of production in the hands of a few large producers and the elimination of the smaller producers was completed by the mid-1930s. The big three-GM, Ford, and Chrysler-have accounted for 95 percent of all automobiles built ever since. A similar pattem of concentration was observed in each of the main European countries during the 1950s and 1960s and went even further on a 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 public takeover of previously private enterpnses. 'Denationalization used later on means he process of control over private enterprises passing from Brazilians to foreigners. Both terms are commonly used in Brazil. Russel Martin Moore, Mukinational Corporations and The Regfonalion of Latn Ameican 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 progressed technologically. Toyota tried to establish tie-ups with Ford but had to take an idependent path as the tie-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 a 15 percent equi share of Hyundai Motor, Mazda and Ford hold 8 pert and 10 percent sbarsm of Kia. GM used to hold 50 percent of Daewoo Motor but plans to withdraw from Korea. - 63 - 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 automotive industry has implied that the organization and management of the production process itself emerged as a key variable in competitiveness. In the United States, it was Ford that revolutionized the production system with the moving assembly line and began to consolidate the industry by offering consumers automotive products at prices not imagined before. In Japan, it was the production system based on just-in-time (1 and total quality control that propelled Toyota into excellence in terms of cost and quality worldwidej.J In Korea, it was only after Korean producers mastered production technology and successfully organized subcontracting networks that they were able to move into the export market on the basis of cost competitiveness. In Brazil, the modern automotive industry began to be shaped only after the government initiatives of 'Program of Targets" established the domestic production system,l2/ by forcing foreign producers to link with the domestic component industry. A recent study has concluded that the dramatic success of Japan in the 1970s and 1980s can be attributed largely to differences in management techniques and to the effectiveness of the Japanese system of production organization.JI/ The inability of US and European producers to comprehend this valuable lesson in the 1980s led to erosion of their competitive advantage to Japan despite their superior product technology. Whichever route was taken, establishing an efficient and internationally cost-competitive industry organization is an imperative phase for the advancement of the industry. 4.23 Fifth, the nature of the "product' of the industry itself has changed from a piece of machinery to a complex package of tangible and intangible attributes that include quality, safety, and reliability. Thus, the success of a domestic industry can no longer be assured purely on technological sophistication but will depend on its ability to provide the entire product package. Thus, the domestic automotive industry also needs to develop a network of distribution and after-sales service centers as well as systems and institutions for ensuring quality control and safety standards. Lack of quality assurance can undermine the success of any automotive product, however sophisticated its technology. 4.24 The sixth, and final, major lesson that emerges is that some form of competition has been critical in forcing the industry to make the tnition from assembly technology to production technology. In Mexico and Brazil, the source of this competition came 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 antomofive assemblers were required to ra the local content to 90 percet in 1960 in rerm for protection of the domestic mauket. 131 Melvyn Puss and Leoard Wavemun, Costs and PoduiWty in A_nkl 1rduo. The ChaUenge ofJqnese 4c , Camridge: Cambwid University Press, 1992. - 64 - 1960s and early 1970s when Mexico adopted an import-substitution strategy, the industry soon 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 and Korean models allowed domestic producers time to learn and understand the imported technology, by protecting them from international competition. Vigorous competition in the domestic market was preserved-even in this phase. As the industries matured, they faced competition in the international markets. The model of discrete imports of technology followed by a protected domestic market was also attempted by India, with results considerably different from those achieved by Japan and Korea. The continued presence of vigorous domestic competition and the parallel development of technological capability seem to have been the key success ingredients that distinguished the Japanese and Korean models. D. VERTICAL DINTEGRATION AND SUBCONTACG 4.25 The Chinese automotive industry in 1992 represents a hybrid combination of the first phase of import substitution in isolation and the second phase of modernization through imported technology. Despite the modernization drive of the 1980s, large segments of the industry, especially those in the production of buses and trucks, continue to produce with obsolete technologies and uneconomic scales of production. Policies set by GOC since the 1980s of large investments and the import of foreign technology and capital have, however, been successful in helping some other sections of the industry move into the second phase of the development. A few leading players have made the progress in mastenng assembly technology and deepening the absorption of the new technology with higher localization content. But for most of the new joint ventures, the process of technological development is as yet in its early stages; thus, much retrains to be accomplished to move the Chinese industry into the tiird phase of the development by establishing efficient industry organization for production. This is a complex undertaking and encompasses technological knowledge, production organization, and enterprise and sectoral management systems. In the long run, only success in the development of production systems will determine the possibilities of the Chinese industry to eventually develop product technology capabilities. 4.26 The Chinese automotive enterprises need to be verfically disintegrated to build an efficient production base through networks of component and parts subcontractors. The development of a dynamic and efficient components industry is critical to the eventual health 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's aspirations to become a world-class automobile manufacturer. 4.27 This underdeveloped component industry is due in large part to the high vertical integration of major automotive producers. FAW still produces 70 percent of the value of its trucks in-house at a time when manufacturers worldwide are realiing the efficiency benefits from outsourcing and developing subcontracting networks. Nissan and Toyota, for example, produce less than a quarter of the value of their automobiles - 65 - in-house.14/ The economic scale production for parts and component manufacturing, a necessary condition for capital investment for quality and productivity, is hampered as the substantial portion of the market becomes captive by assemblers while each of them could not realize the economies of scale vith its own production volume. The vertical integration of the enterprises has also left out the parts and components industry from the benefit of infused technology. As a result, the component industry has remained underdeveloped with antiquated hardware and management technology. 4.28 The condition of the parts and components market in China, however, is not dissimilar to the situation faced by the Japanese automotive manufacturers in the 1950s and the 1960s when passenger car producti&tn gained momentum in Japan. The response of the Japanese manufacturers at that time was to actively promote the creation of a network of subcontractors to meet the complex requirements for a modern parts and components industry: The network had to be technologically contemporaneous to produce components for the joint-venture producers; able to produce to consistently high quality standards; and able to supply on a reliable and timely basis. Additionally, in an industry that requires some 10,000 parts to produce a car, the system of production organization should be such that all of the above be accomplished with limited management costs to the assembler. 4.29 The system of pyramidical subcontracfing evolved and perfected by the Japanese in the 1960s has shown itself able to meet the complex requirements of the automotive 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 the delivery of subassemblies or complex components. These contractors are known as first- tier suppliers and accept responsibility for timely delivery and high-quality standards for their subassemblies. First-tier suppliers, in turn, maintain contractual relationships with second-tier suppliers of parts and components. There are also likely to be additional layers of third-tier and fourth-tier suppliers. For example, one Japanese manufacturer directly procured engine parts from only 25 primary suppliers, but the latter dealt with 912 subcontractors, who in turn procured from 4,960 third-tier suppliers.15/ 4.30 Shanghai Volkswagen is one major manufacturer that has actively tried to emulate the creation of a network of local components suppliers. Of the 70 percent of locally produced components and parts for the Santana model, Shanghai Volkswagen produces 18.5 percent in-house and buys the rest from its 196 carefully selected local suppliers. These suppliers are typically other joint ventures, SOEs, army enterprises, and TVEs; they are subject to a quality assurance system that broadly follows the procedures of the Shanghai Santana's licensor, Volkswagen, and thus are partally exposed to the infused 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 Labor and Investnew In dt Amnobilk and Componen Indues, Bouder Westiew Press, 1988. Ill Kurt Hoffmai and Rapiade Kplinsky, Driving Force: the Glb Rsmwrn of Technology, Labor and Invent in the Automobile and Componnt Indutra, Boulder: Westview Press, 1988. - 66 - government also promotes the development of the local components industry with the proceeds of a tax (approximately 10 percent) on the retail price sale of all Santanas. The proceeds of this special tax are put in a special fund used for loans to the component manufacturers; they are made avalable under the Shanghai Automotive Industry Corporation for projects designed to make the manufacturers capable of supplying to Shanghai Volkswagen under the localization program.l6/ 4.31 Despite the beginnings made by Shanghai Santana in developing a network of component suppliers, however, its efforts have not yet taken on the form of active nurturing, which is typical of the Japanese experience. The economy does not currently have innovative suppliers with the financial, managerial, and technological capabilities to emerge as viable primary suppliers to the new joint ventures, taking responsibility for the much higher standards of quality control, technological innovation, and reliable delivery. More active efforts will be required on the part of the government and other industry leaders for the development of the parts and components industry in China. 4.32 The development of the parts and components industry in China is also constrained by weaknesses in upstream industries. For example, due to the underdeveloped nature of pe.chemical and its by-product industries, a number of vital products for the automotive industries are either not available locally or do not meet quality standards. Paint and sealers, for example, have poor resin. Rubber products, though presently localized, do not meet intemational quality standards. Other problem areas include glass, certain grades of steel, electrical components, electronics, and energy. Glass is considered localized, but all raw materials for the production of glass have to be imported. While cold-rolled steel is available, zinc-coated corrosion-resistant steel poses some problem as the Baoshan steel mill does not produce it in adequate widths for use in cars. Electrical connectors are not sophisticated, and the widespread use of electronics is still a remote concept. Some initiatives are presently under way for the technological renovation of some of these industries. For example, Chinese Capital Steel is thinking of buying a complete steel mill from California and Gennany, and a joint venture between PBG and Guangdong province is under discussion. However, more concerted action witl be needed in developing upstream industries if the automotive industry is to develop further. E. RoLE oF GovERNwr INrRvENoN AN COMmmON 4.33 Governments impose restrictions on the economic systems of their own countries in order to generate different outcomes, presumably more socially desirable, than would be the case in the absence of restrictions. The governments of the latecomers to the world automotive industry devised an extensive set of public poLicies for the promotion of the 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 the nion that hdf of the funds so gathered would be uwe by tho centa govemment to fostr localiaion of parts in other regons, but this paut of the schae bhas not wo*ed well. - 67 - intervention designed to promote the industry sometimes leads to opposite effects, and more often, industry becomes efficiently shaped by market forces. 4.34 Brazil. To support the road-based transport strategy and counter the balance of payment deficit owing to increasing automotive imports, the Brazilian government initiated the Kubitschek plan in 1957,17/ basically a protectionist policy mixed with incentives to attract foreign investment. The plan imposed mandatory requirements to raise the local content to 90 percent for commercial vehicles and 95 percent for passenger vehicles by 1960. In return for this mandatory requirement, the producers were assured of the domestic market with an import ban and were also given adequate and subsidized access to foreign exchange required to import necessary components until localization became fully implemented. This policy was aimed to force foreign-owned KD kit assemblers to link with domestic component producers, and the policy restricted vehicle assemblers from backward integration into the component segment of the industry. By 1962, 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 was controlled 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 one model in each size range produced; thus, each producer had tended to carve out particular segments of the market for itself. The prices were over 25 to 50 percent more expensive than 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 to control the flow of the foreign currency. Shortly afterward, in an effort to promote export, the Brailian government introduced Befiex schemes under which enterprises entered into contracts that allowed them to import (free of tariff but subject to approval from the government) equipment and materials for up to one third of the value of their exports. In addition, there were generous export subsidies. Aided with these measures, exports reached 100,000 units in 1979. Anticipation for future growth induced Fiat and Volkswagen to expand production capacity, leading to excess capacity and fierce domestic competition. This was the period of heavy cost-cutting and industry restructuring, and less-efficient manufacturers were weeded out. By 1980, output had passed the 1 million mark and exports peaked at 212,000 units the next year. Prices were reduced during this competition and became comparable with the intrational level, even though a low valuation of the Brazilian cruro was believed to contribute much to this competitiveness. 4.36 Since the mid-1980s, the industry suffered from poor macroeconomic performance 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 Economist Intelligence Unit, 1991; A Report on the Automodve Industy Sendnr held in New Delhi, India, by IFC, 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 Brazilian Auomobie and Sted Indusia, by Bernbard Fischer et al., 1988; Mulonal Corporatio and the Regioalon ofLagin Am lwen Aomotve In6my, by Russell Mastn Moome, Amo Prs, 1980. - 68 - that had peaked in 1980. The government, in its fight against inflation, introduced a new currency in 1986, froze the price and foreign exchange currency, and abolished most inflation-indexed monetary corrections. Against the govenment's intention, this policy led to illegal premiums on prices, widespread shortages of raw materials and skdlled labor, and a general increase in industdal costs. With the public enthusiastically policing retail prices, profits were squeezed to the point where some automotive companies began to suspend deliveries of products. The producers were unable to meet their production target because of shortages of materials and components. They were said to be losing 25,000 vehicles 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-expensive components and the domestically controlled component industry wanting to extend the protection. One such notable example is the "law of informatics' that keeps the electronics industry 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 further exacerbated by the government policy in which the foreign assemblers were not allowed to integrate backward into the parts industry. 4.37 In the 1990s, the automotive industry continues to suffer from macroeconomic mismanagement in general and price control in particular; however, the industry perceives new challenges and flexibility in the new Brazilian trade policy. The failure of the New Brazil Plan in 1990, which was the prevailing economic reform policy combined 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 lift in 1990, led to a constant disruption of the supply of parts and constant strife with the government. The strife between the foreign assemblers and the government reached its peak when the government tried to block the Autolatina deal, a merger between VW and Ford, by filing an antitrust suit on the grounds of possible monopolistic behavior resulting from the combined share of 60 percent of the domestic market. (Autolatina successfully defended its deal.) In the midst of a difficult macroeconomic environment, the govemment introduced a new industial policy with the aim of modernizing domestic industry through broad trade liberaliation. This policy mitigates many policy distortions: Vehicle imports are freed and the import tariff will be reduced until 1994, the maximum tariff being 35 percent in that year; CKD imports are now permitted, however regulation on CKD is expected to come; the "law of similarity" has been weakened and manufacturers are able to source components from overseas by paying taiffs, which will decline to 30 percent by 1994; local-content requirements were reduced; and the "law of informatics" is being phased out. 4.38 In hindsight of the results of past development, the Brazilian approach to build an indigenous automotive industry seems to have drawn mixed assessments. It used to be regarded as a success story of infant industry development with the technological development 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 in Brazil. - 69 - was highly publicized as an example of the "Brazilian economic miracle." There is a study that positively assessed the Brailian policy witi the view that the Brazilian policy of import substitution benefited society because the taxes from the automotive industry paid off the subsidies given to the industry within the first five years of the policy initiatives .19/ In contradiction to this view, however, there are skeptical views on the export performance of the Brilian automotive industry and the role of foreign MNCs:2DI Favorable export performance is found to be owing to heavy export subsidies and to reflect intermittent business strategies rather than sable competitiveness. These export-promoting subsidies were found to exceed the compensation for the export-retarding effects arising from the import substitution policy of the components and the ovevaluation of cruzeiro.21/ The Brazilian automotive industry is considered to be most efficient when it emerged from fierce domestic competition in late 1970s. In the past decade, the profitability and efficiency of the industry has suffered owing to mismanagement of the macroeconomy and an uneven pricing policy between assemblers and component suppliers. But for the macroeconomic mismanagement and corollary sector policy, the automotive industry could have a better chance of developing internationally competitive producers. Rigidities began to be rectified, however, with the new trade policy in the 1990s, opening the door for import competition. 4.39 Japan. The Japanese automotive industry was successful in developing an import substitution industry based on discrete technology imports and limited foreign capital participation. Japan developed its automotive industry from the position of producing 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 this success could be found in the govemment policy that promoted the automotive industry; however, domestic competition together with technological and managerial innovations played a major role in shaping the industry. 4.40 Seeing the potential in the automotive industry to be the leading sector through backward linkages, MMTI took policy initiatives to protect the domestic industry against opposition from other ministnes. (The Ministry of Transport and the Bank of Japan 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 and dhe Brailian State 1956-1968, Harvard Busess School. Within five yeas of the plan, total investment in the autorotive assembly sector reahed $418 million. Tne subsidies on this investment came to $201 million, or 48 cents per dollar of investment. The biggest subsidies were customs duty exemptions and the rate at which payments on foreign financing was remitted. The policy was successful in inducing foreign 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 of rhe 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 firms reaches 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. - 70 - advantages and favored a free-trade policy.) MlMI protected the domestic market with high tariffs and the domestic producers with prohibitions on foreign direct investment. The incentives given to domestic producers included low-interest loans, preferential tax treatment such as special depreciation allowances for capital investments, exemption of import duty for production equipment and tools, and export incentives such as deduction of export revenue from income. MITI also encouraged the transfer of foreign technology through license agreements. 4.41 Beside these policy measures, however, MII's policy initiatives were not well received by the private sector, and MlTl had to scrap its developmental plans on several 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, Mm tried to restructure the industry by requinng automotive producers to speialize in only one type of vehicle (among minicars, sports cars, and other specialty vehicles) and automotive products with engine sizes of greater than 0.5 liter. Except for Nissan and Toyota, all producers strenuously objected, and MMI had to shelve the idea. In 1963, Mlll also failed to persuade Honda not to enter the automotive industry. As an alternative policy, MM attempted restructuring through mergers, the effort of which was pardally successful with only one merger between Nissan and Prince in 1965 and several tie-ups among domestic producers. Through these tie-ups, Toyota became the largest shareholder of Hino and Daihatsu, and Nissan of Fuji Heavy Ihdustries. The effort to restructure the industry continued into the 1970s with the policy of libealizing foreign direct investment and the participation of US firms in the management of Japanese producers.2@/ However, this did not result in significant reduction in competition or an increase in scale because newly affihiated producers offered different product lines and most producers remained independent. 4.42 Contrasted with these mishaps in policy initiatives, MITl's policy of protecting domestic producers from foreign competition until they become internationally competitive is considered to be a successful measure. This protection was disciplined and was 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 for international competition. The small passenger-car segment, however, received protection throughout 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 in 1971. Ford acquired 25 percent of Mazda equity in 1979. It is notewothy tat 1UZI, Mazda, and Mitsubishi, all sgnificantly smaller than Toyota and Nissan, opted for joint veues with US fimns raher than with Nissan and Toyota - 71 - in 1972 and eliminated it in 1978.24/ Substituting for import competition, however, was the domestic competition among 11 domestic producers, 9 of which produced passenger cars. Due to this intensified competition, the profitability of the Japanese automotive 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, the Japanese automotive industry entered into its export expansion period after the oil shock as the Japanese small cars found a market niche in the United States. The automotive output growth and capacity expansion during 1973-80 was mainly for export.2j/ As a result, the production capacity in Japan is almost twice domestic demand, placing great pressure to pursue an aggressive export strategy. This export strategy met with resentment on the side of trading partners as the Japanese share of the US market, for example, had expanded 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 was initially 1.65 million units per year but raised to 1.85 million units in 1984.27/ This export restraint created an incentive for Japanese producers to invest in manufactunng facilities in their major markets and accelerated the globalization of the Japanese automotive industry. 4.44 Implications for China. The developmental experiences of the aforementioned countries could not and should not be exactly duplicated as the eco. omic and political environment surrounding these countries are different between themselves and from that of today's China. For example, today's global economic environment is not poltically and economically favorable for the replication of the Japanese strategy of export expansion. It is not politically favorable owing to the mounting pressures for trade balance among trading partners. It is not economically favorable because as the global automotive ndustry 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 the oil shock) became hard to find. The technological environment has changed too as the easy 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 trang patns as cusoms officias wssted on nspectig each unported vehicles and would not check one saple and grant a type certificate, as the United States and European countries did, unless sales of a single model were of a volume comparable to domestic maks (a near impossibilty). Besides, only agents registnred in Japan, not foreign producers, were allowed to import vehicles. Strict standards for 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 import subsitution 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, to 9.4 percent in 1975, and 22.6 percent in 1982. _/ he agreed-upon period for the voluntary export restaint ws three years startig from 1981 and ending in 1984. However, Japan unilateray extended this period for additional one year, raising the volume to 2.3 million units. - 72 - managed to have is no longer available, with technology being viewed as the source of competitiveness. 4.45 Experience illustrates that the role of government intervention should be disciplined and that market forces should be allowed to shape the industry as much as possible. There are similarities between the development policies of the above two countries, namely, to initially protect the domestic industry from the import competition and to provide subsidies through credits and foreign exchange allocations. However, the similarities end here and the degree of government intervention varies. The Brazilian government direcdy controlled the pricing and sourcing of automotive components, microelectronic parts in particular, with the aim of promoting the domestic industry. This intervention retarded the industry's development since the distortion of relative prices left automotive assemblers with parts insufficient in quantity or quality for export. Undue protection to the parts industry by forbidding the assemblers from diversifying into the parts segment, in addition to price controls, resulted in tension between assembler and parts industries at a time when the world trend is promoting harmonious collaboration between assemblers and part suppliers. Contrasted with the heavy-handed intervention of the Brailian government, the Japanese government left these details to market competition and kept a few simple, basic policy measures-protection from import competition. 4.46 Government intervention should be also flexible. What could have been right for the 1960s is not necessarily right for the 1990s; moreover, the government should constantly measure its intervention against the yardstick of international and domestic competition. For example, the -law of informatics" would have affected the automotive industry less in the 1980s, when the application of microelectronics to automotive products became the competitive edge among the world automotive producers. The Brazlian government should have assessed the cost and benefit of protecting domestic electronics industry and then redefined the scope of the protection in the changing competitive environment. F. mSss AND On'oR¶TuN 4.47 First, the government's policy framework for the automotive industry needs to be reformulated, as it is not consistent with developmental objectives. The current strategy 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, and has then "assigned" different segments of the market to different producers: luxury cars to Audi, mid-size sedans to Santana, compacts to Citroen, and so on. Joint ventures have been attracted to these segments by means of high levels of domestic protection, at tariff rates well over 100 percent. Moreover, producers are then exhorted to maximize local sourcing and given further incentives to do so, through tariffs and bans on imports of parts. 4.48 Experience in many countries has demonstrated that, in this industry, a strategy based soley on Wort protection (the "inlfant industry* theory) will never lead to eficiency and international compediveness. Rather, import protection incus high social - 73 - 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 competitive automotive industry is doomed to failure unless key elements are changed. In sum, tdis study 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 immediate implementation 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 protection period, tariffs would have been reduced to average levels (15 to 20 percent), and nontariff bariers 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 first approach 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 would offer 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 significant ratonalization of the existing automotive industry is required, with large numbers of existing assembly plants disappearing and with their workers finding alternative employment. Of course, government has the choice of protecting the present producers forever, preventing exit, and accepting a high-cost, domestically oriented automotive industry. 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 international trend 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. - 74 - 5. POLICY RECOMMNATIONS 5.1 The 1990s will present the Chinese automotive industry with the greatest opportunities and challenges it has faced so far. Strategic and selective government action will be cntical in facilitating the transition. In our view, the government has two main functions that it alone can perform: first, and most important, it must create a policy framework for the sector that would be conducive to addressing the issues described above; second, it must create an appropriate supporting institutional framework to assist the industry to adjust to the new policies. These two functions are no different in this sector than in any other: The difference is that economies of scale make entry at a much more expensive scale, and past policies make the problem of exit significantly larger than in many other subsectors of the economy. A. BALANCING PROTECTON AND COMPEION 5.2 The challenge to government policy is to find the balance between providing the domestic industry with just enough protection from imports to give the industry time to move down the learning curve, while ensuring that some import competition-and the certainty that protection will decline to low levels in the future-provide domestic producers with incentives to learn and internalize new technologies, to continuously reduce costs, and to improve quality. 5.3 Therefore, GOC should announce its program, based on offering protection that is limited in time and scope. It is recommended that the customs tariff at the end of the protection period should not exceed 20 percent. This tariff should be the only instrument to implement the trade policy, and all nontariff trade barriers (QRs) should be removed, including import quotas, import licenses, and prohibition on foreign exchange purchase. 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, but experience elsewhere has indicated that a period of five years after policy announcement should be adequate, at the end of which only the 15 to 20 percent tariff would prevail. A longer period would not necessarily guarantee the domestic industry's commitment to higher 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 will respond with their investment sttegies in a competitive faion. - 75 - B. CREATING INcENTfv TO INNOVATE 5.5 The creation of extemal sources of competition and pressures to innovate must also be accompanied by an appropriate framework of domestic policy. The economic and regulatory environment and the incentives and attitudes of managers and technicians in the automotive firms will be crucial factors in the development of the industry and the transfer and application of modern technology. In this regard, three areas seem to be of particular importance. 5.6 GOC needs to provide clear leadersbl9 in supervisory agencies and developmental strategy. A weakness in the present system of sector management is the multitude of first-tier supervisory agencies and the ambiguity of the relationship between supervisors and supervisees at the enterprise level. GOC needs to assign clear authority and responsibility to a single agency, such as CNAIC, for developing and imposing national priorities, particularly in the areas of creation of new capacity and technology development. (This also applies to some of the other issues with respect to the role of government, discussed in section C.) This is because in the present policy framework, and until 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 go forward with the reforms, on the grounds of the loss of production facilities. Moreover, it is necessary to formulate a clear and detailed development strategy for the sector, and to spearhead the restructuring and adjustment program. Finally, the current overlapping responsibilities create excessive and repetitive supervision and an environment that stifles enterprise management. 5.7 Domestic Competiton. GOC should eliminate impediments to domestic competition including interprovincial trade barriers, such as local procurement preference guidelines; government subsidies, such as on raw materials supplied through the Ministry of Internal Trade; government control on prices and distribution; and limited managerial autonomy and accountability.2/ Enterprises should be allowed the full 14 autonomies granted 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 production volume and parts sourcing should be left entirely to enterprises, as should decisions to invest, 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 by provincial 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 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 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. - 76 - 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 and alz with local govemments and, perhaps, banks. These enterprises, given their overall and expected profitability, would seem to be candidates 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 be created for all sucn enterprises; and for the joint ventures, the foreign partners should be given 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 the right policy framework and let the market do its work. Rather, the role of GOC should be to facilitate the proper functioning of the market, through actions to assist economic agents to react to new market signals. Moreover, the market in China is as yet underdeveloped, and may fail in the absence of government action. There are six areas of government intervention at we would consider appropriate and helpful. 5.10 Inefficient enterprises producing with obsolete technology and at an meconomic scale should leave the industry. Since the market is extremely crowded and fragmented, small-scale inefficient producers should be forced to exit. There is simply not room for 117 full producers and 459 assemblers. We can foresee two alternative approaches to this process of rationalization. Under the first, laissez-faire approach, COC would develop minimum quality and safety codes for vehicles. Serious enforcement of the codes, 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 proactive approach, would be to set up minimum standards for production facilities (including size) and technology resources, administered in the form of production licenses. Producers with hopelessly inefficient production facilities or an excessively backward technology level would be made to exit entirely from the sector. Producers with salvageable facilities and technology 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 a task force to draw up a set of criteria with which to review all current facilities. The facilities would then be classified into those that will survive, those that may be salvageable, and those that must be closed down. This approach would also require the provision of funding to assist exit-including maintenance of welfare coverage and transition financing-and diagnostic assistance to salvageable enterprises. Foreign technical assistance could be sought in this restructuring diagnostic function. 5.12 While the first strategy is more suited to the market economy, it must be recognized that the Chinese market is as yet far from developed. In particular, there is a danger that if aU the smaU producers are permitted to continue to exist, the interest groups associated with these facdiities-itotably local governments-may seek to undermine the - 77 - basic policy of developing competition, the basis for developing a sound industry in the future. 5.13 GOC should not encourage new entry to passenger and light-truck segments at subeconomic dze. In the long run, competition would be the key determinant in shaping future industry concentraion; however, until competition has developed through the removal of tade barriers, the government should prohibit new entry at a capacity level below 100,000 units per year. Indeed, there is a case for the government to prohibit entry at all. However, it would be inapproiate to discoucage a new, genuine joint venture that was based on clear knowledge of the future policy framework for the sector; indeed, this could speed up the transformation of the existing joint ventures into competitive production. 5.14 For other segments, entry by joint ventures should be encouraged as these segments have long been neglected in foreign investment. This applies especially to 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 the total during the Eighth FYP. These segments are also the most backward in the automotive sector and thus could benefit from the infusion of advanced technology from foreign sources. Por component and parts segment, entry by foreign component producers should be also encouraged as the segment needs foreign technology and heavy investment because of its high capital intensity. However, most of the joint ventures to date have emphaszed partnership between the domestic and foreign partner, with the domestic partner clearly regarded as the senior. There is a good case for encouraging some wholly owned foreign entrants, or joint ventures in which the foreign partner is senior, in order to develop factories that will regard China as a production base, and the domestic market as just one part of the market for the output of the enterpnse. 5.15 The development of the component sector should be a priority. Selective development of the components sector is suggested at this stage. The government should create a leading group to pioritize major components that can be realistically targeted for localization. This must be based on an awareness that economies of scale for the production of some components are very high and that the inability of upstream industries may constrain the effective localiation of some other components. The existing foeign partners should be invited to participate in such a task force, and provide guidance to Chinese 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. The most important change in process technology in recent years has been the abandonment of verticaly integrated production technology and the development of geographically close, but orniationaly separate, subcontracting. This is best chaactized in Toyota technology. It is recommended that the Chinese govemment should seek astance from those 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 the closing down of many of the existing subeconomic assembly plants, for some of this experts could be converted into subcontating. This could be facilitated through financial, informational, and managerial astance in meetng the standards required of modern components suppliers. In Japan, vehicle assemblers provided this type of assistance to component suppliers to help them overcome initial production problems. In China, given the managerial weaknL;ies of the assemblers themselves, stte-sponsored research and consulting agencies may be more appropriate, with suitable foreign advice. The development of product and quality standards by an indusbywide agency would also be particularly useful at this stage, as it will help small entrepreneurs understand the quality standards expected of them. The designation of an agency to lead the development of the parts and components sector is recommended, but it is observed that this seems to be an appropriate function for CNAIC. 5.17 EnterprIse Magemet. At the enteprise level, oganizational and management systems must be realigned to encourage efficiency and innovation, given their vertical interation and lack of accountability. The level of vertical integration should be reduced drastically and except for the manufacre of some, key components, all parts and components should be subcontracted. Organizationally, they should be reganizd along product divisions and each division should be an independent accounting entity. Managerially, the management systems should be decentralized, with tnsparent performance evaluaion systems and close linlk between performance and pay. The auto works 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 new skills. New systems of production management such as contemporary best-practice management methods oa !1T inventory management and total quality control should be studied and adopted.3/ 5. 18 To identify such problems is straightforward, but implementation and reform design is more difficult. In particular, the question arises as to who should spearhead these technical and o tional reforms. It is suggested that CNAIC should seek technical assince to finance detailed restructuring studies to be carried out by CNAIC with the help 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 been designed and adopted. This should be regarded as assistance to the industry in formulating a plan to adapt to the new policy framework, but it would be for the enterprise and its board of directors, not for CNAIC, to decide on future steps for the enterprise and for the management of the enterprise to implement any such plan. This should thus be seen as an exercise in the sepamtion of government, ownership, and management. 3/ To keep up with increasg investnnt dends and fcial automy, enterpie' financing operaions need to be improved as well. Interlinhkig the Chin auomov sctor with he intational finacial conmmity will be beneficial to both Chinese enpises and inteaioral invetors. The is a role for GOC to play in enhancin his finanial itedining. - 79 - D. LONG-TBRM GOALS-TIE DEVELOPMT OF PURODUCT TECHOLOGY 5.19 The ultmate transition to achieving product technology will depend on the extnt to which the interim transition to acquiring producdon capability has been accompanied ~by the development of inherent technological capability of the domestc economy 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 the development of domestic R & D capability and quality human resources that are required to ensure technological capabity, thus crating an environment of vigorous domestc competition o ensure the reilience and adaptability of domestic enterprises. E. CONCUWSION 5.20 The automotive industy cxemplifies all the industral policy questions facing the government of China today: how fast and to what level to libealize imports; how to make inefficient and uneconomic entprises viable; what to do with displaced workers; how to balance state intervention with market forces during China's transition toward the market economy; and how far to let management go when a market-oriented corporate governance system is yet to emerge; and how to guide the industry development without resorting to the instruments used in the planned economy. This study has atempted to provide a range of suggestions to answer these questions, while recognizing that China is stiU in its transition towards a maket economy and that in scme cases further study has to be recommended. The short- to medium-term answers to the chalenges facing the Chinese automotive industry may change over time with changing macroonomic environment and deepening market reform. However, it cannot be too much emphaized that in the long run the Chinese automotive sector will have a most efficient industrial organization when its development, dictated by intenational competition and state participation in the sector, is eventually replaced by etrepreneurial ownership. -81- - STATISTICS LIsT OF TABLES Table No. lWe Size 1.1 Number of Enterises, 1981-92 1.2 Number of Enterprises Under Each Deprtment 1.3 Number of Enterprises in Each Province or Municipality, 1992 1.4 Number of Employees, 1982-92 2.1 Annual Vehicle Output 2.2 Output of Major Plants 2.3 Output Mix for Trucks and Passenger Vehicles, 1990 and 1992 2.4 Output of Passenger Cars and Jeeps, 1990 2.5 Bus Output, 1990 2.6 Provinces with Annual Output Above 10 000 Units, 1986/87 2.7 Output of Main Components 2.8 Output Value of Provinces, 1983-92 2.9 Subsector Output Value 2.10 Output Value of Autoparts and Components by Prwince, 1988 and 1990 Motor Vehicle Fleet 3.1 Motor Vehicle Fleet 3.2 Growth of Motor Vehicle Fleet 3.3 Motor Vehicle Fleet, 1989 3.4 Age of Motor Vehicles in Use (end of 1988) Trade 4.1 Imports, 1980-89 4.2 Imports, 1986-88 4.3 Exports, 1980-89 4.4 Major Foreign Participation 4.5 Local Content of Foreign Models Assembled in China -82- ANNEX Table No. Title Financial Indicators 5.1 Investment, Sales, Taxes, Profit and Otf .cr Financial Indicators, 1982-92 5.2 Net Value of IFixed Assets of Major Plants (End-1988) 5.3 Taxes Prevailing for Automotive Enterprises 5.4 Passenger Car Prices, 1992 5.5 Truck and Bus Prices, 1992 Highway Tafic 6.1 Highway Freight and Passenger Tzaffic Volume 6.2 Highways Traffic Growth versus Total Trffic Growth 6.3 Highway Expansion, 1980-89 6.4 Highway Expansion in Quantity and Quality Materials, Energy and Euvfroment 7.1 China's National Output and Consumption of Steel 7.2 Consumption of Steel, Iron, Coal and Power in the Automotive Sector 7.3 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 vtbicles Production 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 Activity Province or V(ehice Vehicle Motor- Auto Murnicipality Production Conversion cycle Engine Parts Total Beijing 8 25 0 1 80 114 Tianjin 4 6 1 3 77 91 Hebei 6 28 3 2 53 92 Shanxi 3 4 1 2 47 57 Inner Monoglia 2 6 0 0 29 37 Liaoning 9 29 1 4 96 139 Jilin 3 15 1 1 80 100 Heilongjiang 4 15 1 1 72 92 Shanghai 4 16 3 3 83 109 Jiangsu 9 55 9 4 109 186 Zhejiang 4 .'6 4 4 3 126 Anhui 3 16 1 3 52 75 Fujian 3 9 1 0 54 67 Jiangxi 4 11 6 2 50 73 Shandong 5 29 5 6 111 156 Henan 4 17 8 2 50 81 Hubei 6 35 3 2 118 164 Hunan 6 30 3 6 100 145 Guangdong 5 13 3 1 82 104 Guangxi 3 5 3 3 42 56 Sichuan 12 32 6 8 113 171 Guizhou 3 17 3 4 37 64 Yunnan 6 6 1 1 57 71 Tibet 0 0 0 0 0 0 Shaanxi 4 24 4 0 42 74 Gansu 1 7 0 0 35 43 Qinghai 1 5 0 1 24 31 Ningxia 0 0 0 0 11 11 Xinjiang 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 vehicle Production 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 S46.3 269.1 460.2 Light n.a. n.a. n.a. 60.3 94.9 102.1 139.2 175.0 137.4 95.1 212.4 Mediu.m n.a. n.a. n.a. 103.2 124.0 106.5 117.5 147.4 161.5 139.1 178.8 Beavy 4.7 5.1 6.7 8.9 11.3 10.3 7.9 8.6 10.6 9.6 10.5 Dump 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 162.7 Jeep Id 15.5 15.3 18.2 16.6 20.7 21.9 27.4 35.0 41.7 44.3 55.4 BUJ .J n.a. n.a. 6.2 6.9 11.9 12.3 31.2 50.9 47.6 23.1 84.5 Consverson /£ 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 00 Tractor (large) 52.8 40.3 37.0 39.7 45.0 28.6 37.1 47.2 45.4 31.8 n.a. Ch Tractor (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 and busek 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) are not 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-country Light 4,378 7,003 :3,230 9,663 Medium 90 371 460 1,474 Heavy 291 161 216 291 Trucks Mini 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 -88- 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 19,167 Mini 2,751 342 0 200 Light 1,700 9,249 7,229 18,238 Medium 6 0 0 0 Heavy 1,347 597 160 729 Dump trucks 654 1,053 805 485 Buses 9,502 654 106 3,565 Mini 9,489 0 0 0 Light 2 500 61 8,373 Medium 3 24 1 110 Large 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 Trucks Tianjin 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 Trucks Shenyang 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 Trucks First 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 Trucks Jinan 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 Buses Tianjin 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 Jeeps Beijing 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 _ 1992 Share Share of Vehicle of Vehicle Vehicle 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 Passsnkor Vehicles: Bus 23,148 21.0 84,551 27.9 Car 42,409 38.4 162,725 53.8 Jeep 44,719 04.6 55,378 18.3 Total Passenfer Vehicles 110.276 100.0 302.654 100.0 Specialized and other vehicles 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 Desian Beijing Beijing Jeep Co. 31,754 Hebel Baoting Auto 418 Liaoning Shenyan Air 1a"iufacture 1,306 Hebei Baoting Great Wall Co. 300 Hubei Wuhan Light Auto 639 Jiangsu No. 4 State-owned Machine Plant 459 Fujian PLA No. 7427 Plant 241 Hunan PLA No. 7319 Plant 164 Jiangsi Jiangxi Fire Engine Plant 575 Jiangxi Fuji Auto 1,654 Sichuan Hua Tuen 1,893 Sichuan Chendu Light Conversion 1,579 Sichuan PLA No. 7438 135 Sichuan Golden Horse 707 Xinjiang Xinjiang Auto Plant 140 Subtotal 41.964 Jeep. Foresian Desizn Beijing Beijing Jeep Co. 6,106 Subtotal 6.106 Car. Domestic DesiRn Shanghai Shanghai Automobile 6,072 Subtotal 6.072 Car. Foreian Desian Tianjin Tianjin Daihatsu Auto 2,920 Shanghai Shanghai Volkswagen 18,537 Liaoning First Auto Works 4,200 Guangdong Guangzhou Peugot Auto 3,016 Subtotal 28.673 Total 82.816 - 92- -X Table 2.' Bus Ounwu, 1990 T2pe of bus Province or Specialized municipe'tty large Large Medium Small mini Total Beijing 196 - 465 2,820 - 3,480 Tianjin 70 - 138 - - 208 Hebei - - 348 1,576 - 19924 Shanxi - - 205 50 - 255 Inner Mongolia - 19 88 - - 107 Liaoning 168 24 1,392 3 - 1,587 Jilin 76 11 63, - - 724 Heilongjiang - 582 779 41 - 1,402 Shanghai 612 6 643 716 - 1,977 Jiangsu 44 7 769 3,972 81 4,873 Zhejiang 35 - 397 146 8 886 Anhui 32 20 451 221 - 724 Fujian - - 183 86 - 269 Jiangxi 24 - 817 576 - 1,417 Shandong - 330 818 579 - 1,727 Henan 27 341 162 1,023 - 1,553 Hubei 256 4 909 603 - 1,772 Hunan 39 14 836 1,498 - 2,387 Guangdong 88 - 1,203 1,204 - 2,495 Guar.gxi - 19 589 351 - 959 Sichuan 56 51 1,248 2,488 - 3,843 Guizhou - - 194 989 - 1,183 Yunnan 20 - 251 874 - 1,145 Tibet - - - - - - Shaanxi 19 147 496 446 - 1,108 Gansu - - 605 132 - 737 Qinghai - - 149 15 - 164 Ninxia - - - - - - 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 1986 National 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 1987 National 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 1988 National 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 10.0 Tianjin 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 1989 National 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 6.6 Guangxi 13.8 12.4 - - 0.9 0.1 0.3 Heilongjiang 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 0.1 Jilin 84.2 70.4 - - 1.8 10.1 1.9 Liaoning 49.3 32.4 2.3 - 12.3 1.8 0.6 Shandong 13.5 8.4 - - 0.3 3.7 1.1 Shanghai 24.8 1.9 - 5.5 0.7 1.0 15.7 Sichuan 27.9 14.0 0.8 - 6.9 2.7 3.6 Tianjin 39.2 22.6 - - 13.7 1.7 1.3 Yunnan 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 make very 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 Buildinm Output Output Output as ('000 units) Enterprises ('000 units) Enterprises I of National Engine 687 63 362 27 53 Carburator 1,270 27 994 16 78 Clutch a"sembly 163 16 133 10 82 Transmission assembly 289 45 259 34 90 Steering assembly 413 43 331 28 80 Brake disc 35 13 16 6 45 Brake drums 1,510 60 1,083 34 72 Master cylinder 446 29 200 12 45 Starter 1,442 46 1,293 33 90 Distributor 1,320 18 890 11 67 Lighting assembly 7,154 46 4,069 25 57 Meter 2,380 33 1,140 20 48 Autobody 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 19911a 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 5,153.15 Engine ,0O11.9 1,263.0 1,931.5 2,229.7 2,038.10 Parts 4,841.2 5,496.7 7,719.3 8,594.7 8,507.00 Motorcycle 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 up exacdy to tota. Source: CNAIC dat. -97- Tabl. LIS: Ouwr VAUJ iro AumPArU AND COMFONEnS BY PtOVINC, 18 AND 1990 (Y mIlion, 1980 comtant value) Province 1988 1990 Anhui 123.0 168.9 Beijing 723.4 656.5 Fujian 83.7 135.4 Guangdong 193.9 227.2 Guangxi 47.4 65.0 Guizhou 70.6 127.4 Gansu 69.9 68.7 Hebei 205.5 277.2 Heilongjiang 178.5 129.3 Henan 137.9 182.2 Hubei 1,044.6 1,175.4 Hunan 364.1 437 Hubei 1,044.6 - Inner Mongolia 36.2 94.6 Jiangsu 438.6 543.6 Jiangxi 163.0 157 Jilin 330.8 357.6 Liaoning 424.0 468.4 Ningxia 12.3 15.9 Qinghai 31.9 28.8 Shaanxi 124.7 170.7 Shanxi 68.7 80.1 Shadong 370.3 503.7 Shanghai 515.9 591.6 Sichuan 543.1 754.0 Tianjin 574.1 444.4 Tibet - Xinjiug 12.2 2.9 Yunnan 102.9 90.8 Zhejiang 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 3,294.1 Passenger 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. 1,165.4 special 144.9 148.1 154.1 157.7 184.8 188.0 154.0 163.9 196.9 Motorcycle 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. 264.8 312.3 349.1 448.0 525.0 Passenger 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 3.4 Motorcycle 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 Pleet wrucx 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 4,219.1 Passenger (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) 144.9 148.1 154.1 157.7 185.5 188.1 154.3 164.7 200.3 tiotor¢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 6,208.5 Total (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 highway transportation 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); Automotive Indutry 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 /a Truck 8.7 7.6 10.0 16.9 10.0 13.0 12.0 9.4 10.9 Passenger 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 4.5 Motorcycle 30.8 26.8 47.7 58.2 56.7 -8.6 122.7 n.a. 47.7 Transport 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 Id Truck n.e. n.a. n.a. n.a. 17.9 11.8 28.3 17.2 18.8 Passenger 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 -30.2 138.1 356.6 107.4 Motorcycle n.s. n.e. n.a. n.e. 71.3 13.7 119.9 n.e. 68.3 Transport tractor n.e. n.a. n.a. n.a. 38.9 49.6 13.9 n.a. 34.1 Trailer 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 Fleet Truck (1 8.7 7.16 10.0 29.7 10.7 12.9 13.7 10.3 13.0 Passenger (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 22.6 special (3) 2.3 4.1 2.3 17.6 1.4 -18.0 6.7 21.6 4.8 Motorcycle (4) 30.8 26.8 47.7 144.8 61.9 -0.2 121.4 n.a. 61.9 Transport tractor (5) n.a. n.a. n.s. n.a. 32.6 57.4 8.4 n.a. 32.8 Trailer (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 14.0 Total: (1)(2)(3)(4) 10.6 9.8 16.0 51.2 26.6 8.1 50.5 n.a. 24.7 Total: (1)(2)(3)(4)(5) 10.6 9.8 16.0 139.3 28.8 26.8 30.7 n.e. 37.4 Total: (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 3,068.4 Chinese 2,986.4 Toyota (Japan) 52.4 Nissan (Japan) 2.8 Isuzu (Japan) 15.4 Mitsubishi (Japan) 8.8 USSR 2.7 Truck - diesel mpine 831.0 Chinese 582.4 gino (Japan) 38.7 _8uzu (Japan) 77.5 Nissan (Japan) 8.3 Mitsubishi (Japan) 32.2 Toyota (Japan) 4.8 Other foreign 87.1 Car 757.2 Shan8hai 64.8 W Santana 3904 Audi 1.1 Tianj in 18. 1 Tianjin Charade 1.6 Guangzhou-Peugot 9.7 Volga (USSR) 47.4 Fiat 21.6 Benz 6.0 Toyota (Japan) 98.3 Mazda (Japan) 15.8 Datsun (Japan) 6.7 Mitsubishi (Japan) 15.7 Isuzu (Japan) 14.8 Other 396.3 Light Jam 357.8 Beijing 339.6 Toyota (Japan) 9.9 Mitsubishi (Japan) 5.2 Lada (USSR) 3.0 Passenger Van 204.9 Tianjin-Dihatsu 30.4 Other (Chinese) 174.5 - 101 - Table 3.3: (cont'd) Vehicle Type /a Units C*riLgan 14.1 Chinese 4.5 Dalhatsu (Japan) 9.6 tjgtg PekulD 41.3 Toyota (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 do vehicle 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 Vehicles Age 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 1989 Value Va Units (O mllion) Units ($ millIon) Unlts (O millon) Units Passeast Vehcles Car 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:Esk Pickup 5,575 30 1,569 13 n/- an/ n/a Truck 73,503 1,054 24,523 384 17,557 300 16,911 Saecial Veles Pire 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 I Chassis 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 $J8.9812 24j 112.930 J 85.818 a Mme auto body Is not inludd in total number of veiles lpoitd, while chas wth ein and CKD arn inchded. & CKD impost of 1966 and 1989 i luded in compted vWhicles. Sourm Ch. Aa -bsdwu rywtoo, 1988, p. 530 (*r 1986187); n Sa Yowbook, 1969, p. 643 (for 1988); CNAIC (for 1989). '10Q5- Table 4.3: EXPORTS, 1980489 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Number Truck 79 460 119 1,484 2,401 1,085 500 4,049 805 1,268 Jeep 18 226 65 123 374 157 295 770 58 302 Bus n/a n/a n/a n/a n/a 1 n/a n/a 14 143 Value Vehicles n/a 4 n/a 11 26 17 26 35 25 32 Parts n/a 10 n/a 11 6 5 14 16 38 51 Total 1 14 2 22 32 22 40 a 63 84 Souroe: China Auo-Indwhy Yearook, 1988, p. 531 (for 198047); ChIa Saistk Yearbook, 1989, p. 641 (for 1988); CNAIC (for 1988/89). -106- ANNEX Table 4.4: IoMRT OF TUNOLOGES AND EQUwm, 198247 Location or Project(s) Number of Value Share of Nature of Company Affiliation Began Projects (Y illion) Total (Z) Technical ConsultinR and Training Rubber Research Inst. chemical Mnaistry 1985 1 1.0 Agricultural Machinery Inst. Machinery Ministry 1984-85 13 0.4 Design Institute Machinery Ministry 1986 1 n.s. Computer application Machinery Ministry 1986 1 1.2 Auto plant cNAic 1984-86 5 7.1 9.7 2.5 Testina Etluieant and Technoloties Testing station Shenyang 1986 1 2.1 Research institute Machinery Ministry 1986 3 5.2 Auto repair Jilin 1985 1 0.2 Auto repair Jiangzi 1987 1 0.5 Transport research Shanxi 1986 2 2.6 Auto parts Tianjin 1985 1 0.1 Auto parts xiamen 1986 2 0.3 Auto plant Beijing 1986 1 4.6 Auto plant Dalian 1985 1 0.2 Piston plant Fujian 1986 1 0.2 motor plant Ringpu, Zhejiang 1984 1 0.1 Engine parts Shandong 1986 1 0.3 Auto plant ShenyaD 1985-86 2 3.2 19.6 5.1 Engine Productloa Technologies aid Eouiument Heavy machinery Xuzhou$ Jiangsu 198S 10 37.4 Auto parts Llaonin 1986 3 17.7 Engine plant Beljing 1985 1 0.1 Engine plant Guishou 1985 1 n.a. Auto plant Hebei 1985 7 20.3 Tractor plant Henan 1985 1 0.7 Engine plant Hubei 1987 1 2.4 Engine plant Hunan 1984-86 4 8.3 Engine plant Jiangsu 1982-85 2 3.7 Engine plant lisoning 1986-87 2 7.0 Engiae plant Nantong, Jiangeu 1987 1 0.2 Mini-engine plant Shandong 1985 1 0.3 Eng'-- plant Shanghal 1984-86 4 0.9 Engine plant Shanyang 1984 5 0.3 Engine plant Tianjin 1985-86 4 2.3 Fuel pump plant Shandong 1982-87 8 9.3 Fuel pump plant lantong, Jiangsu 1985 2 0.2 Machine plant Sichuan 1984 1 0.3 Diesel engine China National Ship Industry Company 1983 1 1.1 112.4 29.1 Transmission Production EquiDment and Technolonv Gear plant Beijing 1986 2 20.6 Gear plaat FuJian 1985 1 0.3 Gear plant Guangxci 1984 1 2.0 Gear plant Hebei 1986 3 1.3 Gear plaut Jiangsu 1985 11 22.6 Gear plant Inner Mongolia 1987 1 3.5 Gear plant Shenyang 1986 3 15.3 Engine 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 of Nature of Company Affiliation Began Projects (Y million) Total (Z) Exhaust System Production Auto parts CNAIC, Shandong 1986 2 8.0 2.1 Steering System Production Auto plant Beijing 1986 1 2.1 0.5 Misc. Auto Psrts Production Technolcaies and Eauisment Auto parts Qingdao 1986 2 5.6 Atto radiator Beijing 1986 1 2.2 Auto plant Qingdao 1986 1 3.9 Auto accessories Hubei 1985 4 3.3 Auto clocks Jilin 1987 2 16.2 31.2 8.1 Repair Service Equipment Auto repair Dalia 1986 1 1.9 Auto repair Beihai 1987 1 1.0 Imported auto repair Fuzhou 1985 1 0.1 Auto repair Gansu 1987 1 1.2 Imported auto repair Guangdong 1984-87 5 1.7 Auto repair Guangxi 1983-85 2 1.8 Imported auto repair Gulzbou 1985 1 0.4 Auto body Hebei 1985 1 3.1 Auto repair Shandong 1985 1 0.2 11.4 3.0 Auto Body. Paintina Equipment and Technology Auto plant Beijing 1986 2 3.4 Autr plant Shenyang 1984 3 1.9 5.3 1.4 Welding Equipment and Technologv Trailer plant Shenyang 1985 1 0.3 Auto plant Jiangxi 1986 1 0.1 Auto plant Liaoning 1986 1 0.5 Tractor plant Niugpu, Zhejiang 1984 1 0.0 /a 0.9 0.2 Mouldint Desisn and Production Auto plant Beijing 1986 1 10.0 Moulding plant Shan8hai 1986 1 0.3 10.3 2.7 Auto AssemblinR Technolonv and Equipment Auto plant Dalian 1985 1 0.5 Auto plant Tianjin 1986 1 10.6 Special vehicle plant Qingdao 1987 1 14.5 25.6 6.6 Motorcycle Production Motorcycle plant 2hejiang 1985 2 3.2 Motorcycle plant Beihai, Guangxi 1985 1 5.4 2.2 8.-6 Tractor Production Tractor 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 Value Partners Output Targets Year Contract (Approx.) Location Terex UK (33.72) 30-77 ton dump trucks 1987 20-year joint venture Y 166 M Baotou, Inner Mongolia Inner Mongolia No. 2 Machinery Co. (76.32) Aveling Barford UK 27 ton dump trucks 1986 7-year coproduction $6 M Beijing Beijing Dump Truck Plant Tokyo Umpanki, Japan 1-10 ton forklifts 1986 technology transfer n.a. Hefei, Anhui China !achinery and Equip. Baoji, Sbaanxl Import lExport corp. Hino Motor, Japan 35-seat buses 1986 technology transfer n.a. Shenyang China Shenyang 1,000 by 1990 Aircraft Corp. Daihatsu Motor, Japan Charade, 993 cc cars 1986 7-year license n.a. Tlaujin Tianjin Auto Industry Corp. Mitsubishi Motors, Ja a 800 cc light coumercial 1986 coproduction Y 2 B Liuzhou CNAIC Liuzhou Auto mnustry vehicles, 10,000 by 1989 Corp. Isuu Motors Japan ELF model pickup 1984 joint venture n.a. Clongqing C guto Industry Corp. 1,000 units Isuzu Motors Ltd , and smanl trucks; 1983 technology transfer n.a. Nanjing Tito Coumerciai Co. 600 units Nanj lag Auto Plant Fiat Group Iveco S-series light 1986 technology transfer Y 1.55 B Nanjing Nanjing Auto Plant trucks; 60,000 units VoLksvaaen Santana passenger car 1982 joint venture n.a. Shanghai SEMqgalAuto Comp.an1 sighi Automo0tve Industry Corp., CHAIC Perkins Engines diesel engines 1982 cooPeration and n.a. Beijing Beijing Jeep Corporation proauction agreement AMC-Chrysler (312) Jeep Cherokee 1984 joint venture $51 M Beijing Beijing Jeep Corporation (original capital) Peugot Automoble; pasenger cars, light, joint venture $79.5 M Guangzhou CITIC, G:anuztouy auq trucks AuoHa, Ir and Banque International de Paris Hong Kong Shortridge light trucks, 30,000 p.a. joint venture $145 M Beijing CITIC, Beijing No. 2 from 1990, using Beijimng Jo. 2 cbassts and Isuzu signed light trucks Volkswagen passenger care 1990 loint venture, factory n.a. Changchun China 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 license Sichuan Auto Works and other plants NSK. Japan variable section leaf technology transfer spring technology AP, UK clutch license First Auto Works Wabco, Germany truck brake technology technology transfer Chinese plants Armstrong, UK hydraulic dampers and license Chinese plants struts Mlitsubishi, Japan truck cab technology transfer First Auto Works Tatra, Czechoslovakia Tatra 815 trucks assembling contract Singtai Changzheng Auto Factory Nissan, Japan truck cab technology transfer Second Auto Works Steyr, Austria technology and equipment technology transfer CNHTC B. Engines Berliet, France military and civilian license Chinese plants medium/heavy trucks KHD, Germany air cooled Deutz diesel license for heavy trucks/buses Cummins, USA diesel engines for license CNHTC, Second heavy trucks and buses Auto Works -110 - ANNEX Table 4.5b: (cont'd) Companies Involved Product Type of Transaction Man, Germany diesel engines Romanian license from Man Steyr, Austria range of modern diesels license CNHTC Fiat, Italy SOFIM diesels for light license Nanjing Auto Corporation trucks GM, USA ex-Flint complete engine license and sale of Beijing Engine Corporation plant plant Chrysler, USA ex-Trenton complete license and sale of First Auto Works engine plant plant Peugot, France 1.9 liter engine license for GPAC504/505 range Daihatsu, Japan 2 small engines license Tianjin Automotive Industry Corp. Suzuki, Japan small engines license C. Gears ZF, Germany multi-ratio mechanical technology transfer Sichuan Gear Factory transmission GM and Diesel-Allison, USA mechanical/hydraulic technology transfer Sichuan Gear Factory transmission Eaton, USA heavy truck transmission technology transfer Xian Gear Plant D. Electric Parts Bosch, Germany alternators, starter license motors, ignition systems (including distributors), small electric motors and diesel injectors Nippondenso, Japan ignition systems license Hella, Germany lighting units license VDO, Germany instruments license -111- ANNEX Table 4.5b: (cont'd) Companies Involved Product Type of Transaction E. Foundries and Other Areas Ashland, USA core-box and resin bonded technology transfer GF, Switzerland sand technology British Casting and Iron foundry quality control technology transfer Research Association GKN, UK forging technology technology transfer First Auto Works Haden-Drysis, UK and France metal pre-treatment technology transfer painting and technology F. Technologv Consultina Services Ricardo Consultants, UK engine design updating consulting contract Mira, UK comprehensive vehicle consulting contract testing facilities Source: Anne Hope, China's Motor Indury, 1988, Special Report No. 2008 (London: Economist Intefligence Unit, 1989), pp. 188-192. - 112- ANNEX Table 4.6: LOCAL CONTET OF FOREIGN MoDELs AsMLED iN CHNA, 1989-90 Local Content. 1989 Local Content. 1990 Enterprise Product Rate (X) Type Rate (2) Beijing Jeep Co. Jeep 35.51 simple parts 43.51 Shanghai Volkswagen Santana Car 31.0 autobody 11S 60.09 engine '2 transmission .022 chassis 2.0S other 142 First Auto Works Audi 100 Car 7.9 autobody 1S 13.66 engine .5S chassis 1.4Z other 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 parts Van 15.6 simple parts IVECO 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 AND OTR 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 Original Value of Fixed Assets 8,772 9,771 11,746 14,926 15,254 17,888 21,930 25,558 28,034 46,032 Original value of Fixed Assete for Production 6,954 7,779 9,210 11,590 11,781 13,674 16,874 19,543 21,542 n.a. Net Value of Fixed 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 to Government = 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 by Enterprises - 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 Value Plant (Y million) Mini Trucks Tianjin Mini Auto 85.87 Jilin Light Auto 196.43 Liuzhou Mini Auto 65.58 Harbin Aircraft 150.55 Light Trucks Shenyang Gold Cup 334.66 Tianjin Auto 36.44 Beijing Auto No. 2 5.47 Beijing Auto No. 1 118.62 Nanjing Auto 163.94 Medium Trucks FAW 669.83 SAW 2,047.22 Qinghai Auto 17.87 Heavy Trucks Jinan Auto 117.85 Shanghai Heavy Auto 9.81 Sichuan Auto 70.61 Buses Tianjin Bus Plant 23.86 Dandong Auto 55.68 Guangzhou Auto 25.82 Jeeps/Cars Beijing Jeep 78.41 Shanghai Volkswagen 61.20 Guangzhou Peugot 82.76 Wuhan Light Auto 29.38 Engines Beijing Internal Combustion Engine Plant 116.11 Changsha Auto Engine 20.09 Tianjin Auto Engine 15.15 Yangzhou Diesel Engine 20.84 Hanghzhou Diesel Engine 33.84 Vifan Diesel Engine (Shandong Province) 158.77 Dalian Diesel Engine 35.03 Transmissions Beijing Gear 45.58 Yijian Gear (Sichuan) 42.53 Tansan Gear (Hebei) 42.62 Auto Electric Parts Changsha Auto Electrics 24.2 Shanghai Auto Electric Motor 9.2 Nanjing Spark Plug 27.32 Source: CNAIC. - 115- AX Table 5.3: TAES PREvAILiNG FOR AuTOMOTIE ENTERRISES Effective Type of Tax Year Rate National Taxes, Fees and Contribution to Funds Income La 1983 55.0X of income Value added la 1984 14.02 of value added Sales 1984 3-52 of sales City construction 1985 5-72 of value added/product Education 1986 1.02 of value added/product Real estate 1986 1.2S of original value of real estate Real estate 1986 12.02 of rent Vehicle 1986 n/a Invoice 1988 0.1-0.52 of contract value Invoice 1988 Y 5.00 x number of account books Electro power construction fund 1987 Y 0.01 x number of kw hours used Transport subsidy for coal used for electro power 1987 Y 0.047 x number of kw hours used Land use 1988 rate x number of square meters Energy traffic construction fund 1983 15.02 of profit retained by enterprise Budget adjustment fund 1989 10.02 of profit retained by enterprise Oil burning 1982 Y 70.0 x tons of oil used Bonus 1985 30-3002 of bonus paid in excess of limit Local Taxes. Fees and Contribution to 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 interest Unused 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 Bonds State key project bonds 1987 152 investment Electric power bonds 1987 Y 1.00 x kw hours of increased use of power Taxes Withheld from Vehicle Buyers Vehicle purchase surcharge 1986 102 of price (302 in Beijing) Sedan car consumer tax 1989 Y 20,000 per car National Taxes on Capital Construction Construction 1983 10-302 of Investment realized Sewage system fee 1983 Y 2.40 x square meter Environment effect fee 1989 Y 15-35 x square meter Quality control fee 1980 0.152 of building cost Increased volume of power supply 1989 Y 470 x kws ampere Increased 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 meter Shopping center development 1980 72 of building cost Air raid construction 1980 0.42 of building cost -116- ANNEX Table 5.3: (cont'd) Effective Type of Tax Year Rate Taxes for Joint Venture Enterprises with Cbinese and Forelin Capital Unified industry and coamerce 1983 4.52 of sales of vehicles Unified industry and comnerce 1983 5.02 sales of locally made parts Unified industry and coeerce 1983 3.02 of sales of imported parts Unified industry and commerce 1983 3.0S of income from repair service Shanghai local additional 1983 1.02 of sales (Shanghai only) National income Lb 1980 30.02 of profit Local income lb 1980 3.0 2 of profit Vehicle 1986 n.a. Real estate 1986 1.22 of original value of assets Real estate 1986 12.02 of rent Invoice 1988 0.1-0.5Z of contract value Invoice 1988 Y 5.00 x number of account books Foreign 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 is exempted in the first 2 years, in the nex 3 years income tax is reduced by 50 percent, and there is no local income tax for the first five years. - 117 - ANNE Table 5.4: PA&SEGER CAR PIUcES, 1992 Shanghai Beijing Guangzhou FAW Tianjin Santana Jeep Peugot Audi Charade Ex Works Price Yuan ('000) 61.2 55.6 65.6 94.0 42.2 Plus $ ('000) 9.1 10.6 11.0 17.0 3.5 Retail Price Yuan ('000) 71.2 65.9 77.1 110.9 47.6 Plus $ ('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 5.2 Social fee lb 23.0 15.0 20.0 20.0 '.7 Consumer tax lb 15.0 10.0 15.0 15.0 2.0 Capital 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 yuan according 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 to discourage 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 Market Type (Y) (Y) Mini truck Daihatsu van (TJ11O) 31,000 37,000 Light truck Yejin (NJ1041M) 23,600 27,600 Medium truck Jiefang (CA101) 29,800 34,400 Donfeng (EQF140-1) 31,400 42,100 Heavy truck Huanghe (JN162) 92,500 99,000 Trailer Hanyang (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 1987 Number Number Number Number Purchasing of Share of Share of Share of Share Organizations Vehicles (2) Vehicles (2) Vehicles (2) Vehicles (2) Agriculture Forestry, 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 6.1 Construction 9,065 3.0 4,198 1.3 11,055 3.3 9,452 2.2 Transportation 21,268 7.1 35,495 11.1 21,628 6.4 22,929 5.2 Education, Health, Science 2,313 0.8 4,838 1.5 4,320 1.3 4,100 0.9 Export 2,477 0.8 2,489 0.8 1,279 0.4 4,182 1.0 Marketing 119,019 4.0 132,855 41.5 145,279 42.8 223,283 51.0 State Inventory 2,362 0.8 3,710 1.2 6,215 1.8 1,154 0.3 Other 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 Passengers Preifht Freiaht Kauiv. Total Year Volume Growth Volume Volume Growth Volume Growth La (2) Lb Le (2) La (2) 1980 76.4 3 73.0 18.3 21 94.7 6 1981 78.0 2 83.9 21.0 15 99.0 5 1982 94.9 22 96.4 24.1 15 119.0 20 1983 108.4 14 110.6 27.7 15 136.1 14 1984 153.6 42 133.7 33.4 21 187.0 37 1985 169.3 10 172.5 43.1 29 212.4 14 1986 211.8 25 198.2 49.6 15 261.4 23 1987 266.0 26 219.0 54.8 10 320.8 23 1988 322.0 21 252.8 63.2 15 385.2 20 1989 337.5 5 266.2 66.6 5 404.1 5 1990 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 seat capacity 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) 228.1 250.0 274.3 309.5 362.1 443.7 489.7 541.6 620.7 607.3 562.0 Grorth (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 -262.0 G 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 Traffic WtONS' (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 0.06 Hithway (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 -0.5 Ainual Average Growth Rat sa Mj Passen r Traffic Traffict 15 19 1985-89 8 12 1979-89 12 16 CaR%Traffic 87 .' 8 15 1985-89 9 19 i979-89 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 Rate of 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 highway in 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 IN TEE 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 la Sector 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 Gasoline Automobile 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 Diesel Automobile 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.