Liu Shijin

I. Why is China’s Automobile Industry Not Competitive?

Of the many industries in China, auto industry does not develop fast and is not competitive. There are many reasons that lead to this situation. But the main reason is that it has not experienced a complete process of market opening and competition. This will be clearer after being compared with the development of other industries.

Since the reform and opening-up, China has seen some fast-developing industries, especially the household electrical appliance industry. In spite of many problems, they are generally healthy and dynamic, and outperform other industries in product upgrading, technological progress, quality, service and guaranteeing consumers’ rights. They will be most competitive even after China’s entry into WTO. The sound development of these industries should be mostly attributed to the fact that they have experienced a process of market opening and intensive competition, thus solving the three key problems crucial to the development of an industry:

First, the "discovery" of advantageous enterprises. The advantageous enterprises are not born by nature, self-styled or designated by the government. They must experience a process of being "screened" through competition before being "discovered". Any individuals or organizations including the governments cannot foretell which enterprises are advantageous enterprises. Today’s advanced enterprises were once not sure whether they would surely succeed today. This is determined by the competition on the market.

Second, the learning and training of enterprises’ competitiveness. "Competitiveness can only be acquired through competition" is a basic tenet. An enterprise’s marketing, management, R&D and financing abilities can only be acquired and accumulated from the twists and turns in the course of competition, and consequently, the organization, mechanism and system of an enterprise can be gradually improved as well. The scale and competitiveness of an enterprise are not only a technical concept. More importantly, it is related to system and mechanism.

Third, the exploration and use of market potentials. Competition helps enterprises reduce costs and prices, raise product quality, improve services, promote new products and turn great potential need to realistic demand.

Automobile and electrical appliance industries, both belonging to processing, assembling and manufacturing industries, are similar in terms of technological and market structure, for instance, they both have a high demand for scale economy and develop into highly industrial concentration as a result of competition. However, auto industry has not shown the active development momentum and competitiveness like household electrical appliance industry. This is largely because the former has not experienced a full process of market opening and competition. From the view of policy, we should, in particular, reflect on and examine the strict policy on market access and the restrictive consumption policy. Due to strict limitation on market access, in addition to the restriction on the model, variety and specification of automobiles, the competition is not complete and limited, although China has more than 100 car plants. The restrictive consumption policy has prevented the existing market demand from being unleashed, and at the same time, placed the insufficient production capacity in surplus.

II. "Establishing the Competitive Edge as a Big Country in the Course of Opening": The Option for the Development Pattern of China’s Auto Industry under the New Situation

The development pattern of China’s auto industry under the new situation should proceed from the current domestic and international condition and be based on current and potential advantages. China should learn from the international experiences in the development of auto industry, especially those of the newly developed countries, for making options that conform to the law of development. We believe this pattern could be summarized by "establishing the competitive edge as a big country in the course of opening".

This means, firstly, we should base ourselves on opening. To put it specifically, we should gradually integrate the auto industry into the system of international working division under the framework of WTO so as to adapt to and make use of, not reject, the trend of globalization of auto industry. As a rising developing country, China certainly needs some necessary protection over some of its industries. Instead of relying on the protection, it should take an active part in extensive and in-depth international competition and cooperation. Secondly, China should make full use of and cultivate its own advantages. At the present stage, the advantages of China’s auto industry include the overall capability of the manufacturing industry, labor cost and the large market in a big country. These advantages are the comparative advantages according to the theory of economics. But in many cases, comparative advantages are not equal to competitive advantages. The key is to adjust the system, strategy and policies under the opening policy in order to turn the realistic and potential comparative advantages to competitive advantages. Thirdly, the advantage of a large market in a big country is most important. First of all, China’s huge market will yield the effect of scale economy in various links of the auto industry chains. This will mainly be reflected in car assembling and production of some spare parts. And the demand for independent R&D that meets the need of Chinese market will therefore arise. Next, China’s domestic market can accommodate several strong transnational corporations. At the same time, it can also provide space large enough for a large number of domestic enterprises and enterprises with domestic capital. Finally, Chinese market is not only large, but also appears to be obviously multi-layered, which is conducive to the domestic enterprises that started late and are still developing.

To be specific, the new development pattern should include the following features:

1. Cultivating a domestic market with active and full competitive environment. Compared with the production and sale capacity of more than 10 million automobiles in the future 20 to 30 years, China’s current auto industry with manufacturing and marketing capacity of more than 2 million cars is still at an infant stage now. Therefore, there will be a necessary, possible, to put it more precisely, unavoidable process of competition designed to select advantageous enterprises, raise enterprises’ competitiveness and explore the market potentials. Due to market access barriers on investment scale and technologies on the current industrial basis, the gradual entry of transnational corporations and the government’s rational policy guidance, competition within the auto industry may take on different characteristics from that in the electrical appliance industry, and the process of competition spurring the industrial growth could be shortened. The urgent task is to foster a domestic environment of active and full competition. The limitation on industrial access should be drastically relaxed; as the government’s direct investment stops, various responsible investors including non-state investors should be allowed to enter the industry; the administrative monopoly by departments and regions should be further done away with so as to form an open and unified domestic market; competition order should be regulated, and new systems should be built to restrict activities that hamper positive competition. The basis of and key to the successful new development pattern is a market with active and full competition, without which development will hardly go on. If this foundation could be laid well, we will have every reason to predict that in a short period of time (five years or longer), China will have a batch of competitive enterprises with initial international competitiveness, which include joint venture enterprises, solely-foreign invested enterprises, domestic enterprises and enterprises with domestic capital.

2. Several transnational corporations will enter into Chinese market while outstanding domestic enterprises develop on their own. One important policy orientation is that supporting the entry of transnational corporations will be a component of the country’s global strategy. When the tariff rates are drastically reduced after China’s entry into WTO, the transnational corporations will have two choices: first, exporting cars to China, second, building factories and manufacturing cars in China. Our policy should clearly avoid large-scale car imports, or large-scale cars assembling with low added value for the Chinese market. After China’s entry into WTO, we should relax or abolish the restriction on the equity and localization rate set for foreign investors at a proper time so that they would make industrial transfer to China out of the consideration of global strategy. They should be specially encouraged to export cars and parts from China. The other policy orientation is to encourage the positive competition between transnational corporations in China. The experience of many industries has proved that such competition is extremely important to product upgrading, speeding up transnational corporations’ transfer of technologies to China, improving management and reducing costs. On the other hand, we should encourage domestic enterprises and enterprises with domestic capital to cultivate their core competitiveness and support them to cooperate with foreign-invested enterprises in various forms (not just joint venture), especially their effort in developing, upgrading and enlarging the scale of R&D, brand building and marketing system. The entry of transnational corporations does not conflict with the independent development of domestic enterprises and enterprises with domestic capital. The Chinese market can provide sufficient space for both of them. They will surely compete with each other, but more often, they will cooperate, unite and merge, eventually raising the overall competitiveness of China’s automobile industry.

...

If you need the full context, please leave a message on the website.