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A Review of China's Car Industry in Past 5 Years
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Peng Dan has now accustomed himself to driving his new beloved 1.8 liter Ford Focus on the wandering roads of Southwestern China's Chongqing Municipality.

Ford Focus models are manufactured in China under a joint venture between Chang'an Group and America's Ford Motor Company. Peng said that he was keeping an eye on the car when it came on to the market in September last year.

As a well-paid white-collar worker in the IT industry, Peng is one of the few fortunate Chinese that have enough money to buy a car. "If it were 10 years ago, I would not consider buying a car," he explained.

Peng bought his Focus in September this year for 130,000 RMB yuan (around US$16,000), but only after the price had fallen by 3,000 yuan.

Along with Peng, most Chinese people would not buy cars in the 1990s, when an old-fashioned Volkswagen Santana (which came on to the market in the late 1970s) cost more than Peng's Focus. Now, however, you can buy a new Santana with a much-improved performance for almost half of the 1990s price.

The major turning point that resulted in this dramatic fall in car prices in China took place only five to six years ago, when the country joined the World Trade Organization (WTO).

Decreasing car prices enable more and more Chinese people like Peng, especially some newly rich, to enjoy a lifestyle that they once could only experience in western movies and advertisements.

China was a founding member of the General Agreement on Tariffs and Trades (GATT) in 1947, but withdrew 3 years later in 1950. Since 1986, China focused its efforts on returning to the GATT. However, by 1995, when the WTO came into existence and replaced the GATT, China had not achieved its goal and had missed the opportunity to become a founding member of the new organization.

Obstacles were swept away after China and the United States signed a bilateral agreement on China's entry to the WTO in November of 1999. After that, the process accelerated.

Two years later, during the fourth WTO ministerial conference in Doha, Qatar, a decision on the accession of China into the WTO was made and China eagerly signed the protocol. Finally, on the 11th December 2001, after fifteen years of trying, China officially became the 143rd member of the WTO.

As one of the commitments to the WTO, China's average tariff level has dropped down from 15 percent in 2001 to just under 10 percent in 2006. In terms of the tariff on automobiles, the drop is more significant.

The most recent decrease of the tariff on imported vehicles occurred in July this year, down from 28 percent to 25 percent. In 2001, the tariff on automobiles was as high as 80 percent to 100 percent. Thus, by the middle of this year, China had fully implemented its WTO commitments to tariff decreases in the automobile industry.

Furthermore, some trade barriers in the car industry, as well as an import license system, have been abolished so as to stimulate a growth in imports.

Statistics from Chinese Customs show that China's vehicle and vehicle parts imports have experienced a rapid increase since WTO accession, from US$4 billion in 2001 to almost US$16 billion in the first three quarters of 2006.

One reason for the sharp increase in imported vehicles is that they are much cheaper than before. For example, the price of a Mercedes Benz S600 fell by 1.1 million RMB yuan in 2002. Other luxury cars, such as BMW's and Audi's, were about 15 percent-20 percent cheaper in 2003 than those sold before WTO accession.

Pointing to other benefits of imported vehicles, Li Huanxin, a General Motors dealer commented that, "Besides the decline of price, imported cars are of higher quality". Li Huanxin was speaking at the Beijing Automobile Show, which took place two weeks ago.

In the automobile show, top grade imported cars wowed most of the crowd, including some of Beijing's super-rich. Cars with sky-high prices on display, such as Bentley's, Ferrari's and Rolls Royce's, were marked as "sold out."

Li said that cheaper imported vehicles also compel domestic carmakers to lower their products' prices. In 2002, one year after WTO accession, carmakers lowered their prices 29 times over the space of 12 months and China's car market experienced a "blowout." A year later, in 2003, they lowered their prices 60 times.

"Now you can buy a homemade Buick with 160,000 RMB yuan, which would cost more than 200,000 yuan five years ago", said Li.

Clearly knowing that his Ford Focus would be cheaper in the future, Peng admitted that he was eager to get on the road. He said that, "The price is always on the decline, but I cannot keep waiting. I want to enjoy a lifestyle on wheels."

Li the dealer, however, said that the most remarkable change was that the threshold for having a car had been lowered.

"The government and companies were once our major customers, but now increasing numbers of householders buy our cars. Furthermore, young people have become a major consumption force", said Li, who bought a Buick Sail made by Shanghai General Motors (GM), two years ago at the age of 26.

Almost all of the international car giants, such as Toyota, Honda, GM, Volkswagen, and Ford have increased their investment in China with a number of joint ventures being set up. The cheaper prices that result from these joint ventures are enabling more and more Chinese people to afford cars.

Consequently, vehicle production in China has rapidly increased. According to the China Association of Automobiles Manufacturers (CAAM), the vehicle output of China in 2005 was almost 6 million, making it the third largest car-making country in the world, only after the United States and Japan.

Commenting on the pros and cons of joint ventures, Prof. Hu Shuhua with Wuhan University of Technology stated that, "Cooperation with foreign car companies brings capital and technologies, but also leads to over-dependence on foreign technologies, and inadequate capacities for independent innovations." Prof. Hu is somewhat an expert in this field, as he is also head of the National Automotive Innovation Program's research group, under the auspices of the Ministry of Science and Technology.

After achieving WTO status, the Chinese media along with some domestic experts prophesized doom, and their concerns now seem to have been well-founded. Without a tariff barrier, and with their joint ventures in China, foreign-branded cars now hold almost 70 percent of the domestic market share.

Cars with foreign brands are now running all around the country, but ironically most of them are made in China. Some sections of the audience at the Beijing Automobile Show expressed a strong interest in these Chinese manufactured foreign cars.

The Economic Observer recently commented that China's car industry had gained a domestic market, but had lost its international competitive strength.

In the traditional car industry, small scale implies low productivity and poor competition. During 2001, the total vehicle output of China accounted for only one fourth of that of GM, and only four enterprises had an output capacity of more than 200,000 per year.

Finding themselves in such a predicament, domestic carmakers have started to try and find ways to take the bull by its horns and tackle the challenge of competition head-on. One benefit of the joint ventures is that they offer the benefits of agglomeration economies, in that they are constantly expanding their own capacities and acquiring new knowledge from the partnership.

For instance, with the know-how learned from its long-term partners GM and Volkswagen, Shanghai Automobiles Industry Corporation (SAIC) launched its first self-branded car, the Roewe 750. A new car named Besturn made by First Auto Works, one of China's largest carmakers, also benefits from technologies used in the Mazda 6.

Chang'an Group have also introduced a series of self-branded cars recently, a salesman representing Chang'an at the Beijing Automobile Show commented that, "We have strengthened capabilities for independent R&D, as we've sensed the brutal competition." Asking to remain anonymous, the Chang'an salesman's comment on his company's experience post-WTO accession is representative of that of most of the domestic car manufacturers.

Nowadays, a number of Chinese-branded cars, such as Chery, Geely, and Brilliance, are known throughout the country. Their market share is still small, however, it is on the rise, from 25 percent last year to 30 percent in the first five months this year.

"Homemade cars are now better in quality and technology than before", said Li Huanxin, who has worked as a car dealer for five years and had clearly witnessed radical changes in Chinese car industry. He attributed this change to the benefits of operating alongside foreign car manufacturers, in that they offer an opportunity to make money in join ventures instead of facing a battle of David and Goliath.

Statistics show that China exported around 127,000 vehicles over the 19 years from 1980 to 1998, while nearly 173,000 were exported just in 2005. Thus, the Chinese car industry has made its impact on the global market, albeit mostly in Africa, the Middle East and some economically less developed areas.

While celebrating its booming car market, China has also set its goal for the future. China's high-ranking officials are now paying increasing attention to Chinese branded cars.

Chinese-branded cars and independent capacities for R&D have also gained priority in the government's 11th "five-year development program."

Accession to the WTO has helped to develop China's car market, but there is still a long way ahead. After several years of hiding in the wings of their foreign counterparts, Chinese car manufacturers now seem to be adapting their capabilities for direct competition with these car giants in an open market.

(Xinhua News Agency December 11, 2006)

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