Changing dynamics of the Chinese automotive industry : the impact of foreign investment, technology transfer, and WTO membership

Abstract

The Chinese automotive industry was established 50 years ago with the technology transfer of a truck production system from the Soviet Union. Since then, it developed into a decentralized and fragmented truck industry layout due to the self-reliant and defensive policies set forth by the central government. Over the past two decades, China has obtained substantial and modern passenger car production systems with a large sum of foreign direct investment (FDI) and comprehensive technology transfer from global carmakers in Europe, the U.S., and Japan. This research studies the 50- year development history of the Chinese automotive industry and seeks to understand the role of the Chinese protectionist automotive industry policies and the impact of FDI and technology transfer. China officially entered the World Trade Organization (WTO) in November 2001 and committed to end the 50 years of protectionism. The WTO membership is expected to inject fierce market competition into the Chinese automotive industry and ultimately propel the industry to a new level. My research attempts to forecast what might happen in the coming years. My research included site visits and personal interviews with seven senior executives from Chinese automotive firms located in Beijing, Shanghai, and Guangzhou, as well as three academic experts on the Chinese automotive industry at the Tsinghua University. This research finds that China has benefited significantly from foreign investment and technology transfers. China was able to leapfrog from 1950s-level automotive production systems into 1990s-level advanced technologies, and the gap with world standards continues to narrow. My research also indicates the protectionist automotive industry policies China had before the WTO accession have seriously hindered China's ability to achieve the full potential impact that FDI could have made. The lack of coherent policies between protection and competition has caused the Chinese automotive industry to remain fragmented and uncompetitive. The lack of competition and restrictions on foreign equity has delayed the speed of technology transfers and China's development of full automotive design and production capabilities. China will stride in the post-WTO era. However, the protectionism, particular from regional and local governments, is likely to continue and hinder the full impact of benefits from the WTO membership.