The past decade, since China’s acces- sion into the World Trade Organization (WTO), has seen a phenomenal growth in China’s auto industry. With its automobile output surging from 2 million to 18 million, China has become the world’s largest producer and consumer of automobiles.
Ten years ago, the auto industry was China’s greatest concern in WTO talks; ten years later, it has become an industry that changes and achieves the most in this country.
When asked “what industry has witnessed the greatest changes after China’s admission to WTO?” Long Yongtu, China’s top WTO negotiator, said immediately, “definitely the auto industry.” “It is the auto industry, which was once the biggest obstacle in the WTO negotiations, that has brought the most direct and dramatic benefit to Chinese people. We used to believe that it is not easy to immediately see the effect of China’s entry to WTO and at least needed a period to show it, but the auto industry takes the initiative to demonstrate the effect,” Long said.
The biggest concern in WTO talks
When talking about the negotiations for China’s WTO membership, the negotiators, Long Yongtu, Zhang Xiaoyu, and Xu Changming, all share the feeling that critical problems in reaching an accord lie mainly in China’s auto issues. That was the most challenging and worrying part.
Indeed, there were reasons for them to have such worries. As Zhang Xiaoyu, Executive Vice President of China Machinery Industry Federation (CMIF) and President of the Society of Automotive Engineers of China(SAE-China), recalled, in the period from 1994 to 2000, China’s auto industry developed at a low speed, almost in sluggishness. Basically, it took China almost 8 years to increase its vehicle output from 1.2 million in 1992 to 2 million in 2000.
During that period, some 2 million people were employed in occupations related to automobile production, 45 percent in large enterprises and 55 percent in small and mediumsized enterprises. However, of the total profits, 70 percent were contributed by large enterprises while only 30 percent were from small and medium-sized ones. This reflects the fact that, in China’s auto sector, the small and mediumsized car producers employed more people but with low economic returns. This is because most of those SMSs were simply component manufacturers or refit factories, with outdated technologies and equipment and a lack of capital. The situation was particularly difficult in 1998 and 1999 when the entire auto industry was suffering a nationwide loss. Changchun’s First Auto Works (FAW) and Shiyan’s Second Auto Works (also known as the Dongfeng Automobile) were then in such a serious plight there was even no extra money to pay workers’salary. The two enterprises were later helped by the central government with an order of 20, 000 trucks from the military to make ends meet.

As early as in the 1970s, a dozen of multinational companies from the seven major automobile manufacturing countries, including Japan, the United States, German, France and Italy, controlled 80 percent of the world’s car production. They sourced raw materials and components worldwide, organized the development, production and assembly of auto products and built a sales network and after-sale service system. With the globalization of production, these companies were able to fully utilize the comparative advantages of all countries so as to optimize their allocation of resources and greatly reduce the production cost of their autos. Through a monopoly in technology and market, they managed to gain huge profits. In the early 1990s, the global total automobile output was 50 million units, one third of which were exported. The exports reached $250 billion, constituting 9 percent of the total world exports. In 2000, the global auto production capacity exceeded 60 million units, with 20 percent plants left idle. Competition in the global auto market is becoming increasingly fierce.
In comparison with these powerful auto giants, China’s auto industry still remains in its “infancy”, with relatively weak competitiveness in the global market. Under such circumstances, China’s WTO accession will inevitably bring about a huge impact on its domestic auto industry. Therefore, the auto-related issues complicated the path towards the agreement on China’s WTO membership.
According to Long, negotiations regarding China’s auto industry for China’s admission to WTO were extremely difficult. In 1997 when negotiations concerning the auto tariff started, China’s tariff on car import remained as high as 180 percent to 220 percent. In fact, according to the statistics of the World Bank, due to the rampant smuggling of autos and auto parts, China’s actual tariff on imported autos was only 26 percent. The US negotiators requested that China cut its tariff to 25 percent and phase out its quota and license system upon its admission to the WTO. In order to complete the accession process and create more opportunities for the domestic auto industry, Chinese government made a significant concession by agreeing to reduce the import tariff ratio from 180 percent then to 25 percent on the condition of a five-year buffer period (starting from 2000). China will phase out the high auto tariffs and quotas and license control by January 1, 2005.
Already a great eye-catching industry over a decade
Ten years of development has proven that worries about China’s postWTO auto industry were overrated.
Entry into the WTO has injected vitality into China’s automobile industry that is under the strongest protection by the state. After gaining the WTO status in 2001, the government decided to open its auto sector to a more liberal and competitive market, by loosening restrictions on the accession of foreign capital and private enterprises to car production and extending local governments’ power to approve the establishment of joint ventures. Some domestic self-owned brands, such as Geely and Chery, have now obtained access to the market and become nationwide well-known. On November 9, 2001, the day before the WTO approved China’s entry into WTO, a new Geely car model named “JL6360” made its debut in the national “Vehicle Manufacturers and Product Announcement”. This is a great “breakthrough” for Chinese private auto manufacturers to gain public recognition. Three days later, another low-end mini type car enterprise, Tianjin FAW XIALI, announced the price of its new product, RMB 29,800(about US$3,600). The price for a XIALI car was RMB 110,000 (about$13,290) three years before. Today, in China’s auto market, of the self-owned brand cars account for 30 percent, pas-

senger cars together with mini type cars for 46 percent. Their market share of business cars even reaches 85 percent.
WTO accession has also enhanced China auto’s capacity for independent innovation and narrowed the gap between China auto and world-class auto manufacturers. In 2000, China’s auto market was dominated by imported cars and trucks. At present, some major self-branded automakers in China have become basically competent in the design of cars and the R&D of such key assemblies as engines and transmissions. Cooperation in R&D between enterprises is carried out through various forms, such as independent development, joint development, technology import and entrusted development, and the updating of automotive products is also speeding up. In the meantime, with the wide application of energy-efficient technologies in auto industry, the fuel consumption of Chinese cars has been obviously reduced. Significant progress has also been made in the development of such key technologies as battery, driving motor and electronic control. Pure electric vehicles are put on the market on a small scale. The ability of designing and manufacturing automotive parts is improving and some parts producers with comparative advantages have started scale production and entered the international system of auto parts procurement. In addition, the structure of our auto industry has been adjusted and optimized, with large enterprises taking the lead and the market being the guide. Mergers and acquisitions of auto companies, such as FAW and Tianjin Auto Works, lead to scale economy and increase the degree of industry concentration. In 2010, the biggest three automobile manufacturers in China constituted 49.1 percent of the total output while the Big Ten accounted for up to 87 percent of the total output.
Accession to the WTO has widened the door for foreign enterprises to enter China’s auto market and also sparked rocket-like growth for domestic makers in their competition with foreign counterparts. China fulfills its WTO commitments by gradually easing tariff barriers, phasing out restrictions on the establishment of joint ventures and allowing foreign counseling and financing companies into China’s auto industry. With the lowering of the market access threshold for foreign auto producers, more and more multinational companies are sharing China’s vast auto market. Some world-famous auto giants, such as Toyota, Volkswagen and General Motors, have established joint ventures with China’s domestic automakers with the equity ratio of 50-50. As one of the commitments to WTO, Chinese government will abrogate the quota institution with a time table. The initial quota is 6 billion US dollars in 2001, and increases 15% each year until wholly abrogating the quota by 2006. However, in 2010, ten years after gaining WTO member status, China’s imports of autos totaled 56.94 billion US dollars, ten times higher than the amount we have promised upon entering the WTO. Additionally, more and more domestic automakers are going global by setting up factories abroad and playing an active role in the mergers and acquisitions of global auto industries. In 2009, China’s Geely successfully acquired the world famous car brand Volvo. In 2010, China exported more than 560, 000 autos, compared with 15, 000 in 2000. During the past ten years, the total exports have increased from 2 billion US dollars to 51.837 billion US dollars, at an average annual rate of 28 percent. Since 2005, China’s auto products trade has evolved from a decadelong deficit to a surplus.
“The past decade has witnessed the evolution of China’s auto industry from the biggest worry to the most booming sector. Since China’s entry to WTO, China auto has been growing at an annual rate of over 20 percent, which never happened in China’s automotive history. It is also rare in the world’s auto history,” When talking about the new look of China’s auto industry, Zhang Xiaoyu was quite excited.
Su Bo, Vice Minister of the Ministry of Industry and Information Technology of the People’s Republic of China(MIIT), said, the development of China auto indus-
try in the past decade is the “best ever”. Over the past decade, China’s auto output has grown by 8 times, from 2 million in 2000 to 13.7 million in 2009, making China the largest automobile producing and consuming country in the world for the first time. In 2010, the production and consumption of autos in China continue to increase rapidly, exceeding 18 million respectively, with its output accounting for 23.5 percent of the world’s total output. China also broke the auto sales record of 17 million in the United States. Besides, the total value of auto output also increased correspondingly, up by 10 times in the past decade.
Further opening up still needed
Although China has become the world’s largest automobile manufacturer and consumer, yet compared with those advanced auto powers, its auto industry is still confronted with obvious problems: the industry is growing in size but not in quality; the overall capacity of domestic auto enterprises for technological innovation as well as the comprehensive competitiveness of self-owned brands are relatively weak; there is a lack of essential known-how and internationally competitive auto groups; the development of auto parts production needs further strengthening and the organizational structures of auto companies needs further reforming.
Since its entry into the WTO a decade ago, China’s auto industry has made remarkable achievements by opening to the world, while China’s future development from an auto manufacturing country large in size to one high in level still requires further opening up.
Su believes, in the near future, with the acceleration and extension of globalization, China’s auto industry will face a new round of fierce competition centering on energy efficiency and new energy application. Under such circumstances, China needs to establish a multi-dimensional and high-level opening pattern in the auto industry. By sticking to the “going out” strategy, domestic automobile enterprises should strengthen cooperation with foreign automakers, absorb advanced technolo- gies for re-innovation, make better use of the scientific achievements and intellectual resources around the globe, and strive to obtain intellectual property rights for key know-how. They should diversify their products and optimize the product mix, consolidating their position in the whole auto market in developing countries while systematically increasing their presence in the medium and low-end markets in developed countries. When competing with foreign multinational companies, domestic enterprises should occupy the medium and top-grade market in developing countries and promote the development of automobile accessories. The government should encourage domestic companies to go global and carry out transnational mergers and exports of technologies and services, building their own marketing systems and supporting logistics systems as well as parts supply and service system for exported products. It should also provide financial support to the enterprises to establish R&D center in order to attract foreign talents and trace the latest trends of key parts and technologies, enhancing the competitiveness of domestic auto industry in the international market.
Su said, despite that it is unlikely for China’s auto industry to replicate the explosive growth during the postWTO decade, the conditions and outlook for its future development remain promising, with an expected high growth rate. During the 12th Five-Year Plan period, China auto industry will focus on transforming the development mode by means of integrating opening up with independent exploration and innovation, creating self-owned brands, developing fuel-saving and new-energy automobiles, and readjusting the technological, product, organizational and distributional structures of the entire industry. The development of auto industry should be driven by innovation, with intensiveness and high efficiency, and be environmental-friendly and beneficial to the general public. Only in this way can China’s auto industry enhance its core competitiveness and ability for sustainable development, and finally grow to be a real powerful auto giant.
Links
China’s WTO commitments on auto industry
Tariff: tariffs on autos will be phased down annually from January 1, 2002 to 28 percent by January 1, 2006 and to a maximum of 25 percent by July 1, 2006. Tariff reduction schedules for trucks, special-purpose vehicles and passenger cars are the same. The general tariff rate of motor vehicles in China will be reduced to 30 to 45 percent by 2004 and that for parts and spare parts will go down from current 25 percent to 10% by July 1, 2006.
Quotas and licenses: Quotas and licenses on autos will be phased out by 2006.
Auto service trade: starting from 2006, joint ventures will be allowed in the establishment of automobile chains. Currently, if the number of chain stores exceeds 30, foreign companies cannot hold shares of the stock. This restriction will be phased out by 2006. Upon accession, non-bank financial institutions will be permitted to provide auto financing. The provincial governments will be given more rights to check and approve car projects. China will cancel the foreign shareholding limit of 50 percent.
Industrial policies in auto sector: China will abolish the policy of government granting preferential conditions for enterprises whose production reach a certain localization rate and ease the restrictions on the car types of car makers by 2003 and ensure the automakers to choose their own types of products. However, China remains the right to differentiate vans, vans and cars, which means, projects approved to make cars are not allowed to make buses. China has committed to raise the level of auto manufacturing investment that requires provincial government approval from the current $30 million, to $60 million in 2002, to $90 million in 2003, and to $150 million in 2005.