The history of automotive industry in China

Over the past two and a half decades, China has experienced rapid growth in the population of motor vehicles on its roads. The annual rate of growth in China’s vehicle stock has been over 10%, and this trend will continue. As the world’s largest emerging economy, China has become the most important investment destination for automotive companies. According to Reuters, in 2002 China overtook the USA as the biggest recipient of foreign direct investment, rising to an estimated US$53 billion. In 2009 China overtook the USA again as it stepped up to be the world´s largest automobile market thanks to rural subsidies and tax cuts on purchases of smaller vehicles.This clearly reflects the importance of the country’s position as a major production site and marketplace for automotive products. It also highlights international investors’ support for China’s entry into the World Trade Organization (WTO) in November of 2001

China’s auto industry first came into being at the beginning of the 1950s. The First Auto Factory was founded in Changchun, northeastern China, with the technological assistance of the former Soviet Union. The Second Auto Factory was completed in Hubei province, however total car production in China amounted to a mere 5000 units even in 1983. In 1985, Shanghai Auto Factory and Volkswagen inaugurated production of the "Santana" in China. From this point on, there was full-scale cooperation between the Chinese auto industry and multinational auto companies. In the 1990's, with the expansion of China’s openness, the major multinational automakers of the world advanced into China one after another and auto production in China increased rapidly until 2000. After China entered the WTO in 2001 the reduction of entry barriers attracted the rest of the global automotive manufacturers to enter the market. According to China’s auto industry policy, the portion of ownership of foreign automakers cannot surpass 50%. Therefore, a foreign auto company trying to enter China’s market must cooperate with a Chinese automaker. Moreover, the number of partners is stipulated at no more than two. As a result, the market shares of foreign automakers also reflect the market shares of automotive companies in China.

Although foreign automakers have been operating in China for almost three decades, the trend of conducting their product research and development in the Empire of the Middle is relatively new. Up until the late 90s China was still considered a destination of cheap labor only, however in recent years the increasing amount of governmental investment in institutions of higher education, logistics, technological parks and infrastructure have attracted foreign auto manufacturers to setup R&D centers there.

Due to the constant growth of the Chinese automotive market in the last years, OEMs and suppliers have faced a shortage of time, funds, resources, engineers and managers. Although there are several universities in China with automotive departments, given the increasing demand for automotive specialists, there is still an insufficient number of qualified automotive engineers when compared to international standards. Despite these difficulties, every global auto manufacturer has now established R&D centers in China and continue to increase their investments in them. As a response, the local government has attempted to even out the distribution of foreign presence, by establishing and expanding automotive centers in more remote regions of the country.

The ever growing importance of the Chinese market and the strategic significance of creating competitive advantages in China, has led foreign automotive companies to invest in their activities in China and to conduct on location R&D activities. The main reason for this is that the automotive business requires intense local product adaptation and intensive customer cooperation.

In order to overcome the difficulties, within the Chinese automotive industry, most companies have resorted to co-operation with universities and automotive companies along the supply chain. This has mainly offered advantages with respect to development time reduction, joint use of resources and facilities and regional market knowledge. In many cases the cooperation with universities has been preferred since universities are a good source of qualified automotive engineers. Second, universities might possess testing facilities crucial for product development, such as an engine testing facility. Both reasons are resource-based. Siemens VDO (now Continental AG), for example, has a strong exchange and cooperation agreement with the automotive faculty of Changchun University of Science and Technology. Another potential source for co-operation partners is Chinese automotive firms along the supply chain (vertical integration). They can help to attract customers and build long-term business relationships with key customers. In this case competitors are not be considered as cooperation partners due to apprehension of unwanted technology transfer.

In this article we have taken a look at how the Chinese automotive industry came into being. Next up, I would love to expose some of the advantages and potential pitfalls that foreign companies may face, when entering this very special market. I hope this was an enjoyable read and I look forward to meeting you again in the next post.