The rise of the Chinese automobile industry

Content

1 Introduction
1.1 Aim of the work
1.2 Methodological approach
1.3 Structure of the work

Theoretical Framework
2 The Chinese system – Politics and Economics in China
2.1 The Chinese economy before 1949
2.2 The socialist era 1949–1978
2.2.1 First 5-Year plan 1953–1957
2.2.2 Major events during socialist era
2.2.2.1 Great leap forward 1958–1962
2.2.2.2 Great proletarian cultural revolution 1966–1976
2.2.3 Overall economic performance during socialist era
2.3 Open door policy – 1978
2.3.1 The Chinese approach to transition
2.3.2 Dual-track system
2.3.3 Special economic zones 1980–1984
2.3.4 Tiananmen
2.3.5 The second phase of reform 1993–present
2.4 Major political events and economic reforms in the 21st century
2.4.1 Accession to the WTO in 2001
2.4.2 Belt and Road Initiative
2.4.3 Made in China 2025
2.5 China today

Literature Review
3 History of the Chinese Automobile Industry – Development until 2005
3.1 Central planning and the emergence of the automobile industry
3.2 Chinese automobile industry after 1978
3.3 WTO accession and effects on Chinese automobile industry
3.4 How did the Chinese automobile industry look like in 2005?
4 The Development of the Chinese Automobile Industry over the past 15 years (2005 – 2020)
4.1 Economic policy and government regulations for China’s automobile industry
4.1.1 Entering China requirements
4.1.1.1 Initial joint venture requirements
4.1.1.2 Introduction of wholly foreign owned subsidiaries
4.1.1.3 Draft rules and drop of JV-requirements for foreign companies
4.1.2 General requirements
4.1.2.1 CCC
4.1.2.2 MIIT vehicle public announcement–bulletin register
4.1.3 China’s recent auto sector policies and measures
4.1.3.1 Automotive readjustment and revitalization plan 2009 – 2011
4.1.3.2 Indigenous brands and industry consolidation
4.1.3.3 Chinese government fleet procurement
4.1.3.4 Energy-saving and new-energy auto industry plan (2012-2020)
4.1.4 Subsidies policies and protectionism
4.1.4.1 NEV subsidies
4.2 The competitive landscape
4.2.1 A booming industry – Sales and production numbers
4.2.2 Best-selling brands
4.2.3 Domestic and foreign manufacturers and their “China stories”
4.2.3.1 International joint ventures in Chinese automobile sector
4.2.3.2 State-owned manufacturers
4.2.3.3 Independent Chinese manufacturers
4.3 Available products
4.3.1 ICVs and EVs sales – a comparison
4.3.2 Focus on EVs
4.3.3 Hydrogen fuel-cell vehicles
4.3.4 Connectivity service – the desire for smart cars
4.4 The consumer side
4.4.1 China’s growing middle class
4.4.2 Car ownership in China
4.4.3 Consumer behavior
4.4.4 License plate restrictions
4.5 China’s automobile industry today

Empirical Part
5 Empirical findings and discussion
5.1 Empirical design
5.2 Interview format
5.3 Interviewees – Introduction
5.4 Empirical findings and discussion
5.4.1 Thoughts on the past 15 years
5.4.2 Challenges for domestic and international manufacturers
5.4.3 Chinese automobile products
5.4.4 Focus on NEV
5.4.5 Consumer behavior
5.4.6 Future outlook
6 Conclusion and future work
6.1 Conclusion – research questions
6.2 Remarks – expert interviews
6.3 Limitations of the work and future research
7 Index
7.1 References
7.2 Table of figures

Abstract

This bachelor thesis deals with the development of the Chinese automobile industry (only passenger cars) over the past fifteen years (2005-2020). In the first part of the thesis, the political and economic development in China is outlined and major political events in contemporary Chinese history are discussed. A special emphasis is put on the open-door policies introduced by Deng Xiaoping in the late 1980s that still have a major impact on the Chinese automobile industry.

In the literature review, the development of this industry is analyzed along four categories: government regulations, competitive landscape, products available and consumer behavior. In each of the categories, the changes and developments are elaborated in detail. Significant changes were found in all four categories. Particular attention was paid to government regulations as the research has shown that major changes have been made in recent years that have significantly impacted the entire industry. Ultimately, the current state of the Chinese automobile industry is outlined and shows the importance of this industry for the Chinese as well as the world economy.

In the last part of the thesis, the opinions of experts working in or with the Chinese automobile industry are outlined. Over the working time of this thesis, eight expert interviews have been conducted with professionals from diverse cultural backgrounds and work experience in the Chinese automobile industry. The insights provided should allow a better understanding of the current state and challenges. While for some topics all experts agreed (e.g. surprising rapid growth of Chinese automobile industry), there was no common opinion on other topics (e.g. potential of Chinese EVs).

Keywords: China, automobile industry, automobile manufacturers, Chinese consumer

1 Introduction

Chinese automobile history started rather late compared to the western world, however it has come a long way since 1990 and become the world’s largest market for automobiles. Since 2008 China’s automobile industry has been the largest in the world measured by automobile unit production. The Chinese government sees the automobile industry as a crucial industry. When Deng Xiaoping announced China’s Open-Door Policy in 1978, economic policies and governmental regulations were also set up to promote the development of the domestic automobile industry. In the beginning, foreign companies entered the market through joint ventures and were mainly responsible for the growth of this industry. Meanwhile many independent Chinese manufacturers popped up and their products’ reputation and quality are increasing.

This bachelor thesis aims to identify key steps of the development of the Chinese automobile industry in the last fifteen years (2005 - 2020). Furthermore, the current state and challenges and the current “industry’s players” will be discussed. Automobiles are divided into commercial vehicles and passenger cars – this thesis just focusses on passenger cars.

1.1 Aim of the work

This bachelor thesis aims to answer the following research questions:

1. How has the Chinese automobile industry changed/developed over the past fifteen years (from 2005 to 2020)?
2. What is the current state of the Chinese automobile industry?
3. What challenges does this industry currently face?

1.2 Methodological approach

A theoretical framework which discusses contemporary Chinese history (starting from the 20th century) provides the foundation of the thesis. The following extensive literature review presents the changes and developments which occurred over the past fifteen years. In the final part of the thesis, eight interviews with professionals who have gained knowledge and professional experience in the Chinese automobile industry were conducted. The expert interviews add a practical component to the discussion of the content.

1.3 Structure of the work

This work is structured as follows: the theoretical framework, China’s political and economic development over the past century, the development of the Chinese automobile industry until the year 2005 is further elaborated. As this thesis aims to look at the development of this industry over the past fifteen years, changes and developments in the following categories are indicated: (1) government regulations, (2) the competitive landscape, (3) automotive products and (4) the customers. After this detailed elaboration, the current state and challenges in this industry are discussed. In the last part of this work the empirical findings from the conducted interview with professionals working with or in the Chinese automobile industry will be outlined. The goal of this section is to combine the theoretical knowledge and literary knowledge with experiences and opinions from these professionals. This will allow for a better understanding the current state and challenges.

Theoretical Framework

摸着石头过河

Cross the river by feeling the stones.

Deng Xiaoping

“China’s meteoric rise over the past half century is one of the most striking examples of the impact of opening an economy up to global markets.” (Hirst, 2015). In about half a century China managed to transform its economy from an agrarian economy to a global superpower (Ghosh, 2019). In 2008, the World Bank (The World Bank, 2018) highlights the unprecedented achievements of the Chinese government to lift 800 million Chinese citizens out of poverty and emphasizes the importance of Deng Xiaoping’s reform and opening (改革开放) in the late 80s. These policies have helped to sharply increase productivity and wages and allowed China to become the world’s second-largest economy (Hirst, 2015).

2 The Chinese system – Politics and Economics in China

To understand the current Chinese economy and political system as well as the quick development of the Chinese automobile market, one must have a closer look into contemporary Chinese history of the 20th century and understand what has contributed to the current state of China. This chapter will give deeper insight into the development of the Chinese economy. It will first discuss the time until Chairman Mao Zedong proclaimed the People's Republic of China on October 1st, 1949. The socialist era under Chairman Mao will then be discussed. It further elaborates the Open-Door Policy under Deng Xiaoping to whom the above quotation is attributed. Deng Xiaoping used this as a metaphor to describe China’s approach towards the reform and opening which ended the Marxist centrally planned economy and moved on to a liberalized market-driven one. These new policies were like a river that China had never crossed before, and thus would need to slowly cross it thoughtfully and carefully, by feeling the stones. The final part of this chapter discusses key political events and economic reforms in the 21st century, and outlines China's economic performance today.

2.1 The Chinese economy before 1949

Barry Naughton (Naughton, 2007) describes the time before 1949 in China in his book The Chinese Economy – Transition and Growth as follows:

“For more than a century—from the early nineteenth to the middle of the twentieth century— China’s economic performance was mediocre at best. Moreover, under pressure from the West, China disintegrated politically. The most common interpretation has been that China’s economy failed in the nineteenth and early twentieth centuries and that 1949, therefore, was a real turning point.”

Different scholars and historians consider the period before 1949 to be a challenging time for Chinese society as population growth put increased pressure on living standards and it lacked qualitative change in agricultural technology. Moreover, the Chinese population was threatened with starvation and diseases. Between the years 1127 and 1911, more than 90% of the Chinese population lived in the countryside and worked in the agricultural sector, therefore their work was solely active and demanded an intensive application of work. The productivity of the agricultural-dominated Chinese economy at that time can be summarized as follows: “The average product per unit of land was high, but the average product per unit of labor input was low.” (Naughton, 2007) Throughout the nineteenth century, there were signs that the Chinese economy was facing increasing limitations which could be attributed to population growth which was becoming an increased burden with regards to recourses. In fact, until the end of the eighteenth century, except for one last border in Manchuria, practically the entire potentially cultivated country was cultivated. These social stresses mainly impacted the poor. The industrialization period, starting in 1912 after the Qing dynasty collapsed and the revolution of 1911 happened, was characterized by modern industrial development with modern transportation and communication links. Right after the revolution in 1911, warlords dominated the country and political fragmentation followed. However, in 1927 the Nationalist Party (Guomindang) unified the nation. Until the Japanese invasion in 1937, the Chinese government managed to establish relative peace and started to build the “institutional framework for development”. However, in the year of 1937 the Marco Polo Bridge incident marked the beginning of an uninterrupted war spanning over more than a ten years (Naughton, 2007). From 1927 to 1949 China experienced the Chinese Civil War which eventually “caused a fractal split in the nation’s leadership” between the Communist Party of China (CPC) and the Republic of China (ROC). The CPC ultimately won the war and on October 1st, 1949, Chairman Mao proclaimed the People’s Republic of China (Ghosh, 2019).

2.2 The socialist era 1949–1978

October 1st, 1949 marked the founding of the People’s Republic of China as well as the beginning of the Socialist Era which was characterized by complete reorientation of the Chinese economy. At that time, China was a very poor country and had a seriously damaged economic infrastructure due to war years preceding. Naughton (2007) finds that

“[…] wartime changes in the economy aided the Communist government in the execution of its socialist industrialization strategy.”

Indeed, the Chinese leaders believed that only by adopting a socialist system could China become a rich and strong country in a very short amount of time. Mao Zedong was committed to building socialism in China which meant that they would replicate a version of the Soviet economic model in China. During this time in the 1950s, Chinese society was dominated by a massive influence from the Soviet Union. Not only the industrial technology and organizational design from the Soviet Union was replicated, but also the Soviet Big Push strategy and the command economy system were fully transplanted in China (Naughton, 2007), Chairman Mao aimed for overhauling land ownership, reducing social inequality as well as restoring the economy after the war (Ghosh, 2019). The CPC followed a Big Push strategy where consumption was squeezed, and rapid industrialization held the highest priority. Furthermore, the government had direct control over all bulks of the economy and used this control over all resources also to heavily invest into building new factories and bring industrialization further (Naughton, 2007). Duceux (Duceux, 2019) finds that at that time the Chinese central leadership was led by two ideas:

“Capital-intensive industrialization in heavy industries, inspired from the Soviet Union, and minimal exchanges with the outside world.”

Moreover, Mao also brutally changed the countryside. He adopted forced collectivization of agriculture that destroyed the traditional relationship between country and city (Duceux, 2019). With the forced collectivization of agriculture after 1949, the working incentives of farmers was destroyed. As a consequence, the lack of incentives discouraged farmers to produce food beyond state-set quotas and led to a decrease in output and productivity (Aglietta and Bai, 2013). During the Socialist Era, all the big factories as well as communication and transportation enterprises were owned by the government and in the countryside, and the ownership of the land and management of the agricultural economy were taken over by agricultural collectives (Naughton, 2007). Led by the idea of quick industrialization, it did not take long until the first State Planning Commission was set up and China’s first 5-year plan was introduced (Ghosh, 2019).

2.2.1 First 5-Year plan 1953–1957

The first Five-Year-Plan that covered the years between 1953 and 1958 and was half drawn up in Beijing and half drawn up in Moscow, which intended to build156 large industrial projects of which all should be imported from Eastern Europe or the Soviet Union (Naughton, 2007). It was a major goal to boost China’s industrialization. During this time, the steel production grew from 1.3 million tons to 5.2 million tons, which meant a four-fold growth in four years. Despite the growth rate in steel production also the agricultural sector showed performance: Agricultural output also increased, however, it could not keep pace with industrial output (Ghosh, 2019).

2.2.2 Major events during socialist era

Naughton (Naughton, 2007) describes Mao Zedong’s leadership as follows:

“Shifts in economic policy often came with sharp political conflict. Mao Zedong himself repeatedly changed economic policies in accordance with his own revolutionary ideals or personal wishes. He often portrayed the resulting policy changes as part of his own personal struggle against political opponents.”

Indeed, the Socialist Era initially experienced stability and economic growth, which was very different to the era of war and the widespread poverty that followed. However, the positive development in the beginning of the Socialist Era took a turn at some point and the Chinese leadership put terrible suffering on their own people. This was especially the case during the Great Leap Forward and the Cultural Revolution.

2.2.2.1 Great leap forward 1958–1962

Within a couple months Mao Zedong “had taken the spirit of change so evident in 1957 and turned it in a dramatically new and ominous direction.” China was facing an unprecedented catastrophe (Naughton, 2007). The Great Leap Forward was a campaign that emphasized the transformation from an agrarian economy to an industrial economy and was characterized by a communal farming system which ultimately failed (Ghosh, 2019). Mao’s vision had a serious outcome: a tremendous increase of resources was transferred from agriculture to industry. The Great Leap Forward ended in a massive catastrophe that caused 25 to 30 million deaths due to the great Chinese famine, and due to shortage and malnutrition about 30 million births were postponed (Naughton, 2007).

2.2.2.2 Great proletarian cultural revolution 1966–1976

After the failures of the Great Leap Forward, Mao tried to regain support and power therefore he launched the Cultural Revolution in August 1966 (Ghosh, 2019). It was a 10-year period that was dominated by “a particular kind of leftist political rhetoric” – this period was ended with the death of Mao in 1976. The Chinese leader encouraged students to overthrow the entrenched leadership of the Communist Party of China, expect for himself (Naughton, 2007). The Cultural Revolution was another plan that backfired the development of the country and caused millions of deaths (Ghosh, 2019). When looking at the cultural revolution from an economic point of view, it was not a very important event in China. As a matter of fact, there was a new “leap forward” between 1969 and 1971, however without massively diverting resources from agriculture. Investments increased and consumption was held back as all efforts were directed towards industrial construction. In 1971, economic problems emerged again – this was mainly due to the fact that industrial growth once again outpaced agricultural growth and the increasing number of workers in the industrial sector put pressure on the food supply again (Naughton, 2007).

2.2.3 Overall economic performance during socialist era

There are Neoclassical thinkers that believe that due to the regime of the Communist Party and the adopted policies, the Chinese economy was held back, and China could not develop its full potential during this time. However, when looking into the years between 1948 and 1958 one can see that the country experienced economic growth of around 6% per year (Loong Yu, 2012).

2.3 Open door policy – 1978

At the end of 1978, the time was ready for a fundamental change and departure from the economic policies as well as political positions of the Cultural Revolution era. The “Third Plenum” in December 1978 was the start of a new era in Chinese politics and in the Chinese economy. Deng Xiaoping returned to the position of supreme leader and therefore the way was cleared for free discussions about numerous former taboo topics. From 1979 onwards was the period of new economic and political ideologies and “the material basis of the economy has been completely rebuilt.” China underwent a huge transformation process – under these circumstances it is remarkable that this could happen without large-scale conflict and also rather low social costs compared to other transitional economies (Naughton, 2007).

2.3.1 The Chinese approach to transition

The Chinese leaders took a quite different approach than most other socialist countries when it came to economic transition. At this time, for the Chinese leaders it was quite obvious that China was a low-income country with developing status, and it was more than obvious that its economy would not “postpone economic development until after an interlude of system transformation.” The system transformation had to take place simultaneously to economic development. The main goal of the reforms was to dissolve the compulsory plan and create uniform tax rate and rules for all economic sectors. Consequently, the Chinese leadership re-assessed nearly all aspects of the command economy and there was also a broad social relaxation that was needed after the Cultural Revolution. As part of this social relaxation, many young people returned to the cities after being sent down to the countryside, political prisoners were released, and discussions were “relatively free and wide-ranging”. As the political leaders did not know what changes were possible, they started experimental reforms in nearly every economic sector. It turned out that reforms first succeeded in the countryside and the success in the rural areas paved the way for further and increasingly profound changes. One economic reform in the countryside, for instance, was that farmers signed a contract for their land and agreed to hand over a certain amount of grain to the government, the rest was put on the market. By adopting this policy, the reformers aimed for stabilizing some crucial parts of the existing economic system while liberalizing others (Naughton, 2007). The opening-up approach adopted by Deng Xiaoping was indeed very different to the economic policies under Mao Zedong. However, it is officially stated, that the Maoist-styled Marxist-Leninist ideology was not rejected by Deng Xiaoping, rather meant to improve the planned economy (Aglietta and Bai, 2013). Deng Xiaoping once declared:

“Development is the only hard truth. It doesn’t matter if policies are labeled socialist or capitalist, so long as they foster development.”

2.3.2 Dual-track system

One of the most distinctive features of China’s opening-up and departure from previously followed planned economy was the dual-track system. This system refers to “the coexistence of a market channel for the allocation of a given good and a traditional plan”. Following the dual-track system, goods had both a state-set planned price which was typically low, and a market price, which was typically higher. This system allowed a valuable flexibility and state-owned enterprises could cooperate and transact with nonstate firms (Naughton, 2007).

2.3.3 Special economic zones 1980–1984

One of the reform policies during the Opening Up of China was the creation of special economic zones. These special zones allowed to “experiment with market mechanisms” and “to interact with foreign investors without contaminating the entire economy.” With cheap labor provided by rural migrant workers, economic growth could be stimulated. As the special economic zones soon proved successful, Chinese leaders continued with deepening these reforms (Duceux, 2019).

2.3.4 Tiananmen

In the late 1980s the Chinese nation experienced a balance-of-payments crisis as well as hyperinflation. All of which contributed to a political crisis and social unrest between 1989 and 1992 (Duceux, 2019). The Chinese reformers decided to use planned economy institutions to ease the pressure on the economy and reduce investment. In 1989, discontent among urban citizens grew due to rising inflation that significantly reduced income and people were angry because of state corruption. Moreover, the expectations about economic and political change rose (Naughton, 2007). At that time the Party was polarized into two sections: one part urged more changes, the other part wanted to maintain strict state control. In spring 1989, student-led protests grew and demanded greater political freedom. While in the beginning, the government took no actions against the protesters, Deng Xiaoping then ordered the Chinese people’s liberation army who opened the fire on June 3rd to June 4th. Until now the death numbers have not been published. It is estimated that about 10,000 people died at the Tiananmen massacre (BBC, 2019b).

2.3.5 The second phase of reform 1993–present

A period of conservative ascends followed the Tiananmen Square political crisis. Urban inflation was quickly controlled and other economic imbalances were corrected by market forces in a very short time. Jiang Zemin followed Deng Xiaoping and was again associated with a new phase of economic reform (Naughton, 2007). While in the first half of the reform era the nation’s economy was mainly shaped by a labor-intensive industrialization, the second half of the reform era, was dominated by capital-deepening industrialization. During both parts of the reform era, state ownership, remained a significant part (Lo and Wu, 2014).

2.4 Major political events and economic reforms in the 21st century

The 21st century began with a milestone in China’s reform and opening – China’s accession to the WTO. In 2001, Chinese president Hu Jintao commented on this in the following:

“China’s accession to the WTO is a milestone in China’s reform and opening up, bringing us into a new era to further open up. To join the WTO was a major strategic decision based on our comprehensive analysis of the situation at home and abroad in order to push forward China’s reform and opening-up and socialist modernization drive.”

Despite the acceptance to join WTO, China announced two more impact-full initiatives that not only impact the Chinese economy’s development: In 2013, the Belt and Road Initiative was announced and in 2015 the plans for Made in China 2025 were presented.

2.4.1 Accession to the WTO in 2001

At the end of 1993, comprehensive foreign trade reforms have been adopted that encouraged the unification of China’s foreign exchange regime but also devalued the currency. Moreover, current-account convertibility was established. These steps were thought of being necessary to clear the way for their WTO-membership (Naughton, 2007). Eventually in 2001, after a fifteen-year struggle was overcome, China accessed the World Trade Organization. This entry was considered as an important one as it brought a fifth of the world’s population into the “world’ trading system”. China could benefit from the WTO accession in many ways: Not only their access to foreign markets increased, but also market access was made more secure and China had “received” the ability to shape the rules of the trading system in China’s interests by joining WTO (Martin and Ianchovichina, 2004). When China joined the WTO, the international community thought of it “as a victory for free trade and economic liberalization” and, indeed, China made many commitments to domestic reforms and reduce trade barriers. Moreover, China became one of the most active WTO-member states. However, the country was classified as a non-market economy for fifteen years after it joined. Yet the country must launch deep, systematic reforms, and mixed compliance with WTO dispute settlement procedures. This has sometimes called into question the standards underlying the WTO. As a matter of fact, China’s economy benefited a lot from WTO accession and immediately experienced explosive trade growth which was partly driven by tariff reductions. In numbers, that means that China’s trade in goods increased from $516.4 billion in 2001 to $4.1 trillion in 2017. While there was an average weighted tariff rate of 32.2% in 1992, which compared to the global average of 7.2% was very high, by 2002 this rate had already dropped to 7.7% (ChinaPower, 2019).

2.4.2 Belt and Road Initiative

When Xi Jinping was on official visits to Kazakhstan and Indonesia in 2013, he announced the Belt and Road Initiative which is a vast collection of investment and development initiatives that would extend from East Asia to Europe (Chatzky and McBride, 2020).

Xi Jinping explained the Belt and Road Initiative at the 19th National Congress of the Communist Party of China as follows: (Xi Jinping, 2017)

“China will actively promote international co-operation through the Belt and Road Initiative. In doing so, we hope to achieve policy infrastructure, trade, financial, and people-to-people connectivity and thus build a new platform for international co-operation to create new drivers of shared development.”

Just in time for the PRC’s 100th anniversary in 1949, the Chinese Belt and Road Initiative should be completed and road, sea, and rail routes should be developed in about 152 countries around the world (Ghosh, 2019). It is estimated that Belt and Road investments will add more than $1 trillion in foreign funds for foreign infrastructures over a period of ten years from 2017. There are a couple new financing formats such as the Silk Road Fund, however, most of the projects will be funded by state-directed development banks as well as commercial banks (OECD, 2018). This is also why many experts think that the Belt and Road Initiative will help to significantly expand China’s economic and political influence. Moreover, it provides China with new investment opportunities to cultivate export markets and ultimately boost Chinese income and domestic consumption (Chatzky and McBride, 2020).

2.4.3 Made in China 2025

In 2015, the Chinese Prime Minister Li Keqiang launched an initiative that aims to modernize China’s industrial capabilities, namely “Made in China 2025”. It is a 10-year comprehensive strategy which has a focus on “intelligent manufacturing in ten strategic sectors”. These sectors include railway equipment, high-tech ships, aerospace equipment and also new information technology and new energy vehicles like electric and bio-gas (Backgrounder, 2018). The Chinese leaders want to end China’s role as the world “factory” and will, therefore, invest about $300 billion to boost its manufacturing capabilities (Ghosh, 2019). China should move up into “the lucrative segments of global value chains becoming the ‘research laboratory of the world’.” (Overdiek and Arregui Coka, 2020). Made in China 2025 largely corresponds to the Japanese and German approaches to economic development and innovation and is also greatly influenced by Germany’s “Industry 4.0” (Backgrounder, 2018). The Chinese government will provide massive financing and subsidies of hundreds of billions of US dollars that should allow both state and private companies to build the technological foundation of the “Chinese Dream” (Zenglein and Holzmann, 2019). It is in the interest of the Chinese government to guarantee protection for domestic companies against foreign competition which should help Chinese companies to develop internationally competitive innovation activities (Overdiek and Arregui Coka, 2020). Chinese policy makers also instructed companies to develop international brand awareness and urge them to become “more familiar with overseas cultures and markets” (Backgrounder, 2018). With regards to the Chinese automobile industry, Made in China 2025 provides ambitious targets for increasing domestic market share also in NEV production. The Technology Roadmap 2017, that specified the implementation of Made In China 2025, outlines that China should reach a 90% market share for NEVs and an 80% share for IT products for vehicles by 2025 (Zenglein and Holzmann, 2019).

2.5 China today

“Today’s China is vastly different from what it was during Mao’s socialist period (1949-1976). Half of the Chinese population has now moved from Mao’s beloved countryside to shining—and polluted— megacities” (Duceux, 2019).

China managed to become the second largest economy in the world, making up 16% of $86 trillion global GDP in nominal terms – on a purchasing power basis China has become the world’s largest economy in 2014 (Ghosh, 2019). In the last couple decades, the country has been among the world’s fastest-growing economies and experiencing real annual gross domestic product growth averaging 9.5% through 2018. The World Bank described this pace as follows: “the fastest sustained expansion by a major economy in history”. Nevertheless, the IMF states that projected growth will fall to 5.5% by 2024. These projections are also due to the fact that real GDP growth has slowed significantly from 14.2% in 2007 to 6.6% in 2018 (Morrison, 2019). This years’ pandemic was a great interruption worldwide and the previously mentioned projections did not prove to be true for the year 2020. The coronavirus pandemic has greatly impacted the world economy, including the Chinese economy. In the first quarter of 2020, Chinese economy experienced the largest decline since the start of quarterly GDP records – GDP declined by 6.8% in the first quarter. It was a big surprise to many economists worldwide when China released figures stating that China’s GDP had “returned to growing during April to June” – according to the official numbers China’s economy grew 3.2% in the second quarter (BBC, 2020).

Literature Review

不管黑猫白猫能抓到老鼠就是好猫

It does not matter whether a cat is black or white, as long as it catches mice.

Deng Xiaoping

Deng Xiaoping spoke these words long before he initiated the unprecedented reform and opening-up policies in China in 1978. In context, his quote means that if the economy works, it is a good economy. No matter what kind of economic form it took, if it worked, it was good for the country and the people. Through his reform policies, the Chinese people were given opportunities like never before in China’s entire history and China aims to further build win-win partnerships around the world (Buckle, 2018). In order to have a strong working economy, one needs to establish domestic industries that work. During the last decades, the automobile industry became a major driving force for economic development in China. In the literature review of this thesis a thorough investigation of the evolution of the Chinese automobile industry will be performed.

3 History of the Chinese Automobile Industry – Development until 2005

While during Mao’s reign not all senior leaders in China were convinced that a strong domestic automobile industry was essential, Deng took a different approach and stressed the importance of a domestic automobile industry in China. He spoke up for a shift from automobile imports to forming partnerships with foreign automakers and gaining more independence by also stopping the increasing Japanese automobile imports that occurred in the late 1970s and the early 1980s (Anderson, 2012). This chapter of the thesis deals with the history of the Chinese automobile industry and its development until the year 2005. First, it will discuss its evolution from the first state-owned enterprises during Mao’s socialist era, then the formation of first joint ventures in automobile sector after 1978 will be discussed and the effects of the WTO accession in 2001 elaborated. Lastly, the economic performance of the Chinese automobile industry in the year 2005 will be outlined.

3.1 Central planning and the emergence of the automobile industry

After Japan’s occupation of Manchuria, the Chinese automobile industry was established in 1931. Without doubt, the occupation of Manchuria by the Japanese Imperial Army was a devastating experience for Chinese society. However, when the Japanese army left, they also left an industrial base behind that allowed China to keep some of the hardware that later supported the development of a commercial vehicle industry (Anderson, 2012). China’s main alliance in the early years under Mao’s communist control of China was with the USSR. During 1950 and 1960 the USSR assisted substantially in developing many large projects, such as the establishment of the state-owned enterprise First Automotive Works (FAW) in Changchun (Holweg et al., 2009). In the beginning of FAW, their production focused on trucks from Soviet designs, and later on in 1958, they also started to produce the Hongqi limousine that was used by senior Chinese officials and a Phoenix model sedan was launched some years later. Nevertheless, at that time China’s passenger cars production never reached a substantial size and not more than one hundred passenger cars per year were produced (Harwit, 1995). In the late 1960s, the Second Auto Works near Wuhan, in Central China, was established (Chu, 2011). From time to time China’s relationship to the USSR worsened and consequently the country had to rely on its own resources for development. From now on, all new automotive plants were developed and operated by Chinese employees from existing auto plants. For instance, when establishing Second Automobile Works (Dongfeng) many Chinese employees came from First Automotive Work (Holweg et al., 2009). The social era under Mao Zedong was characterized by little interest in consumerism and consequently, little need for passenger cars for ordinary citizens was shown. This mind-set significantly changed when Deng Xiaoping came to power.

3.2 Chinese automobile industry after 1978

Even though Chinese leaders viewed the automotive industry as a strategic sector that should help “to move the country into the modern industrial age”, it did not develop significantly until the late 1980s (Tang, 2012). Deng Xiaoping was very much aware of that China had to learn from the west and was convinced that the Chinese automobile industry needed to shift from being dependent on imports to gaining technological and leadership knowledge through partnerships with foreign automakers (Anderson, 2012).

In 1987, China had its first automobile industrial policy of which the extended version was published in 1994. The core of this policy was the strategy of “market protection in exchange for technology transfer” (Lo and Wu, 2014). The first joint ventures were formed during the 1980s - the first foreign companies entering China through a joint venture were the following: American Motor Group set up a corporation with Beijing Jeep Company, Volkswagen formed a joint venture with Shanghai Auto Industry Corporation, and PSA Peugeot-Citroen worked together with Guangzhou-Peugeot. Later in 1992, First Auto Works (FAW) established FAW-VW and Second Auto Works (SAW) set up a joint venture with Citroen (China Automotive Technology and Research Center, 2003). The Chinese leaders aimed to create a market that was dominated by a little number of international joint ventures that were supplied by local part manufacturers, and together they should produce internationally competitive products (Tang, 2012). In 1994, the automotive industry has been chosen as one of the “pillar industries” that were meant to drive the national economy as it has strong connections to the other industries such as coal, electronics, textiles, chemistry and many others (Holweg et al., 2009).

3.3 WTO accession and effects on Chinese automobile industry

China’s accession to the WTO in 2001 had major effects on the domestic automobile industry: it began to grow faster than ever (Holweg et al., 2009). Within ten years, market scale increased from just 2 million in 2000 to 15 million in 2010. China became the largest auto market in the world (Liu et al., 2018). Nevertheless, there were also some challenges that came along with the WTO accession. Harwit addresses the impact of the WTO membership on the automobile industry in China, that “the greatest challenge to the industry may come from tariff reductions.” (Harwit, 2001). The WTO agreement required China to cut import duties for passenger cars to a maximum of 25 % by 2006. These new requirements were supposed to provide more profitable opportunities for foreign vehicle makers and as some industry experts said, will cause a rise in import as the tariff rates fall (Harwit, 2001). As the following chapters will show, this did not prove to be true.

3.4 How did the Chinese automobile industry look like in 2005?

This thesis will mainly discuss the development of the Chinese automobile industry starting from 2005. Before the investigation of the development over the past fifteen years, it is vital to understand at what stage the Chinese automobile industry was in 2005 (the data outline below describes the situation in 2004 and 2005). In 2005, 3,941,767 vehicles were produced, and 3,971,101 vehicles were sold on the Chinese market (International Organization of Motor Vehicles Manufacturers).

Figure 1 states the operating Joint Ventures in the Chinese passenger car market in 2004. Like today, also at that time, the German auto manufacturer Volkswagen together with its two joint ventures, Shanghai Volkswagen and FAW-Volkswagen, were the leading and therefore most successful joint ventures on the Chinese automobile market. The Chinese joint venture partners, FAW and SAIC, are ranked the most successful Chinese automotive groups according to sales numbers in 2004 (see: Figure 2). As can be seen in Figure 2 and 3, in 2004 there were also some independent Chinese manufacturers among the most successful Chinese auto manufacturers, such as Geely, Brilliance and Great Wall. The following chapters will elaborate how this situation changed over the years.

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Figure 1: Joint Ventures in the Chinese Passenger Car Market

Source: Automotive News 2005

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Figure 2: The Sales of Major Chinese Automotive Groups

Source: Fourin 2005

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Figure 3: Passenger Car Sales by Manufacturer in 2004

Source: Fourin 2005

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