Putting brakes on China's auto industry

Another big name joined PSA Peugeot Citroen, Honda, Nissan, Kia and Volvo as a Dongfeng Motor Corporation partner last week, when French automaker Renault signed on the dotted line.

Renault sealed a 1.3 billion U.S. dollar 50-50 joint venture agreement with China's second largest automaker on Dec. 16. This allows Renault to assemble vehicles in China and provides easy access to the world's biggest auto market.

Foreign automakers must have a local partner to make cars in China. The policy was conceived in the hope that Chinese carmakers would absorb foreign technology and management expertise. After three decades, foreign brands dominate the market and Chinese brands are steadily losing ground and the rationale behind the joint-venture policy has come into question.

Foreign passenger cars took 73 percent of the market share from January to October, a small rise of only 0.4 percent from the same period of the previous year, according to the China Association of Automobile Manufacturers (CAAM).

As a late starter, China benefited from joint ventures and enormous profits were made from the sale of foreign branded cars but, according to Jia Xinguang of China Automotive Industry Consulting and Development, that's just half the story.

Zhong Shi, an independent auto analyst, holds the view that joint ventures hinder the development of local brands. If the government does not adjust or abandon the joint venture policy, the prospect for stronger local brands is gloomy, he said.

EASY MONEY, LAZY RESEARCH

Easy money and overdependence on foreign technology mean Chinese automakers have very little interest in research and development, said Jia.

Many Chinese brands use chassis technology and engines of foreign partners, sometimes even outdated technology.

First Automobile Works Group (FAW). the company that made the China's first truck in 1958, relies on foreign products, including the Audi 100, Lincoln Town Car and Toyota Crown Majesta, for the range of FAW vehicles sporting the Red Flag badge, a communist symbol.

FAW has joint ventures with Volkswagen, Toyota and Mazda. It sold 2.6 million automobiles and raked in 370 billion yuan (60 billion U.S. dollars) in 2011. It was ranked 197 on the 2011 Fortune Global 500.

FAW has no shortage of funds, but the National Audit Office revealed in June 2012 that the company had not invested enough in research and development of proprietary models and that its 2008-2010 profits stemmed largely from joint ventures.

Angry voices have been raised as Chinese automakers, in cahoots with their joint venture associates, launch so-called "self-developed" and "local brand" cars. These are nothing more than cut price, rebadged and relaunched versions of superannuated foreign models that have gone out of production.

Government assessment of state-owned automakers mainly focuses on profitability, which is detrimental to product development, said industry analyst Xu Binjin.

Private automakers do not get the same support from the government and it is an unequal struggle, competing with foreign and state-owned automakers, said Xu.

What is required is an adjustment to auto industry policy, cooling the cozy relations between state-owned and foreign automakers and obliging state carmakers to stand on their own feet, said Wang Xiaoguang of the National Development and Reform Commission.

PUT THE BRAKES ON JOINT VENTURES

The government encouraged auto joint ventures for 30 years and thereby stifled development of domestic brands, said Zhong Shi.

Rao Da, secretary-general of the China Passenger Car Association and son of the man who headed FAW in Mao's time, wants the government to suspend new auto joint ventures.

Whether China is an auto manufacturing giant lies not in the number of joint ventures or how many cars it sells. It depends on whether the domestic automakers have strong independent research and development capabilities, said Rao.

"How come we were able to design and manufacture the luxury Red Flag limousine in the 1950s but needed to import steering technology for mid-sized trucks in the 1980s?" he said.

He believes that using foreign technology discourages local technicians and that is why state-owned automakers have failed to stop the slide of their own brands.

The Ministry of Commerce told the media on Nov. 19 that the government may relax foreign investment restrictions in areas including auto manufacturing. This easing will weaken the position of indigenous carmakers further.

Dong Yang, CAAM secretary-general, said that if foreign ownership rules were relaxed, Chinese carmakers would lose control of joint ventures.

"Foreign ownership being capped at 50 percent is the red line we must not cross because we need to protect our Chinese brands," Dong said in his blog on the CAAM website in early December.

Although the foreign cars manufactured in China contribute to local taxes and employment, the profit distribution leans toward the foreign companies as they have advantages in technology and management, said Dong.

There is no doubt that joint ventures are an integral part of the Chinese auto industry, but local brands are the core interests, he said.

Foreign automakers' role in technological progress in China is different from their Chinese counterparts. Auto manufacturing is also concerned with China's economic safety and national defense security, he said.

Dong called for the government to solicit opinions from the auto industry and have a scientific appraisal before making a policy that will have a significant effect on the industry, he said.