Chinas Economic Boom: Automobile Industry - Essay Example

China’s Economic Boom: Auto Industry Rachna Jalan China’s Economic Boom: Automobile Industry Analyzing the rapid economic growth Researchers havealways considered the automobile industry as classic topic to study and explore. The automobile industry of China has been undergoing severe transformations since 1980s. The change in the country’s automobile industry serves as an example of “embedded globalization” leading to the nation’s economic growth by leaps and bounds. Institutional reforms and globalization of production are the very bases of spatial changes in China’s auto industry. Both the factors can be understood as follows: Institutional Reforms The institutional ambience of China has been changing steadily from command economy to managed market economy. Earlier the auto industry of China was completely under the direct supervision of the command economy. The country experienced command economy prior to 1978 and stern government control over auto industry in the early 1980s (Sit & Liu, n.d.). Even the raw materials and finished products were looked after by the central or local government. The auto making firms enjoyed power only over production. From the mid 1980s China began experiencing institutional reforms when the economic decision making powers were not just restricted to central government. The decentralization of planning power led to competitions among the provinces. The stern central control was slowly fading giving way to market economy. Groups of auto firms joined hands with industrial ministry or local government giving rise to power establishments. The First Auto Works (FAW) group, Second Auto Works (SAW) group, and Shanghai Automotive Industry Corporation are gradually becoming freer of the ancient command economy. “At present China’s auto sector consists of FDI involved firms, centrally programmed state-owned firms, locally programmed state-owned firms, township enterprises, and private enterprises” (Sit & Liu, n.d.). Among the two major factors i.e. institutional reforms and product globalization for the economic advancement in the automobile industry the institutional reforms play the primary role. Globalization of Production: Increased FDI inflow Another factor leading to the spatial restructuring of auto industry has been improved sharing of production across the world. The enlarged inflow of FDI (Foreign Direct Investment) from various MNCs (Multinational Companies) contributed immensely to the spatial transformations of Chinese auto industries. Increase in Demand: Shared Technology and Increased Production There occurred a rapid increase in the demand of light vehicles and cars. Due to the excess demand over supply of motor vehicles the industry experienced diseconomies of scale. Low technical know-how along with less variety of models and low production capacity existed in Chinese auto industry. Hence, the number of assemblers almost doubled in 1985 (Sit & Liu, n.d.). This rise in demand led to joint ventures with MNCs resulting in superior technical knowledge and importation of vehicles and parts. The number of imported cars exceeded that of domestic cars by leaps and bounds in 1980s (Sit & Liu, n.d.). This high demand compelled China to support FDI in auto production by joining hands with auto manufacturing MNCs. The Sino-foreign joint ventures and international companies were now relieved of tax burden by exemption upto two years and reduction upto three years (Sit & Liu, n.d.). Due to these institutional reforms the auto industry of China experienced immense FDI inflow. Data shows the number of motor vehicles as 13.19 million in 1998 as compared to only 1.78 million in 1980 marking 11.8% as the annual rate of increase (Sit & Liu, n.d.). The China Automotive Industry Policy was set up in 1994 (Sit & Liu, n.d.). China had around 500 FDI related automobile units by 1997 with a cumulative contracted FDI amount of US $ 7.39 billion (Sit & Liu, n.d.). Most of these auto making MNCs have clustered in the Yangtze River Delta and the Beijing – Tianjin region and cities like Guangzhour, Changchun and Wuhan mostly due to proximity to assemblers and superior infrastructure and investment ambience (Sit & Liu, n.d.). Product Diversification and Boom in Car Manufacture Previously majority of China’s auto industry’s production used to be chiefly goods vehicles like trucks and vans. Early 1980s marked the boost in the manufacture of light cars and heavy trucks (Sit & Liu, n.d.). The number of imported cars in the country was far ahead of the domestic cars. Realizing this huge domestic demand for cars the Chinese government decided to expand car production. The “Big Three and Small Three” strategy was implemented (Sit & Liu, n.d.). For this the new entrants into car assembly were prohibited. However, two new groups entered into mini-cars whose parent companies were the China Ordnance Industry Corporation and the Guizhoe Aviation Industry Corporation (Sit & Liu, n.d.). In 1997 along with Shanghai-GM a new car assembler 1.06 million cars were expected to be produced by 2000 (Sit & Liu, n.d.). Shanghai, Tianjin, and Nanjing emerged as important auto industry centers in China (Sit & Liu, n.d.). Problems that came with the Economic Boom Excessive interference and strictness of the government stood on the way of growing automobile industry of China. Institutional reforms after 1980s exerted increased regulation on auto based FDI. Due to the maximum-equity regulation no auto manufacturing MNC could solely dominate the market. Unsystematic regulation on auto related FDI inflow existed. They had localization requirements and strict restrictions on parts imports. This resulted in dissatisfied foreign associates. Lack of adoption of “lean production” and just-in-time (JIT) delivery except by very few assemblers contributed nothing to the economic boom in the automobile industry. Hence, the Chinese auto production has been referred to as “embedded globalization” where the auto producing MNCs were forced to adapt the country’s institutional ambience. Mixed Regulation Mechanisms At present a mixed regulation mechanism comprising of the ancient command economy, the modern market economy and government’s relationships have brought forward innumerable transformations. Actually the mixed regulation mechanism after the Opening and Reform in 1978 encouraged industrial restructures and FDI inflow resulting into spatial change in China’s automobile production (Sit & Liu, n.d.). The Chinese government therefore calls it the “socialist market mechanism”. 1990s experienced rapid spatial expansion of several assemblers, the primary national assembler being FAW. However, the ownership restrictions stand on the way of local and provincial firms to expand across borders. Import-substitution still outlines the Chinese automobile industry. Production has been shifted primarily in the coastal regions due to the concentration of the automobile manufacturing firms. The advancement in Chinese automobile industry due to the gradual institutional reforms has been described as “path-dependent” and the steady globalization of production particularly in the form of FDI inflow has been referred to as “embedded globalization”. The government policies, legacies of central planning, bureaucracy, local or provincial protectionism and political groups combined have resulted in institutional ambience and reforms whereas globalization of production has lead to shared capital, technology, management and marketing each being far more superior than earlier. Conclusion In the light of all the above discussion we come to know how the automobile industry in China underwent radical transformations. On one hand where the institutional reforms of the country have promoted expansion in the manufacture of automobiles the still strict legal policies on the other hand have only discouraged the foreign partners, local and small automobile producing firms. There appears a dual approach in the advancement of the government leading to both expansions and restrictions. Hence, we conclude with the description of China’s automobile industry’s boom as the mixed regulation mechanism or the socialist market regulation. References Sit, Victor F. S. & Liu, Weidong. (n.d.). Restructuring and Spatial Change of China’s Auto Industry under Institutional Reform and Globalization. Department of Geography & Geology, University of Hong Kong, Institute of Geography, Chinese Academy of Sciences. Read More