The Impact on the Automobile Industry in China - Essay Example

The Impact on the Automobile Industry in China After Joining the W A Review of the Literature (Fill in with your information date, class, etc.) Abstract There were great expectations and tense presumptions in the matter of China's entry into the WTO. The long and arduous process of solidifying accession into the WTO was intense and many of the end results were surprising and particularly unexpected. The automobile industry in China was relevantly included in the changes which took place as a result of China's entry into the WTO; economic figures and the overall alterations which took place on the automobile industry are extremely necessary in order to gain a full and proper view on the entire situation. In the end, the entry of China into the WTO was considered a positive thing by most, although there are certainly those with contradictory opinions. The efficacious qualities that China gained by entry into the WTO; an aid to the economy, and the opening up of China's markets for more international trade and investment (to name a few). The aim of this paper is to discuss more thoroughly on these points and more, and to offer a more in-depth and comprehensive point of view on the situation of the impact on the automobile industry in China after China's accession into the WTO. The Impact on the Automobile Industry in China After Joining the WTO: A Review of the Literature There are various separate interests of impact which took place on the automobile industry in regards to China's accession into the WTO. "Since the beginning of economic reform and its opening to the outside world, China's economy has been growing at a rate of nearly 10 percent annually and its external trade has expanded by more than 15 percent a year. In 1999 China's trade volume reached $360.7 billion, ranking 9th in the world, with export volume reaching $195 billion. China has emerged to become an important player in world trading system." (Zhai & Li, 2000). Negotiations over China's accession into the WTO immediately provoked a debate between "pessimists who believed that opening the economy would lead to a flood of imports and a de-nationalization of manufacturing industry, and those who believed that it would spur rationalization of state-owned enterprises, lock in domestic reforms, attract foreign investment, and open the way for trade expansion." (Noble et al). The aim of this paper is to thoroughly realize and discuss these interests and more, in order to come to a clearer and more understanding point of view on the particular situation. In order to do this, the following questions must be addressed: 1. What is the WTO 2. What was China's automobile industry like before China joined the WTO. 3. What was the impact on the automobile industry in China after China's accession into the WTO 4. What conclusions can be drawn from this occurrence By discussing these three questions, we can more precisely comprehend and opinionate on this subject matter. This is what will be dissertated in the following. What is the WTO The WTO (World Trade Organization) is an organization which consists of 123 signatory countries. Established on January 1, 1995, and based in Geneva, the WTO replaced the GATT (General Agreement on Tariffs and Trade) as the most primary legal and institutional foundation among the multilateral trading system of member countries. The aim and prime purpose of the WTO is to set forth the principal contractual obligations which determine how governments outline and execute domestic trade legislation and regulations. Through debate, negotiations, and adjudication, the WTO is the literal platform on which trade relations among separate countries evolve. The WTO is in all actuality the sole organization which deals with the rules of trade between nations. Since the time of its inception, which took place in 1999, protestors and anti-globalization movement contesters have targeted the WTO as a main place of impact. This is because the WTO promotes economic globalization, which goes against anti-globalization activists, who consider the idea of economic globalization to be problematic. The majority of international organizations tend to operate on a 'one country' or 'one vote' system, while the WTO does not. This is where it differs greatly. Instead, many WTO decisions are determined by the consensus of all member states. The main advantage of this type of adopted system is that it encourages efforts to find the most widely acceptable decision. What was China's Automobile Industry Like Before China Joined the WTO It was during the time of the Korean War, which spanned for approximately three years (1950-1953), when China's automobile industry was especially prosperous. During the years of the war, the United States government ordered a large number of army trucks from Chinese automobile manufacturers. There were two primary reasons for why the United States had chose to purchase their automobiles from China; one, China was geographically close, and two, it was still under the United States' occupation (until 1952). The affect of this decision made by the United States reflected greatly on China. The automobile industry experienced a rapid growth, and gained an increasing domestic demand. The expansion which occurred in the 1970s boosted the growth of the automobile industry even further. China's automobile industry is centuries old, and at the turn of the last century, it encountered multiple challenges; the entry of China into the WTO was impending, there was fierce pressure and dominant marketing strategies, and at the time China's automobile was basically left with three choices: First, the industry needed to become closer to the three large domestic groups: The First Automobile Works (Changchun) (FAW), Dong Feng Motor Corporation, and Shanghai Auto-Industry General Corporation. Second was the adopting of an open-investment system. This was essential, and such things included in this were: breaking the limitation on the industry 'accession' with the tints of the planned economy, unclogging various domestic investing channels, transforming government monopoly management of everything, big or small, into an enterprise self-discipline system, and restoring the automobile industry back into what it was as a competitive sector. Third, was the dealing and joining of transnational groups. In the beginning, there were few enterprises joined to transnational groups, leaving most as sole proprietors. It was when the suggestion to allow foreign groups to control specific shares in order to allow both parties to develop and prosper which truly began the joint venture situation. In the present day, the majority of Chinese automobile enterprises are joint ventures, which means that the Chinese side only holds half of the shares. Some examples of joint ventures are: VW (China), GM (China), and Toyota (China). After 50 years of massive construction and re-construction, China's automobile had actually made one incredible improvement: they brought together the specifics in order to be able to cultivate the market of the automobile industry. China invested 58.8 billion yuan into its automobile industry during the ninth Five-Year Plan period, and since then has continued to input a significant amount into the economy of the auto industry. China was actually the largest automobile producer in the world in 2000. A prime factor in the explanation of this is because China's auto manufacturers have advantages over their competitors; firstly, the cost of labor in China is lower, which increases profit margins. Also, China has a well established iron and steel company; iron and steel are absolutely essential for the manufacturing of automobiles, and many other countries have limited iron and steel resources. What was the Impact on the Automobile Industry in China After China's Accession into the WTO It was on December 11, 2001, when China officially became a member of the WTO. It was "after 15 years of arduous negotiationsthatChina became the 143rd member of the World Trade Organization (WTO)." (Adhikari & Yang, 2002, 39:3). It was this profound change which earnestly opened a new page in the annals of China's reform. Many changes have taken place since this occurrence, whether seemingly minor or strikingly severe. The joining of the WTO was an intricately important event for the overall development of China during the 21st Century. "This important eventwaspreceded by the establishment of permanent normal trade relations with the United States in 2000, twenty-one years after the normalization of diplomatic relations between the two countries. These two events are significant because they mark the Chinese economy coming of age as China is recognized by the United States and the world economic community as an equal partner." (Chow, 2001). 'The wolf has come!' was a regularly used phrase during the negotiation period of China's joining of the WTO. To some, the 'wolf' really has come since that time, as China, in only its first year of accession to the WTO, had expectations of quite possibly surpassing the United States as the country which attracts the most foreign capital. This was an extremely exciting precedent to the country of China, especially considering how extreme the United States' foreign market stood at, therefore proving what a remarkable height another would have to reach in order to pass the United States. The term 'wolves' has also been used for another factor in the topic of China's entry into the WTO; 'foreign wolves'. Due to the high tariff and price, quite a vast number of people in China disliked the domestic automobile industry and were in hopes of purchasing imported or homemade automobiles at the discount which would consequently be offered. The hard pressure brought about by these 'foreign wolves' would eventually make China's automobile prices on the same economic level as that of the international market, which would therefore bring many people in China that much closer to their automobile dreams. Over the four years since the joining of the WTO, China has attracted investment from the world's major multinationals, and has now become the third largest trader - actually topping the U.S. now - with foreign trade reaching $1.1 trillion in 2004. There were specific commitments that China was required to make in relation to automobile investment before official entry into the WTO. According to the WTO report of the Working Party on the Accession of China, China agreed to the following: Amend the 1994 Automotive Industry Policy in order to ensure compatibility with WTO rules and principles and to phase out two subsidy measures: loan and foreign currency priorities based on export performance, and preferential tariff rates based on percentage of local content. Eliminate - within two years of accession - all measures applicable to motor vehicles producers that restrict the categories, types, or models of vehicle they can produce. Allow provincial governments to approve foreign investments in motor vehicle manufacturing of up to $60 million U.S. Dollars one year after accession, $90 million U.S. Dollars after two years, and $150 million U.S. Dollars after four years - up from the present $30 million U.S. Dollars cap. Remove the 50% foreign equity investment limit for engine manufacturing joint ventures. Unify laws and regulations with regard to both domestic and imported motor vehicles and auto parts so that imported products would enjoy the same treatment as similar domestic products. As well, China agreed to increase its import quotas on automobile products by 15% per annum, and committed to eliminate quotas entirely on January 1, 2005. It was understood by both parties that as a country, China would earnestly follow and stand by these commitments precisely, and although this was seemingly not problematic at the time, there were other sources of anticipated negativity, a large amount which was in regards to the expected loss in the automobile industry. The agreement that China made with the United States, the European Union, (and the WTO), in regards to the automobile industry was as follows: China would cut import tariffs on automobiles down to 25% before the middle of 2006 from the 80-100% rate which prevailed previously. China was consequently required to lift all restrictions on the category, type, and model of vehicles produced in Sino-EU joint ventures within the two years following the WTO accession. China has truly embraced the world since their WTO entry, in many more ways than one. A prime benefit China assumed they would enjoy from joining the WTO was most certainly affordable luxury. There are many other positive changes that have taken place however, some in particular which may easily be considered more impacting. More job opportunities, a more vast choice of services, and a greater desire among the Chinese population to learn English were a few among the many other positive changes which took place since China joined the global trading club. What was one a particularly rigidly planned economy quickly altered into a rather diverse and open-system situation. Drastic social changes and enriched knowledge about international practices ushered in, as well as an overtly new eagerness for integration in the world arena. There was an incredible boost in regards to the automobile industry after China's entry into the WTO; the effects were remarkably drastic. The auto industry itself has actually been - and continues to do so - sharpening international competitiveness while continuously and simultaneously significantly lowering car prices. The automobile industry in China was mature, with a rather open market, and efficient production and management before China's entry into the WTO, which was a primary reason as to why so many people expected the automobile industry to be one of the most seriously affected industries. However, the end result went quite contrary to people's anticipation. In the first year after China joined the WTO, the auto industry remained stable and well, with not too drastic of changes, and certainly no significant losses of any kind. Several major domestic car-makers actually gained the best profits in history and China's growth rate for the car consumption market reached heights of 40%. "China's automobile market in 2001 turned in its best performance since 1994." (Xing, 29:4). During the first year following China's entry into the WTO, all of the country's domestically produced automobiles had fallen in price in high anticipation of a wave of cheaper imports. During all of this, international auto multinationals began entering or investing a significant amount more in China; this being the true factor which boosted China's automobile industry. Urbanization and the global transfer of production have constantly been centered towards China, which is reasonably the prime explanation for China's domestic auto industry having such great potential. This is in consideration of the fact that China's auto and parts exports hit a whopping $4.3 billion U.S. dollars in 2003; a figure which was estimated to hit anywhere from $1.5 billion to $20 billion U.S. dollars in 2005, and has been expected to reach up to $100 billion U.S. dollars in 2010. The automobile industry in China was actually expected to have the hardest hit after China's entry into the WTO; the allowance and in fact encouragement of cheaper imports were expected to hurt foreign auto ventures with better product quality and services. A majority of the Chinese population actually held off from purchasing automobiles during the time of the accession, due to a warranted expectation of a wave of cheaper imports. Although originally there were these rather gloomy predictions of an influx of cheap foreign vehicles due to China's agreement into the WTO, in 2002, China Association of Automobile Manufacturers statistics showed the output of domestically made vehicles at an increase of 35.3%; the production of Sedans alone rose by 46.3%. Part of China's commitments to the WTO included the gradual reduction of tariffs, and it was due to this from which the expectations of decrease in the automobile industry first loomed. "Lower tariffs would increase in the imports of both agricultural and industrial products. Competition from foreign imports will force Chinese producers to lower their prices and improve the quality of their products, both to the benefit of Chinese consumers." (Chow, 2001). It has been a surprising but obviously positively accepted turn of events; senior economist Liu Ming of the SIC (State Information Centre) actually predicted that the total annual output of automobiles in China would reach anywhere from $3.1 to $3.2 million units and that passenger cars alone would exceed $1.1 million. The prices of automobiles did not drop as drastically as expected in 2002, and incredibly enough, automobile sales boomed. The majority of automobile corporations in China actually doubled - or more - their previous sales records. The most surprising admission on this result was that China's products succeeded in complying with international standards; the fact that an industry which was almost entirely expected to fail actually impressively increased in revenue was unexpected to the majority in interest. The double-digit growth in automobile production and sales since 2002 was a result of what local analysts called the 'fourth wave of investment' in the country's auto sector. A vast array of CEOs from various leading multinationals have visited China and met with government leaders, negotiating with potential Chinese partners, and often times clinching new deals. One in particular was BMG AG, who obtained government consent for a project in consensus with Brilliance China Automotive Holdings Ltd.; Hyundai Motor Company was another example, as they teamed up with Dongfeng Motor Company through its subsidiary, Dongfeng-Yueda-Kia Motors Company Ltd. Another set of corporations which began negotiations were Renault-Nissan Suisse SA with Dongfeng and Daimler Chrysler AG with First Automobile Works Group Corp. (FAW). In April of 2002, Hyundai signed a 30 year joint venture agreement regarding their assembling of cars which was planned at the time to begin later that year. There were many additional commitments and negotiations made after China's entry into the WTO both within China and internationally; foreign automakers decided to commit additional funds to their existing investments, and many also opted to extend their joint venture agreements by anywhere from 5 to 20 or more years. Volkswagen, for instance, signed an agreement in 2002 to extend its agreement with Shanghai Automotive Industry (Group) Corporation (SAIC) for another 20 years and in fact also increased Shanghai Volkswagen Automotive Company Ltd.'s registered capital from $555.8 million U.S. Dollars to $761.2 million U.S. Dollars. Private investors and regional governments were of great surprise in this context; it was they, rather than the central government, who obtained the emergence of significant domestic investment. China's first wave of investment actually began in 1984, and included the establishment of Beijing Jeep Company Ltd. and Shanghai Volkswagen. The second wave occurred in the early 1990s, the third in the late 1990s, and over the years of 2002-2004, there was an emergence of new Chinese car assemblers such as the Geely Group, Brilliance China, Jiangsu Nanya Automobile Company Ltd., Yueda-Kia, and Shanghai Qirui Automobile Company. What Conclusions can be Drawn From This Occurrence The automobile industry in China has come a long way since the mid-1980s, and the country's drastic reduction in regards to import tariffs which occurred at the beginning of 2002 and increase in import quotas for the same year greatly surprised both government agencies and automobile enterprises. The country of China holds 1.3 billion residents - more than 300 million families - making it the world's largest potential automobile market. And although the majority of families in China have certain preoccupations, such as housing, medical care, and education, the actual number of families who can afford to - and therefore most likely will - purchase an automobile is anywhere from 3 to 5 million. Although a seemingly relative small number when compared to the absolute population, this figure is certainly large enough to sustain rapid growth in the auto market. The impact on the automobile industry in China is unavoidable, with the difficulty in import managing quickly becoming more and more intense. The situation in regards to the few years after China's accession into the WTO makes us aware of the unbalanced scale of advantages and disadvantages in different industries and the uncertainty of their change and position. China's accession into the WTO will create new sets of business wins and losses not only for the present, but also for years to come. Perhaps even more importantly, due to China's entry into the WTO, a fresh opportunity is presented to governments, industries, companies; the economy as a whole. It has already been a positive force for the economy in China, and has opened up China's market for more international trade and investment. From this one conclusion we can positively come to is that the sensitive fields in which many people felt insecure about actually did not receive any heavy impact after China's entry into the WTO. Although it has been over 4 years since China's actual accession, this amount of time is still considered a rather short span, and the influence still has not made itself completely felt upon China's relevant industries. Overall, China's entry into the WTO has been perceived as having a highly positive outcome, and although perhaps - and most likely - the most substantial results will not be seen until far into the future. In particular regards to the automobile industry in China; that too will have its own separate ups and downs. There is no doubt that the auto industry will face a challenge. China certainly has its own key industries, and the automobile industry is without a doubt one of them. It is a pillar industry for the country's economy. Again, the outlook for it is, for the majority, on the positive side, but only time can tell what will come of the situation in the future. References Adhikari, R. & Yang, Y. (2002). What Will WTO Membership Mean for China and its Trading Partners Finance & Development Journal. 39(3).. Chow, Gregory C. (2001). The Impact of Joining WTO on China's Economic, Legal and Political Institutions. Noble, G., Ravenhill, J., & Doner, R. (2005). Executioner or Disciplinarian: WTO Accession and the Chinese Auto Industry. Business and Politics. 7(2), 1118-1118. Xing, Wayne W.J. (2002). Automakers in the Fast Lane. China Business Review. 29(4). Zhai, F. & Li, S. (2000). The Implications of Accession to WTO on China's Economy. Retrieved January 25, 2006, from http://www.monash.edu.au/policy/conf/76FanZhai.pdf Read More