“China – big but not easy” (1)
titled the Automotive Industries Magazine in its July 2005 issue, reporting about the German premium car manufacturer Audi, who is manufacturing in China since 1999. This simple statement breaks down the risks and opportunities for the German automotive supplier industry in China into two keywords. The first one is “big”: in the last decades, the eyes of the world’s automotive supplier industry have been directed to China, because it is promising to be the world’s biggest market soon. Given the fact that one fifth of mankind lives in China and its standard of living is rapidly improving, it is only a question of time until the promise becomes real. In addition to this enormous sales potential, the advantages of cheap labor and an improving level of technology and education show China’s attractive sourcing potential. The second one is “not easy”: exploiting this potential and taking part in the growth comes with a variety of challenges to the foreign suppliers: a completely different culture, a dynamic and highly competitive market and a political-legal system that favors its home industry over the foreigners – only to name a few. Although this paper is concerned with the German automotive suppliers in particular, it is inevitable to draw a complete picture of the country in general and the situation of the automotive manufacturers, which are in many areas the driving force behind the supplier’s activities. So the first chapters describe the market environment, progressing from the general to the specific and providing the framework necessary for the in-depth analysis of risks and opportunities. These are separated into internal and external aspects. Internal risks and opportunities derive from the weaknesses and strengths of a company itself. The external risks and opportunities in contrast can hardly be influenced by the suppliers as they are effects of the political and economical development. But the suppliers can develop strategies to adapt: using the opportunities and avoiding the risks! So, the aim of this paper is to show why China is such an important but difficult market for the German automotive suppliers and – as a conclusion – to give recommendations and strategies for being Successful in China.
(1) Wessel-Aas (2005), p.1
Table of content
List of figures
List of abbreviations
1 - Introduction
2 - Country profile: China
3 - The historical development of the Chinese automotive market
3.1 - The development until 2001
3.2 - China’s accession to the WTO and its effects
4 - The current situation of the automotive industry in China
4.1 - Market characterization: OEM market
4.2 - Market characterization: Supplier and aftermarket segment
4.3 - Market outlook
5 - Analyzing risks and opportunities for German suppliers in China
5.1 - Possible motives for the market entry
5.2 - Different market entry modes
5.3 - Risks
5.3.1 - External risks
5.3.2 - Internal risks
5.4 - Opportunities
5.4.1 - External opportunities
5.4.2 - Internal opportunities
5.5 - Proposing strategies
6 - Conclusion
Appendix
Bibliography
Declaration of Academic Integrity
List of figures
Fig. 1 - Map of China
Fig. 2 - Development of the automotive market in China
Fig. 3 - The supplier market in China
Fig. 4 - The top suppliers in China and the world
Fig. 5 - Basic figures of the Chinese automotive market
List of abbreviations
illustration not visible in this excerpt
1 - Introduction
“China - big but not easy”[1]
titled the Automotive Industries Magazine in its July 2005 issue, reporting about the German premium car manufacturer Audi, who is manufacturing in China since 1999. This simple statement breaks down the risks and opportunities for the German automotive supplier industry in China into two keywords.
The first one is “big”: in the last decades, the eyes of the world’s automotive supplier industry have been directed to China, because it is promising to be the world’s biggest market soon. Given the fact that one fifth of mankind lives in China and its standard of living is rapidly improving, it is only a question of time until the promise becomes real. In addition to this enormous sales potential, the advantages of cheap labor and an improving level of technology and education show China’s attractive sourcing potential. The second one is “not easy”: exploiting this potential and taking part in the growth comes with a variety of challenges to the foreign suppliers: a completely different culture, a dynamic and highly competitive market and a political-legal system that favors its home industry over the foreigners - only to name a few.
Although this paper is concerned with the German automotive suppliers in particular, it is inevitable to draw a complete picture of the country in general and the situation of the automotive manufacturers, which are in many areas the driving force behind the supplier’s activities. So the first chapters describe the market environment, progressing from the general to the specific and providing the framework necessary for the in-depth analysis of risks and opportunities. These are separated into internal and external aspects. Internal risks and opportunities derive from the weaknesses and strengths of a company itself. The external risks and opportunities in contrast can hardly be influenced by the suppliers as they are effects of the political and economical development. But the suppliers can develop strategies to adapt: using the opportunities and avoiding the risks ! So, the aim of this paper is to show why China is such an important but difficult market for the German automotive suppliers and - as a conclusion - to give recommendations and strategies for being successful in China.
2 - Country profile: China
The purpose of this chapter[2] is to introduce the reader to China, roughly following the scheme of a PESTEL[3] analysis and emphasizing relevant aspects for the following chapters.
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Fig. 1 - Map of China[4]
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The People’s Republic of China (Zhonghua Renmin Gongheguo; in the following referred to as “China”) is the world’s 4th largest country, covering an area of approximately 9.6 million km2. With its 1.3 billion inhabitants, which corresponds to one fifth of the world’s total population), it is the most populous country in the world. But these impressive figures do not show that there are striking geographical, cultural and economical differences within the country.
China occupies most of eastern Asia, extending from the Pacific Ocean in the east to the central Asian plains in the west; from the Gobi desert in the north to the subtropical zone in the southeast and the Himalaya Mountains in the southwest.
Under the rule of powerful dynasties, China was a leading civilization in arts, culture and technology for thousands of years. In the 19th and 20th century, the country was set back in its development as a result of the Europeans’ colonialist policies and wars against Japan. The People’s Republic of China (PRC) was proclaimed after a civil war in 1949 by the communist movement under Mao Zedong. He established a socialist one-party system with the Chinese Communist Party (CCP) having control over the whole administration. The government is based in Beijing, exercising centralistic control over the 23 provinces, five autonomous regions, four municipalities and two special administrative regions. It is often criticized by international organizations like Amnesty International for violation of human rights, censoring of the media, suppression of democratic tendencies and more. Besides that, several border disputes, the occupation of Tibet, and the political conflict with the Republic of China[5] are foreign affairs yet to be solved. Nevertheless, China is a permanent member of the UN Security Council and, since 2001, member of the World Trade Organization (WTO). Current head of state is President Hu Jintao. Head of government is Wen Jiabao.
China’s economy is one of the fastest-growing in the world. An enormous market potential and low labor costs attract foreign investors, generating wealth and growing demand for all types of goods. This was made possible after the death of Mao and the beginning reformation process under Deng Xiaoping: market-oriented elements were integrated step by step into the centrally planned economy.[6] A private sector was allowed in addition to the public sector and many state-owned enterprises were privatized. Real GDP [7] growth usually reaches 8-12% per year since 1980, with a few exceptions. According to the International Monetary Fund, China is the world’s fourth-largest economy in terms of total GDP (2006: $ 2.6 billion); probably passing Germany in 2008.[8] But the economic development is advancing more rapidly in the eastern part of the country, hence widening the gap to the interior. Most of the rural population lives in poverty, as the government is reducing investments in the agricultural sector. The coastal urban areas, in contrast, are experiencing industrialization, infrastructural development, rising incomes and increasing wealth for large parts of the population. But in total, the average GDP per capita is $7,800, leading to a classification as “developing country” by the World Bank.[9]
The gap between the east and west of China is also mirrored in population density: in the coastal areas it is about twice as high as in the central provinces, and even forty times as high as in the remote western provinces.[10] This is also a result of the rapid urbanization in the country, as people hope to find jobs created by the booming industry in the cities. In 2007, about 44% of the Chinese lived in urban areas.[11] Besides internal migration, the government faces several other socio-demographic issues: aging society, lacking social security, mass unemployment and underdeveloped rural areas show the dark side of the market-oriented reform policy. But due to the government’s rigid one-child-policy, at least the overpopulation problem was solved.[12]
China’s culture, influenced by religions like Buddhism, philosophers like Confucius and the socialist ideology, is difficult to understand for foreigners. Especially westerners have a hard time coping with the complex language, social and business relations (e.g. the guanxi [13] ) and communication styles. Not to mention that there are also huge distinctions in between the Chinese culture.
In terms of technological development, China is closing up to the world’s most advanced countries. The government is fostering science & technology in many ways. According to official figures, 35 million people are already working in this sector[14] - an enormous resource. The education system is improving quickly, eliminating illiteracy gradually and improving the quality of education. The technological standard is also improving due to knowledge transfer from foreign companies investing in China - sometimes unintentional. Intellectual property violations often occur.
Environmental damage is one of the most dramatic side effects of the economic boom: the United Nations Environment Program sees “very serious”[15] environmental pollution and increasing ecological destruction. The OECD[16] estimates China to become the largest emitter of carbon dioxide before 2010[17]. Out-dated production technologies, rising energy consumption and lacking environmental awareness are reasons for the critical situation.
The PRC’s legal system is, compared to western standards, relatively fragmentized and therefore difficult to overlook for foreigners. The decision whether common or special law, nationwide or regional law applies is often subject to the interpretation of the courts. In case of doubt, it is a common practice to select the regulations which give the domestic party an advantage over the foreign party. This unequal treatment is gradually being abolished after China joined the WTO in 2001.
All of the mentioned aspects and statistical data indicate that China is on the way to become the world’s economic superpower. But the government will have to make enormous efforts in order to minimize the negative effects on the population and the environment. The eyes of the world will stay focused on China, as its rapid development in all areas affects the whole planet.
3 - The historical development of the Chinese automotive market
In its fifty-year long history, China’s automotive production witnessed dramatic changes in the early 1980s and in 2001: Deng Xiaoping’s deregulation policy and China’s accession to the WTO. Both reshaped the market and laid the foundations for the current situation, which shall be described briefly in this chapter.
3.1 - The development until 2001
The Chinese automotive industry was [18] founded in 1953 with the establishment of First Automotive Works (FAW) in Changchun. More mid-size state-owned manufacturers were established in the following years, mainly to satisfy the demand of the military. In addition to that, until 1978, small automotive manufacturers were set up in almost every province of China. Controlled and owned by the local administrations, these manufacturers produced slightly altered versions of the same models for their regional isolated markets, avoiding direct competition with each other. Complete supply chains were established in every region: the birth of the Chinese supplier industry.
The second phase of the Chinese automotive history began in the early eighties, when China’s economy began to open up under Deng Xiaoping. The administration had realized that the then structures in the automotive sector could not satisfy the demand of a modernized China, which had begun to import cars in large quantities.[19] Following the import substitution policy of that time, import tolls were increased and foreign investors were allowed to enter the market - but only by establishing joint ventures with Chinese partners. The intention behind this regulation was to attract foreign technological knowhow and at the same time preventing a sell-off of the local industry, which was highly uncompetitive compared to the international companies. Most of the manufacturers and suppliers were inefficient and too specialized elements of small local supply chains and only survived due to government protection.
The “first mover” from abroad was Volkswagen, which established a joint venture with Shanghai Auto Co. (today SAIC) in 1984. Other European, Japanese and American companies followed, so that in 2007, almost every globally-acting manufacturer was present on the Chinese market.
In the mid-eighties, new regulations concerning the “local content” of the produced cars were imposed by the administration and more or less forced foreign automotive suppliers to enter the market. Bosch, for example, started with a licensing contract for Diesel fuel injection systems in 1984[20] ; its US-competitors Visteon and Delphi entered the market in 1993, respective 1994.[21]
3.2 - China’s accession to the WTO and its effects
Although the Chinese economy had been gradually opened since the 1980’s, the administration partly followed a policy of protectionism. Local content laws, tariff protection and unequal legal treatment of domestic and foreign companies were characteristics of this policy. Whatever could be produced locally was protected from foreign substitution [22]. As a result of this, foreign companies hesitated to invest in China and Foreign Direct Investment (FDI) inflows began to decrease in the late 1990s[23]. These and other reasons, for example the financial crisis in Asia in 1997 and 1998, forced the Chinese government to seek the WTO membership[24], although this would come with a certain “pain”[25]: the benefits of attracting more foreign direct investment, technology transfer and better access to the US and EU markets had to be paid with the abolishment of protectionist regulations.
The WTO defines itself as “the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible. [26] The accession to the WTO is equivalent to the signing of the WTO’s three central agreements, the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade of Services (GATS) and the Trade- related Aspects of Intellectual Property Rights (TRIPS).
The GATT and GATS regulations stipulated China to reduce or abolish market entry barriers for goods and services, for example the import quotas, local content requirements, joint venture necessity and state-protection of service sectors [27], until at latest 2010. The effects of the GATT and GATS implementation were positive for China’s economic performance: driven by increasing FDI[28], the GDP grew by more than 10% p.a. since 2003. The trade volume more than tripled from 2001 to 2006[29]. As expected, China became more attractive to foreign investors as production location and market. The automotive industry also went on to invest: BMW, Ford, Toyota, Honda, Bosch and ZF Sachs are examples for increasing commitment in China as production location.[30] But in contrast to other sectors, China still tried to protect its local automotive industry[31] and introduced new "Measures for the Administration of Import of Automobile Components and Parts Featuring Complete Vehicles" ("Decree 125") in 2005. The new regulations included stricter local content regulations, forcing manufacturers to source more from locally producing suppliers if they wanted to avoid a heavily taxed “import” classification of their cars. Therefore foreign suppliers were forced to increase their local presence. As a consequence, the European Union and the United States sued the PRC at the WTO. The trial is still in progress[32]. In the meantime, both manufacturers and suppliers have to cope with the situation.
Another issue still to be solved is the one of Intellectual Property Rights. Cases of piracy and counterfeiting are often reported by the media; and especially foreign automotive manufacturers fight against copies of their products, brought on the market by Chinese companies[33]. The problem is not the legislation: China reformed its laws to meet TRIPS standards. It is the practical implementation, which is still insufficient, as the laws compete against the widespread attitude in the Chinese population that being copied is an honor and award for the inventor.[34]
Despite the risks, the years after the WTO accession saw steady growth in the automotive sector, driven by both foreign and local companies and the large number of joint ventures. These recent developments and the current situation of manufacturers and suppliers are to be analyzed more deeply in the following chapter.
illustration not visible in this excerpt
Fig. 2 - Development of the automotive market in China [35]
The automotive industry in China is unique in its structure as a result of the historical development: Chinese companies compete with foreign OEMs and suppliers, but they do also produce together in Joint Ventures. Another essential factor is politics: since the country began to open up in the 1980s, the Chinese government has tried to reach a balance between protecting and supporting local industry on the one hand and attracting foreign companies and their know-how on the other.
[...]
[1] Wessel-Aas (2005), p.1
[2] Unless otherwise noted, facts & figures in this chapter taken from: CIA (2007), The World Factbook Online. Statistical data from reliable international organizations, if available, was preferred over figures by the Chinese government. The Beijing administration is often accused of “sugar-coating” statistics example: cp. China-intern (2004)
[3] PESTEL: Political, economical, social, technological, ecological and legal aspects.
[4] source: www.paulnoll.com
[5] In 1949, the Communist party overthrew China’s “Kuomintang” government, which went to exile on the Chinese island of Taiwan. Since then, the Republic of China / Taiwan struggles to be internationally accepted, whereas the PRC, claiming to be the only Chinese Republic, is officially accepted by most states.
[6] cp. Heilmann, as cited in: Bundeszentrale für politische Bildung, bpb, (2006)
[7] GDP: Gross Domestic Product
[8] International Monetary Fund, IMF (2007) - World Economic Outlook Database
[9] World Bank (2006) - Country Partnership Strategy for the People’s Republic of China, p.5
[10] China Internet Information Center (2007) - Population
[11] China Internet Information Center (2007) - Facts & Figures 2007
[12] The population is only growing at a moderate rate of 0.6% p.a (2007 figure), ibid.
[13] Guanxi: The network of personal relationships in China; very important for business matters.
[14] China Internet Information Center (2007) - Science and Technology
[15] UNEP (2005) - China - State of the Environment
[16] OECD: Organization for Economic Co-Operation and Development
[17] OECD Press Release (2006)
[18] cp. Meyer (2003), p. 18
[19] cp. Scholz/Postler (as cited in Kasperk/Woywode/Kalmbach, 2006, p.34)
[20] Bosch in China (2007), company presentation, p.2
[21] cp. Kasperk et al. (2006), p.63 et seq.
[22] cp. Kasperk et al. (2006), p.17 et seq.
[23] cp. Graham/Wada (2001), p.3
[24] Fischer, D. in bpb (2006)
[25] Graham/Wada (2001), p.25
[26] WTO (2008)
[27] Telecoms, Banking, Insurance are named by the WTO, cp. ibid.
[28] according to the UNCTAD World Investment Report (2006), China was the 3rd biggest recipient of FDI in 2005.
[29] Deutsche Botschaft Peking (2008); trade volume 2001: 509,8 bil. USD; 2006: 1760,7 bil. USD
[30] cp. Kasperk et al., 2006, p.39 et seq.
[31] The automotive and supplier market is concerned a “key industry” and therefore especially in focus of the government; cp. Kasperk et al., 2006, p.21
[32] for further information: bfai (2006)
[33] example in appendix 2
[34] This is based on the Confucian philosophy. In addition to that, the insignificance of private property in communism influenced people’s mindsets. cp. Karad (2006). For further information on the risks associated with IP rights in China, see chapter 5.3.
[35] source: own figure, based on Kaperk/Woywode/Kalmbach (2006), p.65 et seq.
- Arbeit zitieren
- Felix Emmerich (Autor:in), 2008, An analysis of risks and chances for the German automotive supplier industry within the Chinese market, München, GRIN Verlag, https://www.grin.com/document/92964
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