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Can Beijing Jump Start Cars?


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CAN BEIJING JUMP-START CARS?

China's domestic car industry has not gotten much of a boost from the country's officialdom. For many cadres eager to show off their clout, a snazzy import is almost de rigueur. The situation has gotten so bad that coastal Zhejiang province recently commanded officials to stop driving high-priced imported cars. Last month, a state-run weekly lambasted the foreign-car fetish of officials: "Though all their money comes on loan, it's an imported car they want to own."

The anti-import campaign is now getting some teeth. In an example of Chinese-style industrial policy, Beijing in early July unveiled a plan to nearly triple production and transform the struggling domestic auto industry into a global force within 15 years. To choke off auto imports, the government wants to lure foreign producers into making investments first in Chinese components factories. Beijing then plans to reward those companies by allowing them to form the handful of new joint ventures that will be permitted to manufacture automobiles for the Chinese market.

The goal is to rationalize an industry plagued by the legacy of Maoist-era planners. By dangling the carrot of access to its huge market, Beijing wants to get foreigners to provide technology and jobs. If all goes according to plan, the Chinese government will have transformed its components industry and created an assembly infrastructure to satisfy nearly all of China's domestic demand. Predicts a Western auto executive in Beijing: "Foreigners will own equity, but the product will be Chinese-designed with local content."

The plan is drawing praise from foreign auto makers. Beijing wants to increase the number of cars produced annually in China from more than 1 million to 3 million by the end of the decade. To do that, it will expand the number of foreign joint ventures in 1996. Volkswagen is now the largest foreign auto maker in China, trailed by Peugeot, Chrysler, and Daihatsu. The government hasn't let others produce passenger cars, although it will soon announce whether Chrysler or Daimler Benz will be the winner of a $1.2 billion minivan project. With the ban now set to expire in 1996, rivals see a chance to join the elite order of dominant players.

Indeed, China's appetite for cars has foreign makers salivating. While sales of Chinese-made autos increased 23% last year, imports were up 48%, to 310,000--despite import duties of more than 200%. Smugglers brought in about 200,000 more. "This market is so big, we don't have the capacity to satisfy all the customers who are demanding our cars now," says Rolf Kaste, senior manager at Shanghai-Volkswagen Automotive Co.

"A KID'S PLAYROOM." The government expects the new plan to save its troubled components industry. Countless small factories scattered around the country currently supply low-quality parts to more than 125 auto and truck manufacturers. "The components industry looks like a kid's playroom," says Jack Perkowski, president of Asian Strategic Investments Corp. "They've got blocks strewn everywhere, but they can't build anything."

Fixing the mess is a priority for Beijing. The government "will favor foreign companies that help China develop and manufacture auto components," says Ye Qing, vice-minister at the State Planning Commission. That message has not been lost on Ford Motor Co. Last month, it announced a $50 million investment in joint ventures to produce windshields, dashboards, and other parts. Meanwhile, Perkowski's group has $160 million earmarked for China's components industry.

Ford hopes its investment will give it an edge in 1996, when the government opens the passenger-car market to new manufacturers. After that, the government will group auto makers and suppliers into three conglomerates and seven smaller companies. Beijing will retain its hand in the market by forcing conglomerates to report to Vice-Premier Li Lanqing, who began his career as a planner for state auto companies.

INSTABILITY. Giving a role to planners in Beijing troubles some analysts. "They [will] have bureaucrats who don't understand a market controlling the process again," says Kim Woodard, a consultant for A.T. Kearney in Hong Kong. Local-content rules also worry some industry officials. New regulations force joint ventures to use 40% locally produced components at the start of new ventures and more in subsequent years. That's no problem for Volkswagen, which already uses more than 80% domestic parts. But General Motors Corp.'s struggling truck joint venture, formed last year, relies almost entirely on imported parts. "A joint venture won't be able to import the parts it wants," frets a Western official in Beijing.

The new policy moves have left some auto makers skeptical of Chinese motives. "They want the manufacturing business to themselves," says Juichi Yanagida, head of overseas planning for Daihatsu Motor Corp., which has a licensing agreement with Tianjin Automotive Industry Corp. In general, the Japanese have been especially wary of the instability of the Chinese market. In early July, Beijing dispatched a delegation to Japan to drum up business. Yet it may not be such a hard sell. According to a recent industry poll, 70% of Japanese auto-parts makers want to set up shop in China--and half of them have already taken initial steps.

China's scheme to protect its infant auto industry could still come undone. The government wants to join the General Agreement on Tariffs & Trade, which frowns on countries linking foreign investment decisions to trade matters. Moreover, the vicissitudes of Chinese policymaking add risk to any venture. After austerity plans forced freewheeling government officials suddenly to account for their expenses last year, auto sales dropped. But they soon bounced back. In a market with China's growth potential, a homegrown auto industry seems a natural.

CHINA'S NEW AUTO STRATEGY

-- Triple auto production by 2000

-- Rationalize more than 125 manufacturers into a handful of giants

-- Modernize manufacturing through new joint ventures with select foreign auto makers

-- Create an advanced auto-parts industry with foreign technology and investment

-- Cut down on imports, which grew 48% last year

DATA: BUSINESS WEEKMatt Forney in Beijing, with Neil Gross in Tokyo


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