New auto policy big leap forward
By Wang Yu (China Business Weekly)
Updated: 2004-06-09 14:16

The high-profile Beijing International Motor Exposition (Auto China 2004) is scheduled to open on Thursday, but on June 1 last week an eagerly awaited policy paper by the National Development and Reform Commission (NDRC) aimed at consolidating the fragmented domestic car making sector into a strong, home-grown industry that may one day tap overseas markets, finally came out.

In experts' and carmakers' eyes, compared to the old version issued and put into effect in 1994, the brand new industry policy is a big leap forward in terms of addressing problems connected with the most recent developments within China's auto industry. But there are still some room for further improvements, they said.

"Different from the 1994 version, the new one looks more like a set of guidelines for the industry, which can serve as macro guidelines for the overall market sector. The document covers almost all the major problems that hamper further development of the industry, and it is quite positive and supportive in addressing ways in which to clear away these problems. However, I do not think it is powerful and explicit enough to effectively drive the industry forward in a practical way," said Li Qing, general manager of the China National Automotive Industry Consulting and Development Corp.

According to the senior industrial analyst, the new policy successfully lays out a clear picture about which path the Chinese auto industry should follow and how market players can be successful along the way.

POLICY: Still room for improvement

For instance, the paper states clearly that NDRC, the country's powerful economic planner, supports private vehicle ownership and auto loans.

More importantly, it aims at driving the local auto makers further forward to establish their own brand names even in the international business arena.

However, the document lacks the authoritativeness and implementation power to convert all the positive clauses into realities, Li indicated.

"Take auto parts production and auto loans for examples, although the policy encourages the development of auto parts production and auto loans, it has neither the power nor the means to get involved inthe actual implementation of the two clauses.

"For instance, if banks do not issue loans to car buyers for various reasons, how can the NDRC step in and interfere," said Li.

Endorsing Li's point of view, auto manufacturing executives called on the government to institute enforcement measures and regulations to support the new policy and to convert its spirits into reality.

"On the one hand, the new paper conveys a clear message that authorities will encourage the development of low-emission vehicles, such as compact cars our company produces. On the other hand, however, many cities are implementing discriminatory measures against mini vehicles, prohibiting them from driving on main avenues. That is a problem that the new policy has no means of addressing, and that will require stronger regulations to resolve," said Yin Jiaxu, president of Chang'an Motor Corporation, China's biggest mini vehicle maker. The firm jointly produces compact cars with Japan's Suzuki Motors.

Wu Shaoming, assistant to general manager of the First Automotive Works Corp (FAW), commented that the long-expected new policy has laid out an overall plan for the healthy development of the domestic auto industry.

"But an overall plan is not enough to supervise the market. Relevant enforcing measurements and regulations should be issued as soon as possible to guarantee a smooth implementation," Wu said.

Great leap

Despite the potential problems, the new industry paper is still a big leap forward, and remarkable progress has been achieved, Li commented.

"The production permit withdrawal mechanism will help guarantee the healthy development of the sector," Li pointed out.

According to the new paper, auto makers in China that "cannot maintain normal operations" will be forbidden to transfer their production permits to non-auto and motorcycle enterprises and individuals. If an auto maker goes bankrupt, the company's production permit will be removed.

Moreover, the new policy specifies that total investment in any new auto project should be at least 2 billion yuan (US$241 million).

Such a project must include a product research and development organization with an investment of no less than 500 million yuan (US$60.4 million).

This effectively bars smaller firms hoping to cash in on a car market that nearly doubled last year to about 2 million sedans, as China clamps down on over-investment in the auto, steel and other sectors.

"It's clearly aimed at (curbing economic) over-heating," Yale Zhang at auto consultants CSM was quoted as saying by a news agency. "The government does not want indiscriminate investment."

Although most foreign auto giants still keep a tight lip over the impact of the new policy, some of them have responded swiftly , welcoming the new policy.

"This is a clear indication of the Chinese Government's continued efforts to facilitate a more transparent policy and regulatory environment," General Motors (GM), the second-largest car producer in China after Volkswagen, said last week.

GM said it is now busy researching the new policy and it has found that the Chinese authority is sparing no efforts to make the auto industry sustainable, to create a desirable auto sales environment, to consolidate the local auto sector, and to reduce the SKD (semi Knock-down) and KD (Knock-down) production modes.

"All these principles are in line with GM's long-term strategy here in China," sources from GM added.

DaimlerChrysler (China) Ltd's Chairman Roman Fischer commented that the new policy provides a clearer guide to further "drive" the firm's business here in China.

Long-expected paper

NDRC issued the long-awaited policy paper last week, stating that "before 2010, China will become an important vehicle manufacturing nation, locally made products will basically satisfy domestic demand, and we will enter the international market in a big way."

But it stopped short of stipulating that domestic auto makers should control half the market by 2010 -- a draft clause that analysts said had spooked big foreign firms such as Volkswagen AG and General Motors Corp.

A draft clause requiring Chinese carmakers to export 40 per cent of their output was also dropped.

The document also dropped a clause forcing foreign carmakers to use separate sales channels for locally made and imported models.

Multinationals can still only own half a joint venture. But foreign investors will be allowed to control stakes of more than 50 per cent in automobile and motorcycle joint ventures (JVs) with Chinese partners "if their joint ventures are built in China's export processing zones and shoot at overseas markets," the document states.

The new paper will permit foreign investors to create more than two JV plants in China to produce the same categories of vehicles, if they join forces with their existing Chinese partners to merge other companies in China.

However, if a foreign auto maker controls a majority stake in another foreign firm, they will be treated as one entity when it comes to the requirement on the number of Sino-foreign JVs in China, the new policy states.

One of the Chinese shareholders must have a stake bigger than the total of all foreign investors, if a Chinese listed automobile, motorcycle or other special-purpose vehicle producer sells its corporate shares, according to the new policy.

China has pledged to slash tariffs on imported vehicles to 25 per cent by July 2006 from 40-50 per cent now, and abolish all quotas by 2005.

Imported cars made up less than 10 per cent of national sales of about 2 million units last year.