Tuesday, April 7, 2009

Guess What's NOT in China's Auto Policy

A few weeks ago, China's State Council published a new comprehensive auto policy, the "Automobile Industry Adjustment and Stimulus Plan" (《汽车产业调整和振兴规划》). Because it's a little long (and because I did not really expect to see anything new) I took my time reading through the whole thing. Though I finally finished reading it over a week ago, only today did it occur to me that something is conspicuously missing from this policy.

But first, the briefest of sketches of what the policy does contain...

The policy's authors make the case that "adjustment" of this industry is necessary if China is to have a globally competitive auto industry, and they also make the case that this adjustment is made all the more necessary by the "international financial crisis". I am not certain if this is the real intention, but I would have worded it differently: the international financial crisis has provided China with a golden opportunity to leap into the upper echelon of industrial nations while the global auto giants suffer from a sharp decrease in demand.

Intentions aside, most of the provisions of this policy had already been announced by the time this comprehensive policy was released. Industry consolidation, plans to stimulate purchases through tax breaks and subsidies, a new focus on independent Chinese brands and development of alternative energy vehicles all figure prominently in the new policy. Many previous posts on this blog have already covered these topics ad nauseum.

Added to these major policies are additional policies to develop the financial and physical infrastructure necessary to support a strong auto industry. This includes development of auto financing alternatives, insurance, credit bureaus, auto loan securitization, a second-hand auto market, and construction of roads and parking facilities.

So what's missing from this policy?

A role for the foreign automakers.

There is no mention of a future role for the foreign players and the joint ventures in which they currently participate -- not even a mention of the desire for technology transfer or foreign investment.

The policy contains an explicit goal that, within three years, domestic brands will account for 40 percent of China's market. (Domestic brand market share was 25 percent in 2008.) This, of course, implies that foreign brands still dominate China's market, but the clear goal is to whittle away at that domination in the near future. (See chart below.)

If foreign players are under some kind of delusion that they will be long-term partners in the future growth of China's market, they may want to re-think their strategies. The words of China's policy were crafted through careful deliberation. The lack of a reference to the role of foreign automakers was not an oversight.

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This chart (from WSJ) shows the top ten sellers of vehicles in China in 2008. Only two of these sellers are domestic: Chery and Geely.