Analysis: The effect of government policies on foreign manufacturers and JVs

Gasgoo.com (Shanghai) - About 30 years ago, the Chinese automobile industry opened its door to foreign manufacturers, but only under the condition that they establish joint ventures with domestic companies. The foreign enterprise's stake in the joint ventures would not be allowed to exceed 50 percent, and each manufacturer would be limited to only two JVs. It was under these strict requirements that foreign manufacturers prevailed. Their success was bolstered by the introduction of policies in the 1990s that encouraged foreign investment, which streamlined the application processes for JVs, as well as granting several tax bonuses.

Eying enormous growth potential in China, almost all notable international automobile manufacturers established sales networks in the country, with most of those companies going further and constructing domestic production sites. With foreign manufacturers leading the Chinese industry, is it still necessary for the government to maintain the aforementioned restrictions on JVs? Gasgoo.com (Chinese) conducted a survey earlier this month aimed at answering just that question. Of the 2,185 industry analysts and experts polled, 54 percent answered that China should still continue to limit JVs. 39 percent disagreed, believing that the policies are outdated. Seven percent of respondents were undecided.

As the market continues to grow and competition become ever fiercer, domestic manufacturers have found their niche in the low-end segment, where they control most of the market share. However, foreign JVs still lead the overall Chinese market. They are aided by advantageous government policies aimed at promoting foreign investment, which grant them with several benefits, such as simplified processes for submitting applications to the government and tax benefits. The tax benefits JVs receive cover the fields of income tax, VAT and import tax. Foreign manufacturers have already matured in their home markets, giving them an undeniable advantage over their Chinese counterparts, who at the same time were still learning the ropes of the industry. The playing field against domestic producers, now several in number, is clearly uneven. It is precisely because of this imbalance that the majority of people polled believe that the government should continue to uphold restrictions against foreign manufacturers.

However, those opposed believe that maintaining the restrictions is unnecessary. They believe that foreign manufacturers' dominant position in the Chinese market is already unchangeable; therefore the policies serve no real purpose. Furthermore, some of those polled propose that the policies will reduce encourage between foreign manufacturers, making it even harder for domestic companies to increase their market share.

The Chinese government has already taken the plight of domestic companies into consideration with its 2011 Policy for Automobile Industry Development, where it announced that it would be raising the barrier to entry for prospective foreign manufacturers. The government maintained that foreign companies' ownership in JVs would be limited to 50 percent, while making it harder for them to construct new automobile production sites in China.

In the second question of the survey, participants were asked what they believed the goal of the Policy for Automobile Industry Development was. 27 percent answered that it was to preserve variety in the market. Currently, there are over 130 automobile manufacturers operating in China, more than in any other large economy. However, the top ten enterprises possess around 83 percent of the market, with the other companies left to contend over the remaining 17 percent. As a result, assets and resources are dispersed throughout the industry and not being used to their full effectiveness. The 27 percent in question believe that the Policy for Automobile Industry Development is primarily directed towards solving this problem, rather than targeting only JVs.

Another 27 percent believe that the policy is instead aimed at preventing excess capacity in the industry. Increasing barriers to market entry is a common method used by governments to stop overproduction. Meanwhile, 23 percent responded that the chief goal of the policy is to protect domestic companies. 14 percent believe that the policy is actually aimed at helping foreign manufacturers, while five percent are undecided.

Yet another point of interest is the expansion of policies aimed at promoting industry growth to cover research and development for key auto parts in new energy vehicles. The broadening of the policies is crucial in increasing the technological level of the industry, as well as helping make automobiles more environmentally friendly. Foreign companies were originally covered by these policies, as well, but have since been removed from their coverage. That said, when asked who this policy change benefits the most, 37 percent of participants answered that it was foreign manufacturers currently cooperating in joint ventures. Foreign parties have long since held most of the decision-making authority in JVs and have been privy to most of the profits. Any advancements made in new energy vehicle models will benefit them the most.

Meanwhile, the Chinese sides of JVs have made enormous strides the past decade, with their financial performance far from poor. Additionally, they are somewhat less affected by the phasing out of policies beneficial to foreign companies then their partners are. 32 percent of participants answered they will gain the most from the policy change. The remaining 20 and 11 percent respectively believe that domestic manufacturers and auto part suppliers for new energy vehicles will benefit the most.