Foreign companies plot to break red light

This profound circular: The Circular on Restructuring Auto Industry, issued by National Development and Reform Commission (Hereinafter referred to as the "Circular") seems to try to influence the balance of power of Chinese and foreign joint venture enterprises.

All the foreign companies should have underlined the article 5, chapter 3: "All joint-venture auto companies should undertake appropriate activities according to the contracts signed by the joint venture partners and approved by the relevant authorities. Any unconformities should be completed as soon as possible or plant construction and applications of new products should be suspended."

In the first half of 2006, the National Development and Reform Commission (Hereinafter referred to as the "Commission") issued the sign hoping foreign companies support Chinese brands. This time the emphasis of joint venture contracts reveals same meaning although there is no specific article to link the capacity with technology transfer of joint venture companies. So now we wonder whether there are explicit contents of supporting self-development and accelerating localization.

The commission officials justified:" we have the agreements on new production capacities and foreign companies supporting localization and supporting extent, which we can check. However, foreign companies complained that Chinese government shouldn't impose 30% whole car tax if their production quantities of components can't make 60% of components quantity whole cars but should as per 15% components tax without considering the commitments about localization they made to Chinese government that by a certain date of 60%. We only wrote down what they committed before. What is wrong?"

A director of Industry Division of the State Development and Reform Commission specifically said:" Foreign companies made a lot of commitments in contracts but failed to fulfill, including the establishment of research centers and experimental facilities of engine projects. As the administrative authority, we should supervise the implementation of these projects.

Could the fifth article expedite foreign companies fulfilling the commitments?

Nakamura, the General Manager of Dongfeng-Nissan, told reporters: "we will complete the work of helping local enterprise have their own research ability but I am sorry to say I can't tell you the timetable." Mr. Feng Chuanshang, the General Manager of Guangzhou Honda said: Honda is expanding in China, which is very similar to what we used to in the United States. Now the United States is producing its own vehicles. So we will establish new whole vehicle research centre but I can't give you any information about timetable."

Beijing Hyundai laid the foundation for the second factory in the spring of 2006. The Chairman Chung Mong-Koo said:" The new factory will produce the vehicles developed themselves." His subordinate also said:" There is no timetable."

In fact, the Chinese partners of joint ventures are not willing to produce self-developed products quickly because they can get 50% profits on the premise of that no party increases investment during the process of “introduction, assimilation and absorption. So they do not want to change the present situation.

Some analysts believe that the negative impact of this round of regulations can be counteracted by improving production administration level in foreign companies. International experience tells us that the effective and reasonable capacity of 1 square km is 300,000 to 400,000 units. Honda planed to expand its capacity to 1 million by 2010 but present capacity is 300,000. According to the policy, No factory will be approved. Is there any alternative? Yes. Honda applied 150,000 for Nansha base but it is easy to expand its capacity to 300,000 by extending working hours, for example, changing one shift to double shift even triple shift. It is hard to verify companies'  production capacity.

But some companies will be affected directly, “The attitude of government is strong against assembling imported components domestically to evade customs tax although European countries and The United States initiated the move against China in WTO." Mr. Zhang Boshun said that in this way main up-market car makers will be affected by the Circular, especially joint venture enterprises that do not reach the stage of changing model but must finish localization by 2008, which will pay 15% more tariffs much higher than average and medium-grade joint venture car makers.

From this perspective, foreign partners of joint ventures have to come up with practicable methods to cope rather than overtly agree but covertly oppose.

However, foreign company can operate their programs with the help of relationship with Chinese government. Of course, such bargain is profitable for them. For example, foreign companies allow Chinese partners to produce cars on same production line and use their model even technology to develop Chinese brand and so on. In return they can get the permission of expanding capacity. Actually, foreign companies have started to move actively such as Honda acquiescing Hongqi imitating Crown to make HQ3 and Mazda permitting Haima auto to develop the second generation of Fumeilai and FAW to develop Benteng on the base of Mazda 6.

Gaming is still on. Chinese partners become more and more tactful while foreign partners also practice various tricks for survival. It is certain that the capacity will be expanded for that Chinese and foreign sides will support and help each other to circumvent the fifth article of The Circular and fulfill the commitments superficially, and then establish new more factories.