China auto industry moving up the "food chain"

The possible fuel taxation will have little impact on the auto market in the long run

Gasgoo.com: The corporate income tax law in place since the beginning of this year marks the end of the preferential policy for foreign companies in China. Do you think this will affect the foreign investment in this country? And to what extent will it influence China's fast-growing automobile industry?

Alfred Shum: Certainly the new law will affect the foreign investment. By unifying the corporate income tax standards for domestic and foreign companies, the Chinese government has sent a clear message - the earlier you come, the more benefits you get. All global auto-making giants have set up their manufacturing facilities in China in the past two decades thanks to the preferential tax policy for foreign investment and for high technology. But now the preferential treatment such government subsidies and low tax is starting to fade out, though it will not disappear immediately until some long-term contracts have expired. Now the unified tax standard for national and foreign companies is intended to provide a new platform for equal competition. I think this equality is a good thing. Will the new policy affect the foreign carmakers' investment in China's auto industry? In automotive financing, after-sales service, and other segments, the tax will become less, rather than more. I often tell foreign investors that it is wise of the Chinese government to shift the foreign investment from the labor-intensive manufacturing sector to the service sector. The manufacturing facilities of foreign investors have provided a lot of jobs for China's large labor force, but the production capacities have reached a high level, and now what China needs more is the upscale products in the industry chain, especially the counseling and other services. In a word, the Chinese government is shifting their focus onto the service industry and has reduced the taxes and fees in this sector. This is a right decision.

Gasgoo.com: China has put the environmental protection, energy saving, emissions reducing, among many other important issues, high on its government agenda, so the fuel tax and environmental tax is in the pipeline. Will these taxes promote or deter the automotive industry - its manufacturing and service?

Alfred Shum: China's economy is now developing in the same way as that of all other countries did in the past. At first, they once sacrificed the environment, more or less, for the rapid economic growth. Some people thought that foreign companies brought only old eco-unfriendly technologies to China, but that's not true. Only by using their latest technologies in their investment in China, can the foreign companies remain competitive in this world's fastest-growing market. China now is perhaps the world leader in engine manufacturing and energy-efficiency. It is right for China to integrate its environmental standards with the global ones and reduce the environmental pollution. This eco-friendly policy is to meet the demand of the people and will not hamper the auto industry.

Gasgoo.com: Will this set the trend of auto sales and be favorable to the eco-friendly vehicle models?

Alfred Shum: Not too much, I think. Why? Because it depends on the personal likes and dislikes. The Americans still like to buy large cars though the U.S. began to realize the energy problem much earlier. Many women like to drive a truck-size car. Actually, large and small cars have the same function and performance, and different people like different vehicles. The living standards of the Chinese people have greatly improved and many of them will buy better cars, large or small, regardless of the environmental policy. That will urge the carmakers to reduce the emissions level of their vehicles in the designing and producing process.

Gasgoo.com: With the implementation of the fuel tax, the government will likely encourage the use of low-emission vehicles. Will this lead more consumers to buy cars of this kind?

Alfred Shum: I'd like to say that a car's fuel cost is only a very small part of the expenditure for your daily life. The rising oil price has not influenced car-buyers' choice of cars in the world. If some of them like large cars, they will not buy small cars even when the gasoline / petrol price is surging. China's car-buyers can also adjust themselves to the fuel tax and oil price quickly, as people all over the world have been doing. As a strange exception, China has more business or corporate vehicles than other countries, and they may be slightly affected by the fuel tax policy.

"Moving up the food chain"

Gasgoo.com: Since the new Labor Law took effect in January 2008, the cost of labor force has been increasing. Will this lead the OEM service and auto-parts sourcing of foreign companies away from China to some other Asian countries with lower labor force costs, such as Vietnam, India and Thailand?

Alfred Shum: At first you should see what parts of the auto-making industry. I think the impact of China's new labor law on the assembly facilities of global auto brands is negligible, because they will not employ contract workers and odd laborers to reduce the production cost. Neither will the rising labor force cost have any great influence on some parts of the vehicle prices, such as the engine price. The growing production scale and capacity will offset the rising cost of workforce. But the suppliers of low-end products will become exhausted and feel some impact. As one of the largest "world factories" nowadays, China has been very responsible for the global environmental issue and will continue to maintain the national, Asian, and global stability. The recent two measures taken by the Chinese government are a clear signal: 1. Driving the eco-unfriendly low-end manufacturers out of the country by increasing their production costs here; 2. Urging China's companies to invest in other countries and regions because these investments overseas will boost the image of China as a responsible and dignified "economic powerhouse" in the world. That is what China should do.  

Gasgoo.com: That means that China's auto industry is developing in a higher and more mature direction?

Alfred Shum: Absolutely! It's not only the automobile industry, but all other industries as well. We call this "moving up the food chain."