Shielding China's auto industry is a mistake

By Li Anding (China Daily)
Updated: 2010-12-15 11:05
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BEIJING - Liu Shijin, deputy director of the Development Research Center of the State Council, took plenty of heat after he called for a gradual removal of the 50-percent cap on a foreign automaker's investments in a domestic company.

Many said that China should protect and support its automobile industry. Without the equity limit, they said, China's automobile industry would crash.

The reaction wasn't a surprise. The auto industry plays a crucial role in the national economy and protective measures of the industry have lasted for decades.

History, however, has proven that protectionism isn't a solution. Protective measures will lead to weak enterprises and China cannot have a powerful automobile industry if protectionism persists.

Thus I agree with Liu - the shareholding limit made in 1994 should be phased out. Why? Well, in the past 30 years, protective measures have led to many drawbacks.

These measures have hovered over the automobile industry since the industry's outset. Imported automobiles were subject to strict approvals with an import duty of up to 220 percent.

The direct result was that until 1984, the quality of Shanghai-made automobiles - with an annual output of 2,000 to 3,000 units - paled in comparison to the 1950s Mercedes that were the basis for the Chinese auto manufacturers.

The Hongqi brand, with an annual output of fewer than 300 units, was ordered to suspend production due to high fuel consumption and its poorly made cars.

In the 1980s, foreign investment in the domestic automobile industry was still regarded as a serious violation. If it were not for Deng Xiaoping's permission, protective measures would not be adjusted.

In 2001, before China's entry into the World Trade Organization (WTO), the outlook for the automobile industry in China was gloomy.

The great leap 10 years after WTO membership indicates that the removal of protective measures, actively or passively, will help cultivate powerful local automakers.

Without joint ventures, China's automobile industry would not have been able to bridge the 20-year development gap and succeed internationally; without the removal of industry admittance of local brands, independent innovation would not be on the agenda; without entry into the WTO, and cooperation as well as competition with multinational automakers, China would not become the world's largest automobile market.

Due to the tremendous changes that have occurred in the automobile industry in China and around the world in the past 16 years, removing the limit, or even allowing wholly foreign-owned enterprises into the Chinese automobile market should not be treated as a disaster.

It is unnecessary to view the establishment of wholly foreign-owned enterprises as the end of local brands.

Grgoire Olivier, president of PSA Asia-Pacific operations, said that the shareholding limit has decreased the efficiency of joint ventures. Complex and repeated discussions in strategy-making would hinder automakers in taking good market opportunities.

Dell, Siemens, Nokia and IKEA have set up their wholly foreign-owned enterprises in China. Instead of being washed out, the industries of computer, electronics, mobile phone and furniture are all on the upswing. Then why insist on the equity limit for the automobile industry?

In recent years, the weak performance of some State enterprises came from excessive protection. It is unlikely for wholly foreign-owned enterprises to squeeze local brands out of China, the biggest market of automobile manufacturing and sales. On the contrary, further opening-up is the only path to a powerful automobile country.

The Swedes did not criticize their government for Geely's acquisition of Volvo. Also, it would be against international regulations to confine foreign enterprises in a domestic market after China's entry into the WTO.

Local enterprises should coexist with wholly foreign-owned enterprises, and equity proportion should vary in different joint ventures. This should be the proper structure for the future of the automobile industry in China.

The author is an automobile commentator with the Xinhua News Agency.