China's auto industry explained

Over the past three decades, the China automotive industry has risen to become the largest in the world based on unit sales. Off the back of this growth, foreign automakers have, in an otherwise stagnant industry, enjoyed substantial, and in many cases, spectacular, success in China.

The industry's rise has been carefully managed and nurtured by the Chinese government with the ultimate objective of developing a domestically driven automotive industry. Their basic policy strategy has been to open market access to foreign automakers in exchange for technology transfer through a 50:50 Sino-foreign equity joint venture structure. However, recent regulatory changes and enforcement action within the sector suggest that the government is not satisfied with the ways things are working, and the fallout has unsurprisingly affected the foreign players.

Adjustments to market entry policy

 
Since China's entry into the WTO and the availability of the joint venture structure to foreign automakers, the market has become proliferated with a maze of complex partnership structures between domestic and international players supported by a fragmented components and parts sector. The transfer of manufacturing capability and know-how, however, has been limited and certainly hasn't reached the level that the government had hoped. Foreign automakers continue to carefully guard their best technology from the China side and there has been very little in terms of actual product development within China. The failure of the joint venture structure to achieve the requisite levels of technology transfer can in part be attributed to the continuing inadequacies of intellectual property (IP) protection in China but also to the cross-holding partnerships where a local partner can hold more than one joint venture interest, which increases the potential IP leakage and scope for unhealthy competition.

As a result, the benefits of continuing to retain the 50:50 joint venture cap have been debated in recent years, including by government policy makers. At the risk of sounding cynical, it is clearly in the interests of some to maintain the status quo of a handful of predominately state-owned enterprises continuing to enjoy a 50% stake in profitable joint venture arrangements driven largely by the foreign joint venture partner and fuelled by the domestic consumers' appetite for foreign brand vehicles.