Chinese Car Market an Analysis

¶ … Chinese car market

An Analysis of Entry Mode into the Chinese Car Market

The Case of Chinese Car Industries and Foreign Direct Investment

The flow of Foreign Direct Investment (FDI) in developing countries has been tremendously increasing since in the 1990s. Its role and impacts of Foreign Direct Investment in these countries have led to the development of a number of controversial theories. These theories discuss the positive consequences as well as some negative consequences of FDI in the growth and economic development of developing countries. Before this can be addressed, however, it is important to understand more about foreign direct investment.

The issue of foreign direct investment is one that has been misunderstood for many years. There are individuals that study it and discuss how significant it is, and there are others that see it as some kind of made-up problem that is really not important enough to focus on. Both of these are valid points-of-view but, in recent years, it has generally been accepted that foreign direct investment is growing, and that the study of it is important. While this particular paper deals with the experience of foreign direct investment when it comes to the auto industry in China, it is important to remember that this is not the only area of the world or the only industry that is affected by it.

Sovereign ratings are also important, as they help to show the credit ratings of countries and whether they are strong credit risks where investment is concerned. Sovereign ratings have only been around since approximately 1979, but they have begun to rise dramatically in recent years and the demand for them is only going to increase (Altman & Kao, 1991; Billet, 1996; Lamy & Thompson, 1988; Ederington, Yawitz, and Roberts, 1987). These ratings help to reduce the uncertainty that investors have regarding their exposure to risk and so getting a strong sovereign rating has enabled quite a few governments to get access to ratings on an international scale (Kaplan & Urwitz, 1979; Weinstein, 1977; Wakeman, 1984). This is particularly important to developing countries that still have relatively strong economies (Saini & Bates, 1984). However, the sovereign ratings, while significant, will not be the purpose or the topic of discussion here.

The purpose of this paper is to not only show the seriousness of the problem in question, but to come up with ideas that will help to show how this problem can be reduced in size. The best way to do this is to first analyze the problem in question to determine just how serious it actually is, and then use that seriousness as a wake-up call for those that have been looking the other way and avoiding dealing with the issue. There are many of these individuals, and it is time that this is changed.

These developing countries are not able to provide the local companies and businesses that they have with as much growth and development potential as developed or industrialized countries can, because they simply do not have the resources available. This is unfortunate, but it is also somewhat offset by the FDI that is sent to these countries from developed countries. Were it not for this FDI, the developing countries in this world would not have a lot of chance of rapid development, because the availability of funds would not be there.

After the Asian financial crisis of 1997, many countries are still somewhat nervous about providing funding for businesses in these developing countries, because they are worried that their economies could collapse again. While this is always a possibility, it is not likely that this will take place. The governments of these countries have been changed and adjusted, and this has helped to avoid the problems that were seen in the past. In addition to this, the governments in these developing countries are also more aware now of what could happen, and they can take steps to stop this from occurring again.

While not all investors feel safe yet, there are many that do, and this has helped contribute to the FDI that is seen flowing to these developing countries, especially China, where the economy is growing more rapidly than other developing countries. The longer that this goes on without large economic problems the safer that other investors will feel, the more money will go to these countries, and the faster the development will be seen. This is encouraging for both the investors and the countries that are beginning to rely on this money to fund their economies and build their countries.

This research will analyze the role of FDI in the economic development of China's car industry. It will also discuss both the positive impacts and negative impacts of FDI in order to determine whether the positive impacts will outweigh the negative consequences or vice versa. The main question for those that want to invest in China's auto market is: Does Foreign Direct Investment (FDI) promote economic growth and development?

The answer to this question is crucial not only for policymakers and governments of the host countries but also for multinational corporations, investors, workers, and individuals, and it is important to understand why this is the case. If it is seen that FDI does actually promote the economic growth and development of these countries overall, than the policymakers and governments of these host countries will want to attract more FDI as quickly as possible to continue that growth. These governments will also likely change some of their policies toward investment so that investors from foreign countries would be more likely to send money to that country and develop their businesses to some degree in that country.

For corporations and investors, whether FDI promotes growth and development is also important. These are the companies and the people that will be providing the money to these countries, and they certainly want to get something back for their investment. They do not want to simply hand money to another country and make it a gift. If investing in developing countries does not help the growth and development of those countries, there would be little point in investing in them in this way. The growth and development is necessary for the business to grow in that country and a return on investment to be seen. These kinds of issues must be studied thoroughly before a corporation or an investor can actually determine whether it is wise to invest money and human capital into a particular developing country, or whether that money would best be spent elsewhere.

For workers and other individuals in the developing country, the FDI that comes into that country could potentially allow for more jobs, higher income, and more goods and services that can be easily acquired. Naturally, this is also seen as significant, because these individuals wish to have many things and they have many goals and dreams, although these may not be the same as the goals and dreams of those in already developed countries. This is especially true in China, where many of the younger people like to try new things and would therefore be very interested in the goods and services that could be brought into their country from the developing nations through FDI and multinational corporations.

It is necessary and pertinent to discuss benefits, and this particular study is important to many people across the world. Not only does it have importance for those that are involved in FDI now, but it also has importance for those that are considering FDI in the future, especially where developing countries are concerned. The reason behind this is that foreign direct investment is something that is continuing to grow, and companies that wish to grow and expand should examine in more thoroughly as a potential for that expansion as the world becomes more of a global society.

An important part of the rationale behind this study is that there have not been any other studies done specifically like this one. Doing a study like this therefore provides new and unique information, but it can also be difficult, since there is really no strong precedent for this type of study that the researcher can thoroughly follow.

The further benefits of a study such as this one indicate that other countries can learn from what is discovered here where FDI is concerned. All developing countries are involved with FDI to some degree, with some countries being much more involved than others. When it can be determined exactly what effects FDI has on developing countries, then it is quite likely that these countries' governments and policymakers will be better equipped to handle the ideas and plans of investors and multinational corporations when they want to move into a particular country.

4.1 Analysis of External and Internal Environments in the Chinese Car Market

In general, an auditing of environmental influences that affect the organization needs to be undertaken so that reasonable competitive strategies can be put forward. This indicates that a strategist should try to get a feel for the environmental factors that are currently or that will be important to a specific organization. The process would then need to continue so that the changes that can be seen in the environment can also affect the changes in entry strategies.

Environmental factors, economic factors, political/legal factors, social/cultural factors and also technological factors should all be considered. The legal factors that need to be addressed include issues in employee law, monopolies and mergers legislation, environmental protection laws, and wider issues such as foreign trade regulations. The political factors refer to the stability of the government. The taxation policy, the government spending, the relationship that the government has with other countries, and the industrial policy and all issues should be considered.

The economic factors that need to be addressed refer to inflation, disposable income, unemployment, business cycles, GNP growth rates, interest rates, exchange rates, energy, and the basic prices for raw materials. Factors from cultural and social standpoints include population demographics, the income distribution, what levels of education are seen, lifestyle changes that are being made or that need to be made, attitudes toward work and leisure, consumerism, and the social mobility of individuals in that area. The technological factors addressed include new discoveries and developments in the industry or in related industries, that speed at which technology transfer (diffusion) takes place, that amount of money that the government spends on research, and the rates of obsolescence that are seen. An analysis of all of these issues is called a PEST analysis.

4.1.1 General External Environment Analysis

Where the Chinese car industry and its external environment is concerned, the political environment should be the first one to be addressed. In 2001, China was declared a member of the World Trade Organization (WTO). China's entry into the WTO indicated that there would be a gradual opening of the Chinese market where cars were concerned. Some protection from the government will be gradually cancelled so that the responsibilities of a WTO member can be undertaken.

The development of the Chinese car industry will also help to accelerate the development in various industries such as raw materials, electronics, automation, transportation, financial services, tourism, and insurance. "In the U.S., Japan and Germany about 10% of the population is employed by car or related industries. Taxes related to cars occupy 10% to 18.6% of total financial income of government. Export of car ranges from 10% to 24% of total export" (Chen, 2002). The global market for cars has not yet reached saturation. In some countries, especially in China, the potential demand for cars is very large as the population continues to grow. According to Chen (2002), "1% increase in gross national income may result in 1.3% increases in the demand of car." In more recent times, many foreign investors have hurried into the Chinese car industry, as they sense the huge potential demand that could result from the rapid increase in the GDP. It is very attractive for foreign investors.

4.1.2 Internal environment analysis

In China, consumers were starting to demand better quality cars, and as this was taking place there was increasing pressure on the domestic products that were available, while doors were being opened for foreign companies that were able to offer higher quality. "I see a watershed point in the auto industry here," said Michael Duune, who is the managing director for Automotive Resources Asia LTD, a consulting firm based in Beijing and Bangkok (Simison, 1999). Many auto companies such as Volkswagen, Audi, Honda, Citroen, Daihatsu, Suzuki and Subaru have manufacturing plants located within China as part of their growing companies. (Craig, 1999).

In addition, Japanese car makers have been selling their vehicles within China since the 1970s. Toyota has decided that China is beginning to prosper and has begun selling trucks, buses, luxury cars, taxis, and motorcycles to consumers in that country. Soon after, Nissan, Daihatsu, Suzuki, Mitsubishi and other car companies followed that lead. In 1983 and 1984, Japan's car exports to China increased by seven times, from 10,800 to 85,000. In addition, China became Japan's largest market for foreign cars, excluding the United States. Because there were so many massive imports of all types of autos, foreign currency reserves were rapidly depleted and further licenses for importation were cancelled. The government of China also established various incentives, including taxes, bank loans, and foreign exchanges, in order to encourage more foreign companies to operate in China and to reinvest their earnings and/or export their products. For example, there is a new law which allows joint ventures to avoid tariffs on imports when at least 40% of the value of a specific vehicle has been produced within China.

In 2000, the car industry in China was very fragmented. There were approximately 136 domestic producers of vehicles within the country. However, around 40% of the capacity was idle, and half of all of the car manufacturers were simply losing their money (Jacod & Burt, 2000; as cited in Hitt, Ireland & Hoskisson, 2003). The firms that remained tried to improve their efficiency, however, because it was believed that there was going to be a major consolidation within the car market in the next few years because import tariffs were being reduced and economies of scale were changing. In July, 1999, the State Council of the Central Government made an announcement that it intended to take steps to speed up a restructuring of the vehicle sector. Once China's entry into the WTO seemed more likely, the government planners began to realize that China's domestic auto industry was not prepared for the global competition that it received. It was hoped that a new plan would therefore reinvigorate the ongoing efforts which were used to eliminate duplication of investments and accelerate consolidation. This new plan also coincided which a promulgation of China's 10th "Five-Year Plan" and an announcement for a new "Guiding Catalogue for Foreign investment" which was designed to be released in 2000. Both of the documents would then reportedly be very critical in setting a future course for the auto industry.

4.1.3 Before WTO

Until 2000, Chinese car tariff items are totally 165 and car-related tariff items are 99. The average tariff of car products is 38.89%. Average tariff of 65 tariff items about integral car is 55.94%. The highest tariff ranges from 80% to 100%. The highest tariff of part is 50%. On 1st January, 2001, the tariffs of cars are reduced to about 70%-80%, while the tariffs of car parts are reduced to 30%-40%" (Guo, 2003).

Before China entered the WTO, there were several non-tariff regulations that were applied to the import of various cars, and those have been adjusted now because of the WTO entry.

4.1.4 After WTO

According to WTO agreement, the average import tariff on cars will reduce from 80%-100% in 2000 to 25% in 2006. Especially, on 1st January, 2005, the average import tariff on cars should reduce to 30%. On 1st January, 2006, the average import tariff on cars should reduce to 28%. The average import tariff of car parts must reduce to 10% on 1st July, 2006" (Guo, 2003).

The adjustments of both non-tariff and investment policies are significant, and they include (Guo, 2003): from 2002 to 2004, the import quota of integral cars and car parts annually has increased 15% based on a figure of $6 billion. In 2005, the quota was cancelled, and the made-in-own-country requirements for car parts was cancelled immediately after China entered the WTO.

4.1.5 the Impact of the reduction of Tariffs

Price differences have had an impact on the Chinese car industry. After the tariffs on cars were reduced, foreign cars gained price advantages and the prices of domestic cars categorized in the same grade were significantly higher than the prices of foreign cars in the same category. Overall, the higher the category and price of car, the larger the gap in price between foreign and domestic.

Comparing prices is also very complicated. The domestic car market has been regulated by the Chinese government for such a long-term that it is insufficient where competition is concerned. Under these types of circumstances, domestic car profits are much higher than foreign car profits. Because of this, comparing the sales prices of the cars does not accurately reflect the changes that the tariffs have created.

4.1.6 the Impact of the Change of Car Import Quota

Between 2002 and 2004, the quota of import cars and car parts increased yearly by 15% based on a figure of $6 billion. In 2005, the quota was cancelled, meaning that the import quota of 300,000 to 400,000 cars per year will no longer be in effect. "However, car production volume is just 605,000 in 2000. The import quota is about 50%-70% of annual car production volume" (Guo, 2003). Because of this, the import quota on cars in China has produced a strong challenge for the domestic automobile companies.

4.1.7 the Impact of Opening of Car Trade and Service

After China entered the WTO, foreign companies could distribute and trade cars themselves. Because of this, financial companies were challenged in two different ways. On one hand, the rapid opening of trade availability helps to accelerate the importation of cars from other countries. On the other hand, Chinese cars lag significantly behind oversea counterparts in terms of service, products and other areas.

4.1.8 the Impact of Opening the Chinese Car Industry to Foreign Investment

Because the tariff was gradually reduced and some of the non-tariff limitations were cancelled, foreign car companies have been required to make choices between exporting more cars to China or directly investing in Chinas and having cars produced there. In 2006, the average tariff on cars was 25% and the average tariff on car parts was 10%, which is still considered to be high. Under the circumstance, the growth of the Chinese car market is very important to manufacturers in foreign countries.

4.2 ShangHai General Motor (GM) Case

4.2.1 Brief Introduction to GM Auto Company

General Motors is the world's largest automotive company. It operates in more than 70 countries and has a presence in over 200 countries. In addition, the company has more than 260 large subsidiaries, and employs 395,000 people throughout the world. The company was founded in 1908, and GM has been a global sales leader since 1931. GM has operations in over 32 countries and vehicles that carry the company name have been sold in over 190 countries. General Motors is also involved in Telecommunications, Aerospace, Defense, Financial Services, Insurance Services, Trains, Automotive Systems, and Heavy Duty Transmissions. In all that GM does, their philanthropy and their commitment to helping better the environment in which they live, work, and play is completely unsurpassed within the auto industry.

4.2.2 Shanghai GM Auto - Company Overview

Shanghai General Motors is a 50-50% joint venture (JV) between General Motors and Shanghai Automotive Industry Corporation Group. The joint venture is the largest passenger manufactures in China, with a market share close to 10%. The Shanghai GM factory in the city of Shanghai was set up in 1990 and it measures around 550,000 square meters and an annual production capacity of 100,000 vehicles, 180,000 engines and 100,000 transmissions (GE FAIC, 2005) and. The JV operates 3 production facilities with a total production capacity of 450,000 vehicles per year, in Shanghai, Yantai and Shenyang.

4.2.3 Analysis on Operation Performance of Shanghai GM Auto Company

Increasing trade liberalization will definitely help to spark growth within the automotive industry, and this is particularly true within the growing Asia Pacific region, which is a critical region for future growth in the auto industry worldwide. China's entry into the WTO and the implementation of the AFTA will intensify competition among players in the auto industry. The growth in the automotive industry will also stimulate growth in other industries such as automotive components. Generally, most automakers are very optimistic about future opportunities in the Asia Pacific region, and it is anticipated that vehicle sales throughout the Asia Pacific region will continue to grow at a rate that is greater than the rates in Europe and North America combined.

In 2005, the JV's vehicles sales volume reached 320,000 vehicles. The market forecasts are very promising, pointing to a boom in vehicle sales for the Asian region. GM's sales accounted for 12% of automotive industry sales in this region in 2005 and the Asia-Pacific markets represented 28% of the worldwide sales in the same year (GM, 2006).

In terms of product line, Shanghai GM is manufacturing a few Buick models and Xin Shi Ji (New Century) and the manufacturing system is the top in the industry. The company adopted SAP Advanced Planning & Optimization to ensure lean manufacturing in 2005 to "help reduce volumes and long shipment times" (SAP, 2005).

Contrary to the operation performance worldwide, GM's operations in China started to payoff in 2003, when the profit per vehicle sold was $1,200. The results reflect sales in the local markets because the exports are restricted to a given number at this point. U.S. concerns are that the unsold cars in the Asian markets will be exported eventually, following the Japanese and Korean export patterns (ITA, 2004).

4.2.4 Bottle-Neck Problems Shanghai GM Auto Company has Encountered

China has a restrictive policy regarding the construction of diesel engines, in particular for cars. The oil consumption grows larger as the market demand for vehicles increases and diesel engines are more efficient from the fuel consumption point-of-view. In China's case, given that the resources are limited and scarce, the policy on diesel engines is basically restricting the demand and therefore the consumption. A restricted consumption is synonym to restricted production growth. The studies suggest that if China has 20% of its cars running on diesel engines, it would save up to 19 million tons of oil per year (Te Kan, 2006).

Even thought the Shanghai GM joint venture was set up to serve the Chinese market, some of components end up in the American market. However, before doing so, they spend a lot of time on the way to the American shore and in its ports. These waiting times affect the company's speed to respond to the market's demand and all the suppliers along the value chain (Terreri, 2004).

One other bottleneck that can be quoted is the documentation needed to manage the supply chain. China is not only a consumption market, but also a production market and many companies go there to manufacture their products for a lower cost and sell those back to their home countries. This makes the logistics activity crucial for the business performance.

4.2.5 JV and/or WOFE of Shanghai GM - localization and self-development

By competing throughout the world in America, Europe, and Japan, various automotive leaders have been trying to keep their market shares in domestic markets while still moving into foreign markets. By dealing with growing markets such as the Asia Pacific region, Eastern Europe, and South America, the leading companies are actively starting to look for ways to collaborate with local and national industries while still competing for higher market share.

Shanghai GM managed to set up 250 dealership stores in only 4 years. The way to do so was by allowing all dealers with a weak financial position to sell sedans. Given that most of the dealers are in such a position, the network expanded really fast because this was a very good business opportunity for dealers (Yuann, 2006).

To insure production growth, Shanghai GM followed a strategy of several subsequent acquisitions of spare parts state-owned companies that were later turned into profit. The market demand is growing very fast, but so is the competition. There are 3 major automotive "players" on the Chinese market: Shanghai Automotive Industry Corporation (SAIC), First Automobile Works (FAW) and Dongfeng. They are all trying for the same customer and the market is not regulated as it should be. Thus, a lot of companies face difficulties due to an inefficient copyright protection that ranges from music CDs to car models. GM was put in the situation of suing the Chinese automaker Chery because the latter manufactured a car model similar to Daewoo Matiz.

To ensure workforce talent, GM entered a very convenient JV with SAIC that owned a very large pool of talents at the moment when the venture took place. On the financial side, the company beneficiated from a lot of bank loans that with the help of a local partner became easier to reach. In terms of brand management, the JV manufactured vehicles under Buick brand for the domestic market that targeted low and middle class population and for the external market, spare parts were produced for a wide range of GM brands. However, the latter ones had to have the assembly done in U.S. due to market regulations.

Shanghai GM managed to hold the sales record on the Chinese market in 2006 in terms of units sold. The company is permanently trying to expand its production capacity to cope with the increasing market demand.

4.2.6 Reflection on the development of JVs and/or WOFEs of Shanghai GM

The idea of forming a JV with a local company was very fruitful for GM. The local "player" - SAIC was well established in the automotive market and therefore familiar to the specific market characteristics in China.

Given the large cultural differences and implicitly the large business practice differences, GM minimized the "liability of foreignness" (Zaheer, 1995). The theory suggests that companies internationalize gradually and first enter markets that are culturally closer and as they gain more knowledge about these markets, they internationalize further to culturally more distant markets (Johanson & Vahlne, 1990; Johanson & Wiedersheim-Paul, 1975).

GM's joint venture with SAIC was first of all beneficial because the Chinese partner helped the American one to deal with the local authorities more efficiently. Thus, SAIC enabled GM to acquire state-owned spare parts companies, to get bank loans in a record time and to get preferential government treatment on a given number of issues.

SAID came with a well prepared workforce that helped the joint venture compete on the automotive market successfully. The talent pool was already in place and familiar to the industry activity.

The JV managed to acquire more plants than a foreign company normally is allowed to. However, the American manufacturer trusted SAIC enough to give up shareholder majority in order to make the acquisitions that were available only for local companies/major shareholders.

Jinbei GM was probably the only GM business in China that turned out not to be profitable because the management team was inexperienced and the company had a weak financial position. The lack of experience on behalf of the management team had a fatal effect on the dealership network and the weak financial position forced the company to borrow all its capital. At this point it is obvious that a joint venture with a strategic qualified local partner is essential to have a successful performance.

4.3 ShangHai Volkswagen (VW) Case

4.3.1 Brief Introduction to Volkswagen Auto Company

The Volkswagen Auto Company is a German-based company that has been around for many years. The company sells its vehicles in Germany, the United States, and other countries. Because of this, the company continues to grow and expand. This includes moving into markets where expansion is important and desired, or where expansion is simply needed. This is the case with the auto market in China, because there are many more people in that country today and the region needs more options for car makers.

4.3.2 Shanghai Volkswagen Auto - Company Overview

The Shanghai Volkswagen Auto Sales Corporation has been a joint-venture of three partners, affiliated with China and Germany. There was a unanimous agreement among the partners to penetrate into the automobile market of China, and explore the possible and available opportunities within the Chinese, and regional market. The Volkswagen, German unit has been serious in the progress and development of the automobile market of the region, 'through deepening its cooperation with Shanghai's auto industry'. Initially the organizations titled Shanghai Auto Industry Group, Volkswagen (China) Investment Co. Ltd. And Shanghai Volkswagen Co. Ltd. invested more than thirty million dollars, under distribution of fifty percent, thirty percent, and twenty percent respectively (Yao, 2006).

4.3.3 Analysis on operation performance of Shanghai VW Auto Company

Initially there has been a rumor that German Volkswagen intended to purchase more number of shares towards acquisition of Shanghai Volkswagen and FAW Volkswagen, another joint venture by German Volkswagen in northeast China. However, such rumors have been refuted by the officials from the German Volkswagen, rather the officials have stressed over the need to secure market shares and achieve customer satisfaction. The company has adopted and implemented 'the use of operational ideas and successful experiences from German Volkswagen' (Jonathan. 2005), and has integrated the after purchase services with the sales network, aimed at the establishment 'of a comprehensive and high-efficiency sales-service network' (Mark, 2006).

The Chinese-German automobile venture has recorded sales of more than twenty thousand units on monthly basis, which is forty percent greater than the previous solo performance of the automobile company, excluding Volkswagen. Presently, the Shanghai Volkswagen has manufactured more than 2,000,000 units of cars. The special event was commemorated by Chen Xianglin, Chairman of SAIC, Mr. Weissgerber from German Volkswagen, Mr. Tang Dengjie, director of Municipal Economic Commission, Mr. Chen Xianglin, Chairman of the board and Secretary of Party Committee of SAIC, Mr. Hu Maoyuan, the President, and other leaders of the Group and the Party Committee and Chinese at final assembly workshop of Shanghai Volkswagen No. 3 Plant. The event was the reflection of the fact that the members of the company are deeply associated with each other, and it's more like a family of professionals serving the company. Recalling the events of the past, when the company first launched Santana i.e. Shanghai Volkswagen's simple and crude production line, the critics were reluctant to welcome and honor the company for the milestone, it observed that the company has 'produced cars in a ruined, unsupported and isolated island, the experiment was doomed to fail' (Mark, 2006).

4.3.4 Bottle-Neck Problems Shanghai VW Auto Company has Encountered

Volkswagen has felt victim of the sociolinguistic challenges within China market. The multinational companies including Volkswagen have been accused for their involvement in such practices which generate 'creativity-driven shock values, controversy and extreme individualism commonly accepted in the North American and Western European markets'. Volkswagen has experienced severe tribulations due to its 'advertising language as culture-blind and bona fid', and Chinese market created great hurdle for the Volkswagen industry. It has been important for the company to implement congruence of the values, and avoid the existence of the cultural values in the organization in an implicit manner. It has been observed that the categorization of the organizational, departmental and employee values and behaviors on the basis of the cultural affinity has generated satisfaction among the employees, and has developed positive impact on their 'commitment, absenteeism, turnover, morale and perception of feeling involved in an organization's decision-making process' (David, 2002).

4.3.5 JV and/or WOFE of Shanghai VW - localization and self-development

The unexpected success of the Shanghai Volkswagen is credited to the Shanghai Municipal Party Committee and government and under wise leadership of SAIC, Shanghai Volkswagen staff. The entire unit as a team worked hard in order to achieve 'series of glorious accomplishments' (Eric, 2006). The efforts of the professional family materialized and resulted in the 'localization of Santana from the initial 2.7% to 95% and above, and localization of Passat, Polo and other new versions was 40% at the beginning; the model was developed from the only Santana to Santana 2000, Passat, Polo, totally four production platforms, with more than 10 varieties'.

The company took considerable measures towards after-sales service, and implemented a network which was spread all over the country. The company achieved another milestone after the establishment of 'first class technical center including test drive park and laboratory' (Richard, 2005). All these efforts brought unprecedented fame and success to the company, 'and the registered capital increased from the initial RMB 160 million to the current 63 billion' (Birgit, 2004), 'Shanghai Volkswagen's technical development, management and equipment capability all achieved a new level which was closer to the world leading standard, and it emerged as the most competitive pioneer of auto industry in China' (Richard, 2005).

Volkswagen dominated the China auto market with about 55% of sales. The company was bringing on production of five modern vehicles over the next three years, including the luxury Audi A6 and the VW Passat and Jetta. The No. 1 German automaker was doubling its investment in China to six billion makers ($3.28 billion). Still, Volkswagen was not resting on its laurels. "China is becoming much more competitive, with demand more like it is western marker," said Stefan Jacoby, the VW vice president in charge of the Asian-Pacific region.

Much of Volkswagen's success had been in supplying China's demand for taxicabs, as anyone who visited the mainland in 2000 could determine; most of the taxi in use in the urban areas were Santanas or Jettas. Shanghai Volkswagen catered to this large market segment. For example, in June 1999, Shanghai Volkswagen began a new policy to expand its sales to the taxi service sector. Under the new policy, any local taxi company that bought 100 units of Santana cars or 50 units of Santana 2000 GLS would get an extra unit of the same model. Also, the sales corporation offered a 15,000 kilometre, third class, free maintenance warranty in addition to the 7,500 kilimetre, first class, free maintenance for any Santana 2000 GLS used as a taxi. Approximately 40% of Santanas made in 1998 went to the taxi sector. VW Santanas accounted for over 80% of the taxis in Shanghai. Volkswagen did not offer a sports utility vehicle, and thus did not compete directly with the Cherokee or BJ models.

4.3.6 Reflection on the development of JVs and/or WOFEs of Shanghai VW

SAIC Motor is the local associate of the General Motors Corp and Volkswagen AG in China, whereas the Shanghai Automotive fabricated the parts for the joint ventures. In 2005, the company 'posted a 44% drop in net profit for 2005, posted a higher first quarter earnings due to the buoyant auto sales of its parent's two joint ventures'. The Shanghai Automotive, a branch of the China's second largest automaker SAIC Motor Corp achieved the net profit of more than fifty percent, and reached the mark of 223 million Yuan, from the initial figure of 152 million Yuan last year.

According to the Shanghai Stock Exchange, the company 'generated revenue of 2.08 billion Yuan, up 39% year on year'. Unfortunately, the performance of the shanghai Automobile industry exhibited the profit decline of in five years in 2005 i.e. 'net profit slumped 44.16% to 1.1 billion Yuan last year' (Nicholas, 2002), the justification for such declination was attributed to the competitive forces which the company was subjected to, 'the company was struggling with soaring prices of raw materials, price discounts and intense competition'. The performance and the financial results of the company were contributed by the 'Shanghai General Motors in which Shanghai Automotive controls 20%' (Richard, 2005).

The management of the Shanghai General Motors was successful to topple 'Shanghai VW to be China's top auto seller for the first time in 2005' (Nicholas, 2002), the sales of the company rose significantly by '104% to 81,200 units in the first quarter, and profit totaled about 1 billion Yuan'(Nicholas, 2002). The performance of the Shanghai Volkswagen, a joint venture of SAIC, was successful in the securing the market share in tangible proportion, and rise of 115% was materialized through consistent efforts and comprehensive strategy. According to the National Bureau of Statistics, the investment and the interests of the Chinese automobile companies resulted in the estimated profit of 3 billion Yuan during the first two months of the current year, which is relatively 300% more than the results marked in the last year.

5. Findings & Discussion

5.1 Weaknesses of Chinese Car Industry

The Chinese car development has recently been through a long and difficult time. Until now, however, China has been among the ten biggest car manufacturing countries. In the last five years, however, the Chinese car industry has found itself in a bit of a golden age. Manufacturing and the portfolio of offered products have largely improved. Some types of technologies have reached higher levels in the 1990s. However, there are many gaps still within the technologies and management issues between the Chinese car makers and the foreign car makers. Overall, therefore, it is a rather immature industry, and gaps still exist in areas such as technology, price, and scale of the economy.

5.1.1 Economy of Scale

Since the 1980s, the economy of scale that is seen within international car companies has continued to improve rapidly. There are two reasons for this. One of these is that globalization has affected the car industry. Another is that there have been mergers and acquisitions within the car industry internationally. Because the car industry is both a technology industry and a capital concentrated industry, the scale of economy is very critical to the survival of the Chinese car industry. However, there is also a very large gap between the Chinese car industry and the foreign car industry within the scale of economy. According to the international rules, the scale of economy for a car company to operate must at least equal 300,000 per year. Until now, there has not been a car company within China that has been able to reach this criterion. In the United States and Japan, all of the car companies are able to reach this goal. A poor scale of economy in China helps lead to higher costs of fixed assets per unit, which lowers the advantage of having low cost labor within that country. "In 1998, the total production volume of the biggest six car companies was only about 1/4 of Toyota's. The total fixed assets are only about Volkswagen's" (Guo, 2003). There are, however, three main problems with this: there are too many different car companies, a low concentration of manufacturers, and low productivity.

5.1.2 Technology

Overall, the technological development that is seen in the Chinese auto industry is well behind what is seen in the auto industries of other countries. With the exception of a couple of companies, most are not able to develop new cars. Mostly, the Chinese auto industry imported and imitated techniques, and it did very little on its own. Such a low investment in creating new techniques and ensuring that cars were keeping up with the times lead to the large gap between Chinese cars and foreign cars.

5.1.3 Price

At the present time, excluding issues such as quality, performance, and branding, the average price of the domestic cars in China is 40-100% higher than the prices for foreign cars. According to prices listed on www.sina.com, both Audi and Jetta were sold at almost 370,000 and 170,500 in China, while similar Korean cars were sold at 20,000 and 10,000 dollars in Korea. Buick was also sold at nearly 44,600 dollars in China, while in the United States it sold only at 20,000 dollars. The price of Chinese cars is so high, however, that they cannot compete with foreign cards, even when considering service and quality.

5.1.4 Ownership

In car companies that are operated by the state, the ownership is often unreasonable and it prevents a lot of the healthy development that would otherwise take place. China is a communist country, and much of what they have is characteristic of planning economies that took place and were created before 1980. Although China began transferring from a planning economy to more of a marketing economy, many of the regulations that are put into place never disappear, and this is especially true within the auto industry. Many of the companies in this industry are state-owned because of a policy in the past where private enterprises were not supported. Because of this policy, the development of the Chinese car industry was slowed significantly. Top management could largely do nothing, and generally they only added or adjusted policies that were created by the government.