Chinese Car Market an Analysis Term Paper

Excerpt from Term Paper :

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


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