CHINA'S AUTOMOBILE INDUSTRY AND WTO ACCESSION
CRS Report for Congress
China’s Automobile Industry and WTO Accession
Thomas Lum
Analyst in Asian Affairs
Foreign Affairs, Defense, and Trade Division
Summary
Within the next ten years, China (PRC) is expected to have a significant market for
passenger cars. China’s accession to the World Trade Organization (WTO) and
permanent normal trade relations (PNTR) status would promise to open this market to
foreign trade and investment. However, American automobile and parts manufacturers
face several obstacles in their efforts to gain market share in China. First, American
companies in China, such as General Motors and DaimlerChrysler, face stiff competition
from German, Japanese, and Korean producers. Second, although the PRC pledges to
reduce or eliminate tariffs, quotas, and local content requirements and grant foreign car
companies greater distribution and financing rights, Chinese central and local
governments may still find ways to protect domestic companies and facilitate Chinese
production of cars. This report may be updated as warranted.
WTO Provisions
The U.S.-China bilateral WTO agreement and WTO member requirements, if carried
out, would heavily impact the Chinese auto sector. A Chinese investment journal reports
that China’s automobile industry would be the sector most affected by WTO membership
since it is currently one of the most protected.1 The following changes would apply to the
Chinese auto industry if China enters the WTO and the United States grants China PNTR
status. Upon accession to the WTO, China has agreed to reduce tariffs on imported cars
from 80-100% to 25% and on auto parts from 40-50% to 10% by 2006.2 Import quotas
would be phased out by 2005. According to other WTO rules, discriminatory “value-
added taxes” would be prohibited and domestic content requirements, now 40% or
1 “How WTO Membership Could Affect China’s Auto Industry,” ChinaOnline, January 5,
2 The largest reductions will occur in the first years after accession. “The U.S.-China Bilateral
Agreement and the United States,” The China Business Review, January-February 2000, p. 21.
Congressional Research Service ˜ The Library of Congress
greater, would be eliminated. Foreign car companies would be granted financing and
distribution rights.3
China’s Passenger Car Market
China’s 13 major auto manufacturers reportedly built 1.5-1.7 million motor vehicles
in 1999. Chinese industry analysts estimate that in 2000, Chinese automobile
manufacturers will produce 650,000 passenger cars and import 60,000 passenger cars or
sedans, including both luxury cars and compacts.4 In 1998, China imported only 20,000
cars. According to some reports, in the mid-1990s, nearly 90,000 cars per year were
smuggled into China. The Chinese government curbed this trade by 1998, thereby
reducing the proportion of imported cars.5 In the first half of 2000, imports of cars,
trucks, and buses were up in cities such as Shanghai, which reported an 85% increase over
the same period in 1999. Japanese vehicles represented 64% of Shanghai imports; the
remainder came from Germany, South Korea, and the United States.6
Foreign Investment and Market Shares
The top three Chinese automobile manufacturers – First Auto Works, Tianjin
Automobile Industrial Group, and Shanghai Automotive Industrial Corporation – are
involved in Chinese-foreign joint venture enterprises which account for over 80% of
domestic production. Volkswagen (VW) and Toyota joint ventures dominate auto sales
in China; in 1998 they held 58% and 18% of the market, respectively.7 VW’s Shanghai
plant produces over 230,000 “Santana” models per year (priced at $25,000). The
remainder of the Chinese auto market is served by other European, Japanese, Korean,
American, and Chinese manufacturers. The U.S. share of the Chinese sedan market is
estimated to be roughly 8% and growing. Its share of imported cars is less than 4%. In
(See Tables 1 & 2.)
General Motors (GM) is the leading American automobile manufacturer in China,
with plans to capture 15% of the sedan market by 2005. Its joint venture facility in
Shanghai is expected to build 50,000 Buicks in 2000, or about half of China’s luxury cars.
Shanghai-GM has also introduced a minivan. The plant exceeded expectations in 1999,
3 China reportedly has not yet removed or adjusted its 50% cap on foreign equity in automobile
production enterprises. However, the PRC has allowed majority foreign ownership in
automotive parts production. James B. Treece, “WTO Bid Grabs Beijing Spotlight,”
Automotive News, June 12, 2000.
4 New China News Agency, April 15, 2000.
5 “How WTO Membership Could Affect China’s Auto Industry,”op. cit.
6 “Shanghai Auto Imports Cruising,” ChinaOnline, June 27, 2000.
7 China CarGuide Corporation. [http://www.carguide.com.cn] Toyota owns 51% of Daihatsu
Motor Corporation, whose minibuses and Charade mini cars have become ubiquitous in
Beijing.
8 U.S. Department of Commerce.
when it reportedly sold 20,000 Buicks (priced at $40,000), after less than eight months in
operation, and posted a $75 million profit.9
In the late 1990s, Beijing Jeep (Chrysler) built 20,000 Cherokees per year. Sales
have reportedly begun to decline due to competition from the Mitsubishi Pajero and other
more fuel-saving vehicles. The company has plans to produce a relatively inexpensive10
sport utility vehicle. Other major foreign auto companies in China include Audi (VW),
Citroen, and Honda, which is producing Accords in Guangzhou. Recently-announced
projects include a Toyota joint venture with the capacity to build 120,000 small cars
annually and a Hyundai joint venture with plans to produce 300,000 units per year.
Projected Growth
China has been projected to represent 25% of global demand for new cars over the
next ten years. According to U.S. auto industry estimates, China’s motor vehicle market
could reach 7 million units annually by 2007 and the U.S. level of 16 million units per year
by 2025.11 Passenger cars for both companies and families will make up an increasing
proportion of the overall vehicle market. Analysts at Shanghai-GM claim that per capita
incomes in some of the coastal cities have reached the “threshold” of $3,000 that makes12
cars affordable. An industry specialist predicts that in the foreseeable future, domestic
producers will not be able to keep up with rising demand, and imports will grow.13
Exports of Chinese cars to the United States are likely to remain low. Currently,
China exports almost no family-size passenger vehicles to the United States. In 1999,
China exported 266 golf carts to the U.S. In addition, Americans purchased from China
667 specially designed small vehicles and 1,649 gasoline-powered vehicles with engine
capacity under 1000cc’s (valued at less than $600 per unit).14 Korean automobile
companies are aiming to be the third major competitor in the U.S. market after Japan and
Germany; Korean auto trade experts do not foresee a Chinese threat to their U.S. and
European market shares. An American industry specialist suggests that as the Chinese
market becomes saturated in the long term, Chinese manufacturers may seek markets in
other developing countries rather than the U.S.15
9 Clay Chandler, “GM’s China Bet Hits Snag: WTO,” Washington Post, May 10, 2000, p. E1.
10 Paul Mooney, “Historic ‘Heroic’: Beijing Jeep Rolls out SUV,” China Online, June 13, 2000.
11 Lawrence B. Zahner, “GM Aims To Grab 15% of China’s Growing Auto Market by 2005,”
Korea Herald, December 8, 1999.
12 Chandler, op. cit. China’s per capita GDP in purchasing power parity (PPP) terms is $4,228;
China’s nominal per capita GDP is $790. PPP factors in cost of living. See CRS Issue Brief
IB98014, China’s Economic Conditions, by Wayne M. Morrison.
13 Automotive Trade Policy Council, Washington, D.C.
14 United States International Trade Commission, U.S. Department of Commerce.
15 “China’s Entry into WTO Likely To Hurt Korea’s Long-Term Trade,” Korea Herald,
November 17, 1999; Automotive Trade Policy Council, Washington, D.C.
Table 1. U.S. Vehicle Exports to China
(1000 dollars)
Commodity 1995 1996 1997 1998 1999
Ambulance/Hearse/Prison Van87236371195288
Buses and Vans1,5435,22569721428
Chassis with Engines191101174,659
Light Trucks12,1879153,072420517
Motor Homes9172282546250
New Medium and Heavy4,8526,86037,4656,0402,236
Trucks
New Passenger Vehicles44,1608,62414,85114,1195,106
Used Passenger Vehicles3,3743,8897,6585,9422,077
Used Road Tractors00123169150
Total 67,122 25,989 64,492 27,279 15,112
Source: Motor Vehicle Division, U.S. Department of Commerce
Table 2. U.S. Vehicle Exports to China
(in units)
Commodity 1995 1996 1997 1998 1999
Ambulance/Hearse/Prison Van37846
Buses and Vans7612017444
Chassis with Engines2201398
Light Trucks738721253125
Motor Homes3410612
New Medium and Heavy78971,76113133
Trucks
New Passenger Vehicles2,6124675436201,668
Used Passenger Vehicles364369536444122
Used Road Tractors00542
Total 3,907 1,144 3,001 1,280 2,260
Source: Motor Vehicle Division, U.S. Department of Commerce
Vehicle Parts and Accessories
China’s accession to the WTO could benefit U.S. parts and accessories suppliers.
Lower tariffs on both autos and parts and the elimination of domestic content requirements
may raise demand for imported parts. An auto industry specialist suggests that low
productivity and quality would likely reduce the price-competitiveness and attractiveness
of many locally-made parts compared to imported ones.16 Chinese industry analysts argue
that only two Chinese manufacturers, First Auto Works and Shanghai Automotive, can
make major automotive components that meet international standards.17 Michigan
exported $264 million worth of goods to China in 1998, mostly machinery and auto parts.
Half of the 400 companies in the state that do business with China supply the new GM
plant in Shanghai. General Motors estimates that it will export $2 billion in vehicles and
parts to China in the next five years if PNTR status is approved.18
Other trends indicate that the Chinese parts industry is becoming more competitive.
Chinese exports of vehicle parts and accessories to the United States have been increasing
steadily. The United States runs a trade deficit in auto parts with several countries,
including China. (See Table 3.) As efficiency and quality improve, local parts may
become more appealing despite a reduction in tariffs on imported ones. For example, a
Shanghai-GM executive stated that the company plans to increase locally sourced
components from 40% to 80%.19 Much of Chinese output in parts for export and domestic
auto production involves foreign investment. Toyota has two dozen parts facilities in
China. Delphi Automotive Systems, which has built ten plants in China, has become a
leading supplier of parts to some of China’s major auto makers.20
Table 3. U.S. Exports/Imports of Automotive Parts, Top Ten Trading
Partners
(1000 dollars)
199719981999
Country Exports Imports Exports Imports Exports Imports
Canada 24,386,570 13,833,572 25,297,880 14,712,138 29,643,478 16,934,110
Mexico 9,582,179 13,324,020 9,501,618 14,481,252 9,271,320 16,767,508
Japan 2,312,161 11,856,106 2,138,740 11,878,906 1,892,879 12,775,546
Germany 1,005,596 2,625,685 1,018,942 3,113,780 949,532 3,451,295
United 752,233 808,571 843,828 1,030,808 1,190,634 1,118,410
Kingdom
Brazil 612,793 1,233,233 816,020 1,240,407 428,297 1,359,552
France 296,400 961,092 268,185 1,093,982 280,956 1,302,583
Korea 660,708 664,095 364,357 761,894 597,206 919,452
China 310,771 795,317 132,048 1,036,856 251,000 1,284,063
Source: U.S. Department of Commerce
16 Harry Stoffer, “Suppliers Are Early Winners in China Deal,” Automotive News, November
17 “How WTO Membership Could Affect China’s Auto Industry,” op. cit. China reportedly has
about 2,500 parts makers, mostly small-scale, inefficient, and not technologically adept.
18 Mike Magner, “China Trade Status Battle Affects Michigan Businesses,” The Grand Rapids
Press, May 7, 2000, p. E1.
19 Shanghai, December 1999.
20 “Shanghai Auto Parts Producers Expect To Succeed in Long Run,” China Business
Information Network, December 10, 1999.
Prospects for U.S. Business
Rising Chinese Demand for Imported Cars. China’s accession to the WTO would
lower tariffs and prohibit other trade barriers, eliminate domestic content requirements,
allow foreign financing, and grant foreign joint-venture partners greater decision-making
powers and control over distribution. WTO provisions would make imported products
more economical to the rising Chinese middle class and investment more profitable for
foreign companies. An indication of the likely rise in imports is the estimated 30% drop
in car sales in China since the U.S.-China WTO agreement was signed. This decline has
reportedly been triggered by the anticipation of cheaper imports once China accedes to the
WTO.21 According to industry experts, companies that already build cars in China have
advantages of name recognition, existing distribution networks, and government contacts
that would facilitate sales.
Possible Impediments to Greater Imports
Political and economic obstacles may hamper production and constrain foreign car
sales in China. Excessive bureaucratic regulations and fees and low productivity have
made many joint venture projects unprofitable.22 Even successful foreign companies may
face formidable competition from Chinese manufacturers in the long term. The PRC
government welcomes foreign investment as a means to develop a domestic automobile
industry that can compete on its own. The state, which owns a significant share of the
largest car manufacturers, provides capital to the domestic companies and requires foreign
partners to transfer cutting-edge technology.
Economic and other factors may impede auto sales in general and demand for
imported cars in particular. Myriad taxes and fees artificially raise the cost of vehicles –
both foreign and domestic – beyond the reach of most consumers. Auto services, including
maintenance, parking, insurance, and gasoline distribution, remain underdeveloped, which
discourages auto purchases. Some Chinese experts suggest that for the next ten to fifteen
years, sedans will be unaffordable and unsuitable to Chinese peasants, who comprise three-
quarters of the national population.23 State agencies and corporations are required to buy
domestically-produced vehicles. Some provinces and municipalities have favored cars
produced in their own localities.24 Shanghai, for example, has required its taxi fleets to buy
Shanghai-made Volkswagens and charged additional licensing fees for cars made outside
the municipality.
21 Craig S. Smith, “A Buyer’s Guide to China’s Latest Cars,” New York Times, April 16, 2000,
p. A18.
22 Chester Dawson, “Toyota’s China Play,” Far Eastern Economic Review, June 8, 2000.
23 “How WTO Membership Could Affect China’s Auto Industry,”op. cit.
24 These include joint-venture products. Craig S. Smith, “Global Corporate Report: WTO
Membership for China Threatens Inefficient State-Owned Auto Makers,” Wall Street Journal,
May 10, 1999, p. 6; “China Plans To Protect Local Car Makers after WTO,” ChinaOnline,
December 7, 1999.