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Chapter 1

Linkages Between Foreign Affiliates and Domestic Firms in Chinese Automobile Industry

(1470 words)

Introduction

The presence of technologically advanced suppliers can provide affiliates with access to external technological and skill resources, feeding into their own innovative efforts. The direct effect of linkages on domestic suppliers is generally a rise in their output and employment. Linkages among countries offer benefits to foreign affiliates and domestic suppliers, as well as to the economy in which they are forged as a whole. For foreign affiliates, local procurement can lower production costs in host economies with lower costs and allow greater specialization and flexibility, with better adaptation of technologies and products to local conditions. (UNCTAD, WIR 2001)  Linkages can also transmit knowledge and skills between the linked firms. A dense network of linkages can promote production efficiency, productivity growth, technological and managerial capabilities and market diversification for the firms involved. The process of globalization in the automobile industry and accompanying global linkages has also begun to restructure the manufacturer-supplier relations in the Chinese auto industry. ( Chinese Automobile Industry Report, 2000)

Automobile industry is the backbone industry of Chinese national economy. It is playing a major role in the development of national economy and improvement of people’s living level. (Chinese Automobile Research Report, 2000) From this report, facts had revealed that foreign new product and new technology and foreign & Hong Kong , Macao, Taiwan investment have been introduced into China since the policy of opening-up and reform was adopted. It says that they are very important on the technical reform and structural restructuring of manufacturers in the industry. The said industry is catching up with international market with a rapid development speed. (Chinese Automobile Report, 2000)

While China is changing from the command to market economy, both the central and provincial governments are still using the management of the center-periphery relations as the principal tool for managing this transition. China at times faces more restraints, being a weaker partner in its rapidly emerging global linkages.(Yang) This has resulted in greater policy ambivalence and contradictions. As the experience in the automobile industry suggests, China relies on cross-border partnerships to obtain the foreign capital and technology needed for introducing new products and modernizing the production process. In reason, China has sometimes to allow the local decision units to retain more policy autonomy. It has also to retreat from disallowing the foreign partner’s access to the Chinese partners’ domestic market. And so with this, the process of globalization in the automobile industry and accompanying global linkages has also begun to restructure the manufacturer-supplier relations in the Chinese auto industry.  (Foreign Linkages Report, 2001)

Background of the Study

At the end of the 20th century, the globalizing trend of the world economy is beginning to effect on the government management of the national economies. National governments are turning increasingly to the market for economic management and retreating from their insulation against the international market forces. In this period of transition from mercantilist, command and protection-oriented national economies to global market forces, all national economies have ambivalent and sometimes contradictory policies. Thus, the United States holds onto managed trade through quota, retaliation and strategic trade policies. At the same time, it seeks to enhance national competitiveness by creating the advanced factor endowments (Ohame,1985) The second largest economy Japan rejects managed trade but maintains voluntary export restraints. The People’s Republic of China is also in a period of transition from the command economy. It is trying to create market mechanisms to attract foreign investment as well as establish linkages with the global economy.

China has also had frequent opportunities to display its policy ambivalence and contradictions towards the global market forces. The Chinese have had to rely on the global linkages to develop their auto industry, despite their preference for having a national industry. They want to develop it into a “pillar industry”,( Ohame,1985) one that represents the maturing of the industrial revolution in China, even though it contributes only modestly to its employment and national income.

Thus, mass production seems to hold broad appeal in China, particularly with its auto industry hurrying to position strategically in the rapidly expanding domestic market. But the Chinese auto builders are beginning to receive counter-influence from those foreign corporations that practice lean production successfully, as they diversify the foreign linkages. Recently, China is wooing Ford which has transformed from the mass to lean production for assistance in rationalizing its auto parts and components production.( Xinhua News, 1982) The Japanese producers are also beginning to look seriously at China while awaiting recovery elsewhere in the Triad. Nissan, for instance, intends to organize its keiretsu suppliers to transfer production to China. Besides lowering production costs, one of its objectives is to test the water for a full-scale manufacturing venture in the future.(Newswire,1993.) But how will Volkswagen’s method of production mix with that of a lean Ford across the intermediate supplies market? How may the practice of the Japanese keiretsu affect the changing structural linkages in China’s auto industry?

Questions like these point to long-term implications of the technological synthesis with which the Chinese have yet to come to grip. For now, however, any attempt at guessing China’s prospects in technological catching up requires a return to its starting point–the constraints built in the fixed matching relations between the Chinese enterprises. One has reason to believe that they hold the key for China’s future insofar as duplicating institutionalized teamwork is necessary for technological learning, just as Toyota found it six decades earlier, and as the followers of lean production have learned. It has been pointed out that the matching relations provide the foundation of cooperation among China’s automotive enterprises. Like in a Japanese keiretsu, personal networking, trust, and long-term commitment have held together this inter-firm structural relationship. But unlike in a keiretsu, the function of the matching relations remains largely protecting infant industry instead of perpetual technological learning after market entry, as a result of the government policy of insulating the domestic enterprises against the competitive challenge of the market forces. What the matching relations lacks is an emphasis on merit, which Toyota built in its keiretsu network by first introducing the two-supplier procurement strategy (Adachi et al, 1993) and then supporting the competitive pressure of the market disciplines with voice.

On the other hand, reorganization and co-operation with foreign competitors are the best way out for China’s auto industry which will soon be facing mounting competition from overseas with the country’s impending entry into the World Trade Organization (WTO), China Daily.  In other words, China has still a far distance to travel to become fully integrated with the globalizing industry, when its complete vehicles will be exported to the Triad and be tested in the world’s toughest markets. As a first step towards that point, it needs to get the automotive enterprises competitive at home. Whether it likes it or not, the global linkages in place are already helping to turn the domestic market increasingly into a battleground. To be truly competitive, however, China will have to move away from cuddling the infant industry with high tariffs, imports licensing,(Vines,1993) “buy import substitutes” campaign,(Vines,1993) as well as a captive consumer base whose demands are elastic to the government’s fiscal policies instead of product price(Xue, “Chinese, Strategy for the Future ,” 118-120) So as to escalate the competitive pressure among both the joint venture assemblers and their Chinese suppliers. It may want to adjust the geographical jurisdictional boundaries in marketing and sales and building a pool of picky consumers, perhaps among a rapidly growing middle-class. (Interview in Beijing (A),1992).

Thus, the global linkages have affected not only the relationship between China and the world economy, but also that between the central and local government authorities and the Chinese enterprises. The central decision makers have had to let the provinces and enterprises keep their independence to maintain the existing Sino-foreign partnerships and attract more foreign investors into the country. The local governments have also had to retreat from their administrative control. They are turning, instead, to improve the local investment climate to attract capital and technology into their own administrative areas so as to help some of the local enterprises to change and catch up in manufacturing capability. This way, the local authorities are helping to reduce an important market barrier in China. One their part, the automotive parts and components makers have also begun to take measures to transform themselves into competitive performers. In this process, they may gradually move towards re-focusing the matching relations on long-term technological learning to develop a competitive production system. Thus, the auto industry in China is entering a new era of growth. The transformations going on at both the center and periphery hold promise for not only the Chinese auto industry, but also the foreign firms that take a long-term perspective of business and profitability.