What has WTO Membership Brought to China’s Auto Industry? Accession to the WTO has sparked rocket-like growth for domestic makers China joined the World Trade Organization (WTO) on December 11, 2001. After the five-year transitional period, it might be interesting to recall what a Chinese official said around the time of the document signing. “For China, accession to the WTO is a turning point, when cars will begin to enter Chinese homes,” said Long Yongtu, chief Chinese representative for negotiations on China’s WTO accession. What Long said has largely come true and China’s auto industry has grown and become stronger in the past five years. Before their country became a WTO member, Chinese people had been worried that China’s automotive industry would be crushed by floods of imported cars following the WTO accession. This has not happened. The auto industry has not only withstood those trials but has also become a pillar of the national economy. In 2001, the year of China’s WTO accession, national sales of cars were just 800,000 units, with most of them used by institutions. For most people, owning a car was only a dream. By 2006, annual motor vehicle production (and sales) exceeded seven million units, and sales of cars reached four million units. China has thus become the world’s second-largest automotive market and third-largest automotive producer. In this five-year period, China’s motor vehicle output has more than doubled and its export of automotive products has been increasing by 15 per cent annually. Export value reached ¥20 billion ($2.5 billion) in 2005. In the meantime, fulfilling its commitment to the WTO, China has opened its doors to foreign vehicles. In 2005, the country imported $18 billion worth of vehicles and components. Said Zhang Xiaoyu, president of SAE China: “The way China’s automotive industry has developed in the last five years shows how we’ve been fulfilling our commitment to the WTO. China has become an increasingly important part of the global automotive industry.” China is now home to more than 800 Chinese-foreign joint ventures and cooperative operations that produce either vehicles or vehicle components, and their cumulative capital has reached $96 billion. Tariff cuts and abolition of import quotas At their highest, tariffs on imported autos reached 220 per cert in 1986. This made imports enormously expensive. On July 1, 2006, fulfilling its commitment to the WTO, China cut tariffs on imported autos and auto parts to 25 per cent and 10 per cent respectively. With the tariff barrier dissolving step by step, the market has matured. The last round of tariff cuts, for example, had little impact on the auto market in terms of sales. With the continued lowering of import tariff rates, the government in 2005 abolished the auto import quotas that had existed for 20 years. Reduction of import tariffs, according to industry officials, is one important factor in the fall in prices on the domestic auto market. Persistent tariff reduction, which has acted as a catalyst for the development of the automotive industry, has not led to a flooding of the home market by imported automobiles. Instead, it has enhanced the competitiveness of domestic automobiles. From 2001 to 2005, the annual number of imported autos increased from more than 70,000 units to over 170,000, but their share of total sales on the domestic auto market fell, from 6 per cent in 2001 to less than 3 per cent. And, the average price of imported autos has tended to go up: in 2000 it was less than $20,000; in 2003, $29,990; and by 2005 it was up to $33,900. More importantly, losing the protective effect of high tariffs on imported cars, domestic automakers have actively cooperated with their international counterparts. Their manufacturing and R&D capabilities have developed rapidly as a result, and new models have kept rolling off the assembly lines. Rising production capacity and competition have continued to drive down auto prices. During this period, multinational automakers have begun to give priority attention to the Chinese market, and their introduction of new models has accelerated markedly. Domestic automakers, with indigenous brands represented by Chery, Geely and Brilliance China, have also developed at a rapid pace. In the meantime, fulfilling its commitment to the WTO, China has also opened up its auto finance market. Following the promulgation in October 2003 of Administrative Methods of Auto Financing Companies, General Motors, Ford, DaimlerChrysler, Volkswagen, Toyota and Citroen established wholly-owned or joint venture auto finance firms, and promptly began to offer loans to auto buyers. Twenty-five per cent annual sales growth, eight per cent annual price falls In the early 1980s, a 1.8L Santana made by Shanghai-Volkswagen sold for close to ¥200,000 ($25,000). Three models, the Santana, Jetta and Citroen Fukang, had a combined market share of 60 per cent. Due to the limited scale of auto production, the prohibitive prices and outdated models, auto manufacturing was regarded as the most troubled industry in the wake of China’s WTO accession. “The greatest benefit WTO membership has brought to China’s automotive industry is full competition in the marketplace,” said an industry official. Competition has brought prices down and contributed to technology advances. Today, the same Santana, with some updates, bears a price tag of under ¥90,000 ($11,250). The QQ3, a mini car made by Chery Automobile, sells for just ¥29,800 ($3,725). In the five years since WTO accession, auto prices have come down by an annual average of more than eight per cent. In 2004, prices fell by an overall 13.5 per cent. Production rose sharply over the same period. In 2001, national motor vehicle sales were just 2.39 million units, seventh in the world; by 2006, total sales exceeded seven million units, making China the world’s second-largest auto market after the United States. In the five-year period, motor vehicle sales went up by an annual average of 25 per cent. China’s share of global vehicle sales rose from 4.3 per cent in 2001 to 11 per cent in 2006. Correspondingly, local brands have grown quickly in terms of output, with market share rising from less than five per cent five years ago to almost 30 per cent today. And, domestic automakers have begun developing products for the medium-grade and upscale vehicle markets. In the past five years, local domestic brands have also grown in scale, nowadays accounting for the larger part of China’s automotive exports. In 2005, China exported 173,000 vehicles, 11,000 more than it imported. This is the first time that exports have exceeded imports, though the export value was less than that of the imports. Since WTO accession, China’s automotive exports have grown at an average of 15 per cent annually to reach today’s ¥20 billion ($2.5 billion) in value, a rate unseen anywhere else in the world. Indigenous brands grow despite adverse conditions "The automotive industry will be the most impacted sector following China’s WTO accession.” This was the view held by many people as soon as China joined the WTO five years ago. Their prediction has not come true, however. In the last five years, the country’s auto industry has become strong, instead of being crushed by the imports. Big-name automakers such as GM and Ford have placed their greatest hopes in China as a way to escape from their current predicament, and have introduced their latest models there (such as the S-MAX and many Cadillac models). More noticeably, many multinational automakers have set up R&D centres in China, helping to further enhance the general competence and ability of the auto industry there. According to a forecast by Ford, over the 2002-2010 period, annual global auto output is expected to increase by 11 million units, of which 65 per cent, or seven million units, will come from the Asia-Pacific region. Of these seven million, half will come from China. Car buyers have benefited the most from a changed auto market: prices have been cut almost in half over the last five years. In the past, customers had few models to choose from: today, they worry about too many choices. Indigenous brands have gradually emerged amid the foreign brands. Talking about the impact of the WTO accession on China’s auto industry, Chen Zuguang, a member of the China Auto Industry Advisory Committee, said: ‘‘The greatest benefit to China’s auto industry from our WTO membership is that it has forced Chinese automotive enterprises to innovate independently. The current healthy development of the domestic auto industry is a demonstration of the progress made by the industry under WTO-generated pressures.” Li Shufu, chairman of private automaker Geely said this: “Without China joining the WTO, there would have been no Geely.” Li has always maintained that Geely is the biggest beneficiary of China’s accession to the WTO. Chery, another homegrown automaker, has made even greater advances than Geely. In 2006, with its car production (and sales) exceeding 300,000 units, Chery joined China’s Top Four carmakers. In product design, Chery has also moved past the initial period of imitating hot-selling foreign vehicles. At Beijing’s Auto China 2006, Chery displayed 10 new models, five engines and one CVT transmission. Cars of indigenous brands now have more than a quarter of the market. And with the debut of the Roewe from SAIC and the Besturn and HQ3 from FAW, the upscale market has also begun to see cars bearing domestic brand names. Domestic auto makers have done even better in the commercial vehicle field, with a 90 per cent share of the current home market.