It’s an open secret in Chinese industry circles: within the next six to eight years, the domestic auto industry wants to stand on its own technological feet, instead of relying on U.S., European and Japanese joint venture partners. At after-work hangouts, such as “Schindler’s Anlegestelle” around the corner from Volkswagen Group China’s headquarters in Beijing’s bar and embassy district Sanlitun, fare-well parties for managers heading home are already decreasing. In the name of the almighty efficiency, most foreigners have already been replaced by supposedly cheaper Chinese. And now, no more pussy-footing around. According to Gasgoo.com, which read it in the Beijing News, which cited a faceless industry analyst, Chinese industry giant FAW is “focusing its human, financial and material resources on making cars of its independent brands.” The joint venture partner of Volkswagen, Mazda, and Toyota “aims to sell two million vehicles by 2010, and half of them must be FAW’s own-brand vehicles.”
In 2007, FAW sold 1,465,000 vehicles, which include 620k own-brand vehicles. According to China Knowledge, the FAW Group reported very robust auto sales growth of 17.1 percent for the January-September 2008 period. However, their own-brand vehicles are overweight in the commercial sector; passenger car output is dominated by joint venture models. From January to September, FAW sold 382,845 VWs (and Audis), 283,464 Toyotas, and 90,485 Mazdas. Even FAW’s “own brand” models are mostly based on foreign platforms.
In related news, FAW has announced that they will fold their own and formerly illustrious “Red Flag” brand for good, and rename it to “Shengshi” (“Days of Prosperity”). Chairman Mao’s ride, repositioned as a capitalist’s tool. The Red Flag brand had anemic sales of 788 units in the first six months of 2008. Its flagship HQ3 is based on the Toyota Majesta. New models in the “Days of Prosperity” lineup will be developed by the Austrian engineering house Magna Steyr, designer of Mercedes-Benz’s “4MATIC” and the BMW X3. As hard as the Chinese may try, some foreigners will be around for a while.
From the “no one could have predicted…” file.
The US government will eventually need to tell China that they can’t behave that way if they want to keep exporting goods to the US. Open your markets or we close ours. But it may take an entire “coalition of the willing” — international trade agreement — to pull this off. It’s not like China will allow the Japanese, Koreans, Europeans a seat at the table either.
The US government will eventually need to tell China that they can’t behave that way if they want to keep exporting goods to the US. Open your markets or we close ours.
As our friend Pete would say, “ain’t-gonna-happen.com”
From day one, the Chinese government has dictated (literally) local content and openly allowed intellectual property violations on an international level. Why did we do business with them in the first place? If any US/Non-China company is suprised when they get kicked out, it is their own fault. This is a little too obvious.
Doing business in China is rather like supplying Walmart or partnering with Microsoft. Yes, it’s lucrative–in the short term. Get too successful, though, and in the long term, you’re looking at serfdom at best or an outright gutting at worst.
And this should surprise no one. Chinese business is–with some exceptions–at the same time incredibly predatory, lacking in accountability and disrespectful of such things as intellectual property, and tied as closely to government as it is, it has no incentive to change. Russia (the other “Next Big Thing” for margin-hungry western companies) is just as bad.
If I were a titan of industry, I’d be looking very hard at the cost/benefit ratio of doing business in either state and diversify into emerging markets that, while perhaps not as immediately profitable, are at least less corrupt. India and Brazil come to mind.
Why did we do business with them in the first place?
Because the geniuses with the letters after their names determined the benefits outweighed the negative consequences. China is learning a valuable lesson as we speak, however: without a market (uhm, that’s us) for their goods, they’re up the proverbial s*** creek. Read today’s NYT piece about slow growth and empty factories in Mao country these days.
I don’t know about Brazil, but India is corrupt++.
And I wouldn’t mind being in an economic “slowdown” where the annual growth is 8%…
If a modern analog to Gibbon’s classic “The Decline and Fall of the Roman Empire” is ever written about the USA, the longest chapter will be devoted to how short term profit seeking behavior drove long term suicidal actions.
I can speak firsthand that the culture in Brazil only VERY rarely (at least at the consumer level…I have not worked there) respects IP & copyright.
You can go into pretty much ANY city and find TONS of vendors to sell you the latest copy of Windows for a couple dollars, as well as playstation games, dvd’s, or any other easily copyable media. This is out in plain sight. Not from the back of a van, but in an actual store or vendor stall.
When I asked people there why they don’t think copying commercial software is wrong, they often say “Manufacturer already has enough money. Why should we care if we copy their stuff? I can’t afford the legitimate version”.
The funniest part is, it is their OWN government that insist on super high taxes on ANYTHING imported. Some free market, eh? I have a friend in IT there, and 1TB hard drives are running $1000 in local currency (equivalent spending power to $1000 US here in the USA), while here they are approaching $100.
For something more related to this website, I looked at MSRP’s of popular cars there (a couple years ago..things may have changed since then) and a BMW 325i I think was MSRp’ed at the time of about $140,000 US. 140,000!!!! A subaru WRX was listed at about $80k and the STi was not for sale there. A friend there just bought a 2009 Peugot 207 and it was $42k local currency. Doing some reading the Brazil Peugot207 is a redesigned 206….
I can count on one hand the number of people I’ve met there who believe in software copyright.
As my good faith effort (I have been a programmer and I firmly believe there is no need to illegally copy commercial software, dvds, mp3’s, etc), I built my niece a computer based on Linux. She enjoys it no less (she has her IM, her web browsing etc, just like her moms windows computer) since I set up everything in Portuguese so she can use it.
My former company jumped on opportunity to do business in China. To make long story short, Chinese current trade laws do allow foreign investors to take out of the country the value of their original investment and no more. Which is probably OK for GE and Wal-Mart: they purchase extremely cheap crap painted in lead paint and sell them in US and Europe at tremendous profit. How anyone else can make money is a mystery to me.
I don’t know about Brazil, but India is corrupt++.
I can speak firsthand that the culture in Brazil only VERY rarely (at least at the consumer level…I have not worked there) respects IP & copyright.
Everyone is corrupt to some degree, and it’s particularly rampant in developing countries but China and Russia elevate it to an art form. Between official policy and back-room agreements between government and industry, you’d be hard-pressed to make long-term profits in either country. BP’s experiences, for example, should be a lesson to automakers wanting to get into bed with AutoVAZ or one of the many Chinese brands.
I’m not saying Indian or Brazilian corporate culture is a paragon of virtue, but that a foreign investor stands more than a snowballs chance in hell of not being pushed out when they start making money. Low-grade, wheel-greasing corruption is a cost of business; the risk of your venture being nationalized on a whim and/or your ex-pat employees being tried and convicted of whatever the government can make stick.
@ Autonut: If that happened to your former company, then they incorporated in China long, long, long time ago. Or the got very bad advice. (In those times, it was a bad idea to make a profit in China proper. You made it somewhere else …)
The corporation to have is a WFOE (pronounced “woofee”):
“PROFIT REPATRIATION
China Government allows Foreign Invested Enterprises remit their profits out of the country and such remittances do not require the prior approval of the State Administration of Foreign Exchange (SAFE). Dividends cannot be distributed and repatriated to oversea if the losses of previous years have not been covered while dividends not distributed in previous years may be distributed together with those of the current year. Repatriating the Registered Capital to home countries is forbidden during the term of business operation.”
“the risk of your venture being nationalized on a whim and/or your ex-pat employees being tried and convicted of whatever the government can make stick.”
That’s Russia, whom has a bone to gnaw on vs. the West. I don’t think there are any examples of that in China. It’s obvious to anyone that’s walked in the central business district in Beijing, that there are tons of US/European companies making big bucks in China.
Funny that you mention Sanlitun, it wouldn’t exist if it weren’t for the rich expat community. And not just rich relative to the local population, rich compared to the average Joe in the US. When those expats return, they aren’t driving a Malibu.
“the risk of your venture being nationalized on a whim and/or your ex-pat employees being tried and convicted of whatever the government can make stick.”
Exactly. Got the countries confused. Foreigners are being treated like royalty here.
This may sound like heresy, but heck, I’ve always been a heretic:
I have lived and owned businesses in Europe, in the USA, and in China. On all three continents for a long time, successfully, and intensively.
Nowhere have I experienced more freedom and less interference than in China. In Europe, you get taxed, regulated, and controlled to death. In the US, lawyers make your life a misery once you make some money. Don’t dare to get married or sell auto parts.
If you love capitalism, you’ll adore China. They say “Happiness is an American house, a Japanese wife, and a Chinese cook.” Hey, I traded in the house for the other two. And thank God, I did it just in time, two years ago …..