China’s automakers grew up on truck manufacturing. When it became clear in the 1980s that a mass market was emerging for sedans, Beijing turned to foreigners to supply the expertise that domestic players lacked.
The initial agreements crystallized into formal joint venture contracts in the 1990s and these enterprises now form the backbone of the industry – joint ventures involving General Motors and Volkswagen accounted for about a quarter of total light vehicle output last year.
The question is: what have the local firms learned from the experience?
"The joint venture system may have been profitable for the Chinese partners, but the foreign partners may not have transferred enough technology and expertise about making a car," said Charles Cheung, head of regional autos at Citigroup.
"For example, Shanghai Automotive Industry Corp (SAIC), a long-term joint venture partner of Volkswagen and GM, bought Rover Ssangyong [a Korean manufacturer], most likely to acquire more of the necessary platforms and expertise required to make its own cars."
The car companies themselves are, unsurprisingly, more upbeat.
"The government wants the country to have its own auto industry and we respect this policy and are helping SAIC develop," said Joseph Liu, executive director of vehicle sales, service and marketing for GM China. "We see them as a long-term partner."
He stressed that GM has learned much from SAIC in terms understanding the local market and using the Chinese company to build ties with the government.
"We have leveraged their resources and they have leveraged our know-how."
Similar sentiments were expressed by a spokesperson for Volkswagen.
The companies have built up strong supply chains in China, sourcing 80-90% of components locally. But Cheung argues that, with the local partners now looking to build vehicles independently that could eventually challenge joint venture products, the foreign firms are very careful about putting technology in China.
"Generally, all the high-tech component production stays overseas. For example, the wrapping for airbags can be sourced locally but the sensors that are put in the airbags come from abroad."
The joint venture contracts tend to be about 20 years in length so most of the major sedan production deals have plenty of time to run in this cycle alone. What happens after that largely depends on the state of the industry at the time.
But Lawrence Ang, executive director of Hong Kong-listed Geely Automobile Holdings – which isn’t involved in a joint venture – doubts that the joint venture system is good for local firms’ long-term competitiveness.
"They are not really under any pressure to learn. If your father told you there was lots of money in the bank and don’t have to worry about anything in life, would you really want to go to college?"
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