Analysis of the Dynamic Relationship between the Emergence of Independent Chinese Automobile Manufacturers and International Technology Transfer in China’s Auto Industry

This paper examines the relationship between the emergence of independent Chinese automobile manufacturers (ICAMs) and International Technology Transfer. Many scholars indicate that the use of outside supplies is the sole reason for the high-speed growth of ICAMs. However, it is necessary to outline the reasons and factors that might contribute to the process at the company-level. This paper is based on the organizational view. It examines and clarifies the internal dynamics of the ICAMs from a historical perspective. The paper explores the role that international technology transfer has played in the emergence of ICAMs. In conclusion, it is clear that due to direct or indirect spillover from joint ventures, ICAMs were able to autonomously construct the necessary core competitive abilities.


Introduction
The purpose of this study is to investigate the chaotic but progressive emergence of independent Chinese automobile manufacturers (ICAMs).It will also provide an academic view of the relationship between the emergence of ICAMs and international technology transfer, from the points of view of both of the firms involved in the joint ventures (JV), that is, from both the major foreign automobile manufacturers ' (i.e., VW, etc.) and the Chinese domestic automobile manufacturers ' (i.e., FAW, etc.) points of view.
Many economists have documented the relationship between international technology transfer and the development of the Chinese automotive industry.For example, Guo and Zhang (2008) discovered that technological transfer from multinational companies has not brought a substantial improvement to the Chinese passenger vehicle industry, but has caused even more dependency on foreign technological transformation.Focusing on the change over time in the investment behavior of multinational corporations, Lei and Xu (2006) have concluded that the investment atmosphere has changed from one of monopoly to one of competition, which has helped to improve the international competitiveness of China's automobile industry.Jia (2004) reached a similar conclusion.
However, most studies have focused on the transferring side (multinationals), not on the recipient side (Chinese companies).The findings of the aforementioned studies indicate that the expectation of international technology transfer exists in China, as does the belief that the competitiveness of China's automobile industry has improved through advanced technology transfer and investment behavior transformation.However, since industrialization is neither spontaneous nor caused just by an outside ripple effect, this paper will focus on the internal aspects, that is, the nature of the "Chinese learning mechanism" and the role of international technology transfer in the growth of independent Chinese automobile manufacturers.These manufacturers are regarded as the new forces of Chinese manufacturing To clarify these issues, this paper will attempt to answer the following questions: (1) How and why did ICAMs enter the passenger vehicle market?Why was their emergence chaotic but progressive for the Chinese automobile industry?(2) What role has international technology transfer played in the ICAMs' emergence process?What effects, if any, did international technology transfer have on the competition building of ICAMs?(3) What are the largest barriers faced during international technology transfer from automotive Sino-foreign joint ventures to ICAMs?These questions are followed by another, that is, whether the key factors indispensable to the growth of ICAMs into world-class automakers are present in the current situation.
To answer these questions, this paper was divided into three parts.First, we distinguish between      As a result, in the early 1990s, the Chinese automobile market was an oligopoly, led by a few authorized players and strictly protected by both industrial policy and high import duties.All the authorized players intended to raise productivity through joint ventures with foreign corporations.This import substitution policy met with partial success.However, the price of products made by    1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Billion RMB 0 3000 6000 9000 1200 1500 RMB per capita GDP per capita GDP these joint ventures was higher than levels in the rest of the world, and much higher than the income levels of the normal Chinese household (see Table 2).
For this reason, in the early 1990s, automobile demand was mainly supported by state officials and state-owned companies, not by households.The high price of vehicles was the largest constraint on household demand.The average price of most vehicles was higher than RMB 130,000, which was more than 20 times the GDP per capita in 1997.In addition, the smuggling in of passenger vehicles in the 1990s greatly exceeded legal import (see Figure 3).
Generally speaking, the motorization of a country is quite smooth after its GDP per capita surpasses US$ 1,000.After 1994, the Chinese GDP and GDP per capita experienced rapid growth (see Figure 4).
In the late 1990s, the Chinese market attracted the attention of global automakers, who revealed plans to enter the market because of its high growth potential.In 1998 and 1999, Honda and GM successfully used their last opportunities to enter the Chinese market, before the country's admission to the WTO.Honda founded a joint venture with Guangzhou Auto, and GM, in cooperation with its partner, Shanghai Auto, located one of its plants in Shanghai.
In the middle of the year 2000, when the Chinese GDP per capita was close to the US$ 1,000 mark, the government and most joint venture automakers started to focus on the production of "family cars" (or "public cars").Many automakers planned to promote products specified as "family cars," worth RMB 100,000, to influence motorization in China.However, in 2001, the income levels of Chinese households still were low, and motorization became possible only in some advanced areas like Shanghai, Beijing, and Tianjin (see Table 3).
Foreign companies were not the only ones to recognize the opportunities in the Chinese market in the late 1990s; Chinese domestic companies recognized them as well.In the 1990s, the high rate of profits in the passenger vehicle industry attracted domestic companies that had potential capabilities (see Figure 5).Additionally, the high price of the joint venture products and the high potential demand from households gave domestic producers the best opportunity to enter the segment of vehicles priced under RMB 100,000, which joint venture automakers did not intend to enter (see Table 3).
CHERY and Geely had been planning to enter the passenger vehicle market since 1997 with products priced at under RMB 100,000 (which was 1/2 to 2/3 of the price of the models produced by joint venture automakers).Although these domestic companies were not authorized as automakers due to the limitations of the automobile industrial policy enacted in 1994, before China's entry to the WTO (1997)(1998)(1999)(2000)(2001)(2002)(2003)  Most of CHERY and Geely's first generation products were thought of as either copies of existing vehicles or hodgepodges of different products (see Tables 4 and 5).This was especially true for exterior design.Both companies were placed under the scrutiny of intellectual property disputes with foreign automakers.However, as we will see below, this point 8 http://www.geely.com/english/about/intro.htmIn addition to the 30 foreign experts, CHERY invited more than 150 Chinese experts and engineers from FAW (FAW was supposed to have employed more engineers than any other state-owned automaker).These highly skilled professionals commenced work in the R&D and manufacturing departments of CHERY.By the end of 2006, CHERY had 18,000 employees, 20% (that is, approximately 4,000 people) of whom were engineers, and 1,500 of whom were directly related to R&D (see Table 6).need to gain and enhance original R&D capabilities was common to all of them.In light of the fierce competition between the joint venture automakers and their forerunners, there was no room in the passenger vehicle market for new local participants such as CHERY and Geely, especially because their strategy was to copy and market existing low-end models.

Discussion: The role of international technology transfer
ICAMs demonstrated rapid growth rates in both the domestic and the international markets.In 2007, ICAMs accounted for a 31% share of the domestic market, which was the highest record in history.CHERY is a good example, with sales of 3,810,000 units in 2007, compared to just 87,000 units in 2004.In 2007, CHERY also sold 119,800 units to overseas markets, including Russia (see Figure 6).
There is no doubt that the expansion demonstrated not only in domestic but also in overseas markets, especially in Russia, Southeast Asia, and the Middle East, was made possible by the growth of CHERY'S original capabilities in design and R&D.At the same time, global automakers achieved further expansion through the establishment of Sino-foreign joint ventures (see Table 7).
If we take a look at the sales of 14 global automakers in the Chinese market, we see that in  8) to improve its technological capabilities in R&D and manufacturing.
In conclusion, even though international technology transfer (as an important external factor) had a number of positive effects on the development of ICAMs development, the building of managerial capabilities and system integration (as an internal factor) became the main aim of all ICAMs.

3.
Background of the emergence of ICAMs: What stimulated new entry?This section provides an insight into the history of the Chinese automobile industry.As one of the key industries in the Chinese economy, the automobile industry was strictly controlled by the central government until the Reform and Open Policy was implemented in 1979.At that time, all production activities related to automotives (such as R&D, manufacturing, and delivery) was based on the annual plan issued by the central government, and no independence or management rights were given to the automakers.In this context, the growth of the Chinese automobile industry was mostly based on a policy of self-reliance.The main product lines were trucks and buses.The use of passenger vehicles (regarded as belonging to a "capitalist" lifestyle) was limited to official business purposes, and was not promoted until 1987.The first family-cars (or "private cars") were released in 1989.From Figure 2, we can see that, in comparison with trucks, the production of basic passenger vehicles increased very slowly until 1989.At a glance, the Chinese central government did not promote passenger vehicle manufacturing until 1987.Permission to launch joint venture projects was was somewhat contradictory to the policy of product restriction.By granting this permission, the central government hoped to achieve the objective of import substitution.As a result of the self-reliance policy, which had been in effect for approximately 30 years before the Reform and Open Policy, the Chinese automobile

Figure 3 .
Figure 3. Importation in China through the 1990s

Figure 4 .
Figure 4.GDP and GDP per capita in China, 1991-2005 materials and manufactured the first magnalium bent board in China.In April 1994, Geely entered the motorcycle industry, and in June of the same year, it manufactured China's first scooter motor.Its total sales volume reached 60,000 units in 1995 and 200,000 units in 1996.Geely thus became the main motorcycle manufacturer in China. 6"In May 1996, Geely Group Co., Ltd was re-organized.In March 1997, Geely entered the higher-education industry.The Group now has three colleges, including Beijing Geely University-one of China's privately-owned universities that possesses the independent right to authorize the High Education Diploma in Beijing city. 7"In 1997, Geely entered the automobile industry.On August 8, 1998, the production of the first Geely Car was launched in Linhai City, Zhejiang Province.On November 9, 2001 and December 26, 2001, China State Economic and Trade Commission (hereafter SETC) approved the Geely Automobile JL6360, HQ6360, MR6370, and MR7130 series to be listed in the SETC automobile products public catalog.Geely Automobile became the first private enterprise approved as an automobile manufacturer in China." 8 vehicle market.Without the necessary technology accumulation required for original R&D, qualified human resources, and capital, the ICAMs, including CHERY and Geely, designed new models by using reverse engineering tools, outsourcing design, and introducing technology and know-how through product line acquisition.However, as we have mentioned above, this imitative design caused numerous intellectual property rights problems before 2003.Therefore, to avoid conflict with foreign automakers, it became extremely important to enhance original design and concepts for all ICAMs.We study the case of CHERY to illustrate how ICAMs managed to increase their capabilities of original product design and R&D.The same phenomenon was demonstrated in the case of Geely.(a) The headhunting of high quality proficient experts The first stage of knowledge acquisition (especially design and R&D know-how) included hiring Chinese engineers who were working for major global automakers and related companies, through headhunters and other types of intermediaries.A number of foreign experts were also invited to work in China.For example, CHERY invited about 30 overseas experts with broad experience in such companies as GM, Ford, Visteon, Daimler Chrysler, Du Pont, TRW, and Motorola.These experts brought advanced technologies and know-how to CHERY and then diffused their knowledge throughout the company by means of on-the-job training.This was especially effective in the case of young engineers (who are capable of absorbing useful knowledge directly and quickly).
(b) Joint-development projects and design outsourcing Besides the human resource policy, CHERY acquired technology and know-how via co-operation projects of joint-development and design outsourcing.Most ICAMs operated in a similar fashion.They preferred the tie-up cooperation of joint development and introduced the necessary knowledge from foreign professional engineering corporations.For instance, in 2001, CHERY initiated a joint development project with AVL of 18 high-level engines (AVL is the world's largest privately-owned independent company in the development of power-train systems with internal combustion engines and instrumentation and test systems). 9In this joint development project, for the purpose of improving its capabilities, CHERY wanted to acquire not just the 18 ready-made engines, but also the knowledge of how to design an original high-level engine.A special training program for CHERY's specialists was organized by AVL, and a group of guest engineers was sent to AVL to acquire technical knowledge of the process.After a full day's work, they were required to recall all the details, record them, and report to CHERY's head office.Based on the working records of these guest engineers, CHERY established its own development standards and launched the development of its own original engine.For design outsourcing, CHERY chose to cooperate with an outsourcing destination by sending a team of CHERY engineers to the outsourcing company.As soon as CHERY's engineers were able to understand and master certain aspects of a project, they were entrusted to fulfill these functions by themselves; only the operations that they could not comprehend were outsourced.Having repeated this process several times, CHERY acquired more of the knowledge, technology, and know-how necessary for enhancing original design capabilities.(c) Original affiliated supplier chain construction When CHERY and Geely made their first attempt to enter the passenger vehicle market with their first generation products, they depended on the existing parts suppliers who were subordinated to joint venture automakers.For example, in 2002, Geely relied on parts from Tianjin Xiali's suppliers (at a maximum rate of 95%) to produce HaoQing. 10CHERY procured parts from suppliers affiliated to ShanghaiVW for its first generation sedan product, which was called WindCloud.However, the procurement of essential parts from competitors' affiliates caused a dilemma for CHERY and Geely because they had to compete with the very companies from which they procured essential parts like engines and chassis.As new entrants, they depended on a low-price strategy to gain competitiveness in the passenger vehicle market.Relatively high prices of parts from competitors, however, reduced their potential profit.This motivated CHERY and Geely to build their own network of affiliated suppliers as quickly as possible.By the end of 2004, there were approximately 200 parts suppliers who had business relationships with Geely.Meanwhile, Geely gained 50% control of 100 companies and successfully founded its own stable system of parts suppliers.As a result, the dependence on Tianjin Xiali affiliates for supplies decreased from 95% to 1% by 2004.Using these methods, ICAMs gained the opportunity to enhance original design capabilities and improve competitiveness.What is remarkable is that although ICAMs were not at the same growth level since they had entered the market at different times and had different management structures, the 10 Sun, Jili, & Shangde (2007).

Table 1 .
Sales of top 10 passenger vehicle manufacturers in theChinese market, 2001-2008 (1,000Units) Note: 1/ In June 2002, when China FAW Group Corp acquired Tianjin Automotive Xiali Co., the abbreviated name of Tianjin Automotive Xiali Co. was changed to Tianjin FAW.2/ SinceSAIC sold its stock back to CHERY in 2004, the abbreviated name of CHERY changed from SAIC-CHERY to CHERY.3/ The sales of Geely Automobile is the sum of all its related subsidiaries, including SMA (Shanghai Maple Guorun Automobile).4/ Sales of crossover vehicles are not counted.5/ DPCA is the abbreviation of Dongfeng Peugeot Citroen Automobile Co., Ltd.6/ Since the data-sources for 2001 and 2002-2008 are different, there may be some inconsistency in the figures for 2001 and after 2001.Source: 'Annual vehicle sales and production of China 2001 (2001 Nian 1-12 Yuefen Qiche Shengchan Xiaoshou 1 In 2001, the Chinese government amended Motor Vehicles and Trailers-Types-Terms and Definitions from GB 3730.1-1988 to GB 3730.1-2001.Under this amendment, the definition of "passenger car" is updated as including basic passenger cars (i.e., sedans or saloons), MPVs (Multi Purpose Vehicles), SUVs (Sport Utility Vehicles), and crossover vehicles.For this reason, some local Chinese SUV or MPV manufacturers, regarded as commercial vehicle manufacturers under the previous definition, have become passenger car manufacturers since the amendment was approved.In this paper, we do not cover these cases; we are concerned only with the companies that are permitted to manufacture basic passenger cars.That is why we just focus on these eight passenger vehicle manufacturers.state-owned automakers are supported by the central government and are protected (from competition by new entrants) by industrial policy; these automakers enjoy being joint ventures and have lost the ability to become "independent."In the other words, they are non-independent.

Table 2 .
Prices of some short-lived models in the Chinese market in the 1990s
Profit margins in the U.S. and China Note: Here, Profit margin is calculated as total profit as a percentage of total sales.
, they tried nevertheless to enter the market by gaining support from local governments (e.g., CHERY), or by taking over small state-owned automakers (e.g., Geely).Both strategies would give4For further details, see Li (2007a), Figure 5.