Oct 16, 2019 in Economics Essays

Introduction

China has shown a great concern in transforming its automotive industry into a big export powerful unit. Due to its rapid economic growth and global integration, Chinese authorities were planning to give foreign automakers an access to the Chinese market, where they could be credited by state-owned banks. The main purpose of this agreement was to empower domestic automakers to learn from multinationals with the further opportunity to compete in the international market. A great number of different automakers who emerged China with foreign cars largely provide cheap labor for joint ventures. China embraces a mix of purely domestic companies and joint ventures. Purely domestic cars attract Chinese much less than foreign cars. This paper intends to demonstrate reasons that make Chinese consumers buy foreign cars instead of their own brands. China Association of Automobile Manufacturers should protect domestic automakers and take into consideration new import tax policy for foreign cars.

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The Implementation of Policy of Consuming Foreign Cars in China

During the last decades, China’s economy has grown about 10 percent per year. Many experts consider that successful economic growth has occurred due to national economic reforms. Rapid economic development has made China the second country in the world (after the USA) of direct foreign investment. Sperling and ‎Gordon (167) assumed that China is open for multinational corporations and provides intensive policies to increase these investments. Nowadays, China experiences the fastest growth in its automotive industry. A turning point of China’s embrace of foreign cars has started in 2001 after China’s admission to the WTO. Successful reforms in the automotive industries impact on their further development. After joining WTO, China has become the fourth largest worldwide automobile manufacturing country. Many researchers asserted that China’s domestic cars could not compete with foreign car magnets. However, some experts claimed that in spite of challenges incorporated with foreign cars, China might experience new opportunities for domestic car producers and benefit from globalized economy (Veeck, ‎Pannell, and ‎ Smith 167).

Nowadays, when foreign automobile industry has emerged Chinese market, it is evident that the Government’s agreement to make China’s automobile market open to foreign investments was a wise decision. China offers favorable business opportunities to the famous world automobile dealers in its domestic market. Thus, for example, it attracts foreign investors by providing the reduced tariffs for import. According to the current regulations, all import and export could be provided without agents. International auto manufactures invested considerable sums of money into the Chinese automobile industry. Many international automobile companies, such as General Motors, Ford, Volkswagen, Toyota, and many others invest much money in China. Tucker (289) reported that these foreign investments have made China a significant worldwide automobile export base.

The policy of consuming foreign cars in China intensified foreign trade. Thus, if most of local brands are sold in China, foreign cars are exported throughout the world. It is a very profitable industry. The number of sales and production is growing annually. Thus, the experts predict that the number of car owners will reach about 200 million by 2020 (Sperling and ‎Gordon 175). Foreign car owners are the main beneficiaries of China’s embrace of foreign cars. Due to tough competition, domestic automobile producers have to experience hard competition with expensive foreign brands. Though, there are some advantages of this competition, disadvantages are more obvious.

The Aim of This Policy

Nowadays, mostly state-owned automakers want to persuade China’s Commerce Ministry to allow foreign automakers to assemble cars in China only with 50/50 partnership with domestic partners. Such a requirement of the status quo is not supported by smaller automakers that do not have joint venture partners. They want to compete and sell their cars in the international markets through exports and overseas acquisitions (Bradsher 2014). Many experts consider that implementation of foreign cars in use in China would refresh its own automobile production. The boom of foreign auto industry in China reinforced pressure on the domestic automobile industry. Domestic automakers, such as the chairman of Geely Holdings, Li Shufu, stand against a 50 percent cap. He considers that this policy would undermine domestic auto industry and its producers.

Many researchers insisted that China’s domestic automobile industry was unable to compete with foreign auto magnets. Some experts even predicted that China’s automobile industry would not be able to survive in the situation of tense competition (Bradsher 2014). After joining WTO, China’s automobile enterprises had to resolve different problems, such as poor operational management, low operational efficiency, less innovative achievements and small economic scales. Thus, Chinese car manufactures have faced double problems: on the one hand, they should compete with domestic producers, and on the other hand, they should be aware of international competitors. One of the main concerns of contemporary China motorists is that domestic Chinese automobile service is less developed than car manufacturing. Foreign companies may provide whole-sale retail, maintenance, and after- service facilities.

The policy of consuming foreign cars in China allows automakers to sell these cars in more developed countries. Unlike developed European countries that experience decline in car sales, China is demonstrating high sales. This progress is supported by the Government and its policies. For example, tax rate was decreased from 10 to 5 percent for smaller cars. The Government also supports rural citizens with special policies. China has launched a lot of joint ventures with many countries. Thus, Shanghai Automotive is a partner for Volkswagen and General Motors; Changan Automobile is a partner for Ford; and Dongfeng Motor Juggles is in partnerships with Honda, Nissan, Kia, and Peugeot. Many people in China benefit from creating new joint ventures that manufacture foreign cars. Bradsher (2014) noted that joint venture with Ford comprises 15,000 employees that produced 6,000,000 cars last year. By opening a new factory, Ford will assemble about one million transmissions annually. Another big plant will be opened in Hangzhou, in East Central China.

Some Disadvantages of China’s Embrace of Foreign Cars

Evidently, foreign car makers have built a numerous number of new plants in China and hire people to work there. On the other hand, workers in the native countries, such as Germany, the USA, France, and other are losing their jobs. The main reason why foreigners come to China and open joint ventures is their search for cheap labor. Tucker (201) noted that an average auto industry worker in the United States earned $54 per hour, while in China the same worker received $ 5.50 per hour. For this reason, foreign auto makers open joint ventures with Chinese in order to make higher profits overseas than at home. The increased use of Chinese labor market empowers foreign auto makers to invest a great amount of money into the Chinese automotive industry in China. The research asserts that millions of American car workers are at risk because their positions are replaced by Chinese. Chinese employees often work without safety and health protection.

Chinese automobile industry faces many challenges because of the embrace of foreign cars. Many experts consider that intense competition in the auto industry does not mean intense innovation. Sperling and ‎ Gordon (215) asserted that any ingenuity in Chinese car design was essentially imported by joint venture partners and not developed in-house and that foreign companies were not transferring their best technology. Moreover, the local joint venture partners were not developing their own unique strengths. In other words, Chinese engineers are still given little opportunity to contribute to their designs. Thus, the policy affects the supply side of a market. Veeck, ‎Pannell and ‎ Smith (172) reported that with an increased number of cars China would face difficulties with oil consumption. Though, China has the lower prices for oil-imported countries, it is rather dependent on Middle East oil.

As China has become to experience a huge boom of foreign cars in spite of their high prices, sales of native brands began to fall. Chinese consumers prefer to buy foreign cars because they are more comfortable, reliable and better designed. Chinese tend to pursue Western lifestyle and foreign cars inforce their socioeconomic status. People in China do not want to save up money and they are ready to spend their money on better technologies buying foreign cars. Experts argue that Chinese enthusiasm about foreign cars has led to the overwhelming number of them on the Chinese roads. The city of Beijing, for example, adds 1,500 new cars to its roads every day (Bradsher 2014). Chinese environmentalists worry about air pollution because of the great amount of cars in China.

Conclusion

Chinese growing economy attracts a lot of foreign auto makers. Chinese cities are overcrowded by different international car brands. Regardless of high cost of foreign cars, Chinese prefer to buy them instead of domestic. As a result, sales of native brands began to fall during last years. More Chinese people show their desire to pursue Western lifestyle. They found out that foreign cars are more reliable and comfortable. The Government and the China Association of Automobile Manufacturers should protect domestic automakers and take into consideration new import tax policy for foreign cars.

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