Friday, May 4, 2012

car sector in china

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The car sector within China automobile industry is taken as an infant

sector and, as such, it has always been subject to protection against

imports by means of the highest import tariff rate. On several

occasions in recent years, China has made readjustments to tariff

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rates. The import duty has been reduced to 80% for complete cars with

a displacement of three liters or less and 100% for those with a

displacement of three liters or more. This is higher than for all

other imported industrial goods.

The tariff rates for car parts and accessories, however, are lower

than for complete cars 40-50% for engines, gear boxes, driving axles,

vibration reducers, clutches and breaks, % for tires, and 1-5% for

electronic devices used in cars. To encourage domestication of car

building, the state is practicing a string of preferential tariffs.

Entitled to these preferential tariffs are imported parts and

accessories by enterprises producing complete cars provided they meet

the domestication standards prescribed by the state.

Going hand-in-hand with protection by high tariff rates are non-tariff

restrictions on import of automobile products under the import quota

and licensing system. It is true that import quotas are playing a less

important role in restricting automobile import as domestically built

vehicles have become increasingly cheap and their prices on the

domestic market are now closer to international prices. Despite that,

a comparison between the marketing prices of imported goods and their

normal tax-included prices (prices that include the custom duty, VAT

and consumption tax on them) brings to light that the non-barrier duty

equivalents practiced under the quota systems will still be as high as

10%-0%. Restrictions by the quota system will be even more

significant on the import of medium- and high-class cars with a

displacement of liters or more.

Since the beginning of the 10s, the annual national automobile sales

has grown at an average rate of 14.5%, and corresponding rate of

increase is as high as 1% for sales of cars. In other countries and

regions, the number of automobiles in the population possession will

increase rapidly when the annual GDP of a country or region reaches

US$4,000 per capita (at purchasing power parity). By then, the

elasticity index of per capita possession of cars relative to economic

growth up will have risen from 1.7-1.8 to .6-.7. According to recent

studies (e.g. Maddison, 18; Ren, 17), China GDP, calculated at

purchasing power parity, is close to US$,000, suggesting that

beginning 004, the domestic demand for car will grow even more

rapidly than now. Our own computation indicates that by 010, cars

owned by the Chinese population will average 47 per 1,000 people, and

corresponding figure for automobiles will be 17 per 1,000 people. Both

figures will match those for Japan in the mid-160s and those for the

Republic of Korea and Taiwan in the 180s. Basing ourselves on this

computation, we are expecting a potential national demand for 5.8

million automobiles and million cars in 005, and 10 million

automobiles and no less than 4 million cars by 010.

In the first place, the domestic automobile market is isolated from

the international automobile market because of the high tariff rates

imposed by the state. And as a result, Chinese automobile enterprises

are almost free from the pressure of international competition. At

present, the domestic selling prices for imported cars that include

import custom duties, import-linked VAT and consumption tax are

.-.5 times their CIF (cost, insurance and freight). Besides,

automobile imports are subject to restrictions of import quotas,

import licensing and other non-tariff measures. As a result of so

great a protection against imports, cars imported through normal

channels are bound to suffer from limited competition capability in

light of the cost of production and selling prices for domestically

built cars. As a matter of fact, automobile imports have continuously

declined in recent years, to less than 40,000 vehicles in 18, and

imports of cars, to less than 0,000. The share of the Chinese market

was imported automobiles was 18.5% in 1 and, by 18, it had

dropped to .5%; and the share for imported cars, from 61.1% to .5%.

Moreover, deductions in tariff rates in recent years have failed to

push up imports. It is therefore clear that as long as China continues

to practice the current tariff rates and import quota system, cars

imported through normal channels will be no challenge to domestically

built cars. What also merits attention are the various protection

measures taken by local governments, which lead to partition of the

domestic market and inadequate competition between domestic producers.

The automobile industry does have certain barriers against entry

because of its scale economic feature. The state, on its part, has,

through policy measures, imposed restrictions on the number of

automobile projects to be started. All the factors cited above

invariably result in a market structure with a certain degree of

monopoly as a most striking feature. And finally, competition on the

domestic automobile market is also subject to state restrictions,

e.g., by valorizing automobiles to restrict price competition.

The 1 car manufacturers operating in 18 produced 510,000 vehicles

altogether averaging less than 40,000 by each. For the largest, the

Shanghai Volkswagen Automotive Company Ltd., the output was a mere

0,000. About 0 car manufacturers are operating in China, but

factories producing cars may number about 0, including some that are

not licensed for car manufacture.

Again the car sector. The sector has a total production capacity of

more than 1 million vehicles but the effective market demand is

computed at no more than 500,000. The volume of car sales, which is

limited, has become a serious handicap to car production, as it leads

to idle production capacity and excessively high fixed cost of

production apportioned to cars produced. Further deductions of tariff

rates on imported cars may cause prices to drop on the domestic

market. This, in turn, helps boost the market demand for cars. The end

result will be lower cost for domestic manufacture of car and greater

competitiveness of the domestic automobile industry.

The domestic automobile industry falls far below the best

international standards for batch quantity of production, prices of

products and technological level, hence its inability to take part in

international competition in an all-round way. The current protection,

however, can in no way help the industry achieve scale production,

enhance its efficiency, improve its technological level and reduce the

cost of its production and operation. Weak market demand and imperfect

competition are the main reason for problems the domestic automobile

industry faces low level of production concentration, limited size of

individual enterprises, low efficiency, inadequate competitive power,

etc. Because of this, a constantly expanding demand and increasing

competition are what the domestic automobile industry inevitably

requires in seeking development. China WTO entry will be conducive to

effort to expand the domestic automobile market and enhance the

domestic automobile industry competitive power. In view of this, the

government, while striving for entry of the global trade organization,

should make positive efforts to foster the market. That means

establishing a kind of highly efficient, pro-competition market

mechanisms, and using market means and competition to promote the

merger and re-organization of the existing car manufacturers. And in

the process, those technologically backward and poor in efficiency

will be eliminated and manufacturers in general will be forced to

improve their management and efficiency. In short, within the short

protection period allowed to China in the wake of its WTO entry, the

Government should see to it that the domestic automobile industry will

rapidly enhance its competitive power.

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