the emergence of the chinese and indian automobile industries

8/14/2019 The Emergence of the Chinese and Indian Automobile Industries

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TheEmergenceoftheChineseandIndianAutomobileIndustriesandImplicationsforotherDevelopingCountries

GregoryW.Noble

InstituteofSocialScience

UniversityofTokyo

May,2006

TheChinesearecoming,theChinesearecomingandnowtheIndians,

too. Alarmsabouttherapidemergenceof twogiganticnewcompetitorshave

beguntorattletheglobalmotorvehicleindustry. Injusthalfadecade,China

has grown from a modest market on par with Spain to the third-largest

automotivemarketandfourth-largestautoproducingcountry,withoutputtrailing

onlytheUnitedStates,JapanandGermany;in2006Chinaisallbutcertainto

surpassJapanasthesecondlargestmarketfornewmotorvehicles. Chinahas

attractedtensofbillionsofdollarsindirectforeigninvestment(DFI)eachyear,

notleastinmotorvehicles.Virtuallyalloftheworldsautomobileassemblersand

leadingsuppliershaveinvestedinChina,bothtoaccessthedomesticmarket,

and (in the case of parts firms, and potentially assemblers) to export.

Assemblers and first-tier component firms in North America inform their

suppliersthatunlesstheymatchtheChinaprice,theywillbedroppedwithouta

secondthought. Justinthelastyearorsoasimilarbuzzhasbeguntoemerge

aboutIndia,anothergiantcountryfilledwithsmartengineersandinexpensive

workersmanyofwhom,unlikemostChinese,arehighlyarticulateinEnglish.

Noristhesenseofthreatcontainedtoautomotiveproducersandlaborunionsinhigh-wagecountries: tomany in the developingworld,Chinaand Indiaseem

destinedtoemergeasfierce,evenoverwhelmingcompetitors.

Despitetheunderstandableconcernexpressedbyheadlinewritersand

threatenedfirmsandunionswhenthemostpopulouscountriesonearthstart

growing athigh speedand breaking into newmarkets,within the automobile

industry skeptics are not hard to find. Huge populations and growing

economies notwithstanding, China and India remain relatively small and

unsophisticated players in the global industry, particularly in the crucial


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passenger car segment, their exports still only a fraction of thoseemanating

frommid-sizedplayerssuchasMexico and Korea,much less global leaders

Japan, Germany, France and the U.S. Their impact on other developingcountriesisevensmallerandmoreindirect,sincethelargebulkoftheirexports

aim at advanced markets such as Europe and North America. The

value-addedandtechnologicalsophisticationofChinaandIndiaremainlimited,

andmanyobserversquestionwhethereitherorbothwillbeabletomaintainthe

wavesofreformnecessarytosustainhigh-speedgrowth.

Thealarmistandcoollyskepticalviewsarenotimpossibletoreconcile.

ChinaandIndiaarealreadyimportanteconomies,andtheyarelikelytosustain

vigorousgrowth,butfromsmallbases. Theglobalautoindustryisgiganticand

highlysophisticated,andChinaandIndiawillcontinuetoplaymodestrolesfor

thenextdecadeormore. Theymaycometoexertasomewhatgreaterimpact

incertainregionsandmarkets,suchassmallcars,vansandlighttrucksinthe

Asia-Pacificregion,andlabor-intensivepartsthroughouttheworld. Butevenin

Asia, other factors will remain more important, such as the widespread

opportunities created by the continued expansion of demand, bilateral and

regional trading agreements, and the changing relative balance of power

betweenestablishedWesternautocompaniesandtheupcomingJapaneseand

Koreanassemblers.

Thepolicyimplicationisclear:particularlyintheshortrun,thereislittle

reason to devote excessive concern about China and India, and even less

reason to turn toward protectionist measures that will grow steadily more

counter-productiveastheglobalizationoftheautoindustrycontinues.Firmsand

governments in less-developed Asian countries perhaps should think twice

beforecompetingdirectlywithChineseandIndianfirmsinthoselimitedareas

were they are beginning to make a concerted push. At the same, new

opportunitiesforcooperationwillemerge,bothdirectly,asthedivisionoflaborinAsiaproceeds,andindirectly,asothercountriesfeedtheextraordinarygrowthin

Chinaand India. TheemergenceofChineseand Indian firms,particularly in

smallcarsegments,mayalsocontribute,ifinitiallyonlymodestly,tothesocial

problems attendant upon widespread motorization, including increased

pressuresonenergypricesandgreenhousegaseffects.

Between understandable concern and misleading hype: the sudden emergenceof China and India


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Overthepastfewyears,anincreasinglyintenseroundofconsolidation

has squeezed the ranks of independent auto assemblers and drastically

reduced the number of parts producers. Reorganization and consolidation,drivenbyincreasinglypowerfuleconomiesofscaleandscope,areexpectedto

continue,driveninpartbythegradualdisplacementofWesternassemblersand

partsfirmsbymoreyoungerandmoreefficientJapaneseandKoreanfirms.A

JapaneseautoexpertintheconsultingfirmAccentureestimatesthatinthepast

15yearsmergers,bankruptcies,andexithavereducedthenumberofworldauto

partsfirmsbyroughly80percent;overaslightlylongerperiodalmostasmany

assembly firms have disappeared (Misawa 2005: 66). Particularly in North

America, with its relatively openmarkets and proximity toAsia,bankruptcies

have spread even tosuchgiant first-tiercomponentmanufacturers asDelphi

andDana. IndustryobserversagreethatifGeneralMotors(GM)andFordare

toavoidbankruptcytheywillhavetotakemuchmoredrasticstepstocutexcess

capacityandimprovetheprocessofnewproductdevelopment;manydoubtthat

theywillbeabletodoso.

In this volatile andcontentiousenvironment, theentry ofChineseand

Indianfirmsasnewcompetitorsunderstandablyhasraisedgreatconcerns(see

e.g Detroit News December 5, 2004). Western suppliers report that their

customers, desperate to reduce costs to compete with Toyota, Hyundai and

otheroverseasrivals,demandthattheymatchtheChinapricebydrastically

cutting prices themselves, procuring materials from China, or investing in

Chineseproduction(BusinessWeekDecember6,2004). Billionsofdollarsin

direct foreign investment inChina, and more recently in India, have created

impressivenewcapacitiesandraisedthespecterofexcesscapacitythatmay

onlyberesolvedthroughexports.Unliketheircounterpartselsewhere,Chinese

auto firms, sustained by rapid growth in demand, support from local

governments, and capacity to develop niche markets of little interest to themultinationals, and lacking a developed institutional framework and political

environmentfacilitatingacquisitionsandmergers,arenotconsolidatingbutstill

expanding inbothnumbersand capacity. Andwhilemostpartsproduction in

China,particularlyforexport,focuseson labor-intensiveproductssuchaswire

harnesses or wheels, skills are rapidly increasing; with sufficient effort by

multinationalinvestors,virtuallyanythingcanbebuiltinChina.Assemblersand

first tier suppliers can bargain down the price of components from smaller

WesternpartsfirmsbythreateningtosourcefromChina.


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A proprietary study conducted by McKinsey and the Associated

Chambersof Commerceand Industry of India (summarized inPTI, April 18,

2005;Newsweek International November 28, 2005, and theFinancial Times,December1, 2005)estimates thatby2015global autoproduction is likely to

reach$1.9trilliondollars,ofwhicharound$700billiondollarswillbeproducedin

low cost countries. Exports from low cost countries look to increase to$375

billiondollars,more thanquintuple the current level ofabout$65 billion.The

study suggests that Indian production could expand from nine billion dollars

currentlytoaroundfortybilliondollars,ofwhich20-25billiondollarswouldbe

exportedtwentytotwenty-fivetimesthecurrentlevelofexports.Roughlyhalfof

the export growth wouldcome fromdisplacingproductionbyother countries.

Already,Suzukiandotherforeignassemblershavebeguntoprocureengines

and other major parts from India for export to third markets (Nihon Keizai

Shinbun,February5,2006).

As for China, itsMinistry of Commerce has suggested that by 2015

Chinesefirmscouldaccountfor10percentoftheglobalmarket,or120billion

dollarsinexports(AsiaPulse,April1,2005). Asonepressaccountnotes,GM

importsonlyone-tenthof1percentofthepartsusedinitsU.S.assemblyplants

from China [but] expects to increase its auto part purchases from China

20-foldinsixyears--from$200millionin2003to$4billionin2009(DetroitNews

April 7, 2005). Similar trendsare observableatDelphi,Fordand othermajor

assemblersandfirst-tiersuppliers(U.S.-ChinaEconomicandSecurityReview

Commission2005:30).

Similarly,whileoutsourcingof informationtechnologyandengineering

hasbeenrelativelytentativeinautoscomparedtothesituationinmanyother

industries,whereitincreasinglyincludesevensmallcompaniesandearlystages

ofproductdevelopmentbyinnovativestart-upsinSiliconValley,majorincreases

haveoccurredrecently. GM,Fordand leadingsuppliers suchasDelphi andBosch have opened research and development centers in China and India

employingthousandsofengineersandscientists,manyofthemwithPhDsand

yearsofthemost sophisticatedworkexperience.Mostof theirworksupports

development of the local market, but the investments, particularly in India,

increasingly aim at true arms-length outsourcing as well. A study by the

McKinseyGlobalInstituteconcludesthatInautomotiveengineeringandR&D,

42percentoftotalemploymentcouldpossiblybeoffshored.(citedinKenney

andDossani2005:6).


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Caremustbetakeninevaluatingthesenumbers. Theexactmagnitude

oftradeinautomaterials,partsandcomponentsisobscuredbydefinitionsthat

varyacrossandevenwithinboundariesanddouble-countingdifficulttoavoidinaccounting for the construction of a product integrating tens of thousands of

partsandorganizedby tiers. Somestudiesincludetiresandcarradiosinthe

definition of auto parts, for example, while others do not. Similarly, some

countriesincludethevalueofautopartsincludedinexportsofbuilt-upvehicles,

whileothersdonot. Long-termprojectionsbyconsultingfirmsandgovernment

officials must also be viewed with reserve. Still, the universal expectation of

rapidlyexpandingimportsofgoodandservicesfromdevelopingcountriesledby

ChinaandIndiaisclear.

Finally,ChineseandIndianfirmshavesharplysteppedupthepaceof

their exports of vehicles to the developing world, and have begun assembly

operationsfromMalaysiatoIrantoRussia.Bothhavebecomenetexportersof

cars,havepurchasedcontrollingsharesinSouthKoreanautomakers(SUVsfor

China, commercial vehicles in the case of India), and have begun acquiring

engineering and design capabilities in Europe and North America.

IndependentChineseassemblerssuchasCheryandGeely,inparticular,have

initiatedexportsofsmallcarsandcommercialvehiclestoWesternEurope,and

haveannouncedboldplanstosellhundredsofthousandsofunitsinEuropeand

NorthAmericawithin the next five years. Industry observers remain cautious

about the exact timing, but increasingly incline toward the view thatChinese

firmswill succeed in exporting large numbers of vehicles in the foreseeable

future (New York Times January 10, 2006;Automotive News November 1,

2005).

These bold new initiatives reflect long-term declines in the costs of

transportation, telecommunications, and package software, and long-term

increasesinthecapabilitiesofdevelopingcountries. Theyalsosignaltheendoftheolddichotomyinworldautoproductionbetweenefficientandinnovative

advancedcountriesandprotected,inefficientenclavesindevelopingcountries.

Withtheexpansionoftradeandliberalizationsymbolizedbythecreationofthe

World Trade Organization (WTO), cozy enclaves are no longer viable. New

exportopportunitieshaveopeneduptocountriesandproducersthatcanmeet

global competitivechallenges, though productionofmany heavy, fragile, and

labor-intensive items will remain viable in the developingworld, and the shift

towardjust-in-timemanufacturingwillencourageinvestmentsintheassembly


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ofmanymedium-intensityitemsonsite.

Thus,itappearsthatmotorvehiclescouldbegintotracethetrajectoryof

otherindustriessuchastextilesandelectronicsthathavewitnesseddramaticanddisruptiveincreasesinexportsfromasmallnumberofhighlycompetitive

developingcountries, ledbyChinaandnow increasingly India aswell. After

the Asian financial crisis of 1997-98, direct foreign investment shifted from

paralyzedSoutheastAsia torelativelyunaffectedChina. Lessnoticedat the

time,WesternfirmssuchasGeneralElectric(GE)begantooutsourcesoftware

production to India. SinceChinaand Indiacombinehugepopulations, rapid

growth,andanunprecedentedbreadthanddepth ofengineeringcapabilities,

otherdevelopingcountrieshavereasontofearthattheycouldloseoutbothin

competitiontoexporttothirdcountries,andevenintheirhomemarkets.Initial

econometricanalysisprovidessomebackingforthenotionthatexportsofother

developingcountriescouldsuffer(EichengreenandWang,forthcoming2006).

Skepticism: The Impact of China and India will be Limited EvenifChinaandIndiabothcontinuetogrowrapidly,exportingawider

rangeofpartsandvehiclestoawiderrangeofcountries,theirexpansionmay

notmakeamajordifferencetotheglobalindustry.AccordingtotheWTO(2005:

TableIV.66),worldexportsofautomotiveproductsin2004totaled$847billion

dollars,accountingforjustunder10percentofallglobalexports,withtrade

expandingatablisteringclipof16percentinboth2003and2004. WhileChina

wasasignificant(eighthlargest)andswiftlygrowingexporter,lessheralded

countriessuchasTurkeyandSouthAfricaalsoexpandedautoexportsrapidly,

andatjust0.7percentofglobalautomotiveexports,Chinasexportsstilltrailed

thoseofMexico,BrazilandTurkey,andremainedlessthanafifththoseofSouth

Korea. Indiasautoexports,inturn,totaledonlyaboutone-thirdofChinas

(SeeFigure1,WTO,Leadingexportersandimportersofautomotiveproducts,2004,andFigure2,WTO,Exportsofautomotiveproductsofselected

economies,1990-04).Moreover,Chinasautomotiveexportsremained

overwhelminglydominatedbysalesoflow-techreplacementitemssuchas

wheels,tires,batteries,andbodypartsforwhichthedemandsonqualityand

designintegrationwerelow.Despiteimprovementsindomesticcapabilities,the

greatbulkofdesignandtechnicalskillsremaininthehandsofforeignfirms;

evenindevelopingcountrieswithstrongengineeringcorpssuchasChinaand

India,subsidiariesofforeignfirmsconductmostofthedesignandengineering


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(cf.Gilboy2004).

Noristherelianceonforeigndesignandtechnologylikelytochangein

thenearfuture.AsFujimoto(2003)emphasizes,whilemostelectronicproducts,motorcycles, and even trucks have become highly modular, designing and

assembling passenger vehicles demands a high degree of integration and

intermeshing.Somemovementtowardgreateruseofmodulesnotwithstanding,

interfaces between most functional components in the auto industry remain

resistanttostandardizationandcommoditization. Changingadesigntomake

acarmorefuel-efficient,forexample,islikelytorequirecomplexrecalibrationof

otherelements,suchascrash-worthinessandnoiseinsulation. Asaresult,the

designofvehicles,particularlypassengercars,andthekeycomponentswithin

them,remainfirmlyinthehandsofalimited,andrapidlyshrinking,numberof

global firms. Even Korea, with its highly successful assembly industry, has

failedtocreategloballycompetitivecomponentfirms,andremainshighlyreliant

onWesternandJapanesesuppliers. Tobesure,thedegreeofintegrationmay

besubject to change (cf.Gereffi,et. al2005), and someChineseand Indian

industryfiguresandacademicresearchersbelievethatdevelopingcountriescan

apply a relatively modular approach at the lower end of the market, where

demandsforseamlessintegration,preciseroadfeelandnoisecontrolareless

exacting,butitseemshighlyunlikelythatanyassemblersfromthedeveloping

world can compete independently in themiddle to upper ranges of the auto

marketwithinthenextdecade,ifnotlonger.

The Emergence of China and India as Economic Forces Untilthe1990s,lowincomesandpervasiveprotectionandintervention

by government constrained the economic development of China and India.

Policyreforms,particularlygreateropennessofforeigninvestment,beganinthe

1980s and deepened in the 1990s. The effects of reform were particularlystriking in the automobile industry, not least by increasing incomes and

improvingsupportingindustriesandinfrastructure.

Thelasttwoorthreeyearshavewitnessedtheemergenceofavirtual

cottage industry comparing and handicapping India and China, sparked in

particularbyaprovocativearticleinForeignPolicy(HuangandKhanna2003;

seealsoHuangsreaffirmationinFinancialTimes,January23,2006;Farrell,et

al. 2004; DeutscheBankResearch2005;BusinessWeek,August 22,2005).

Vigorousdebatesnotwithstanding,aroughconsensusseemstohaveemerged.


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Chinahaspulledahead,withapercapitalincomeroughlydoublethatofIndia,

largely because of its booming labor-intensive manufacturing, supported by

superiorphysicalinfrastructureand,partlyasaresult,greaterattractivenesstodirectforeigninvestment. DespiteIndiascurrentweakness,itmaywellhave

better long-term prospects because of its superiority in software and soft

infrastructure,includingademocraticpoliticalsystem,anindependentjudiciary,

better(ifstill imperfect)financialsystem,andtwoacesin thehole:widespread

proficiency inEnglish,andbetter-managedcompanies largely free ofpolitical

interference and full of experienced project managers with extensive

international experience. In the United States and Japan, the hopeful

conviction that India isdestined tosurpassChinapervadeseliteopinion and

official government statements (see e.g. New York Times April 10, 2005;

WashingtonPostJune9,2005;NikkeiBijinesuMay8,2006:26-50,esp.p.43).

Thisstylizedcontrastmissesthree importantelements. First,the two

countries sharemany similarities, not just in size of population and level of

development,butweakinstitutionsandreformtrajectory.Ofthe157countries

rankedintheHeritageFoundation/WallStreetJournals2006IndexofEconomic

Freedom2006,Chinaranks111andIndia121. IntheGlobalCompetitiveness

Report2005-2006,publishedbyGenevasWorldEconomicForum,Chinais49th

of116countriesingrowthcompetitiveness,followedbyIndiaat50.Finally,in

theWorldBankssurveyDoingBusiness2006:CreatingJobs,Chinacomesin

at 91 out of 155 countries, while India ranks 116. Even allowing for the

inevitable imprecision of these surveys, the consistency with which the two

countriesarerankedclosetogether,withChinaslightlyahead,isimpressive.

Evensomeareascharacterizedbyapparentlyyawninggapsturnoutto

be surprisingly similar, or at least somewhat convergent. By conventional

measures,Chinahasattractedfarmoredirectforeigninvestment,atestamentto

thegreaterattractivenessof itsmarketandtheweaknessofitsdomesticfirms.The gap is significantly exaggerated, however, by the prevalence of

round-trippingbymainlandfirmsseekingtotakeadvantageoftaxandother

benefits granted foreign investors, and by differences in definition and

measurement. AsashareofGDP,thegapinnetforeigninvestmentisnotso

great,particularlyinrecentyears,asChineseDFIhaspeakedwhileDFItoIndia

has begun to surge (though exact measurement and comparison remain

difficult)(OECD2005:13,27;Mohan2005).Ina2005surveyofmultinational

firms(releasedDecember7,availableatatkearney.com),Indiavaultedpastthe


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United States to trail only Chinaas a preferred destination for direct foreign

investment.Similarly, thecontrast betweenChinasstrength inmanufacturing

and Indias superiority insoftwarehas erodedsomewhatrecently: the rate ofgrowth of Indian manufacturing and exports (particularly in autos) has

accelerated,whileChinahassurpassed India in totalsoftware output, though

Chinas software houses remain far smaller, less sophisticated, and less

internationalized(RedHerring,September5,2005;A.T.Kearney2004).

Second,notwithstandingthesesimilarities,Chinaisindisputablyahead

ofIndiaineconomicandsocialdevelopment(AsianDevelopmentBank2005)

andcontinuestopullahead. Chinasgrossandpercapitanationalincomeare

morethandoublethoseofIndia. Chinasratesofsavingsandinvestmentsare

nearlytwicethoseofIndia,leadingtosignificantlyhighergrowthrates. Despite

theaccelerationofIndiasgrowthrate,Chinahascontinuedtogrowevenmore

rapidly,sothegapcontinuestoexpand.Taxrevenues,historicallyaweakpoint

in China, have surged in recent years, allowing China to spend farmore on

infrastructurewhilemaintainingrelativelysoundgovernmentfinances,andtocut

tariffs,thuscreatingamoreopenandcompetitiveeconomy.Between1990and

2002, Chinas lead in secondary school attendance widened, while Indias

advantage in tertiary education turned into a deficit. In 1990, 42 percent of

Chinesegirlsand55percentofChineseboysattendedhighschool,compared

to 33 percent of Indian girls and 55 percent of Indian boys. By 2002, the

Chineserateshadrisento69and71percent,whiletheIndianrateswereonly

47 and 58 percent. Similarly, whereas twice as many Indians as Chinese

attendedtertiaryinstitutionsin1990(fourpercentoffemalesandeightpercent

of males vs. two percent of females and four percent of males), by 2002,

Chinesetertiaryattendancesurgedtothelead(14percentoffemalesand17

percentofmales,vs.10percentoffemalesand14percentofmalesinIndia).In

1988,almost twiceasmany Indians asChinesepublished papers in leadinginternational scienceand engineering journals; by2001, the ratiohad almost

exactlyreversed(NationalScienceBoard2004:Appendixtable5-35;Zhouand

Leydesdorffforthcoming2006). Inthelatestyear forwhichdataareavailable

(2002 for China, 2001 for India) R&D spending inChinawasmore than four

timesgreater than thatofIndia (UNCTAD2005:105). Lackingadequatetax

revenues, and committed to improving funding of primary and secondary

education,theIndiangovernmenthasfounditdifficulttomaintainthequalityand

competitive position of Indian universities and research institutes (Yasmeen


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2004).

Third, while observers routinely point out the numerous daunting

obstaclesthreateningtoslowdownorevenoverthrowtheChinesejuggernaut,therealityisthatneithercountrywillbeabletosustaingrowthunlessitcontinues

to carry out difficult reforms. Both countries suffer from a high and rapidly

increasingrelianceonimportedenergyjustasoilpriceshaveskyrocketed.Both

willneedtocontinuereformingtheirbankingsystems. Chinasone-childpolicy

is leading to a rapidly agingyet still poor society lackinganadequatesocial

safetynet. AhigherrateofpopulationgrowthwillkeepIndiayounger,butsince

the new entrants will hail disproportionately from the poorest and most rural

partsofnorthernIndia,integratingthemintoanincreasinglyprosperoussociety

willcreateamajorchallenge.

Fortunately, China and India are similar in another crucial way: the

successofliberalizationandreformoverthelastdecadeortwohasconvinced

policymakersandpublicalikethatfurtherreformandgrowtharenecessaryand

possible. AvarietyofpublicopinionpollsshowthatIndiansandChinese(orat

leastthemoreeasilysurveyedurbanresidentsinthosecountries)arethemost

optimisticpeoplesinallofAsia(PewGlobalAttitudesProject2005;Wang2005).

Short-sightednessandconflictoverdistributionalissues,suchasmovingpeople

offlandslatedforpublicworksandindustrialdevelopment,willnotdisappear,

but technocrats and politicians in both countries now understand that the

legitimacy of their rule increasingly depends onmaintaining rapid economic

growth.

The Emergence of the Chinese and Indian Auto Industries Theautoindustryencapsulatesmanyofthethemesofrecenteconomic

developments in China and India: constrictive protection has given way to

liberalizationandtakeoff,andIndiahasjoinedthechase,withoutclosinggroundon China. In both countries, reforms in the 1980s and especially the 1990s

loosened restrictions on both demand and supply. The key breakthrough

occurred almost simultaneously: in the early 1980s, the Indian government

formedajointventurewithSuzuki,Japansminicarandmotorcyclespecialist;

shortly thereafter,China finalized a jointventure in ShanghaiwithGermanys

Volkswagen (VW). At first, local buying power and technological capabilities

limited output, but by the end of the 1990s, the combination of further

liberalization and rising incomes led to a sudden expansion in demand and


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production(seeFigure3,Chinesemotorvehicleproduction,1991-2005)

Increasing success, in turn, gave the two countries confidence to

accelerate liberalization. In1993 Indiaended licensingof foreignautomobileventures,andin2001itliftedvirtuallyallrestrictionsondirectforeigninvestment

intheautoindustry.Tariffsremainedstiff,atover100percentonvehiclesand

just under 35 percent on parts, though preferential trade agreements with

ASEAN, and particularly Thailand, led tosomecuts in duties. Chinas entry

intotheWorldTradeOrganization(WTO)thesameyearledtoamoregradual

liberalization:tariffsonvehiclesdeclinedto25percentbymid-2006,whileparts

tariffsshranktoanaverageof10percent. Foreignautocompaniesgainedthe

righttoofferautoloansandtoparticipateincardealerships,thoughtheywere

stillrestrictedtonomorethana50percentshareinassemblyoperations,anda

limitoftwoChineseassemblypartners(Noble,Ravenhill,andDoner2005).

Indianpassengercarproduction,barelyover200,000unitsin1993-94,

doubled tojustoverahalf-millionunits in2000-01. Inthenext fouryears, it

nearly doubledagain, toppingonemillionvehicles in2004-05,and hitting1.3

millionvehiclesin2005-06(includingutilityvehiclesandMPVs;seeFigure4,

India 1994-2005 Industry Statistics,updated for 2005-06 byEconomic Times

April29,2006).Exportsincreasedevenmorequickly. Between2000and2005,

exportsofassembledvehiclesincreasedbyafactorofsixtoreach176,000units,

all but 40,000 of them passenger vehicles (Society of Indian Automobile

Manufacturers, http://www.siamindia.com/scripts/export-trend.aspx , accessed

May4,2006).Outputofautoparts,whichhadgrownsomewhatmoreslowlyin

the1990s,alsodoubledbetween2000-01and2005-2006,reaching10billion

dollars. Exports of auto parts, including those incorporated in assembled

vehicles,alsoincreasedrapidly,hitting1.8billiondollarsin2005-06(seeFigure

5,ACMA,IndiaIndustryStatistics,AutoComponent05,updatedfor2005-06by

EconomicTimesApril29,2006). Thoughitisoftensaidthateconomicopeningandreformbeganmore

thanadecadeearlierinChinathaninIndia(theendof1978vs.1991),infact

Indianreformbeganintheearly1980s(RodrikandSubramanian2004),andas

lateas2001,productionofpassengercarsinChinaonlymodestlysurpassed

thatofIndia(607,000unitsinChinain2001vs.513,000inIndiain2000-01;

though productionof trucks and busses alreadywas higher inChina). Then

Chinesedemandandoutputskyrocketed,hittingonemillionunitsin2002and

twomillionin2003.Themuch-remarkedslow-downinoutputofmotorvehicles
http://www.siamindia.com/scripts/export-trend.aspxhttp://www.siamindia.com/scripts/export-trend.aspx


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hidthecontinuedvigorousgrowthofpassengercarproduction,whichreached

almost2.8millionunitsin2005,more thandouble the level inIndia. Despite

continuingcuts intariffs thatstartedout lowerthan in India, importsofwholecarsstagnated(163,000unitsin2005),whileexports,ledbyaHondatransplant

but including also new vehicles from independent Chinese firms, more than

doubledin2005to173,000units,surpassingimportsforthefirsttime(Peoples

Daily, Japanese Internetedition,January14, 2006). ExportsofChinese auto

partsin2004totaledabout10billiondollars (UNComtradedata, fromNoble,

Ravenhill, and Doner 2005); in 2005 parts exports increased 75 percent

(JinyangwangMarch10,2006),toanorderofmagnitudegreaterthanthoseof

India (not including parts and components incorporated in exports of whole

vehicles;recalltheproblemsnotedaboveindefining,measuring,andcomparing

partsproductionandexports).

The mix of vehicles produced in the two giants is also converging

somewhat. Compactandsub-compactcarsandsmalltrucksandcommercial

vans have long ruled the roost in India. Incomes are lower and tariffsmuch

steeper than inChina, whilemini-carmakerSuzuki stillaccounts for a large,

though shrinking, share of the market. In China, government officials and

corporatemanagerslongmanagedtohavetheirworkunits(danwei)purchase

carsontheirbehalf,oftencompletewithchauffeur. Jointventureswithforeign

automakershavefocusedonthemoreprofitablemiddleandupperpartsofthe

market. In the last couple of years, however, the compactand sub-compact

segmentshavegrownmoreprominentashouseholdshavecometoaccountfor

amajorityofpurchasers,andnewdemandhasbeguntoshifttolessprosperous

inlandareas. NewlyriseninexpensivedomesticbrandssuchasChery(Qirui)

and Geely (Jili) that minimize imports of costly foreign components, capital

equipmentandtechnologyhavebothbenefitedfromandcontributedtotherise

ofsmallercars. Theeconomicandpoliticalenvironmentislikelytoacceleratethetrend

towardcompactvehicles. BothChinaandespeciallyIndiaincreasinglyrelyon

importedoil,whichanalystsbelievemaystayexpensive. Theexplosionofcars

has raised concerns about air pollution, greenhouse gases, and congestion,

causingthegovernmentstoshiftpoliciestofavorsmallercars. BothIndianand

Chinesefirmsarebeginningtodesigntheirownsmallcars,anditislikelythat

thevehiclesandpartsthatthetwocountriesexportwillincreasinglyconcentrate

onthecompactsegment.


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Working to overcome possible obstacles to further growth of the auto industry Firms and governments in China and India are acutely aware of thecritiquesraisedbytheskepticsnotedabove,andarestrivingtoovercomethe

obstacles thatcurrentlykeep local firms far behind,anddependent upon,the

WesternandJapaneseleaders. Themostobviousproblemisproductquality,

whichlagswellbehindever-stifferandmorecomplexinternationalstandardsfor

fit and finish, drivability, durability, safety, emissions, recycling and product

liability. Acarefulcomparativebench-markingstudyoftheChineseandIndian

autoindustries(Sutton2004)suggeststhatassemblersandfirst-tiersuppliersin

both countries have been able, usually with the help of foreign parents or

joint-venturepartners,toimprovequalityandproductivityremarkablyeffectively:

globalautocompaniesincreasinglycanproduceworld-classproductsinawide

range of developing countries, including China and India. Auto producers,

however, are highly dependent on tiers of sub-contractors, and increasing

qualityinthesmallerandlessinternationalizedfirmsinthelowertiersisafar

moredifficultproposition. Norarequalityproblemslimitedto individualparts.

Evenassemblers and first tier componentmanufacturers capableof churning

outhigh-qualitycarsandpartsfortheirWesternpartnersfacedauntinghurdles

whentheytry todesignandintegratetheirownproducts. ChinasGeelyand

Chery,forexample,havefoundsubmittingtheircarstoWesterncrashtestsa

soberingexperience, thoughtheyarerelentlesslyredesigningthemodelsuntil

theypassthetests.

Neithercountryseemstohavecarvedoutanunassailableleadin

productquality.Suttons(2004)survey,oneofthefewstudiesdirectly

comparingChinaandIndia,findstheleadingfirmsinthetwocountriesroughly

equivalent. Balakrishnanetal.(2004)documenttheimpressiveprogressmade

byIndiasbestautofirms,andnotethelargenumberofDemingprizeswonbyIndianfirms.Acloserexaminationsuggests,however,thatDemingprizesarean

idiosyncraticindicatorofquality.TheJapanUnionofScientistsandEngineers

(JUSE)establishedtheDemingawardsin1951andfirstawardedaprizetoa

foreignfirmin1989.From1989to2000,foreignfirms,includingoneIndianfirm,

wonjustfourofthefiftyapplicationprizesawardedbyJUSE.Thenfrom2001to

2005foreignfirmsearned20of23awards,suggestingthatastructural

transformationoftheawardshadoccurred.Ofthe20foreignawards,12wentto

Indianfirms,whileThaicompanieswontheother8(compiledbyauthorfrom


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dataontheJUSEwebsite,http://www.juse.or.jp/e/deming/10_prizelist.html#02,

accessedMay4,2006) Thelargemajorityofthe20foreignawards,inturn,

wenttofirmsfromjusttwogroups,bothofthemwithintimatetiestoJapan:theTVSgroup,formerjointventurepartnerofSuzuki,inIndia,andinThailandthe

SiamCementgroup,whichhasnumerousjointventuresandlicensing

agreementswithJapanesecompanies(mostoftheremainingawardswentto

theIndianmaterialsgroupAdityaBirlaanditsThaisubsidiaries).In1997the

SuzukiaffiliateMarutiUdyogfirstpusheditssupplierstoapplyforDeming

awards,andhelpedinitiateaprogramattheConfederationofIndianIndustry.

CoachingbyaggressiveandevenabusiveJapaneseconsultantshasbeena

factorinmostifnotallofthewinningfirms(Saripalle2005:3-35;IndiaToday,

July22,1999).

NotallIndianfirmshavetakentheDemingroute:theTatagrouphas

aimedatAmericasBaldridgeAward(Domain-b.com,BoomTimeBonanza

andDemingRush,December23,2003).Similarly,Chinesefirmstendtofocus

ontotalqualitymanagementratherthantheToyota-styleleanmanagement

popularintheUnitedStates.Moreover,giventhehistoricandgeo-politic

tensionsbetweenJapanandChina,ifJapanesequalityconsultantsberated

ChineseapplicantsthewaytheyberatetheirIndianclients,riotswoulderupt.

Thus,thedominationofDemingawardsbyIndianratherthanChinesefirms

probablyproveslittleotherthanaheightenedwillingnesstosubmittothe

Demingassessmentprocess.

Moreover,despitethegreatstridesmadebyIndianfirmsinrecentyears,

otherindustryexpertsremainskepticalthatIndiacancompetewithChinain

manufacturingquality(FinancialTimesNovember29,2005).Certainly,Chinas

extraordinaryperformanceinexportingsophisticatedelectronicequipment

suggestsaformidablelevelofqualitycontrolinmanyChineseplants.Asurvey

bytheManufacturingProductivityInstituteofover400ChinesemanufacturersthathaveorareapplyingforISO9001certificationfindsthattheyspendmoreon

trainingandinformationtechnology,putmoreemphasisoninnovationand

achievecomparableorslightlyhigherratesofqualitythantheaverageAmerican

manufacturingfirm(whileinterpretingsurveyresultsandmakingdirect

comparisonscanbedifficult,Chineserespondentsreportedslowerturn-around

timesandmuchlowerratesofworkerempowerment,suggestingthattheydid

notnecessarilysimplyrespondtothesurveylesshonestlyormore

enthusiastically.IndustryWeek,November1,2004).Similarly,theJapanese
http://www.juse.or.jp/e/deming/10_prizelist.html#02http://www.juse.or.jp/e/deming/10_prizelist.html#02


15/46

managersofGuangzhouHondasexportplantreportthatproductqualityis

higherthaninthecomparableAmericanfacility(thoughslightlylowerthanin

Japan;thelevelofimportedpartsalsoremainshigh,asitlongdidintheU.S.NewYorkTimes,June25,2005;FinancialExpress,April29,2006).Atanyrate,

improvementinproductqualityinbothcountrieshasbeenimpressivelyquick,so

effortsathandicappingsoonbecomedated.

A separatebut relatedclaim is that Indian firms are bettermanaged.

While the overall ranking of China in the Global Competitiveness Report

2005-2006 report cited above is a hair above that of India, on company

operationsandstrategyIndianfirmsrankmuchhigher(30)thanChinesefirms

(57). A KMPG International report (2005: 8) cites a Confederation of Indian

IndustryreportasfindingthatthereturnoninvestmentforIndianmanufacturing

firms is19percent vs. only 14percent for Chinese firms. Similarly,Yasheng

Huang(2006)notesthatChinesefirms,especiallyprivatefirms,reportgreater

difficulty in obtaining capital, despite Chinas extraordinary savings rate, and

points to the superior rankingof leading Indian firmsona variety ofsurveys

conducted by the international business press. KPMG and others (2005: 8)

contendthatwhileChinesefirmsexcelatmassproductionusingstandardized

technologies,Indianfirmshaveanadvantageinpartsrequiringintensiveinputs

ofengineering.ThismightgiveIndianfirmsanadvantageintheautoindustry,

with its relianceon tacit skills,particularly innichemarkets,suchassales to

smalldevelopingcountries.Ontheotherhand,Balakrishnanetal.(2004)report

disquieting evidence that Indian firms have had a difficult time translating

superior productquality intosuperioreconomicperformance. The top Indian

firmsmaybebettermanaged,andmayhaveattainedbetterproductquality,but

the range of competent firms is probably wider anddeeper in Chinasmuch

largerandmorerapidlygrowingindustry.

A related problem affecting both product quality and corporatemanagementisthequalityoftheChineseandIndianworkforces. Hereagain,

thereisamassivedisparity between thehighqualityofthebestworkersand

engineers,andthehundredsofmillionsofpoorlyeducatedworkers. Acareful

comparisonoffour-yeardegreesinengineering,computerscienceandrelated

disciplinesfoundthatin2004Indiagraduatedalmostasmanyengineersasdid

theUnitedStates(112,000vs.137,000),whileChinaproducedmorethanthree

timesasmanyasIndia(352,000)(ongoingresearchledbyGaryGereffiofDuke

University, cited inThe News & Observer, December 13, 2005). In 2004,


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Chinese and Indians accounted for one-quarter ofall foreign students in the

United States (International Institute of Education, November 14, 2005,

accessed at http://opendoors.iienetwork.org/page/71388/). In 2004, Chinesestudents accounted for a quarter of all American PhDs awarded to foreign

students(bothoverallandinscienceandengineering),morethanstudentsfrom

thenextthreecountriescombined,andmorethanthreetimesthetotalawarded

to students from India, the third largest country. Chinese science and

engineeringstudentsalsooutnumberIndianstudentsinAustralia,Canada,the

UnitedKingdomandoverwhelminglysoinJapan,GermanyandFrance(NORC

2005:Table12,p.52;NSB2004:Table11,AppendixTables2-40,2-41,2-43;

FederalMinistryofEducationandResearch2005:10).Evenmoreimpressive

hasbeen thegrowth of PhD training in many Asian countries, ledby China.

Whereas conferral of PhD degrees in science and engineering at American

universitiesremainedessentiallyflataftertheearly1990satabout25,000PhDs

per year, in 2001,China awarded over 12,000 PhD degrees in science and

engineering, five times the number awarded a decade earlier. Indian

universitiesawardedover10,000degrees,upaboutaquarter(NationalScience

Board2004:AppendixTable5-35).

Despite these highly impressive numbers, doubts remain about the

adequacyof thework forces inboth countries. Bothhavehugepopulations

andhaveonlyrecently(particularlyinthecaseofChina)beguntoturnoutlarge

numbersofhighlyeducatedprofessionals,sostockisnotasimpressiveasflow.

Doubtsalsoshadowthequalityofinstructionandresearch,particularlyatthe

higherend.Inquantitativecomparisonsoftheworldsleadinguniversities,China

farespoorlyandIndiaworse(Yasmeen2005). Ontheotherhand,Kenneyand

Dossani (2005: 10) suggest that the gap in educational quality at the

undergraduate level is only 10-20 percent. At any rate, in both cases, the

perceived gap between the best and least well-educated portions of thepopulationishuge. TheconsultancyMcKinseyandCompanyreportsthatboth

countries face serious skills shortages; while China has expanded higher

educationmorerapidlyandisputtingmoreresourcesintoscience,engineering,

andEnglish-languagetraining,IndiaretainsabigleadinEnglishcompetence,

internationalization, and geographic flexibility. Even in India, however,

employersreportthattheEnglishlevelofthelargemajorityofthepopulationis

inadequate to interact professionally with the rest of the world (McKinsey

Quarterly 2005:4, Chinas Looming Talent Shortage; 2005: Special Edition,


17/46

EnsuringIndiasOffshoringFuture).Sincetheautoindustryisasophisticated

andrisingindustryinIndiaandChina,itslargerandbetter-placedfirms,atleast,

shouldbeabletoattractambitiousandwell-trainedyoungemployees.AsIndiaandespeciallyChinagaingreaterexperiencewithdevelopingtheirownmodels,

many of the current weaknesses, such as lack of experience in product

integration,shouldgradually dissipate.Nordoes theauto industry requirethe

kindofnear-nativecompetencyinEnglishandquasi-Americanaccentrequired

for success in the call centers that have powered Indias prominence in

information technology. On balance, skill shortages are unlikely seriously to

impedetheprogressoftheIndianandChineseautoindustries.

A related issue is whether Chinese and Indian firms will be able to

increasethelevelofdesignandresearchanddevelopmentwork. TheChinese

government,inparticular,hasbeenintentonupgradingthecapacitiesoflocal

firms,andencouraginglocalsubsidiariesofmultinationalfirmstoincreaseR&D

capacitiesinChina.TheratioofR&Dtonationalincomehasrisensharplyin

recentyears,reaching1.35percentin2004(EnglishPeoplesDaily,March1,

2005); total research expenditures in China, 60 percent from the corporate

sector,arenearingthoseofJapan(roughly80percentofJapanslevelin2003)

and growing much more rapidly (NSF 2006: 19, Figure 0-6). The recent

statisticalanalysisofRodrik(2006)suggeststhatChineseexportsarefarmore

skilland technology intensive thanwouldbesuggestedbyChinasper capita

income.Betweenpressurefromthegovernmentandfromupstartdomesticfirms

breaking into the lowerpartsof themarket, ShanghaiAutomotive,FirstAuto

Works, Changan and other Chinese automotive companies with

foreign-dominatedjointventureshavebeguntoturntheirattentiontodeveloping

brands and intellectual property independentof their foreign partners (Noble,

Ravenhill, and Doner 2005). Local firmsGeely andGreatWall, though still

small,havebuiltdevelopmentcenterswithhundredsofengineers,andGeelyclaimstoinvestover10percentofrevenuesinR&D,anextraordinaryfigurefor

a automobile company simultaneously engaged in a massive expansion of

production capacity (average R&D spending in the Chinese auto industry,

includingbothassemblersandpartssuppliers,was1.4percentofrevenuesin

2004. ZhongguoQicheGongyeNianjian2005:495;accordingtoasurveyby

A.T. Kearney, in 2002 American suppliers averaged 2.5 percent, European

suppliers3.5percent,andAsiansuppliers4percent.MichiganCraintech,July

21,2003).Cheryclaimstohave1,600R&Dworkers(ToyotasAmericanbranch


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hasonly1,100),including54seaturtles(staffwhohavereturnedfromstudy

and/orworkexperienceabroad)and51PhDs(Qiruipresentationatinnovation

conferencesponsoredbyZhongguoQiyeLianhehui[Cec-ceda],April26,2006).The independent auto companies have developed a dizzying area of new

models and engines, initially with considerable help from European design

boutiques and engineering consultancies such as Pininfarina and AVL, but

increasinglyontheirown(MeiriJingjiXinwenJanuary11,2006).

Initially, some foreign firms apparently built R&D centers largely to

satisfytheChinesegovernment,leadingcheekyforeignerstodubthemPR&D

centers(Brandt,Rawski,andSutton2004:27,fn.38),butinrecentyears,GM,

Delphi, and other foreign firms have engaged in a wave of expansion that

suggests that they are serious about developing increasing local capacities

(Walsh2003;NewYorkTimes,September13,2004;BusinessWeekMarch29,

2006). A 2005 survey identified 130 foreign auto parts concerns with R&D

facilities in China (Zhongguo Shangbao July 29, 2005). In 2006 Visteon

(formerly the parts arm of Ford) announced that it would move its global

headquartersforelectronicstoShanghai,whileGMshifteditsglobalelectronics

procurement office there (Automotive News, February 27, 2006). Germanys

BoschplanstoexpanditsChinaresearchstaffto1,400by2010(Automotive

News,March13, 2006). InMarch2006, theAmericanautosupplierTenneco

announcedthatanemission-controlR&DcenterunderconstructioninShanghai

would become one of its threemost important research facilities worldwide.

WhilethecenterinitiallywouldserveTenneco'scustomersinChina,CEOMark

Frissora bullishly proclaimed that "If we can expand this capacity faster and

cheaperthaninNorthAmerica,wewillengineereverythinghereOurvisionfor

thisis itcouldbecomethecoreengineeringcenterintheentireworldYoucan

engineer basic products a lot cheaper here." (Automotive News March 13,

2006).NorisincreasingR&DspendinginChinalimitedtomodifyingpartsfor

globalexports.Long-timemarketleaderVWrespondedtoarapidlossinmarket

sharetonewJapaneserivalssuchasToyotaandHondaandtheriseofcheap

Chinesebrandsbyannouncingplans todevelopfrom scratchan inexpensive

newmodel inChinaspecially for theChinesemarket;VWwill attempt tocut

costsbydrasticallyincreasingtheuseofChinesepartsanddesigns( Automotive

News,January9,2006),andplanstoboostexportsfromChinatoVWsother

plants. Similarly, GM has begun exploring the possibility of developing in


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China a very inexpensive commercial vehicle for export to other developing

countries(FinancialTimes,January11,2006).

Someof thesame trends canbe seen in India. At theendof 1998,TataMotors,adivisionofoneofIndiasleadingconglomerates,introducedthe

Indica, the first indigenously designed passenger car in India. Tatas major

market is commercial vehicles, but it has become Indias second largest

producer of passenger cars, and most active in pursuing independent

development.TatadevotesabouttwopercentofitsvenuestoR&D(TataMotors

SixtiethAnnualReport 2004-2005: 6-7, 31). Market leaderMaruti Udyog, in

contrast,proclaims that itwillbecomearegionalAsianR&DforSuzuki,but it

devotesonly0.48percentofrevenuestoR&D(MarutiUdyogLimited, Annual

Report2004-2005:23,29-30).Thiscomparesto5.0percentatNissanand5.9

percentatSuzukiMotor(calculatedfromSuzukiMotor,AnnualReport2005:2,

20).In2002,numberthreeproducerMahindra&Mahindra,longtimeleaderof

the farm equipment sector, introduced the Scorpio, a multi-utility vehicle

developed on its own, with help on the engine from the Austrian engine

specialistAVL(TheHinduJune16,2002).In2006,itdisplayedanexperimental

hybrid vehicle.At1.34 percent of revenues, however,M&MsR&D spending

remains modest (Mahindra & Mahindra59th Annual Report, 2004-2005: 15).

Thus,whileindependentdesigneffortsareincreasing,theyarelessnumerous

andaggressivethaninChina.

As in information technology, Indias major importance in the auto

industrymaycomeasabaseforR&Dbymultinationalsautomakersandparts

firms. GeneralMotors is rapidly expanding itsR&D center in India. Delphi

recentlyannouncedthatbankruptcywouldnothinderitsrapidexpansioninAsia,

andthatitexpectedtohaveanR&Dworkforceof800inBangaloreby2008

(Automonitor.co.inNovember10, 2005). In late 2005Germanys Bosch, the

largestautopartsfirmintheworld,openedinBangaloreitsbiggestresearchanddevelopmentoperationoutsideofGermany,andannouncedthatitwasscouting

alocationforasecondfacilityofequalsize.AswithDelphi,thenewcenterswill

not be limited to supporting the Indian market: Bosch India provides

engineeringandnon-engineeringservicestotheBoschWorldsuchaselectronic

control unit development for automotive, industrial, consumer goods and

building technology, as well as IT services, process consulting, mechanical

engineering, IT design, shared services accounting, and

translation/documentation.(AsiaPulseJanuary11,2006).


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Most of the research and development by foreign firms discussed

aboveinvolvesmodifyingforeignproductstofitlocalconditions.Similarly,much

oftheR&Dbylocalfirmsinvolvesincreasingabsorptivecapacitiestomakeitpossible to license or reverse-engineer foreign technology or co-develop

technology under the direction of foreigners. In these cases, a degree of

increasing overseas R&D is not inconsistent with a continuing comparative

advantageinR&Donthepartofadvancedcountries.Inthecaseoftheauto

industryinChinaandIndia,thisprobablyaccountsforthelargebulkofreported

R&Dcenterssofar.MoreandmoreforeignMNCs,inautosasinotherindustries,

however,arelookingtoChinaandIndiaforspecificcompetenciesthattheycan

usethroughouttheirglobaloperations.InthecaseofIndia,thatmeansmostly

softwareandinformationtechnology.ForChina,theprimaryarea,atleastfor

now, is auto electronics, which can piggyback on the extensive electronics

manufacturingbaseinChina,notallofwhichislabor-intensiveassembly.

Moreover, the firms and governments involved are not just following

markets.TheyaretakingmanystepstoincreasetheattractivenessoflocalR&D.

Ironically, the increasingly aggressive attitude of Western firms toward

protectingintellectualpropertyrightshascreatedasenseofcrisis,particularlyin

China, and adetermination topropel autonomous (zizhu) development.Nor

are Chinese firms sticking strictly to incremental innovation: they view

technologybreakthroughssuchashybrid carsor even fuel cellsasaway of

leap-frogging the deep knowledge accumulated by foreign companies in an

industrystilllargelydominatedbytacitinformationandincrementalinnovation

(Noble, Ravenhill and Doner 2005; Noble, forthcoming). Just as world

commerceconsists notonly (orevenprimarily)of thecomparative-advantage

based trade explained by the Heckscher-Ohlin theorem but of intra-industry

trade among advanced countries with similar factor endowments, so too

increasingly R&D will be distributed not so much on the basis of level ofadvancement(percapitaGDP),butonanindustry-specificbasis,withcountries

specializingtoagreaterorlesserdegreeinthetechnologiesrelevanttospecific

industries. Of course, this is a long-term trend, and even in, say, auto

electronics,themostcuttingedgeworkisstillbeingdoneintheUS,Japan,or

Europe.Forthetimebeing,alargegapislikelytocontinuetoseparateWestern,

JapaneseandKoreanautofirms,withtheirhigherratesofR&Dspendingand

greatercommitmenttoradicalinnovation,butifcurrenttrendsareanyindication,

thatgapwillnarrowsignificantlylongbeforeChinaandIndiabegintoapproach


21/46

theper-capitaincomelevelsofKorea,muchlessJapanandtheWest.

Someoftheobstaclestothecontinueddevelopmentoftheautoindustry

stemfromthewiderenvironment,andrequirebroaderresponses. IndiaandChinahavesomeofthemostcrowdedandpollutedcitiesintheworld,andthey

havebegunworkingaggressivelytotacklethesocialillsattendantuponmass

motorization. Oncerelativelaggardsinpollutioncontrol,bothhaveadopted

versionsofEuropeanemissionstandards.Majorcitieshavetakenthelead,and

by2010bothChinaandIndiaplantoapplynationwideEuro-IVstandards,the

moststringentcurrentlyavailable(theEuropeanUnionisexpectedtoadoptthe

draftEuroVstandardsin2008).Bothhaveeliminatedleadfromautomobile

fuels.Amoredifficultproblemisreducingsulfurfromgasoline,whereChinain

particularlags(Huizenga2004).TheChinesegovernmentloweredthesulfur

standardtothatoftheUSin2005,thoughsoonaftertheUSmovedtoamuch

stricterstandard

(http://www.greencarcongress.com/2005/01/sinopec_refinin.html ).Atanyrate,

sulfurinChinesefuelwillnotaffectexports.Alreadythenewcarscomingoutof

ChinaandIndiaarerelativelyclean,andby2010theywillbeatworldlevels;

comparedtowaterpollutionandChinasmanyothersevereenvironmental

problems,autoemissionsareamenableofrelativelystraightforwardsolutions,

andthecostscaneasilybeplacedoncarbuyers.Similarly,theemphasisboth

IndianandChineseautomakershaveplacedonexportingtoEuropemeansthat

theircarswillsoonroutinelymeetdemandinginternationalsafetyandrecycling

standards.

Moredifficultandevenmorepressingisincreasingfuelefficiency.

ChinaandIndiahaveenteredaperiodofmassivemotorizationjustasfuel

priceshavehitnewhighs(atleastinnominalterms)andmanyexpertsthink

priceswillspiralhigher.ContrarytotheusualargumentsthatIndia,asa

democracy,findsitmoredifficulttotakedecisionsthatwillarouseoppositionfromcitizens,Indiahasdoneamuchbetterjobofincreasingfuelprices,perhaps

becauseahigherdegreeofdependenceonimportedoilgivesitlittlechoice.

Higherfuelpricesnodoubthelpexplainwhysmall,energy-efficientcarsare

morecommoninIndiathaninChina.Fueltaxesareararecasewhere

oppositionfromChinasNationalPeoplesCongress(combinedwithsquabbling

byvariousunitsandlevelsofgovernmentoverthedistributionofrevenues)has

preventedtheChinesegovernmentfromtakingresoluteaction(ZhongguoJingji

ShibaoMay7,1999;XinhuaNovember15,2005;FortimeseriesdataonChina,
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22/46

Indiaandothercountries,seeInternationalFuelPrices2005,pp.6,35-36,

accessedat

http://www.gtz.de/de/dokumente/en_International_Fuel_Prices_2005.pdf ).Recentpolicypronouncements,notablythe11thFiveYearPlan,however,

suggestthattheChinesegovernmenthasbecomealarmedaboutpollution,

globalwarming,andespeciallyenergy,andisunlikelytogiveuponincreasing

fuelpricesandtaxes.

Inthemeantime,asapoliticallyacceptable,second-bestalternative,the

Chinesegovernmenthasintroducedanewfuelefficiencystandardformotor

vehiclesmoredemandingthanthatoftheUnitedStates,andislikelytostiffenit

furtherafter2008(WorldResourcesInstitute2004).Thecentralgovernmenthas

alsorevisedthesalestaxonautomobilestofavorsmallercars,andhasordered

Chinesecitiestostopusingrestrictionsonsmallcarsasawaytosolvetheir

trafficcongestionproblems;somecitieshavefoughtbackbystrictly

implementingpollutioncontrolstandards,whichmaydeteraninfluxofolder

smallcars,butinthelongrunwillcontributemoretoimprovingemissions

standardsthantoreducingthenumberofsmallcars(RenminRibao,January10,

2006).

IfIndiaisaheadinraisingfuelpricestoreflectinternationalprices,China

hasdonefarbetterinbuildinginfrastructuretoaccommodatebothautomobiles

andmasstransit,inlargepartbecauseoftherobustincreasesintaxrevenues

stemmingfromrapidgrowthandtaxreform. China,whichtrailedIndiainroad

coverageuntilthe1990s,hasengagedinaextraordinaryprojectofhighway

constructionthatwilleasecongestionandencouragethecontinuedgrowthof

autosales;Chinanowpossessesthesecondlargesthighwaynetworkinthe

world,andinadecadeorsoislikelytodrawevenwiththeUnitedStates.Of

course,increasingthecoverageofroadsisamixedblessing.Chinesecities,led

byBeijing,inanticipationofholdingthe2008Olympics,arealsoexpandingrailandsubwaylinesatafranticrate,andthecentralgovernmentisstressingthe

developmentofacomprehensivenationalbusnetwork(XinhuaJanuary16,23,

2006;ZhongguoKechewangJanuary10,2006).Particularlyinrapidlygrowing

secondandthird-tiercitiesthathavenotyetconstructedsignificantmasstransit

systems,however,thereisagreatdangerofcreatingland-usepatterns

irretrievablydependentonprivatecars,andthusexpensiveimportedoil.

Indiahasembarkedonasignificanthighwayexpansionprojectaswell.

ThegoldenquadrilateralhighwaylinkingIndiasfourlargestcitiesisscheduled
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23/46

forcompletionthisyear(NewYorkTimes,December4,2005). Masstransitis

alsorapidlyimprovinginDelhi,partlyinpreparationforthe2010Commonwealth

Games,andismakingprogressinseveralothermajorcitiesaswell. Overall,however,IndiatrailsfarbehindChinainhighways,modernbussystems,and

masstransit(TheHindu,January17,2006).Withoutfurtherefforts,Indiafaces

theworstofbothworlds:congestionthatslowscargrowthbutleavescommuters

withfewalternativemeansoftransportation.

HoweversuccessfulChinaandIndiaareindealingwiththedomestic

consequencesofrapidmotorization,twoimplicationsfortherestoftheworldare

clear. First,thepressuresofrisingdemandonoilpricesareunlikelytoabate.

Second,exportsofbothvehiclesandpartsfromChinaandIndiaarelikelyto

concentrateincreasinglyonsmall,clean,fuel-efficientandreasonablysafe

passengercarsandlightcommercialvehicles.Indeed,someexpertsbelieve

thatChinaandIndiamaybecomeleadingusersofcleansmallcars,pushing

globaldevelopmentofnewautomotivetechnologicaltechnologyand

occasionallycontributingtoitthemselves.

Finally,achallengeofspecialconcerntotherestoftheworldisthat

untrammeledinvestment,particularlyinChina,isleadingtoexcesscapacitythat

willspillovertotherestoftheworldasChinesecompaniesdumpexcesscars

andpartstheminutedomesticdemandslows. Thesumtotalofannounced

capacityinvestmentsintheautoindustry,forexample,couldleadtocapacity

rivalingthatoftheUnitedStatesinjustacoupleofyears.TheChinese

governmentemphaticallysharesthisconcern,notbecauseitopposes

inexpensiveChineseexports,butbecauseitisconcernedthatopportunisticnew

firmsandaglutofcommoditiescouldleadtoapricewarthatimpedestheefforts

ofestablishedcompaniestoincreasethequalityandsophisticationoftheir

products.Worseyet,itfearsthatunderusedfactoriescouldsaddleChinas

shakybankingsystemwithunpaidloans,andplungetheeconomyintodeflation. Historically,however,theChinesegovernmentsrepeatedcallsoncompaniesto

mergeandconsolidateintoafewsmallgroupshavefallenondeafears,andthe

governmenthasprovenunwillingorunabletotakethepainfulstepstoprevent

theemergenceofexcessivecapacityintheautoindustry. Foreignproducers

continuetopileintoChinatograbapositioninthestill-maturingmarketbefore

consumerpreferencesbecomefixed.Thus,despitetheextraordinarilyrapid

increaseindemandforautomobiles,overthelastcoupleofyears,pricesof

Chinesecars,oncefaraboveworldmarketprices,havesteadilydeclined.


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TheNationalDevelopmentandReformCommissionhasredoubledits

effortstoshutdowninefficientproducersanddiscouragenewinvestmentsinthe

automobileindustry(seeforexample,thecommentsofNDRCMinisterMaKai,XinuaviaAsiaPulse,December16,2005).Anumberofwould-benewentrants

havepulledoutoftheindustryforlackofsupportfromthe

(government-controlled)banks(AsiaPulse,July20,2005). NDRCisunlikelyto

persist(muchlesssucceed)inforcingconsolidationaroundafewleading

groups,butrecenteventssuggestitmayhaveasomewhatgreaterimpactin

shuttingdowntheleastcompetitivefirms.

Itisquitepossible,however,thatmarketmechanismswillserveto

alleviateexcesscapacityevenabsentacredibleexitthreat,andonoccasionthe

NDRChasalsosuggestedthatitwillrelymoreonmarketmechanismstoreduce

capacity(ShijieJingjiBaodaoviaSina.com,January6,2006)Exuberant

investmentsattheendofthe1990sandtheturnofthecenturyrespondedtoan

extraordinaryburstindemandandaballooningofprofitrates. Inthepasttwo

years,despitestillstronggrowthindemand,profitratesintheautoindustryhave

declinedsharply,duebothtoexcesscapacityandspiralingcostsofoil,steeland

otherinputs. In2005,profitabilityinautosslidbelowtheaveragefor

manufacturingindustriesforthefirsttime(ShanghaiDailyJanuary28,2006).

Already,someforeignfirmsarecuttingbackinvestmentsinthefaceofdeclining

marketshareandsaggingprofitability.ThemostprominentcaseisVolkswagen.

LongChinasmarketleader,ithaslostalargechunkofmarketsharetorapidly

expandingJapaneseandKoreanrivalssuchasHyundai,Honda,andToyota.In

response,itannouncedanOlympicProgramthatwillscalebackfuture

capacityincreasesafter2008(AutoAsiaOctober19,2005).

Excesscapacityremainsaseriousproblem,asitisthroughoutthe

globalautoindustry,butitmaybeeasiertorespondtoinChinathaninmore

advancedcountrieswithstagnantorevendecliningmarketsorsurgingimports:sincedemandwillcontinuetogrow,reductioninfutureinvestmentsmaybe

enoughtowhittlebacktheoverhangofcapacitywithoutrequiringthefarmore

difficulttaskofforcingorallowingexistingproducerstoshutterfactories.Falling

pricesrepresenttheeffectsnotjustofexcesscapacitybutofrapidincreasesin

theproductivityofChineseproducers.Foreignproducerswillfaceanincreasing

competitivethreatfromChina,butitislikelytostemfromincreasesinreal

capabilities,notsolelyorevenmainlydesperatedumpingtoalleviateexcess

capacity.


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The rise of the Chinese and Indian auto industries: Implications for otherdeveloping countries Itiseasyenoughtounderstandwhyworkersandengineersinadvanced

countriesarenervousaboutthemusculargrowthofChinaandIndiainrecent

years: imports fromChina have jumped, India looks to be repeating Chinas

success,andoutsourcingfrombothcountries,notleastinautomobiles,maywell

soar. Eveniftheoverallgainsfromtradearepositive,thecostsofadjustment

couldbe substantial for the workers involved. What about other developing

countries, whosewage levels aremuch closer to those of China and India?

EichengreenandWangs (forthcoming 2006:29-30) studyof tradingpatterns

from 1990 to 2003 shows that for poorer countries, crowding effects may

overwhelm positive growth linkages, particularly in auto parts: Countries

specializingintheproductionandexportofcomponents,capitalgoodsandraw

materials feelpositiveeffectsfromChinasgrowth,whilecountriesspecializing

intheproductionofconsumergoodsfeelnegativeeffects.ThepatternofFDI

spillovers isbroadlysimilarThispositive response is shapedbyproximity; in

particular,AsiancountrieslocatedclosetoChinahaveageographicalandcost

advantage when attempting to capitalizeon these supply chain relationships.

Butthisresponsealsodependsonindustrialspecializationandhenceonpast

policy.Forexample,countriesproducingelectronics,anindustrythatlendsitself

to production fragmentation, are better positioned than producers of motor

vehicles, where for policy-related reasons, ifnot also because of technology,

thereislessscopeforexploitingtheseinternationalcomplementarities.

The degree to which these results hold in the future will depend in

significantmeasureonhowquicklyChinese (and Indian) firmscanmove into

marketsnowdominatedbyfirmsfromadvancedcountries,andthespeedwith

which outward FDI from China and Indiavirtually nonexistent in the periodstudiedbyEichengreenandWangincreases.Evenintheshortterm,however,

it is important toplace theseresults inperspective:China(and India) remain

smallplayersininternationaltrade,andotherfactorsaremuchmoreimportant

indeterminingthedevelopmentoftheautoindustryindevelopingcountries.

Thedevelopingeconomiesmostlikelytofacethebruntofintensified

competitionfromChinaandIndia(andindeedliberalizationofworldauto

marketsmoregenerally)arethefourlargeeconomiesofSoutheastAsia;others

includePakistanandTaiwan. YetwiththepartialexceptionsofthePhilippines


26/46

andPakistan,autoindustriesareflourishinginallofthosecountries,andinnone

ofthemiscompetition,whetherdirectordirect,fromChinaandIndiaamajor

concern.Economicgrowthhasbeenrespectablesincethefinancialcrisis,ifnotquiteasrapidasbefore,orasfastasinChinaandIndiaoverthelastdecade.

GrowthratesinASEANgenerallyhaverangedfromfourtosevenpercentper

year,withsomepickupin2003-2005,especiallyinindustrialgrowth.

ThemostobviouslyflourishingcaseisThailand,whichthrewopenits

doorstomultinationalinvestorsandregionaltradeanddevelopedplansto

becometheDetroitofAsia(backwhenthatappellationseemedmore

propitiousthanitmighttoday). AftertheAsianfinancialcrisisof1997-98,

Thailandseizedonexportsasthesaviorofitsautoindustry,andithasnever

lookedback.Productionofmotorvehiclesfellfrom560,000in1996to158,000

in1998,butby2005,productionisestimatedtohavereached1.15millionunits,

ofwhichabout450,000unitswereexported(JAMA2005);2005estimatesfrom

AsahiShinbunJanuary12,2006).

Traditionally,Thailandhasspecializedinsmallpickups,forwhichitis

thesecondmostimportantmarketandproductionlocationaftertheUnited

States,buttheproportionofpassengercarsisgraduallyincreasing,hitting

one-thirdin2004. TheriseofthepassengercarmarketcouldmakeThailand

somewhatmorevulnerabletocompetitionfromChinaandIndia.Thailandsauto

industryhasenjoyedaninfluxofdirectforeigninvestment,mostlyfromJapan

butalsofromGMandFordoftheUS.Indeed,Thailandhasnoindependent

assemblers,andvirtuallyallsignificantlocally-ownedpartsfirmshavebeen

acquiredbyforeignfirms.Intheory,thosefirmsaremorefootloosethan

locally-ownedfirms,butinthecurrentboomthereisnolikelihoodofsignificant

disinvestment.Externaltariffsonautosandpartsremainhigh,butThailandhas

enteredintoadizzyingarrayoffreetradeagreements,startingwithASEANs

AFTAagreement,andincludingChina,India,AustraliaandJapan. Moresurprisingly,theIndonesianautoindustryhasalsoperformed

reasonablydespitethedevastationcausedbytheAsianfinancialcrisis,andthe

relativelyslow,consumption-basedgrowthsincethen.Autoproduction

collapsedfrom389,000unitsin1997tojust58,000in1998,butfinally

surpasseditspre-crisispeakin2004withproductionof498,000units(JAMA

2005;productiondatafor2005arenotyetavailable,butaccordingtothe

Indonesianeconomicsministry,autosales,theoverwhelmingbulkofwhichare

accountedforbydomesticassembly,increasedbyover10percentin2005).


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Foreigninvestment,whilemuchlessrobustthaninThailand,hasincreasedto

supporttheexpansionofproduction. Foreigninvestmentintheautomotive

sectorin2005lookedsettosurpass2004srecordofaboutUSD400milliondollars(AsiaPulseDecember16,2005). Moresurprisingly,foreignassemblers

ledbyToyotahavebeguntoexportsignificantnumbersofvehiclesfrom

Indonesia(66,000unitsfromJanuarytoSeptember2005;AsiaPulseOctober

20,2005).Tradeliberalizationbeganinearnestafterthefinancialcrisis,and

Indonesiahasjoinedthe0-5percenttariffregimeofAFTA. Thoughthe

industryislargelylimitedtoassemblyandtheskillbaseisnotdeep,Indonesias

populationofovertwohundredmillionvirtuallyassuresthecontinuationofa

significantautoindustry.

MalaysiawasnotasbadlyaffectedbytheAsianfinancialcrisisas

Indonesia,butrecoveryalsowaslessdramatic,partlybecausethepoppingof

theinformationtechnologybubblein2001hitelectronics-dependentMalaysia

hard:2004productionof472,000unitsbarelysurpassedthepreviouspeakof

457,000unitshitin1997(JAMA2005;in2005,salesincreased13percent).

ThemainprobleminMalaysiaiswhattodowiththenationalchampioncar

companiesPerodua(nowcontrolledbyToyotaaffiliateDaihatsu)andespecially

state-controlledProton,bothofwhicharesaddledbypoliticalinterferenceand

policiesofethnicpreferenceandthathavestymiedthegrowthofacompetitive

partsindustry.LongasymbolofMalaysiasindustrialambitions,Protoncannot

competewithoutheavyprotection. Regionaltradeintegrationposesagrave

threattoanindependentProton,whichlacksthefundstodevelopnewmodels.

ThesigningofanFTAagreementwithJapaninDecember2005providedan

interimsolutionthatsacrificespartstosaveProton.Malaysiaagreedtoeliminate

immediatelytariffsonpartskitsimportedfromJapan,whilekeepingprotectionof

largercarsuntil2010andcarswithenginesundertwolitersuntil2015(AFP,

June25,2005;KyodoNews,December14,2005).Thegovernmenthascanvassedanarrayofpotentialpartners(saviors)forProton,butits

unwillingnesstorelinquishmajoritycontrolsankadealwithVW;talkscontinue

withPeugeotandavarietyofChinesefirms.

ThePhilippineswasevenlessaffectedbythefinancialcrisisthan

Malaysia,butithasneverdevelopedasignificantassemblyindustry,producing

only110,000motorvehiclesonthecusponthecrispin1997,andjust45,000in

2003(JidoushaNenkan2004nenban:477). Inrecentyears,ithasusedthe

loweringoftariffswithinASEANtodevelopacomparativeadvantageinafew


28/46

partsandcomponents,includingsomesimpleautoelectronics,anditactually

exportsmuchmorethanMalaysia,withitslargepassengercarassembly

industry. BothToyotaandFordhavemademajorinvestments,andToyotaexportstransmissions,especiallytoitsotherassemblysitesinASEAN.In

November,2004,JapanandthePhilippinessignedapreliminaryagreementon

anFTAthatwouldhaveprogressivelyeliminatedtariffsonautomotiveproducts

by2010. InthefaceofvehementobjectionsfromFordandotherWesternauto

firmsthattheagreementwouldhaveviolatedtheunderstandingunderwhich

theyhadinvested,negotiationsbetweenthePhilippinesandJapanstalled(Wall

StreetJournal,June26,2005;JETRO,December27,2005).

ThroughalltheseSoutheastAsiancasesruntwofewsimplethemes:

First,stronggrowthindemandforautos(thoughnotasstrongasinChinaand

India)haskepttheregionalautoindustrygrowingandrelativelyoptimistic

despitethedislocationsattendantuponliberalization. Second,ChinaandIndia

remainbutadistantconcern,greatlyovershadowedbydebatesoverregional

integrationandFTAswithJapanandothercountries.

Thesethemesaresupportedbydataontradeinautoparts(whichinthe

caseoftheASEAN4generallydwarftradeinassembledvehicles):Chineseand

especiallyIndianexportstothebigfourASEANcountriesremainrelatively

limitedinthecontextofoverallASEANautotrade.ASEANexportstomajorauto

marketshavenotsufferedanyobviouscrowdingoutbyChineseorIndianparts.

Between1996and2003,ASEANexportstothemajorautomarketstheUnited

States,theEU15,andJapan--increased,inmostcasessubstantially(theonly

exceptionsarePhilippineexportstotheUSandEU,whichstagnated). Exports

toChinaalsoincreasedsubstantially,butremainedfarbelowthoseoftheother

majormarkets.ThispatterncontrastssharplywiththatofKorea,whichgrew

muchmoredependentupontheChinesemarketassalesofHyundaiandKia

vehiclesassembledinChinazoomed(seeFigure6,ExportsofautopartsfromSouthKoreaandthefourlargeASEANcountries).

ItistruethatChineseexportsexpandedrapidlyin2003and2004(and

2005,thoughdetaileddataarenotyetavailable),andinsomecasesChina

cametorunanoverwhelmingsurplusinautopartswithitsSoutheastAsian

tradepartners.InthecontextofthetotaltradeofASEAN,however,theamounts

remainedmodest.Usinganotherdatasetthatincludes2004(butcoversa

narrowerrangeofpartsthoseinthe784industrialcodecoveringgeneralauto

parts),wecanseethatwhileChinacametorunlopsidedsurpluseswith


29/46

IndonesiaandMalaysia,theabsoluteamountsinvolvedwerequitemodestat

about70milliondollarsinChineseexportstoeachofthecountries,and

accountedforonlyatinyfractionofChinasexpandingexports(seeFigure7,Chinastradeinautoparts). AutotradewithPhilippinesremainedminuscule.

InthecaseofThailand,Chineseexportsexpandedrapidly,butimports

expandedevenmorequickly,andChinasone-timesurplusturnedintoa

bilateraldeficit. Eveninthecaseofthesetwoburgeoningautopowers,

however,traderemainedextremelylimited:in2004,Chinaimportedabout49

milliondollarsofgeneralautopartsfromThailand,andexportedabout30million

dollarspartsonlyabout0.68percentofChinas4.4billiondollarsinexportsof

generalautoparts.

IndianautotradewiththeASEANfourwasevenmorelimited(see

Figure8,Indianautotradeoverview).Atfirstglancethismightseemsurprising:

Indiahasalarge,rapidlygrowingandhighlyprotectedmarket,fromwhichits

companiesareaggressivelyexportingvehicles:in2004,Indiaexported

passengercarsworthmorethantwiceChinascarexports(727milliondollarsvs.

317milliondollars),butwhereChinaimported4.6billiondollarsworthof

passengercars,Indiaimportedjust7,500cars,worthonly98milliondollars.

Indiaspartstraderemainsfarmorelimited,however,anditsvehiclesmostly

flowtoEuropeanddevelopingcountrymarketsinwhichJapanesebrandsare

lesswellestablishedthaninSoutheastAsia.AnexaminationofIndiastradein

otherautopartsin2000and2004showsanoverwhelmingrelianceonimports

fromJapan,andlimitedtradewithothercountries. Malaysiashowedsurprising

strength,butoverallthenumbersremainedsmall.Thiscouldcertainly

changeToyotaannouncedthatitwouldexport140,000gearboxesfromIndia

toSoutheastAsiain2006,forexample(AsiaPulseFebruary3,2006)butthe

baseissmall.

TheoneexceptionisthedramaticincreaseinpartstradewithThailand:onlyaboutamilliondollarsingoodspassedeachwayin2000,butby2003India

imported18milliondollarsworthofpartsfromThailandwhileexportingalmost7

milliondollarsworth.InOctober2003Indiasignedfreetradeagreementswith

bothThailandandASEANasawhole,includinganearlyharvestprovision

leadingtorapidcutsinmanyautopartstariffs. In2004otherautoparts

importsfromThailandshotupto51million,whileexportsmorethandoubledto

16milliondollars.

Thisincreaseoccasionedtheonlysignificantcaseoftradefrictionto


30/46

eruptbetweenChina,IndiaandSoutheastAsiaintheautopartsareaandthe

nervouspartyisnottheASEANcountries,butIndia,whoseautoparts

executivesfearedthathightariffsonsteelandotherimportshandicappedthemincompetingagainsttherelativelyopenandefficientmarketsinThailandand

potentiallyotherASEANandPersianGulfstateswithwhichIndiaisnegotiating

FTAs.TheIndiangovernmentpushedforstiffrulesoforiginandvalue-added

requirementstopreventJapaneseandKoreanpartsfromslippinginvia

SoutheastAsia,andcontinuedtoworkondecreasingtariffsoninputstoallay

thepain,butconcernaboutlostrevenuesimpededrapidcuts(HinduBusiness

LineAugust20,2004,October26,2005;DowJonesNewswire,October21,

2005).Indianauto-relatedfirmsalsopetitionedthegovernmentforanti-dumping

reliefagainstimportsofThaiandChinesebusandtrucktires(nottreatedas

autopartsinthedatagiveninthispaper),andexpressedconcernaboutthe

turn-aroundinthetradebalancewithChinainthefirsttwo-thirdsof2005,when

importsfromChinasuddenlydoubledIndiasexportstoChina(Rediff.com

January17,2006;notethatthesearepreliminarydata,andnotnecessarily

compatiblewiththeUNComtradedatausedelsewhereinthispaper;in2005,

ChinaemergedasIndiaslargestsourceofimportsandwithintwoyearsis

expectedtosurpasstheUnitedStatesasitslargesttradepartner.ReserveBank

ofIndia,2006). Theseincidentsserveasremindersthattradepatternsmay

changerapidlyastheChineseandIndianautoindustriesdevelop,butasof

mid-2006,themostimportantfindingremainsthelimitednatureofChineseand

Indianautotrade,particularlyinSoutheastAsia,andtherelativelysmooth

progressofgradualtradeliberalizationthroughouttheregion.

ThelimitedpresenceofChinaandIndiaisevenmoreevidentindirect

foreigninvestment. Globally,DFIisacrucialcomponentoftheautoindustry.

ThailandstransformationintotheDetroitofAsia,forexample,hasbeen

accomplishedalmostentirelybyforeign-ownedfirms,andIndonesiasmodestrecentresurgenceisattributableingoodmeasuretoToyotastakeoverofthe

manufacturingassetsofitsformerjointventurepartners.Andofcoursetheauto

sectorsinIndiaandespeciallyChinahavereceivedhugeamountsofforeign

investment.OutwardforeigninvestmentfromChinaandIndiahasbeenfarmore

limited,thoughitisbeginningtopickuppace.ChineseandIndianfirmshave

beguntoestablishassemblyoperationsinotherdevelopingcountries,asseen

inagreementsreachedin2005byMalaysiasAlado/InformationGateway

groupstoassembleunderlicensevehiclesbytheindependentChinesefirms


31/46

Chery,Geely,andChangan.Geelyoriginallyhopedtoselltensofthousandsof

unitsinMalaysia,whereautopricesaremuchhigherthaninChina,andalsouse

MalaysiaasabaseforexportstootherASEANcountriesattariffsof5percentorless,aswellastoothercountrieswithright-handdrive,suchasAustralia,the

UKandpotentiallyIndia.InblithedefianceofWTOnorms,theMalaysian

governmentinitiallyinsistedthatAladoexportitsentireproduction.Intheend,

Geelyagreedtoexport80percentofoutputatUSD$5,000-$6,000perunit,with

initialcontentof40percent(barelymorethanthecostofassembly),risingto60

percentwithinayear.Byagreeingtouseidleassemblyfacilities,Geely

assuagedthegovernmentsconcernsaboutexcessivecapacity,andreducedits

owninvestmentstovirtuallynothing(DiyiCaijingRibaoFebruary6,2006;The

EdgeDaily,March29,2006).Amongthepossiblepartnersfortroublednational

championProtonareChinesecompaniesincludingChery.Accordingtoone

proposal,eachcountrywouldassemblecarsfortheother,thoughwhether

ProtoncarswouldbecompetitiveinChinaremainstobeseen(FinancialTimes,

March30,2006;ReutersMay6,2006).

TheonlyprominentpartsinvestmenthasnotbeenfromChinaorIndiato

SoutheastAsia,butfromIndiatoChina. BharatForge,theworldssecond

largestforgingcompany,announcedthatitwouldacquiretheforgingdivisionof

Chinaslargestautoconglomerate,FirstAutoWorks(ReutersDecember8,

2005).Thesearesmallandunusualexamples,however. TataMotorhas

exploredassemblyinvestmentsinThailand,butoverallTataandBharatForge

aremoreinterestedininvestinginKorea,GermanyandpossiblytheUnited

States,wheretheycanacquireanddevelopthebrands,skills,distribution

channelsandexperiencenecessarytoexpandsalestoadvancedmarkets.The

sameistrueofChina,whereindustryleaderWanxiang,amakerofuniversal

joints,hasboughtcompaniesandestablishedoperationsinNorthAmerica,

Australia,England,andGermanyandexpressedinterestininvestinginIndia,buthasmadenomovestoenterSoutheastAsia.

Inmanyotherareas,thepresenceofChineseandIndianautofirms

remainslimited.AutotechnologyisstilloverwhelminglydominatedbyWestern,

Japaneseand(toamuchlesserextent)Koreanfirms. Theincreasingfocusof

IndianandChinesefirms--andtheChineseandIndianoperationsofWestern

firmssuchasGM--onsmall,inexpensivecarsandcommercialvehiclesmay

exertsomemilddownwardpressureonprices,whichcouldthreatensomelocal

producers,butalsoprovidenewopportunitiesforhouseholdsandsmall


32/46

businesses. Onbalance,though,theimpactforgoodorillremainslimited.

Surprisingly,eventheautoindustriesofPakistanandTaiwan,the

economiesmostlikelytobeconcernedabouttheriseofChinaandIndia,haveremainedrelativelyunaffected.Ifanything,theimpacthasbeenpositive. Until

recently,Pakistanhasmaintainedaclassicprotectedautoenclave,inwhicha

swarmofassemblersproduceatinynumberofvehiclesinuneconomical

batchesbehindhightariffwalls.Since2000thegovernmenthasgraduallycut

tariffsandpromotedliberalization,andanincreaseinindustrialandGDPgrowth

hascreatedgreaterconfidence. Still,theautoindustry(includingJapanese

investors,whoaccountfor90percentofassembly)remainsardentlyopposedto

decreasingprotection(TheNewsInternationalMay9,2005;Dawn,January15,

2006). Inaddition,PakistanhasnotyetexplicitlygrantedMostFavored

NationaltradingstatustoIndia,anddespiteIndiassizeandpropinquity,itisnot

inPakistanstop10listsofexportorimportpartners(JETROcountrydata,in

Japanese).Chinaisamajorsourceofimports,butimportsofautomotive

productsremainlimited.Onbalance,though,thegrowthofChinaandIndia

reinforcesthesensethatwithproperreformsPakistan,too,coulddevelopan

autoindustry.Ironically,theextremeunderdevelopmentoftheautoindustryto

datein2000-2001Pakistanproducedfewerthan40,000carstosupporta

populationofover150million(UNESCAP2002:86)maywellprovide

ammunitiontothemanycriticsofcurrentpolicies,andhelpthemovercome

concernsaboutbeingoverwhelmedbyforeignautomobileindustries,among

whichChinaisstillaminorplayer.

Similarly,theeruptionoftheChineseautoindustryhasprovedmore

boonthanbanetoTaiwan,whichbeganaslowprocessofmarketopeningfor

autosin1986. Liberalizationandthestagnationoftheislandscarmarketat

about500,000unitsperyearpushedmanufacturerstolookoutwardfor

opportunities. Partsfirmshavesucceededinexpandingexportsofautomotivecomponents,mainlywheels,bumpersandotheritemsfortheaftermarket,

despitetheriseofcompetitorsinthemainland,andindeedTaiwanpartsfirms

alsohaveestablishedhundredsofsubsidiariesinthemainlandtoproduce

lower-level,labor-intensiveitems. Taiwansleadingassemblers,particularly

thetraditionalchampionYulon(Yulong)anditssistercompanyChinaMotors,

havemadesignificantinvestments,inconjunctionwiththeirJapanesepartners,

insoutheastChina. AlongwithKuozui(Guorui),thelocalassemblerofToyota

vehicles,theyhavealsodevelopeddesigncentersspecializinginthe


33/46

modificationofJapanesecarsfortheAsianregion,particularlymainlandChina.

Politicaltensionsnotwithstanding,Taiwansautofirmsnotonlyhaveadapted

smoothlytotheriseofChinabuthavepinnedmuchoftheirstrategyonChina,andrecentlytheyhavebecomeinterestedinIndiaaswell.

CONCLUSION HowmuchpressurearethenewlyrisenChineseandIndianauto

industrieslikelytoexertonotherdevelopingcountries,particularlyintheir

immediatevicinity? Theanswerissomethingofaparadox. Ontheonehand,

theimpacttodatehasbeenremarkablylimited. Directforeigninvestmentfrom

ChinaandIndiatootherdevelopingcountrieshasjuststartedandbarelyratesa

blipontheglobalradar,andtradeflowshavenotbeenmuchgreater.Theone

exceptionisKorea,whosegrowingdependenceontheChinesemarketdoes

createsomeuneaseathome,butwhichhasgrownsorobustlyinNorthAmerica

andotherworldmarketsthatconcernsremainmuted. Similarly,theonly

significanttradefrictionintheautoindustrywehaveidentifiedinvolvesThailand,

theKoreaofthe2000s,andthecomplainantisIndia,notThailand.TheChinese

andIndianautoindustriesremaindistinctlyjuniorplayersinaglobalindustry

firmlydominatedbyJapanese,Korean,andWesternfirms.

Ontheotherhand,thegrowthintheChineseautoindustry,andmore

recentlytheIndianindustry,trulyhasbeenremarkable,andthehuge

populations,lowcarpenetrationrates,andrapidgrowthofthetwocountries

suggestthattheymaywellgrowintoglobalpowers. Exports,particularlyfrom

China,haveshotupoverthelastcoupleofyears,andappeartobeonthecusp

ofamajorexpansion.Skepticsabound,ofcourse,andtheynotethat

straight-lineprojectionishazardoustoonespredictivehealth. Doubtsabout

Chinascapacitytosustaingrowthandwithstanditssocial,economicand

ecologicalconsequencesareespeciallycommon. Thisstudyoftheautomobileindustrysuggestsadifferentandrathermorebullishinterpretation,particularly

whenitcomestoChina. First,policychallengesarenotlimitedtoChina(on

India,cf.Kochharetal.2005),andatthemomentChinaisfaraheadnotonlyin

production(twicethatofIndia),exports(morethantentimesthoseofIndia),and

physicalinfrastructure,butalsoinproductionofengineersandskilledworkers.

ThetopIndianfirmsmaybebettermanagedandmoreprofitable,butthe

Chineseindustryisbroader,deeperandexposedtogreaterinternational

competition.Moreover,astheirsimilarscoresonanumberofinternational


34/46

rankingsofreviewedabovesuggest,IndiasharesmanyofChinasproblems,

includinginefficientbanks,inadequatelegalsystems,anddeep-seated

inequalitybetweenurbancoastalregionsandruralheartlands.Second,despitethesedauntingpolicychallenges,acrucialpsychologicalbarrierhasbeen

passedinbothcountries:abroadconsensushasemergedthatreformis

necessaryandpossible,andthatthegrowthpaybackfromreformwillbehigh.In

bothcountries,thatconsensushassurvivedturnoverofthenationalpolitical

leadership.Thus,whileaseriesofobstacleslooms,theskill,confidenceand

determinationwithwhichChineseandIndianleadersaretacklingthemhave

alsorisensharply.

Thesetrendsinthecarandcarpartssectorpresentastartlingcontrast

todevelopmentsintextilesandelectronicsassembly,whereChinesefirmshave

grabbedmarketsharefromotherdevelopingcountriesandestablisheda

dominantpositionintheworldeconomy,especiallysincetheelimination(in

principle,atleast)ofquotasontextileexports. Industrialcharacteristics

accountformostofthedifference.Theautosectorisfarlargerthesingle

largestindustryintheinternationaltradingsystemandmuchofitisskilled-labor

andcapitalintensive. Thetacitandincrementalcharacteroftechnological

innovationinautosmilitatesagainsttherapidentryofnewcompetitorsseenin

electronics,whilethenumerousincentivesforlocalproduction(transportcosts;

differencesintastes,taxes,andregulations;just-in-timeproductionsystems;

after-servicecare),makeitdifficultforautomakersandevenmanypartsfirmsto

relysolelyonexports.Thusitisnotsurprisingthateventhedramaticexpansion

ofmarketdemandandproductioncapacitiesinChinaandIndiaasyethas

exertedonlyamodestinfluenceontheworldindustry. Perhapsmore

surprising,eventhatlimitedimpacthasbeenfeltfarmoredeeplyintheUnited

StatesandWesternEurope,whereworriesaboutoutsourcingandcheap

importedpartsrundeep,thaninthedevelopingcountriesnearChinaandIndia. IftheimpactofCh

the emergence of the chinese and indian automobile industries

Documents