An Ideas-Based Online Magazine of the Global Network for Advanced Management

The Evolving Auto Industry in China

Will China’s auto industry follow the path of its East Asian neighbors, with a focus on exports to the West? Or will it take the typical path for developing countries and build cars for its giant internal market? Can energy-efficient cars be a competitive advantage? Baolin Wang of Renmin Business School discusses the state of the industry.

What is the current state of auto industry development in developing countries?

The auto industry is very interesting to me. So far, there are not a lot of global leading brands from developing countries. The two prominent countries to lead the race are Japan and Korea. The biggest changes are in China and India’s car industry, which is on the rise, but most other countries are relatively behind.

How are climate change and other environmental concerns changing the industries you study? 

First, China’s auto industry has been greatly affected by the climate and (especially) environmental changes in recent years. This is reflected in two aspects. The first aspect is traffic congestion and the second aspect is air pollution. China’s auto industry is a pillar to the economy and in return China’s economic developments drive the auto industry. However, it has caused severe damages to the environment we live in. This contradiction is a central issue facing China now. In 2010, the Chinese government placed a new regulation to restrict vehicles from use on one day of the week based on license plate numbers to limit the severity of traffic congestion in China’s first-, second-, and third-tier cities in order to reduce fine particles in the air. We all are aware of the horrible air pollution in Beijing. Another method implemented was the use of a lottery system to restrict new car purchases. Furthermore, cars registered in other cities are restricted to drive in Beijing during rush hours. New-energy vehicles are the future of China’s auto industry.

What challenges does China face in its industrial development that other East Asian countries do not? 

East Asia mainly refers to the region with China, Japan, and South Korea. From the perspective of East Asia, China is slightly behind in development compared to its neighbors Japan and South Korea. East Asia’s industrial development uses a special model, because some countries have a small population; the market is very small, thus they develop by exporting to Europe, the United States, and other developed countries. Historically, Japan and South Korea mainly exported to Europe and the United States. International division of labor, international trade, and global economic integration mainly drove their economies. Japan and South Korea developed during a period when globalization increased; the timing was perfect for their economies. On the other hand, China is now experiencing a new situation where many economies are anti-globalization, such as U.S. President Donald Trump who pushed anti-globalization after taking office. This shift in trend is something Japan and South Korea have never encountered before. One of the biggest problems facing China’s industrial development now is facing the trend of anti-globalization.

What are some of the unique characteristics of the Chinese car industry? What companies have become standouts in manufacturing and innovation in recent years?

China’s auto industry is characterized by joint ventures; foreign automotive brands all enter China through joint ventures. China also has its own brands. Therefore, the Chinese market has a lot of different brands and enterprises making it extremely competitive. In addition, China is currently the world’s largest automotive market. Independent brands and foreign brands within the market are very different. Independent brands occupy the low-end market while foreign brands occupy the high-end market. However, due to heavy competition, foreign brands began entering the middle to low-end markets this year.

In recent years, innovation within the manufacturing industry has increased and the Chinese-funded brand of BYD has distinguished itself through new-energy vehicles—electric cars and especially hybrid new-energy vehicles. The company’s strategy is to absorb and adopt from foreign practices while combining it with China’s innovative ability. The second Chinese brand doing well domestically is Great Wall Motor. They are unique in using a centralized technique by only producing SUVs. It invests a lot in the R&D department and its crash-testing techniques are very professional. Due to its concentrated investments, their R&D greatly leads other brands.

In addition, there are also independent brands, such as JAC Motors, that uses another method to compete in the market. JAC Motors opened subsidiaries in Japan and directly recruits Japanese talents to China, which has been paying off for them.

The fourth example is Geely Auto, which uses a more innovative way of purchasing high-end brands (Volvo) as their competitive advantage. First, they purchase the foreign brand and then uses that platform to conduct R&D, which gives them a high starting point, allowing them to quickly, efficiently reach high results.

I think China has worked hard in innovation, and some of our enterprises are doing very well.

What insights into cross-cultural business relationships have you gained from your close studies of China and Japan? 

An interesting element I found while studying Chinese and Japanese enterprises is their longevity. Through my research, I noticed that there are many Japanese enterprises with over 1,500 years or 500 years of history. Japanese studies have found that the reason for their longevity is in the role that Confucianism and Buddhism play in the enterprise by not putting the profitability of the company first but rather placing an importance on benevolence and righteousness. They think of the teachings of Confucianism while setting their corporate culture. However, Chinese and Japanese enterprises are actually all influenced by the philosophies of Confucianism. In fact, China is the birthplace of the Confucian ideology but on the contrary, China does not have many sustainable enterprises. (Of course, this may be due to our revolutionary wars.)

Why is it that Japanese enterprises are able to sustain through the years while Chinese enterprises haven’t is a very interesting cross-cultural research topic to me. I do not agree with previous studies that conclude Confucianism is the main factor in their sustainability.