Four Decades of Foreign Direct Investment of Automakers in China: Growth...

Four Decades of Foreign Direct Investment of Automakers in China: Growth, Challenges, and Transformation

By BAO Ge and CHI Yaxin

The auto industry is characterized by its extensive supply chain and complex component ecosystem, serving as a direct reflection of one nation's industrial capabilities. Since the Reform and Opening-up, coinciding with the end of the Cold War and the acceleration of globalization, foreign automakers have capitalized on China's heavy industry foundation, established by the planned economy, to gradually invest throughout the industrial chain—from basic to advanced stages. This process has witnessed China's transformation from a minor player to a global leader in the auto industry. From being on the periphery of the global auto landscape to being at the central, China’s auto industry has benefited significantly from the active participation and contributions of foreign automakers. Looking ahead, as both the global and Chinese auto markets undergo profound shifts, foreign automakers will face increasing competition in China. Nevertheless, they are poised to remain key players in driving the intelligent and advanced transformation of China's auto industry.

Foreign capital was the dominant force in China's auto industry

Foreign investment has been present in the Chinese market for 40 years, undergoing various stages of development and profoundly influencing the structure and technological advancement of China's auto industry.

Early Stage (Late 1980s to 1990s)

As China rapidly integrated into the global market, consumer demand grew strong and diversified. Demand for cars, especially sedans, far exceeded supply, attracting global automakers to invest in China. However, in 1980s, the income of Chinese households were low, the per capita disposable income of urban residents was 477 RMB. Additionally, China’s auto industry was in early stages, and international auto companies to underestimate the Chinese market. Coupled with the long-term disconnect between China's auto industry and global supply chains, the CKD (Completely Knocked Down) model has become the preferred choice for foreign automakers.

Given China's fragile industrial system, there was a national debate on whether the auto industry should be developed as a strategic sector for the national economy.Ultimately, the Central Committee decided at the 1987 Beidaihe Conference to prioritize the development of the auto industry, with a focus on sedan. It was decided that the major sedan production would be made by First Auto Works (FAW), Second Auto Works (SAW), and Shanghai, while Beijing, Tianjin, and Guangzhou could use local resources to produce modified sedans and civilian jeeps based on previously introduced microcars and jeeps. This decision laid the foundation for the long-standing "Three Big, Three Small" structure of China's auto industry and marked the formal entry into the era of JVs.

Under the JV model, foreign carmakers had to enter the Chinese market through partnerships, with foreign shares limited to a maximum of 50%. The Chinese partner was mandated to hold a controlling stake. The structure of these JVs had to include Chinese participation to increase the localization. That is, JVs were required to localize key production processes and establish local supply chains. Advanced foreign technology was encouraged, but with a focus on technology transfer and increasing the domestic production rate. The priority was to develop economy sedans and commercial vehicles, while limiting the production of luxury cars.

During this period, the Central Committee and the State Council introduced a series of industrial policies. In 1983, the State Council approved the establishment of the China National Auto Industry Corporation to oversee foreign investment. In 1984, the Standing Committee of the National People's Congress promulgated the Law on Sino-Foreign JVs, providing the legal framework for foreign investment in the sector. In 1994, central government issued the Auto Industry Policy, which aimed to increase domestic production rates while restricting the excessive expansion of foreign investment.

When negotiating cooperation with foreign manufacturers, competition was intense. In 1983, Beijing Auto Manufacturing Plant partnered with American Motors Corporation (AMC) to establish Beijing Jeep Corporation. Beijing provided facilities, equipment and capital, holding a 68.65% stake, while AMC provided technology, intellectual property and capital, holding a 31.35% stake. In 1985, Guangzhou signed an agreement with Peugeot to establish Guangzhou Peugeot Auto Company, with Peugeot contributing technology and production equipment to hold a 22% stake, while the Chinese side held a 78% stake. Japanese car makers mainly enter China through technical cooperation. In 1984, Tianjin Auto collaborated with Japan’s Daihatsu Motor, and Chang’An Auto partnered with Suzuki, introducing microcar assemble line technologies.

After Shanghai obtained the approval to set up a JV, major global car makers such as General Motors, Peugeot, Toyota, and Nissan offered to cooperate. However, these companies treated the Chinese market as small, and thought the local auto supply chain as underdeveloped. Their cooperation proposals aimed to introduce the outdated and obsolete vehicle models.

In contrast, Volkswagen, the then second-tier player in the world, sought to enter the Asian market. It established Shanghai Volkswagen Auto with a share of 49%, with the China holding the share of 51%. The initial investment was about 200 million RMB. Rather than treating Shanghai Volkswagen as an assembly plant, Volkswagen has aligned itself with China’s industrial policy requirements. Through deep collaboration, it introduced advanced technology and a quality management system domestically.

This marked a new era in China auto industry, driven by foreign capital and technology transfer. It then became a model for local JV auto companies and continues to operate until today. It improved the industrialization and the internationalization of the country auto industry.

For example, the initial localization rate of Shanghai Volkswagen Santana was below 3%, with only the wheels, cassette players and antennas produced locally. Other domestic components failed to meet Volkswagen certification standards stipulated in the JV agreement. To increase localization, the Santana Localization Consortium was established. Beginning in 1988, Volkswagen Shanghai leveraged a fund to introduce technology and equipment, and recruited retired Volkswagen experts to Shanghai to address technical challenges. These efforts significantly upgraded Shanghai’s local auto parts supply. By 1995, Santana’s localization rate had reached to 85%.

This established Volkswagen and Volkswagen Shanghai’s leading positions in China for a long period. Conversely, China’s FAW missed advantageous opportunities for JVs, resulting in its flagship brand, “Hongqi” (Red Flag), experiencing prolonged quality issues and failing to achieve significant market success.

Rapid Expansion Phase (2000s)

Following China’s accession to the World Trade Organization in 2001. This led to a rapid increase in the number of foreign car makers and vehicle models into the Chinese market, accelerating the integration of local industry with the world.

During this period, reducing tariff barriers and easing market access restrictions played a key role. For instance, tariffs on complete vehicles were reduced from 25%-30% in 2001 to 25% by 2006, while tariffs on auto parts were reduced from 15%-50% to 10%-15%. This has provided with more technological options and attracted foreign car makers to expand rapidly locally.

In 2009, the General Office of the State Council released the Auto Industry Adjustment and Revitalization Plan, providing strategic guidance with a focus on key areas such as enterprise restructuring, new energy vehicles, and the development of domestic brands. This plan has profoundly influenced the development trajectory of China's auto industry, ushering the "trade market for technology." It exhibited three features.

First, expansion of JV brands. After 2001, global auto giants poured to the Chinese market. JVs such as FAW Toyota, Dongfeng Yueda Kia, Beijing Hyundai, Dongfeng Peugeot, Brilliance BMW, SAIC-GM-Wuling, Dongfeng Nissan, Dongfeng Honda, GAC Toyota, Beijing Benz, and Chang’An Ford have been established successively, with their influence continuing to day. Before 2002, China had only about a dozen JV car makers. Between 2002 and 2009, the number of newly signed auto JVs soared to 229, including 42 vehicle manufacturers and 126 auto parts companies.

Second, exploration of domestic brands. Guided by policies encouraging the domestic brands, central and local state-owned enterprises such as FAW, SAIC, Dongfeng, BAIC, GAC, Chang’An, along with private automakers like Chery, launched their own brands. These efforts included exploring mid-to-high-end markets, gradually reshaping the market structure.

Third, knowledge spillover. Private companies such as Great Wall Motors, Geely, and BYD began to compete with JVs. In 2010, Geely, founded just 13 years earlier, acquired Sweden’s Volvo, a company with 80 years of heritage. Established in 1997, Chery focused on third-and-fourth-tier cities and rural markets, offering economy models such as Fengyun and Qiyun. It independently developed the ACTECO engine, achieving a high localization rate. Chery has also found success in overseas markets such as MENA. Despite these advances, foreign automakers maintained their dominant position in the fuel vehicle segment.

This period, vehicle production and sales rose from 2 million in 2000 to over 5 million and then 10 million. By 2009, China’s auto production and sales reached 13.791 million and 13.644 million respectively, surpassing the United States for the first time to become the world’s largest auto producer and market. In 2010, China’s auto production and sales exceeded 18 million units.

Transformation and Upgrading Phase (2010s)

During the 2010s, China actively promoted new energy vehicle (NEV) policies to drive market transformation and upgrading. In 2013, China's auto sales exceeded 20 million units for the first time, continuing to climb and reaching an all-time high of 28.88 million units in 2017. In recent years, China's auto sales have stabilized at more than 25 million annually, with 2022 sales of 26.86 million.

Key NEV policies during the 2010s