Partnership with local interests is the only way foreign carmakers can enter the auto-manufacturing industry in China. On paper, the partnership requirement is deemed necessary to protect the local car industry. In application, the Chinese government is effectively prohibiting full equity control.

 

For foreign carmakers, the primary objective in establishing joint ventures with local interests is to exploit the comparative advantage of local entities in manufacturing parts and components, distribution and after-sales networks.

 

Along with the increase in the number of partnerships between local carmakers and large foreign auto groups, a complex network of partnerships has emerged in China. The most prevailing pattern in the Chinese manufacturing industry is the "one-to-many" relationship. As with local companies, foreign carmakers can forge ties with a multitude of local providers.

 

Three issues are causing disputes in the management of partnerships between local interests and foreign companies.

 

First, partnership with advanced foreign companies can help local firms enhance R&D and management capabilities, while technological advantages for foreign companies become less apparent.

 

The primary goal of Chinese companies is improvement of R&D and production capabilities. Hence, there is a high probability that partnerships between local and foreign companies will eventually evolve into competition.

 

Using R&D capabilities cultivated during partnerships with foreign companies (including Rover, Volkswagen and GM), Shanghai Automotive Industry Corp (SAIC) developed its own vehicle, the Roewe 750, which went into showrooms in May. In the few months it has been on the market, a large number of local consumers have opted for the Roewe instead of buying GM's Buick Lacrosse or Volkswagen's Passat.

 

Second, if local firm C partners with foreign firm B, there is potential for such partnerships to eventually hurt the competitiveness of foreign firm A. When Volkswagen and SAIC churned out Santana models in 1985 under a partnership deal, there was a lack of production lines, with the localization ratio hovering at 2.7 percent. Thereafter, Volkswagen helped SAIC to build auxiliary production facilities, with the localization ratio rising to 40 percent in 1997, when SAIC became a local partner of GM.

 

Third, when forming partnerships with more than a couple of local companies, foreign carmakers need to keep their relations with local entities harmonious. After establishing two different joint ventures, one with Beijing Automobile and the other with Dongfeng Automobile, Hyundai Motor used a single distribution channel, resulting in unnecessary competition among its own models.

 

Foreign firms need to lay a foundation for shared prosperity with local partners instead of repressing new developments. The former can sustain a technological gap with the latter by transferring technology on a contingent, step-by-step basis. In August 2005, DaimlerChrysler handed over the manufacturing technologies of the Jeep2500 and Jeep2700, models produced jointly with Beijing Automobile, to a subsidiary of Beijing Automobile, and established a joint venture, Beijing Benz. Through the technology transfer, DaimlerChrysler provided Beijing Automobile with an opportunity to develop its own brands, while successfully differentiating its joint venture from Beijing Automobile.

 

Some foreign companies employ a strategy of controlling technology transfer and repressing the growth of local partners. SAIC asked Volkswagen to purchase the technology for Volkswagen's Santana model (1980), and planned to develop a new vehicle development based on the technology. However, this proposal was rejected by Volkswagen.

 

In a diversionary action to prevent local partners from running their own development activities, a handful of foreign companies are strengthening their control over joint ventures. JAC severed its 10-year relationship with Hyundai Motor in 2006 as the latter attempted to take full control of the core parts of production and sales.

 

To prevent the transfer of resources from local partners to rival competitors, foreign automakers need to tighten control of resources, as well as minimize management of risk through diversified investments. Guangzhou Honda devised a strict confidential information protection measure aimed at preventing leakage of information on the 8G Accord to its rival Guangzhou Toyota via Guangzhou Automobile.

 

Foreign companies also need to reduce their reliance on single local partners or facilities by forming more than a few local partnerships. Toyota prevents competition among its local partners by applying different positioning strategies and sales channels for Crown and Reiz models (made by FAW Toyota) and the Camry (Guangzhou Toyota).

 

(China Daily December 19, 2007)