China is calling for domestic automakers to vigorously enhance their own development capability amid mounting competition from foreign companies after the nation's entry to the World Trade Organization (WTO).

Vehicles produced by Chinese manufacturers using their own innovation should account for more than 50 per cent of total annual auto sales in China by 2010, according to a draft of a new government policy for the nation's auto industry.

The draft seen by China Business Weekly says big Chinese auto groups will become part of the world's top 500 companies.

The new policy stresses the promotion of the development capability of Chinese automakers as the key task, according to officials from the State Development and Reform Commission, the main watchdog of the industry.

China is committed to developing a new policy for the auto industry to replace the old one from 1994 following WTO entry in December 2001.

"Development capability is the lifeline of China's auto industry and companies to have real competitiveness against foreign rivals," said Jia Xinguang, an analyst with the China National Automotive Industry Institute.

"But development capability is the Achilles' heel of our auto industry and companies."

Chinese automakers are weaker than foreign rivals in vehicle and components development capability.

At present, the vast majority of passenger cars made in China are foreign models, such as the Buick of General Motors (GM) and Volkswagen's Santana, Jetta and Bora, and the Accord of Honda.

Most domestic companies, including the nation's top three automakers - First Automotive Works Corp (FAW), Dongfeng Motor Corp and Shanghai Automotive Industry Corp (SAIC) - are assembling passenger models of their foreign joint venture partners to cash in on the fast-growing car market in China.

Only a few small players, such as Geely Group, China Brilliance Auto and Chery Automobile Co, are producing their self-developed cars.

To alter this situation, the State will encourage domestic automakers to set up research and development organizations and co-operate with foreign partners in the field, according to the new policy draft.

The State will give financial support to the research and development projects that are world class and use their own intellectual property.

"We are determined and confident of enhancing our own development capability greatly," said Xu Heyi, chairman of Beijing Automotive Investment Co.

The company will invest a great deal of money and co-operate with Hyundai Motor Co in research and development, said Xu, also chairman of Beijing Hyundai Motor Co, a joint venture between the South Korean carmaker and the Beijing auto investment company.

To enhance the development capability of domestic automakers, the State will speed up the restructuring of the fragmented industry to form several larger groups through mergers and acquisitions to cut costs and realize economies of scale in production, according to the policy draft.

Each of the auto groups, including their subsidiaries and joint ventures with foreign partners, should have a domestic market share of more than 15 per cent, the draft states.

There are currently around 120 automakers in China - half of which have an annual output of fewer than 10,000 units.

China's total vehicle output reached 3.25 million units last year.

FAW, based in Northeast China's Jilin Province, acquired a 50.98 per cent stake of Tianjin Automotive Industry Corp - another major domestic auto company - last June. It represents the biggest shake-up of the industry so far.

The policy draft also calls for domestic automakers to form strategic alliances.

Each strategic alliance should have a domestic market share of at least 10 per cent, the draft says.

Alliance members should undertake extensive co-operation in research and development, production, sales and after-sales services.

To aid domestic automakers, restrictions on foreign companies will be maintained under the new policy.

The requirement regarding equity structure of Sino-foreign auto joint ventures - the most sensitive issue in the industry - will remain basically unchanged.

The Chinese side must have a stake of at least 50 per cent in Sino-foreign auto joint ventures.

However, the requirement will not apply if Chinese and foreign automakers set up their joint ventures in China's export processing zones and if their products will be exclusively for export, according to the draft.

Such joint ventures should still be approved by the government.

Japan's Honda Motor Co has become the first foreign automaker to have a majority stake in a Chinese joint venture.

Honda has a 65-per cent stake in the export-orientated car joint venture, construction of which started at the beginning of this month in the Guangzhou Export Processing Zone in South China's Guangdong Province.

Dongfeng and Guangzhou Automobile Group control 10 and 25 per cent stakes in the joint venture respectively.

The draft says a foreign automaker will continue to be permitted to set up at most, two joint ventures in China, with local partners to manufacture the same category of products, including passenger cars, commercial vehicles and motorcycles.

But foreign and domestic automakers will be allowed to set up more joint ventures through mergers and acquisitions of other companies in China, according to the draft.

US-based GM has formed four joint ventures in China through mergers and acquisitions.

Many other foreign automakers, such as Volkswagen, Toyota and DaimlerChrysler, are also seeking more than two joint ventures in China along similar lines.

China's auto market is forecast to reach 4.5 million units this year.

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