Shi Yaodong, Research Department of Industrial Economy

Research Report No.238, 2007

I. Correctly Understand the Role of Joint Ventures in Innovation System of Auto Industry

1. Joint ventures play a major part in China's auto market

According to statistics made by China Association of Automobile Manufacturers, in 2005, the number of the automobiles with independent brands manufactured by CBU joint ventures across China accounted for more than half of the total CBU output, of which cars with foreign brands manufactured by joint ventures made up 72% of the total car output. On car market (accounting for 53% or so of all auto markets) with the best performance, products of foreign brands manufactured by joint ventures assumed an overwhelming superiority.

By comparison, products manufactured by Chinese-funded car manufacturing enterprises represented by Chery, Geely and Brilliance possessed a market share of less than 30%. Although in 2006, such car manufacturing enterprises with independent Chinese brands like Chery and Geely grew rapidly, with Chery and Geely both ranking among the top ten Chinese car manufacturers, the statistics show that the market occupancy of cars with independent Chinese brands yet dropped 2 percentage points to 26%. The Chinese-funded enterprises found it still difficult to replace the absolute predominance of joint ventures on car market.

With regard to auto spare parts market, during the past ten years, more than 70% of the transnational auto spare parts manufacturers have set up branches in China. The number of the spare parts enterprises with foreign investment has exceeded 500 in China and almost all world-famous auto spare parts enterprises have set up joint ventures or foreign wholly-owned enterprises in China. Take the world three biggest auto spare parts manufacturers as an example. Their business in China has shown a tangible increase in terms of their business across the globe. The German Robert Bosch has established 13 branches, 3 R&D centers, 6 joint ventures and 6 marketing companies in China, with its products covering a wide variety of areas, such as EFI, ABS, control and transmission systems. Even the Delphi Corporation, which has already applied for bankruptcy in the United States, has also invested and established 14 auto spare parts plants in China, with a total investment exceeding 450 million US dollars and a production of more than 40 categories. The world third largest auto spare parts supplier Denso Corporation has set up 15 joint ventures and wholly-owned enterprises in China. In 2004, Denso Corporation fulfilled a total turnover in China amounting to 40 billion Japanese Yen and plans to reach 150 billion Yen in 2010.

2. Three stages and features of the innovation capacity construction among joint ventures

Since mid-1980s, joint ventures have roughly undergone several stages in establishing technology as well as R&D institutions in China.

The first stage was from mid-1980s to early 1990s, a period of "technology transplant". During this period, the European and American transnational auto corporations represented by Volkswagen set up a number of Sino-foreign joint ventures in China. In order to put the introduced projects into production smoothly, the joint ventures set up the subordinate engineering and technology departments. By importing complete sets of technologies and equipment from abroad (mainly from their foreign parent companies) and in the form of CKD and SKD, the joint ventures were involved in the making of mid- and low-end products¹. During this period, although the mainstream products manufactured by the joint ventures did not carry the then world advanced automobiles and technologies, they occupied a leading position for quite a long time on China's market, which was then in an infantile stage with less competitiveness. The products manufactured by Volkswagen had once occupied half of the Chinese car market.

In terms of technology, during this period, the "turn-in key" projects were adopted for the construction of the joint ventures as a whole, with foreign parties providing complete sets of technologies, technological process, production equipment and key components. The relevant engineering and technology departments established in the enterprises were only involved in supply of supporting technologies, equipment debugging, technical management and quality control in the course of production as well as the nationalized production of non-core parts, rather than independent research and development activities in a practical sense which could genuinely embody the innovative values of the Chinese and foreign parties in joint ventures. In technology departments, the relationship between the Chinese and the foreign parties was the practice of "passing on experience, giving help and setting an example in training new hands" led by the foreign parties, namely, a small number of foreign technicians provided knowledge and technical guidance for the Chinese technicians to learn. The Chinese side could only learn whatever was taught and passed on to them by the foreign side.

The second stage was from early 1990s to the end of 1990s, a period of "adaptive development". During this period, transnational corporations represented by General Motors set up independent R&D institutions or engineering and technical centers (Shanghai Automotive Industry Corporation (Group) and the General Motors jointly founded the Pan-Asia Technical Research Center in 1997) one after another in China to meet the need for the rapid business development in China. In terms of product and technology, during this period products manufactured by joint ventures gradually came up to the standard of the foreign markets, and the introduced models and technologies were already the mature mid-level models and technologies of international standard to a certain extent. The technical R&D departments of the joint ventures were not only acting as engineering and technology centers, but also began to carry out a series of adaptive developments and partial improvements to meet the Chinese market. For instance, Shanghai Pan Asia Technical Automotive Center Co., Ltd. successively accomplished the transformation of "Sail" and Buick "Regal", and completed the designing of the two types of concept cars, Kylin and Roc within the first few years.

Compared to the first stage, during the second stage, a large number of Chinese technician groups got trained in the course of digesting and absorbing imported technologies and in project development; learned about and got familiarized with the process of automobile development and experience in management, and initially formed the independent technical competence partaking of product definition-engineering designing-engineering verification-product making-post-market service; gradually formed the unique advantages of the joint ventures and gradually acquired the ability to integrate Chinese and foreign resources. But on the whole, the Sino-foreign partnership was still an unsymmetrical and unbalanced partnership and the foreign partners still occupied the leading position in research and development conducted by joint ventures. Particularly the foreign partners got a firm grasp of the leading position in research and development orientation, CBU and platform designing, designing of research and development process, database, software development, certification of nationalized production, platform designing and designing of core parts, while the Chinese side mainly contributed to the adaptive development that was closely linked with the digestion and absorption of the imported technologies and the nationalized production, such as the partial auto refitment and the adjustment of inner decoration, yet not in a position to independently develop CBU automobiles, with a poor ability in primitive innovation and integrated innovation. As a result, the technologies needed by the joint ventures still depended much on foreign supplies and the joint ventures did not completely melt into the global innovation system of the transnational corporations or did not grasp the important resources like the core database. The Chinese and foreign sides had much difference in innovation conception and in distribution of interests and both sides enjoyed unequal rights to speak.

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¹Daimler Chrysler and Volkswagen successively set up two joint ventures in 1984 in Beijing and Shanghai to produce Cherokee jeeps and Santana cars and became the first transnational automobile corporations to enter the Chinese automobile manufacturing field. In February, 1991, China FAW Group Corporation joined hands with Volkswagen, Audi and Volkswagen (China) Investment Co. Ltd. to set up the FAW Volkswagen to produce the Jetta and Audi car series, which is the first modern car manufacturing base established with relevant economic scale in China. In May 1992, Dongfeng Motor Corporation set up Dongfeng Peugeot Citroen Automobile Company Ltd., with such shareholders as the French PSA to produce Citreon-Fukang car series.