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COMMENTARY
Japanese car makers shouldn't race into
China
By C H Kwan
After
China's entry to the World Trade Organization, Japanese
auto makers such as Toyota and Honda have been
reinforcing their production bases in China in what
appear to be bold attempts to conquer the potentially
gigantic market. Under WTO rules, however, China will
substantially lower import tariffs so that imported cars
will become cheaper. As a result, the advantage of
producing cars in China will be sharply reduced. One
cannot help wondering whether the increasing inclination
toward local production is the right strategy for
Japanese auto makers wanting to penetrate the Chinese
market.
Up until now, the Chinese government has
encouraged foreign auto makers to produce locally by
allowing auto sales in the domestic market on one hand,
while imposing high tariffs on auto imports on the
other. Under this "swapping market for technology"
strategy, foreign auto makers would hit a wall of high
tariffs when they tried to export to China, but the very
same wall would protect them if their production were
inside China.
Japanese auto makers used to face
nearly 100 percent tariffs on their auto exports to
China. A domestically produced car with a price tag in
Japan of US$10,000, for instance, would have to be sold
for $20,000 in the Chinese market. They were no match
for competitors such as Volkswagen of Germany and
General Motors of the United States, which were already
producing in China. Thus, Japanese auto makers had no
choice but to begin local production if they wanted to
sell cars in China.
But things are changing.
Since its entry to the WTO late last year, China has
been gradually revising its trade-related policies.
Regarding the automobile sector, China will abolish
import quotas and lower import tariffs on finished cars
from the current 80-100 percent to 25 percent by
mid-2006. As a result, it may become cheaper to export
finished cars to China rather than producing them there.
Should Japanese auto makers opt for exports as a
way to increase their presence in the Chinese market,
they will be able to shift their investment in China
away from production facilities and into the
reinforcement of sales networks, maintenance services,
and the establishment of research and development
(R&D) facilities for improving auto designs to fit
local tastes. Meanwhile, expanding production at home to
satisfy the rising demand in China would slow down the
hollowing-out of the Japanese industry.
Moreover, the Chinese auto industry faces so
many handicaps that cheap labor in China does not
necessarily translate into low production costs. Most
auto makers there are so small that they are unable to
benefit from the economies of scale. Their productivity
and R&D capability also remain low and the quality
of their products is far below global standards.
As a consequence, often the costs of local auto
production are higher than international prices for cars
of equivalent quality. Utilizing their technology and
financial resources, Japanese auto makers may be able to
overcome some of the drawbacks of producing in China.
But it is doubtful whether they can compete with
imported cars produced by their foreign rivals when
China's import tariffs on auto imports come down to 25
percent.
The majority view among Japanese auto
makers is that they should produce close to the market
so as to improve their brand image and meet the needs of
consumers. But consumers rarely do their shopping by
visiting car factories, and their needs can be served
better by expanding local R&D facilities and
maintenance and repair services. Indeed, European auto
makers that are expanding their share of the Japanese
market do not produce in Japan.
Also, for
expensive goods such as cars, other things being equal,
Chinese consumers would certainly prefer a "made in
Japan" to a "made in China" label. Above all, if
Japanese auto makers try to increase their production in
China, they should also be prepared for the risk of
overcapacity problems, which they may face in the near
future as a result of too many foreign auto makers
rushing into the Chinese market.
While their US
and European counterparts have already made massive
capital investments in China, Japanese auto makers
should enjoy the advantages of being latecomers.
Japanese companies have more freedom in formulating
their business strategy. Instead of jumping on the
bandwagon and building new plants in China, Japanese car
makers should consider an alternative option: staying in
Japan.
(Republished with permission from
Miyakodayori, the newsletter of Japan's Research
Institute of Economy, Trade and Industry. RIETI invites
you to visit its English website at
http://www.rieti.go.jp/en/index.html.)
C H Kwan
is a Senior Fellow at RIETI. The opinions expressed
or implied in this paper are solely those of the author,
and do not necessarily represent the views of the
Ministry of Economy, Trade and Industry or RIETI.
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