Appendix Three: Policies of the Chinese Government on the Automobile Industry

State Council Policy on the Automobile Industry
Promulgated on 12 March 1994
Goals

To construct, in the 8th and 9th Five Year Plan, the auto industry as one of the pillar industries for developing the national economy; to reform the auto industry from the constraints of dispersed investments, small scale and backward production; to strengthen the R&D capacity and product quality of automobiles. The state should direct the auto industry to utilize the domestic and foreign capital for constructing the domestic and international market, and mass production of diversified automobile products.
Policies

1. Consolidation of the domestic industry – Intensive support of the approved car assembly and auto parts projects to support the development of 2-3 auto conglomerates; 6-7 major auto enterprises; 8-10 motorcycle companies that have export capacity.
2. Core products: auto parts; passenger cars; trucks; motorcycles.
3. Support conglomeration of auto companies, through re-structuring, mergers and acquisitions, state-owned auto enterprises reform through tax exemptions, loans concessions and policy support for public listing.
4. Encourage the use of foreign capital for reforming the industry. Foreign auto companies must not set up more than one company for the production of the same car category; considerations will be given for the production of the second category depending on the local sourcing rate. Joint ventures and collaborations must satisfy the conditions of: in-house R&D investment; using up-to-date technology and car models; export for the majority of the products; prioritize local sourcing of auto parts; domestic capital ownership of not lower than 50%.
5. Import control – Import of assembled cars is not allowed except in the 6 authorized ports and zones; CKD and SKD assembly of imported auto parts is not allowed; tariff concessions will be given in connection with the degree of local sourcing of parts.

In 2001 China gained access to the WTO. The country committed to remove the import quotas on assembled cars, reduce the tariffs on imported cars to 25% and auto parts to 10% within 5 years’ time.

State Council Policy on the Automobile Industry
Promulgated on 12 March 2004

Goals
To pursue the combined principle of market and state intervention in promoting the national consumption of automobiles; by 2010 the country should be a principal auto manufacturing country in the world that has mass export of cars in the international market. To promote technology autonomy and domestic auto brand building. To reform and re-structure the industry for the formation of auto conglomerates and car alliances; and the development of large-scale auto parts enterprises in the international sourcing market.

Policies
1. Re-structuring – Support conglomeration of domestic auto enterprises through M&A, forming car alliances with local as well as foreign auto companies for scale economies and globalizing production; allow the closure and re-structuring of inefficient and state-owned auto enterprises.
2.  Auto-parts – to improve the competitiveness of the domestic auto parts enterprises by developing local R&D and mass production capacity for core auto parts production; and loans for enterprise re-structuring.
3. Foreign investment – Domestic capital ownership in private or public listed joint ventures and collaborations should not be lower than 50%. Foreign enterprises invested in the export processing zones are exempted from this restriction.
4. Tariffs – tariffs are significant tools for the country to continue to regulate the imports of assembled cars and auto parts.

To prevent CKD assembly of the imported auto parts during the buffer period, the government passed the Administrative Methods on the Import of Auto Parts Ready for Assembly in 2005 to follow up with the 2004 Policy. The Administrative Methods imposed a higher tariff on the import of auto parts whose aggregate price constitutes 60% or more of the total production cost of the assembled car. These auto parts should be paying the same tariff rate of 25% as the import of the assembled car. This administrative control was aimed at regulating the trading of the core auto parts at the expense of localized sourcing.

The tariff on imported cars was reduced to 30% and auto parts to 10%.

The EU and US filed complaints to the WTO against the Administrative Methods for creating trade barriers. The WTO gave ruling against China in 2008. In 2009, the Ministry of Industry and Information Technology and the State Development and Reform Commission issued the Order No.10 on 1 Sep 2009 to revoke the tariff restrictions. The county will implement the commitment made and set the tariffs on imported cars at 25% and 10% for auto parts.