International Technology Transfer in China’s Auto Industry: Implications for

Future Energy Development

Kelly Sims Gallagher, Ph.D.Energy Technology Innovation ProjectBelfer Center for Science and International AffairsJohn F. Kennedy School of GovernmentHarvard University

Shanghai Auto Industry

Corp.

First Auto Works

Tianjin Auto Works

Guangzhou Auto Works

Dongfeng Auto Works (former

SAW)

Beijing Auto Industry

Holding Co.

General Motors

VW

Toyota

DaimlerChrysler Hyundai

Nissan

Honda

Geely

CheryChang’An

Ford

Citroen

Suzuki

Foreign Investment in China’s Auto Industry: A Complicated Network

?

Shenyang Brilliance

BMW

Kia

The Sino-U.S. Joint Ventures

Beijing Jeep Corporation (BJC)

“We are here to make money – that means with the proper business model in making the JV profitable – and in the meantime perform respective training.”

– Wei-Ming Soh, DaimlerChrysler

“Top executives in big companies only see China as a market to sell vehicles. They don’t see China as a place to develop vehicles.”

– Chinese engineer at BJC

Above: The Entrance Gate to Beijing Jeep. Below: Old BJ2020 and newer Jeep Cherokee

Shanghai GM

“We did everything we promised to do.” – Phillip Murtaugh, Chairman and CEO of GM China

“The foreign companies are not good teachers, but the Chinese companies are not so clever.”

-Chinese citizen working for GM China

Shanghai GM factory gate in Pudong, Shanghai

Chang’An Ford

“Ford knew that WTO rules prohibited the Chinese government from requiring technology transfer.”

– Keith Davey, Director of Business Strategy for the Asia Pacific and Africa, Ford Motor Company

“Ford should be more open technologically because there would be mutual benefit.”

–Chinese engineer at Chang’An

Chang’An Ford plant under construction in Chongqing

Comparative Analysis

Beijing Jeep Shanghai GM Chang’An Ford

Technology or R&D Center?

Internal, but no joint work (all Chinese engineers)

Yes (PATAC) Internal, but very small for product adaptation

Capability level of Chinese partner accord. to US firm

product adaptation, localization

product adaptation, localization

Too new to characterize

U.S. firm funds other research in Chinese univ. or institutes?

No Yes Yes – In coordination with National Science Foundation of China

Number of Chinese vs. U.S. engineers

200 Chinese

1 U.S.

400 Chinese

>20 U.S.

n/a

Management of Tech Centers

1 Chinese,

1 U.S.

7 of 11 dept’s managed by U.S. engineers

n/a

Funding 30,000 RMB per year ($3,600)

For PATAC, GM put $25 million in cash and SAIC put $22 million (“in kind”)

n/a

Seven Main Findings• U.S. FDI did not substantially contribute to improving

Chinese vehicle technological capabilities because little knowledge was transferred along with the product.

• Chinese government failed to design and implement an aggressive, consistent strategy for the acquisition of technological capabilities from foreigners in the automobile industry.

• U.S. companies in JV’s are purely profit-motivated – Chinese also seek profits in short term, but most want skills for long term.

Findings (cont.)• Chinese firms have acquired good manufacturing skills

and also acquired some product adaptation capabilities. Parts suppliers appear to have more advanced capabilities due to local content requirements.

• Technologies that were transferred by U.S. firms in the period studied were rarely, if ever, updated once a model was in production, with the emerging exception of SGM. This is now changing due to competitiveness.

• Even though technology transfer was purely product, the FDI has contributed to the growth of the industry, which has benefited the Chinese economy in terms of jobs and spillovers.

• U.S. firms did not transfer pollution-control technology until required to do so by the Chinese government.

Remaining Challenges Fuel quality Rate of deployment of advanced technologies (and rate

of growth of sales of passenger cars) Economic growth pressures, and role of auto industry Lack of incentives for foreign companies to transfer

cleaner technologies other than Chinese policy, which is weak

Lack of Chinese technological capabilities to design and manufacture clean technologies themselves

Still relatively weak fuel efficiency standards

Remaining Opportunities

The next 50-100 million cars in China Alternative transportation and modes of mobility

Limits to Leapfrogging?

Huge opportunity to “leapfrog” due to existing small base and rapid growth. . . but, opportunity is being missed. Why?

The combined short-term motivation of producing and selling cars is the main common incentive for technology transfer today

There are fairly different incentives for technology transfer on either side of the joint ventures

Thank You

We gratefully acknowledge general support from:Energy Foundation, William & Flora Hewlett Foundation, David & Lucile Packard Foundation, Shell Exploration & Production, Winslow Foundation

For in-use vehicle emissions testing project:U.S. EPA, Energy Foundation China Sustainable Energy Program, Ford China, Ford Asia Pacific, and GM China

Research Questions1. What role has U.S foreign direct investment played

in the development of the Chinese auto industry?

2. Have the U.S. auto firms helped to deploy cleaner or more advanced technology in China?

3. What have been the most important barriers to technology transfer from the U.S. to China in the auto sector and why? What have been the best incentives for technology transfer?

4. What special barriers or incentives will exist for cleaner technology transfer for automobiles, if any?

Methodology• Case study approach: 1984-2002• Interviews with dozens of officials in the joint venture

companies and their parent companies in both the U.S. and China

• Visits to offices, factories, and research facilities in Shanghai, Chongqing, Beijing and Tianjin

• Interviews with numerous government officials in U.S. and China; company public materials and some internal documents

• Academic literature and secondary sources (news media, wire services, magazines)

• Quantitative analysis using data from CATARC

Auto Industry in Chinese Economy

1.6 million Chinese were directly employed by this industry as of 2003 (not counting the employees of industries that supply the auto industry (i.e. steel, rubber), which are estimated at approximately 36.4 million workers). Auto industry is 3 percent of total manufacturing employment.

The value added by the Chinese auto industry represented 6.3% of the total value added of manufacturing in China in 2003, a tripling of this percentage from its level in 1990 (CATARC 2004).

History of Chinese Auto Industry

• Little to no manufacturing experience prior to WWII• Tech transfer from Soviets before Sino-Soviet split in 1960• After Cultural Revolution, no technological capabilities in this sector• Decision to “make or buy” – forced to buy because of weak

technological capabilities• Formation of many joint ventures with foreign firms and licensing of

technology from them as well, but without formal industrial policy• 1994 Auto Industry Policy – intention to create national industry• Consolidation of industry, but currently 118 manufacturers; all the

major ones have formed joint ventures with foreign auto companies• Joining WTO in 2001 effectively reversed many previous policies, but

increased competition• 2004 Auto Industry Policy – auto industry as “pillar” industry; create

better technological capabilities and consolidate industry

Chinese Automakers

Currently 116 automakers in China Vast majority of output comes from the firms that

have formed joint ventures with foreign companies (quasi-exceptions are Chery and Geely)

High profitability Skills in manufacturing, parts and components,

and business development Weak design and innovation capabilities,

especially for advanced engines and system integration

Terms of WTO for Chinese Auto Industry

• Import tariffs for complete vehicles are to be reduced from the current 80 to 100 percent to 25 percent by July 1, 2006

• Import tariffs for parts and components are to be reduced from 35 percent to 10 percent by the same date

• Import quotas on vehicles will be decreased 15 percent per year until they are cancelled in 2005

• Import licenses will also be phased out by 2005. • Majority ownership limits on foreign manufacturers for engines will

also be eliminated • Also, provincial governments will be given the authority to approve

foreign direct investment projects up to $150 million by 2005 (used to be $30 million)

• All of the Chinese government’s requirements regarding technology transfer, maintaining a foreign exchange balance, maintaining a trade balance, and meeting localization standards were eliminated upon China’s entry to the WTO in 2001.

2004 Auto Industry Policy

10-year update to 1994 policy Emphasizes need for consolidation of

industry (i.e. FAW-Tianjin-Toyota) Urges more capacity-building and innovation First articulation of concern about

environment and oil imports More emphasis on (and incentives for)

exports

11th 5-Year Plan for Auto Industry

依托现有基础加快产业自主发展。Speed up autonomous development based on the

current conditions (Chinese branding)依靠技术进步推动产业可持续发展。

Promote sustainable development by using advanced technologies

利用市场机制促进产业结构优化升级。Optimize and upgrade the industrial structure using

market mechanisms

Background Data

Comparisons

United States China

Total Oil Consumption, 2005

20 million bbls/day 6.5 million bbls/day

Percent Oil Consumed by Motor Vehicles

50 percent 40 percent

Percent Oil Imported, 2005

60 percent (12 million bbls/day)

43 percent (3 million bbls/day)

Total Number of Passenger Cars

228 million (approx.) 20 million (approx.)

Passenger Car Production in China (1991-2005)Data Sources: CATARC, 2005 Auto Industry of China; China Auto (Jan. 2006)

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Production Mix is Changing

64 59 60 5850 47 42 41 41 36 34 34 28 30 27

2526 23 23

2827

28 28 28 34 36 33

27 2422

11 15 18 19 22 27 31 31 31 29 30 3446 46 51

0%

20%

40%

60%

80%

100%

1991 1993 1995 1997 1999 2001 2003 2005truck bus car

Source: CATARC, 2006

Vehicles Per Capita

0

1000

2000

3000

4000

5000

6000

Total

Beijing

Tianji

nHeb

ei

Shan

xi

Neimen

ggu

Liaon

ing Jilin

Heilon

gjian

g

Shan

ghai

Jiang

su

Zheji

angAnh

ui

Fujia

n

Jiang

xi

Shan

dong

Henan

Hubei

Hunan

Guang

dong

Guang

xi

Hainan

Chong

qing

Sichu

an

Guizho

u

Yunn

an

Xizan

g

Shan

xi

Gansu

Qingha

i

Ningxia

Xinjia

ng

GD

P/p

erso

n(U

SD

/per

son)

0

20

40

60

80

100

120

140

vehi

cles

in u

se(in

uni

t/100

0 pe

nson

s)

GDP/person(in 1 USD/person) vehicles in use（in 1 unit/1000 persons）

EIA Projections of Motor Vehicles in China 1999-2020

Data: EIA, "International Gross Domestic Product, Population, and General Conversion Factors Information," 2002 and EIA, "International Total Primary Energy and Related Information," 2002.

0

10

20

30

40

50

60

70

80

1990 1998 1999 2005 2010 2015 2020

Nu

mb

er

of

Ve

hic

les (

mill

ion

s)

Historical

Chinese Oil Reserves, 2003

21%

2%

77%Rest of WorldChinaOPEC

BP Statistical Review of World Energy, 2004

Oil Imports

China became the second-largest consumer of oil in the world in 2004

China now imports about 3.5 million bbl/day China is now the third-largest oil importer after the United States

and Japan. Crude oil import growth has been about 0.5 million bbls/day in

recent years. More than half of China’s oil comes from Middle East According to the Economist Intelligence Unit, imported

petroleum (and related products) cost China US$44.5 billion in 2004, making petroleum-related imports the second-largest category of import behind electrical machinery (EIU DataServices March, 2005)

$15 billion spent over the past five years to acquire more than 100 foreign oil fields and companies (McKinsey Quarterly 2006)

Domestic Oil Prices Chinese domestic prices of gasoline and diesel

among the lowest in world. Government tightly controls prices of gasoline

and diesel in domestic market. Concern about effect on poorer areas and

manufacturing. Refining industry squeezed. Buying crude at

world prices, selling refined products at low prices.

6

8

10

12

14

16

750 1000 1250 1500 1750 2000 2250 2500

Vehicle Test Weight (lbs)

L/1

00

km

Red Line -- Phase II Maximum (2008-2009)Green Line -- Phase I Maximum (2005-2006)

For both Phases, the upper solid line is for Automatic transmissions and the lower dash line is for Manual transmissions .

New Continued models models

Phase I 7/1/2005 1/1/2006Phase II 7/1/2008 1/1/2009

China Light-Duty Vehicle Fuel Consumption Standards

Feng An1, Wei Wu2, Yuefu Jin2 and Dongquan He3 ; 1Transportation Consultant 2China Automobile Technology and Research Center 3The Energy Foundation

Air Pollution•Motor vehicles are now a leading source of urban air pollution in China’s big cities

Percentage of urban air pollution attributed to motor vehicles in China

CO HC NOx

Beijing (2000) 77 78 40

Shanghai (1996) 86 96 56

Guangzhou (2000) 84 50 45

Sources: Mao et al (2000). http://www.adb.org/documents/events/2002/RETA5937/manila/downloads/tp_15C_maozhongan.pdf

Chinese Government Policies

• First emission standards in 2000• Catalytic converters required in 2000• Leaded fuel banned in 2000• Clean Vehicle Action (alternative fuel vehicle

program) started in 1999 • Ministry of Science & Technology (MOST) high-tech

(863) R&D started program on clean vehicles in 2001 (US$120 million over 5 years)

• New fuel efficiency standards in 2005• Euro III standards to take effect in 2008

Vehicle-Emission Standards

Comparison of Air Pollution Emission Standards for Gasoline-Fueled Automobiles (grams/km)

Country, Year CO HC NOx CO2

Euro I, 1992 4.05 0.66 0.49 none

China, 2000 4.05 0.66 0.49 none

Euro II, 1994 3.28 0.34 0.25 none

China, 2004 3.28 0.34 0.25 none

Europe 1995* 187

U.S. Tier 1, current

2.6 0.16 0.37 none

Euro III, 2000 2.3 0.2 0.15

China, 2008 2.3 0.2 0.15 none

Euro IV, 2005 1 0.1 0.08

China, 2010 1 0.1 0.08 none

U.S. Tier 2, 2007^

1.3 0.01 0.04 none

Europe 2008* 140

*Separate and voluntary standard. ^There are different "emission bins" for the NOx standard but the fleet has to average at the number provided. There is an interim NOx standard of 0.3 g/mile that eases the transition until 2007, and it is gradually phased out between 2004 and 2007. Data sources: (Beardon 1999; EC 2001; SEPA Official 2002).

Chinese vehicle emission standards1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Beijing Light Vehicle

Heavy Vehicle Motorcycle

Shanghai Light Vehicle

Heavy Vehicle

Motorcycle

China Light Vehicle

Heavy Vehicle

Motorcycle

EURO I EURO II EURO III EURO IV

Source: He, Kebin, Oct. 2004

Carbon Emissions from Chinese Passenger Cars Under Various Scenarios

Million barrels per day of oil in

2020

Annual Carbon Emissions (million

metric tons)

Best Case Scenario 0.3 13

Mid-Range Scenario 3.3 144

Worst Case Scenario 24 1,051

China’s total greenhouse gas emissions in 1999

670 +/-50

Author’s Calculations

China is already the second-largest emitter of GHGs in the world Transportation is currently only responsible for a very small fraction of

those emissions, but this sector is likely to be the one with the most rapid growth in emissions during the next two decades

In-Use Vehicle Emissions: Tianjin

Project Partners:•ETIP, Harvard•CATARC•ISSRC, UC Riverside•Tsinghua University

•Fuel Quality Testing

•Vehicle Activity Study

•In-Use Emissions Testing (Remote Sensing and PEMS)

Preliminary Results

THC

00. 5

11. 5

22. 5

33. 5

44. 5

5

9: Carburetor 4: MPI +TWC 3: MPI +CCTWC 2: MPI +TWC+EGR

g/km

CO

05

101520253035404550

9: Carburetor 4: MPI +TWC 3: MPI +CCTWC 2: MPI +TWC+EGR

g/km

NOx

0

0. 5

1

1. 5

2

2. 5

9: Carburetor 4: MPI +TWC 3: MPI +CCTWC 2: MPI +TWC+EGR

g/km

CO2

0

50

100

150

200

250

300

350

9: Carburetor 4: MPI +TWC 3: MPI +CCTWC 2: MPI +TWC+EGR

g/km

Technology Distribution (Preliminary)

Fraction of Total

Route TimePass

CarTaxi

Small Truck

Med Truck

Large Truck

Small Bus

Med Bus

Large Bus

Motorcycle

sVeh/Hr

A07:00-14:00

57.7 12.0 2.7 1.6 1.9 3.1 3.3 1.3 16.4 1497

A14:00-21:00

56.5 16.3 5.5 2.0 0.6 4.4 6.9 1.0 6.8 1256