China surpassed Japan and became the world’s leading automobile exporter in the first half of 2023. Although it was the leading global car producer since 2009, it currently leads the world’s production of electric vehicles and the transformation of the sector towards renewable energy.
Many wonder how its automotive industry has been able to grow so much in such a short time, considering that China was still a car importer in 2001, the year it joined the World Trade Organization.
The answer lies in the peculiar history of the Chinese automobile industry from its creation in the 1950s – under the regime of Mao Zedong – until the turn of the millennium. The first Chinese automobile companies, such as First Automotive Works (FAW), were born at the height of collaboration with the Soviet Union (1949-1958), when Moscow transferred technology and aid to industrial plants to produce the first truck models.
Although that collaboration was marked by the Cold War and the characteristics of economic cooperation between socialist countries, the public companies created in that framework still constitute the fundamental pillar of the Chinese automobile industry today and are known as backbone companies. Despite their public nature, these companies had a clear international orientation from the beginning.
China’s break with the Soviet Union in the years of the Great Leap Forward (1958-1962) ended industrial collaboration between both countries. However, the Chinese automobile industry continued with its international collaboration projects with both Western Europe (West Germany, Italy and France) and Eastern Europe (Czechoslovakia, Yugoslavia, East Germany). Despite this, the Chinese industry was lagging behind, technologically speaking, compared to the rest of the world.
This became evident when, in 1979, economic reforms began. The bulk of Chinese production was focused on the manufacture of commercial vehicles, while the production of passenger cars was symbolic and reserved for the political elite.
The low supply of private cars and the prospects for growth in demand (given the end of the consumption restrictions of the Maoist era) motivated Deng Xiaoping to encourage agreements between public companies of the Maoist period and foreign multinationals. The objective was for them to transfer their technology in exchange for preferential access to the Chinese market. In this sense, the most successful agreements took place between 1986 and 1996 between the Chinese public companies SAIC and FAW and the German Volkswagen group.
In the early years, Volkswagen moved production of car models that were no longer manufactured in Europe, such as the Santana model, to China. CKDs (complete knocked-down) were sent to China: that is, the parts that make up each car, packaged and ready to assemble. Although initially the Shanghai factory only worked with parts manufactured in Germany, the national content progressively increased. This was achieved thanks to the fulfillment of the agreed condition of providing training to Chinese engineers.
Joint ventures between Volkswagen and public companies led the nascent Chinese market as the state opened up consumer possibilities and competition. Other collaborations between European and Chinese companies also prospered while others were not as successful.
In the 1990s, China allowed non-state national companies, such as Geely or BYD, to enter the nascent consumer car market, while foreign investments multiplied in search of Volkswagen’s formula for success, which could be summarized with the Chinese expression of “technology in exchange for the market.”
Although China still did not export cars, its companies (especially state ones) were internationalized, since almost all of them signed contracts with one or several Western or Asian multinationals (Japanese or Korean).
Despite its limited experience in global markets as a car export power, when China entered the WTO in 2001 it was able to grow rapidly because its companies had extensive experience in internationalization processes.
The love affair between multinationals and Chinese public companies (which also became multinationals) came to an end when both parties began to compete in third markets, a trend that has become more pronounced in recent years. The culmination of this rupture came when China began to produce cars with its own technology that, as in the case of electric and intelligent vehicles, has proven to be more advanced than that of its previous partners and now also competitors from the rest of the world.
This article was originally published on The Conversation
