Blog: Dave LeggettChina's 'strings attached'

Dave Leggett | 10 June 2003

China's auto market growth potential is obviously of enormous interest to car companies and suppliers looking for volume growth. But investment in China has always carried certain conditions and risks. One condition has been that JVs are under the local partner's majority control. That gives the foreign partner less room for manoeuvre than it would like. Sure, workers may be 'cheap as chips' but, Mr Capitalist auto executive, you'll be employing a shed-load of them. And you can drop any ideas about substituting more reliable machinery and equipment for some of that small army on the shop floor. They're effectively non-negotiable, as are that other small army of managers, liaison people and oversee-ers sitting in committee rooms drinking tea most of the time. Product quality perhaps isn't as good as the PR people at HQ say it is (people, unlike machines, make mistakes) but the local market isn't exactly demanding in that area. If you want more control of your JV operation you'd better offer something big in return - like eventual major league exports (Honda's tactic). Honda may get away with that, after its considerable investment in Chinese export oriented parts operations, but you simply wouldn't be believed in Beijing.

And then there's technology transfer and intellectual property rights. If you don't play ball, they'll threaten to play ball with someone who will and you don't want your China strategy to look bad compared with those of your competitors. The shareholders wouldn't like it. Better to bite the bullet, share technology and hope that the consequences further down the road are not too hard to live with. Sorry, what's that? Market leader and biggest investor in China, VW Group, has already had its fingers burnt? I guess that's true. Just take a look at FAW's 'Red Flag'-branded and thinly disguised Audi 100 (which FAW used to make). And the spirit of partnership wasn't exactly evident when SAIC Chery Automobile - part-owned by VW's Shanghai Volkswagen partner, SAIC - said last year that it wasn't worried about VW's objection to VW-branded parts finding their way into its own vehicles because, wait for it, it could now manufacture them itself!


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