BEFORE THE UNITED STATES INTERNATIONAL TRADE COMMISSION
Statement of Andrew Z. Szamosszegi
Regarding
THE ROLE OF CHINESE GOVERNMENT SUBSIDIES AND MARKET INTERVENTION IN THE OFFSHORING OF U.S. AUTO PARTS PRODUCTION
October 30, 2007
Good morning. I am Andrew Szamosszegi, a managing consultant at Capital Trade Incorporated. I am here today to discuss the development of the Chinese auto parts industry.
The Chinese government views some industries as being too important to leave to the invisible hand of the market. In these strategic or pillar industries, such as autos, the government either maintains direct ownership stakes, and/or uses industrial policies to achieve desired market outcomes.
What is different about the automotive industry, compared with one such as steel, is that U.S. automobile and parts producers have been major contributors to China’s recent successes.
I will address the following points.
First, China’s goals for the auto and parts industries;
Second, policies used by the Chinese government to develop the parts industry with the assistance of foreign firms; and
Third, the impact of these policies on commercial outcomes.
China’s goals for its auto and parts industries
Most of China’s official aspirations for the automotive industry are expressed in terms of cars, not parts. However, it is clear that the government has high hopes for parts as well. China believes it cannot have a world class auto industry unless it has a world class parts industry.
China’s auto parts industry was woefully underdeveloped and technologically backward through the mid-1990s.
Upgrading and expanding the national automotive industry has become a matter of national importance for the Chinese government. Listen to the words of Zhang Ji, a deputy director in China’s Ministry of Commerce:
“The auto industry represents a country’s overall economic strength. The government should provide vigorous support.”
“Automobiles are in a way different from other merchandises. Automobile exports adds {sic} to the dignity of a nation.”
“When Chinese-made cars drive on freeways in developed countries, the status of China as a great nation will be further elevated. We must therefore make quality automobiles.”
I find Mr. Zhang’s comments refreshing in their candor. They tell us that Beijing views the automobile industry as being important not only to China’s industrial development, but also to China’s image. It is also clear from these statements that the ultimate goal is to sell Chinese cars abroad. That is, China is pursuing something that it lacked in the mid-1990s: comparative advantage in the automotive industry.
The parts industry in China has been deemed a priority industry under the two most recent national Five Year Plans. According to the most recent auto plan, the government anticipates the emergence of five to ten large internationally competitive corporate groups in the parts industry exporting 20 percent of their production. The top 3 groups are expected to hold a 70 percent market share.
As for the auto industry in general, the 11th five-year plan indicates the government has a strong desire to Sinocize the domestic automotive industry. An additional goal of policy is to create more Chinese brands and intellectual property.
Chinese government policies toward the automotive industry
Despite well-publicized economic reforms, China continues to have a serious automotive industrial policy. What follows is a brief description of the major Chinese subsidies and incentives.
First, the Chinese government ties local parts purchasing to auto assembly expansion and new product approval. The Chinese government once relied on explicit local content requirements. Now that China is a member of the WTO, its policy tools have changed, but the goal of increased localization has not. Foreign automakers seeking approval to expand production in China must submit feasibility studies with the central government spelling out localization plans. The government also uses the approval process for new models to encourage purchases of Chinese-made parts.
Second, the Chinese government maintains a significant ownership stake in the domestic automotive industry. The three main automotive producers FAW, Dongfeng, and SAIC, are owned by either the central or municipal governments. Provincial government ownership exists in other producers as well. The Chinese government uses its ownership stakes in auto assemblers to encourage potential foreign joint venture partners to localize production and to facilitate preferential access to financing through state-owned banks.
Third, the Chinese government provides WTO illegal subsidies and other preferences. The subsidies offered to parts producers include tax holidays, tax exemptions, and income tax rate reductions; value-added tax (VAT) refunds and exemptions; and tariff reductions and exemptions on imported machinery used in export processing zones. The level of subsidies is frequently dependent on export levels.
A comprehensive list of subsidies was found on the web site of the China-Singapore Suzhou Industrial Park, a joint undertaking by the governments of Singapore and China. The SIP web site reads like a who’s who of the international parts producers, with firms such as Delphi, Tyco, Metaldyne, Bosch, Georg Fischer, and Akebono featured in press releases. Most of the investments we found had occurred within the past three years.
Fourth, Chinese policies have encouraged foreign investment in the automotive industry to rapidly upgrade domestic capabilities. Beijing’s strategy has been to trade additional market access in China for technology. The Auto Five Year Plan indicates that the government will support R&D and the auto electronics industry. The government provides tax incentives for R&D expenditures and requires that any newly-approved auto project include a commitment to invest $60 million in R&D.
Fifth, the Chinese government attracts parts producers to China through high tariffs and informal quotas. The Auto Five Year Plan cited import substitution as a major policy goal. China reduced duties on parts from 28 percent to approximately 10 percent, but even this lower level is significantly higher than U.S. duties. The government of China announced a doubling of tariff rates on imported parts that surpassed a certain threshold of the value of the finished vehicle, but delayed implementation for two years after the United States and the EU jointly filed a complaint at the WTO.
Sixth, the Chinese government subsidizes auto production in China with an undervalued currency. Several experts estimate the yuan is undervalued by 25 to 50 percent. The weak yuan makes Chinese exports cheaper in foreign markets, and U.S. products more expensive in China.
My final point is that these Chinese subsidies and incentives have had a major impact on the U.S. automotive industry. Look at trade flows. China’s recently backward parts industry achieved an auto parts trade surplus in 2005. China’s share of U.S. parts imports more than tripled between 2002 and 2006, and China recently surpassed passed Germany to become the second largest national supplier of automotive parts to the United States.
It is evident from the investment and purchasing patterns of individual U.S. producers that Chinese incentives have had their intended effect.
Delphi’s operations in China have been growing substantially. By 2004, Delphi’s Chinese operations included 14 wholly owned and joint ventures, eight technology transfer agreements, a technical center, and a training center. In April 2005, while its U.S. operations were drifting toward bankruptcy, Delphi established its fifteenth Chinese firm – an auto electronics producer. Delphi is now a major importer of auto parts and components from China, importing $104 million from April 2006 to March 2007.
Visteon, a major U.S. parts producer spun off from Ford, is also a major player in China. It has an estimated 21 plants there, and 20 percent of Visteon’s purchases are from China.
GM has played a prominent role in developing the Chinese automotive industry. GM established a 50-50 joint venture with the government-owned SAIC in 1997. As part of the joint venture agreement, GM was required to create an R&D facility in China. GM transferred process technology to China, and the joint venture now exports auto components abroad. Reports yesterday indicate that GM has earmarked an additional $250 million in investments for two more research centers, one in Shanghai and one in Beijing. In the 12 months through March 2007, GM imported $145.3 million from China, excluding products sourced from Delphi and Chinese products sourced through Canada, such as the Equinox’s engine. GM has committed to purchasing $10 billion annually in Chinese produced auto parts by 2009.
Obviously, by shifting auto and parts output from the United States to China, Beijing’s subsidies and market distortions have harmed U.S. industries that supply parts producers.
To summarize, the Chinese government has played a primary role in the relocation of auto parts production to China. China has used WTO-illegal subsidies and incentives to jump-start its weak automotive industry. U.S. automakers and auto parts suppliers have responded with significant investments in China. As a result, China has leapfrogged other countries to become the second largest parts supplier to the United States.
Statement of Andrew Z. Szamosszegi
Regarding
THE ROLE OF CHINESE GOVERNMENT SUBSIDIES AND MARKET INTERVENTION IN THE OFFSHORING OF U.S. AUTO PARTS PRODUCTION
October 30, 2007
Good morning. I am Andrew Szamosszegi, a managing consultant at Capital Trade Incorporated. I am here today to discuss the development of the Chinese auto parts industry.
The Chinese government views some industries as being too important to leave to the invisible hand of the market. In these strategic or pillar industries, such as autos, the government either maintains direct ownership stakes, and/or uses industrial policies to achieve desired market outcomes.
What is different about the automotive industry, compared with one such as steel, is that U.S. automobile and parts producers have been major contributors to China’s recent successes.
I will address the following points.
First, China’s goals for the auto and parts industries;
Second, policies used by the Chinese government to develop the parts industry with the assistance of foreign firms; and
Third, the impact of these policies on commercial outcomes.
China’s goals for its auto and parts industries
Most of China’s official aspirations for the automotive industry are expressed in terms of cars, not parts. However, it is clear that the government has high hopes for parts as well. China believes it cannot have a world class auto industry unless it has a world class parts industry.
China’s auto parts industry was woefully underdeveloped and technologically backward through the mid-1990s.
Upgrading and expanding the national automotive industry has become a matter of national importance for the Chinese government. Listen to the words of Zhang Ji, a deputy director in China’s Ministry of Commerce:
“The auto industry represents a country’s overall economic strength. The government should provide vigorous support.”
“Automobiles are in a way different from other merchandises. Automobile exports adds {sic} to the dignity of a nation.”
“When Chinese-made cars drive on freeways in developed countries, the status of China as a great nation will be further elevated. We must therefore make quality automobiles.”
I find Mr. Zhang’s comments refreshing in their candor. They tell us that Beijing views the automobile industry as being important not only to China’s industrial development, but also to China’s image. It is also clear from these statements that the ultimate goal is to sell Chinese cars abroad. That is, China is pursuing something that it lacked in the mid-1990s: comparative advantage in the automotive industry.
The parts industry in China has been deemed a priority industry under the two most recent national Five Year Plans. According to the most recent auto plan, the government anticipates the emergence of five to ten large internationally competitive corporate groups in the parts industry exporting 20 percent of their production. The top 3 groups are expected to hold a 70 percent market share.
As for the auto industry in general, the 11th five-year plan indicates the government has a strong desire to Sinocize the domestic automotive industry. An additional goal of policy is to create more Chinese brands and intellectual property.
Chinese government policies toward the automotive industry
Despite well-publicized economic reforms, China continues to have a serious automotive industrial policy. What follows is a brief description of the major Chinese subsidies and incentives.
First, the Chinese government ties local parts purchasing to auto assembly expansion and new product approval. The Chinese government once relied on explicit local content requirements. Now that China is a member of the WTO, its policy tools have changed, but the goal of increased localization has not. Foreign automakers seeking approval to expand production in China must submit feasibility studies with the central government spelling out localization plans. The government also uses the approval process for new models to encourage purchases of Chinese-made parts.
Second, the Chinese government maintains a significant ownership stake in the domestic automotive industry. The three main automotive producers FAW, Dongfeng, and SAIC, are owned by either the central or municipal governments. Provincial government ownership exists in other producers as well. The Chinese government uses its ownership stakes in auto assemblers to encourage potential foreign joint venture partners to localize production and to facilitate preferential access to financing through state-owned banks.
Third, the Chinese government provides WTO illegal subsidies and other preferences. The subsidies offered to parts producers include tax holidays, tax exemptions, and income tax rate reductions; value-added tax (VAT) refunds and exemptions; and tariff reductions and exemptions on imported machinery used in export processing zones. The level of subsidies is frequently dependent on export levels.
A comprehensive list of subsidies was found on the web site of the China-Singapore Suzhou Industrial Park, a joint undertaking by the governments of Singapore and China. The SIP web site reads like a who’s who of the international parts producers, with firms such as Delphi, Tyco, Metaldyne, Bosch, Georg Fischer, and Akebono featured in press releases. Most of the investments we found had occurred within the past three years.
Fourth, Chinese policies have encouraged foreign investment in the automotive industry to rapidly upgrade domestic capabilities. Beijing’s strategy has been to trade additional market access in China for technology. The Auto Five Year Plan indicates that the government will support R&D and the auto electronics industry. The government provides tax incentives for R&D expenditures and requires that any newly-approved auto project include a commitment to invest $60 million in R&D.
Fifth, the Chinese government attracts parts producers to China through high tariffs and informal quotas. The Auto Five Year Plan cited import substitution as a major policy goal. China reduced duties on parts from 28 percent to approximately 10 percent, but even this lower level is significantly higher than U.S. duties. The government of China announced a doubling of tariff rates on imported parts that surpassed a certain threshold of the value of the finished vehicle, but delayed implementation for two years after the United States and the EU jointly filed a complaint at the WTO.
Sixth, the Chinese government subsidizes auto production in China with an undervalued currency. Several experts estimate the yuan is undervalued by 25 to 50 percent. The weak yuan makes Chinese exports cheaper in foreign markets, and U.S. products more expensive in China.
My final point is that these Chinese subsidies and incentives have had a major impact on the U.S. automotive industry. Look at trade flows. China’s recently backward parts industry achieved an auto parts trade surplus in 2005. China’s share of U.S. parts imports more than tripled between 2002 and 2006, and China recently surpassed passed Germany to become the second largest national supplier of automotive parts to the United States.
It is evident from the investment and purchasing patterns of individual U.S. producers that Chinese incentives have had their intended effect.
Delphi’s operations in China have been growing substantially. By 2004, Delphi’s Chinese operations included 14 wholly owned and joint ventures, eight technology transfer agreements, a technical center, and a training center. In April 2005, while its U.S. operations were drifting toward bankruptcy, Delphi established its fifteenth Chinese firm – an auto electronics producer. Delphi is now a major importer of auto parts and components from China, importing $104 million from April 2006 to March 2007.
Visteon, a major U.S. parts producer spun off from Ford, is also a major player in China. It has an estimated 21 plants there, and 20 percent of Visteon’s purchases are from China.
GM has played a prominent role in developing the Chinese automotive industry. GM established a 50-50 joint venture with the government-owned SAIC in 1997. As part of the joint venture agreement, GM was required to create an R&D facility in China. GM transferred process technology to China, and the joint venture now exports auto components abroad. Reports yesterday indicate that GM has earmarked an additional $250 million in investments for two more research centers, one in Shanghai and one in Beijing. In the 12 months through March 2007, GM imported $145.3 million from China, excluding products sourced from Delphi and Chinese products sourced through Canada, such as the Equinox’s engine. GM has committed to purchasing $10 billion annually in Chinese produced auto parts by 2009.
Obviously, by shifting auto and parts output from the United States to China, Beijing’s subsidies and market distortions have harmed U.S. industries that supply parts producers.
To summarize, the Chinese government has played a primary role in the relocation of auto parts production to China. China has used WTO-illegal subsidies and incentives to jump-start its weak automotive industry. U.S. automakers and auto parts suppliers have responded with significant investments in China. As a result, China has leapfrogged other countries to become the second largest parts supplier to the United States.
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