The Chinese way of promoting local companies.

While European car makers remain adamant on gaining a relatively unrestricted foothold in the Indian market through the proposed EU-India Bilateral Trade and Investment Agreement (BTIA), under negotiations since 2007, Indian manufactures, mostly of Japanese and Korean origin, remain firmly opposed to any reductions in import duties. India imposes high import duties on assembled vehicles, 60 percent to 75 percent. (reference: http://tinyurl.com/mp8ewmf)

Many groups in India are against the proposed FTA with EU (pic: caef.org.uk)
Many groups in India are against the proposed FTA with EU (pic: caef.org.uk)

Swamped by a number of challenges, ranging from inhibited demand to strikes and worker-management conflicts, the Indian automobile industry is apprehensive of losing significant market share following the entry of European majors.

Apart from working through the existing irreconcilable points of negotiations in the proposed deal, the government of India has to ensure that these fears do not materialise and Indian companies continue to grow even after the BTIA is signed.

The Chinese may have a few learning points for Indian policymakers. The authorities in China have been trying consistently to bring up a few domestic companies to the level of global players even though the Chinese market is apparently tilted in favour of foreign car makers. Sales for General motors (GM) increased by 9.2 percent in May, for Ford by 32 percent in the last month in the Chinese market while domestic manufacturer, Great Wall Motor Co., experienced a 16 percent decline in sales last month, according to a Bloomberg report. (reference: http://tinyurl.com/mdqnazq)

pic: (chinacartimes.com)
A second hand car market in China.(pic: chinacartimes.com)

Another report in Bloomberg by Edward Niedermeyer, summarises a series of steps taken by Chinese regulators, particularly the National Development and Reform Commission, to reportedly fine-tune the domestic market to allow a few local guys to take-off to the global platform.(reference http://tinyurl.com/pr3d2em)

“Though China’s new interventions are being made under the rubric of anti-monopoly and pro-consumer regulations…..the real point remains building a globally competitive Chinese auto industry,” the report said.

Beijing auto show 2012 (pic: 2bp.blogspot.com)
Beijing auto show 2012 (pic: 2bp.blogspot.com)

Along with a limit of 50 percent on foreign ownership, the requirement for foreign car makers to enter into a partnership with local manufactures intends to aid the transformation of domestic enterprises into global ones. However, despite these measures as domestic car makers remain the secondary players even in the Chinese market, the authorities have started a number of investigations to bring down the profits of foreign companies, the report implied.

Another report in Reuters (reference: http://tinyurl.com/owtv7hu) talks about German luxury brand Mercedes-Benz being found guilty of manipulating prices for after-sales services in China. Regardless of the true intentions of authorities, foreign companies have readily agreed to reduce the prices of their spare parts following these investigations to ensure a competitive presence in the biggest automobile market of the world.

Protests were raised by the European Chamber of Commerce against the motivated targeting of European companies. The Chinese, on the other hand seem to be working to create a level playing field between the foreign and local companies. Backed by excessive profits foreign players may just wipe out the local car makers in the long run.

Chinese auto company Geely's  luxury car (pic: wpmedia.driving.com)
Chinese auto company Geely’s luxury car (pic: wpmedia.driving.com)

For the global avatars of local players to emerge, certain direct measures are also being taken. Top on the list is the need for market consolidation. There are around 110 competing brands in the Chinese market and many will get their licenses cancelled if they fail to meet the minimum production target, of at least 1,000 passenger vehicles or 50 medium to heavy trucks, by October, 2015.

To weed out the marginal players Chinese government has decided to empower the dealers by tweaking their contractual relationship with the car makers. Often, the burden of inventory build up is simply passed on to the dealers which allow the marginal players to drag along despite a weak demand for their products. New rules will give more breathing space to the dealers.

Through such measures, “Chinese reforms will probably reward the country’s most viable automakers with the best possible chance of joining the global elite,” the Bloomberg report by Edward Niedermeyer said.

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