China: China's Support Programs For Automobiles And Auto Parts Under The 12th Five-Year Plan

EXECUTIVE SUMMARY

In 2009, as the global economy reeled from the financial crisis and major automotive companies in the U.S. and elsewhere stood at the edge of collapse, China became the world's largest auto producer and the world's largest automotive market. In 2010, China produced more than twice as many motor vehicles as the United States, 90 percent more than Japan, and more than all of Europe combined. China has also become a major source of automotive parts for the rest of the world, including the big three U.S. automakers. These trends are likely to intensify over the coming years. China plans to invest more than $18 billion over the next ten years to become the world's leading producer of electric and hybrid vehicles and their key components. It also aims to increase its exports of completed automobiles, move up the value chain of auto parts production, and promote its indigenous automotive brands and intellectual property around the world.

The Chinese government has played a central role in the growth of China's automotive industry, and it will continue to do so in the coming years. This report traces the evolution of China's subsidy programs for the automotive and parts industries from the 2004 Automotive Industry Development Policy through the 12th Five-Year Plan approved in March of 2011 and subsequent implementing policies for the plan. The report analyzes a number of government support policies for the automotive sector that appear to violate China's WTO commitments, including domestic content and technology transfer requirements, prohibited export subsidies, and restraints on the exportation of key raw materials. Subsidies to individual automotive producers in China, particular domestic content and technology transfer agreements, and specific provinces, localities, and economic development zones that provide additional subsidies to automotive producers are also identified. Finally, the report provides an overview of the growth in China's auto parts exports since the 2004 Automotive Industry Development Policy was adopted, highlighting products where exports to the U.S. market have surged since the domestic industry's crisis began in 2008. The report also identifies particular auto parts products that major U.S. automakers are importing from China, as well as recent expansions by traditional Western parts suppliers in China.

The automotive industry in China has been designated as a "pillar industry" since at least 1991, and it continues to play a central role in the government's economic development policies today. In the 12th Five-Year Plan, China designates "new-energy" automobiles and their components as one of the seven "strategic and emerging industries" in which it aims to become a world leader by 2030. The Chinese government will invest $1.5 trillion in these seven industries over the next five years to enable them to grow at an annual rate of 35 percent over the period. Specific auto parts targeted in the plan include batteries, electric motors, electronic control systems, and fuel cells. By focusing its support policies on the newest growth area in the automotive market, China hopes to overcome its industry's historic technological disadvantages by leapfrogging to the next level of development with significant government support. These levels of government support to the industry have grown dramatically since China joined the WTO in 2001.

• Under its national high-technology research and development program, the government invested nearly RMB 5.6 billion ($872 million) in newenergy vehicle technologies from 2002 through 2010.
• In its 2009 stimulus plan, the government allocated another RMB 10 billion ($1.5 billion) for the development of key automotive parts and technologies, including but not limited to new-energy vehicles.
• From 2011 through 2020, the government plans to invest at least RMB 115 billion ($18 billion) to build up its energy-saving and new-energy automotive industry, nearly half of which will subsidize the development and industrialization of core technologies.

In addition to these publicly-reported allocations to China's auto industry, vehicle and parts makers enjoy access to a broad array of subsidies that are not as easily quantified. The government targets specific automotive components and technologies as encouraged national projects, and producers of products listed in these catalogues enjoy reductions in the corporate income tax rate of 50 percent, subsidized credit from stateowned banks, export credit financing from the Export-Import Bank of China at belowmarket rates, discounted premium rates for export credit insurance from the China Export and Credit Insurance Corporation, and many other benefits. China's Export-Import Bank, for example, currently lends more than any developed country export credit agency, and it does so at rates that do not comply with the minimum terms agreed to by the world's major export credit agencies decades ago. One Chinese automotive company, Chery Auto, received export credits from the bank of RMB 5 billion in 2005 and another RMB 10 billion in 2008. Lists of the specific auto parts products that are eligible for such subsidies, and more of the Chinese firms that have received them, are provided in this report.

The Government of China further supports domestic automotive and parts producers by restraining the exportation of key raw materials, including materials that are critical for light-weight composites, special alloys, fuel cells, batteries, and electronics used in automotive applications. These restraints – including export duties, quotas, and licensing requirements – are facial violations of China's WTO commitments. The export restraints confer a unique advantage on China's domestic producers by guaranteeing supplies and lowering input prices within China while reducing supplies and increasing prices for producers outside of the country. Rare earth minerals, for example, are needed to produce the permanent magnets used in electric vehicle motors and generators as well as in certain battery components. World prices for rare earths have skyrocketed as China has tightened its restrictions on the exportation of these critical materials.

Domestic automotive producers in China also benefit from domestic content and technology transfer requirements that have helped the industry develop the capacity to produce key components with advanced technologies.

• The 2004 Automotive Industry Development Policy requires new investors in finished automotive production to also produce complete engine sets in China. The policy appears to still be enforced: In September of 2011, Daimler announced it would move toward localized engine production as part of an agreement to produce trucks in a joint venture with one of China's state-owned auto makers.
• Subsidies of up to $18,000 per vehicle for private purchases of energysaving and new-energy vehicles are funneled through domestic manufacturers so that imported vehicles do not qualify for the subsidy; in practice, each of the more than 400 vehicles eligible for the energy-saving vehicle subsidy are produced in China. New-energy vehicles exempt from Chinese vehicle taxes are also limited to those made in China.
• Foreign investors cannot produce complete automobiles in China unless they do so through a joint venture with majority Chinese ownership, giving the Chinese partners leverage to negotiate for technology transfer as part of any agreement. The Chinese government retains the authority to approve any joint venture agreement, and technology transfer is one of the issues reviewed in granting such approvals. The report lists major automakers that have transferred technologies, including electric and hybrid technologies, to gain access to China's market.
• China has enacted new rules that impose similar joint venture requirements to the production of batteries for new-energy vehicles, and it has also proposed that producers of new-energy automobiles in China demonstrate that the vehicle's components have Chinese intellectual property.

The report examines each of these requirements and explains how they fall short of the commitments China undertook when it joined the WTO.

China's policies are felt not only in China, but also around the world. While China's exports of complete automobiles are relatively small, it aimed to export 10 percent of its production in 2011. If its 2015 projected excess supply of 13 million vehicles were to hit world markets, China's exports alone could exceed current total U.S. production for all markets. China already exports 25 percent of the automotive parts it produces, and that proportion is expected to increase to 30 percent (of $350 billion) by 2015. The Government of China maintains an array of policies to meet these ambitious export goals.

• Producers of complete automobiles are exempted from joint venture and performance requirements if they locate in export processing zones.
• Even where producers are not located in those zones, Chinese joint venture partners use their controlling share to seek concessions from investors to supply their global operations – GM signed such an agreement with the state-owned Shanghai Automotive Industry Corp. in 2010.
• Automotive and parts producers are eligible for concessional export credits and discounted export credit insurance, and recent policies urge them to make greater use of these government support programs.
• Some policies also direct the government to provide priority support to export-oriented automotive and parts producers, either by emphasizing firms that achieve integration into global procurement systems or setting minimum levels of export performance as eligibility requirements for awards or other incentives.

China's generous government support policies have fueled rapid growth in China's exports of auto parts to the world. In 2010, China exported $48 billion in auto parts, more than four-and-a-half times the value of the auto parts it exported in 2004. In the first eleven months of 2011, China's global auto parts exports have jumped by 27 percent compared to the same period last year. The U.S. absorbs nearly a quarter of China's auto parts exports, and those imports have grown sharply since the depths of the crisis in the domestic sector in 2009. If current growth rates continue, U.S. imports of auto parts from China in 2020 could exceed our total auto parts imports from the world in 2010, and account for over half of U.S. consumption. Products highlighted in this report include aluminum wheels, radiators, laminated safety glass windshields, mounted brake linings, and engine ignition coils. Many parts are imported directly by the big three U.S. auto producers, who imported over 42 thousand metric tons of auto parts from China in 2010 and the first eight months of 2011. China's exports are likely to increase as planned expansions by major parts producers in China come on-line this year.

China has achieved astronomical growth in its domestic automotive and parts industry through generous government subsidies, performance requirements for foreign investors, technology transfers, discrimination against imported goods, restrictions on raw material exports, and priority support for exports of vehicles and parts. China plans to devote more resources to these policies over the next five years. In addition, it aims to expand existing requirements for complete automobiles to portions of the auto parts sector. China has committed an unprecedented level of fiscal and political support to its automotive industry under the 12th Five-Year Plan, and it seeks to use an intensified focus on new-energy vehicles to make its industry a world leader in the next generation of automotive technology. As China ramps up its support programs for the sector, the effects will be felt not only in China, but throughout the automotive industry around the world.

I. INTRODUCTION

In 2009, China became the world's largest auto producer and the world's largest automotive market. In 2010, China produced more than twice as many motor vehicles as the United States, 90 percent more than Japan, and more than all of Europe combined. China has also become a major source of automotive parts for the rest of the world, including the big three U.S. automakers. These trends are likely to intensify over the coming years, as China plans to invest more than $18 billion to become the world's leading producer of electric and hybrid vehicles and their key components. China also aims to increase its exports of completed automobiles, move up the value chain of auto parts production, and promote its indigenous automotive brands and intellectual property around the world.

The Chinese government has played a central role in the growth of China's automotive industry, and it will continue to do so in the coming years. This report traces the evolution of China's subsidy programs for the automotive and parts industries, from the 2004 Automotive Industry Development Policy, through the 11th Five-Year Plan issued in 2006, the 2009 stimulus plan for the automotive industry, the 2011 plan for developing new-energy vehicles, and the 12th Five-Year Plan approved in March of 2011. The report analyzes a number of government support policies for the automotive sector that appear to violate China's WTO commitments, including domestic content and technology transfer requirements, prohibited export subsidies, and restraints on the exportation of key raw materials. Subsidies to individual automotive producers in China, particular domestic content and technology transfer agreements, and specific provinces, localities, and economic development zones that provide additional subsidies to automotive producers are also identified. Finally, the report provides an overview of the growth in China's auto parts exports since the 2004 Automotive Industry Development Policy was adopted, highlighting products where exports to the U.S. market have surged since the domestic industry's crisis began in 2008. The report also identifies particular auto parts products that major U.S. automakers are importing from China, as well as recent expansions by traditional Western parts suppliers in China.

China's auto sector is already the world's largest. Its exports of automobiles and parts are on track to increase significantly in coming years, with parts exports projected to reach 30 percent of production by 2015. This growth would not be possible without the large array of well-financed government support policies detailed in this report. The government of China has devoted significant political and financial capital to bring its automotive sector to where it stands today; that commitment will intensify as China seeks to dramatically increase its presence in global automotive markets in the years to come.

II. CHINA'S SUPPORT PROGRAMS FOR AUTOMOBILES AND AUTO PARTS

A. Overview

China's strategy for developing a globally competitive automotive sector has evolved over a number of decades. In 1991, China designated the automotive sector as a "pillar industry" in the 8th Five-Year Plan, and the government issued a comprehensive Automotive Industrial Policy in 1994.¹ These policies were designed to encourage foreign investment in the sector while ensuring that investment contributed to the development of a domestic auto parts industry and to the acquisition of technology and know-how. Foreign investors were required to source a minimum percentage of parts domestically, and they were also subject to technology transfer and research and development requirements.² While many foreign automakers complied with these requirements to gain access to China's market, concerns arose that state-of-the-art technological development and related value-added production were still not being conducted in China; analysts were also concerned that government policy prioritized attracting foreign investment to the detriment of the development of a self-sufficient indigenous automotive sector.³

When China entered the World Trade Organization in 2001, it made several commitments to reform its automotive policies to confirm with WTO rules.⁴ The 2004 Automotive Industry Development Policy, while aimed in some respects at bringing China into compliance with the automotive sector commitments it made when it joined the WTO in 2001, also promulgated policies that put China in direct violation of those commitments. As explained in more detail below, some of the WTO-inconsistent aspects of the policy were challenged by China's trading partners at the WTO and subsequently revised, while other WTO-inconsistent policies appear to remain in effect. Indeed, the plan reflects a tension between, on the one hand, the government's desire to bring itself into compliance with WTO rules and encourage foreign investment, and, on the other hand, its goal of strengthening the position of indigenous vehicle and parts producers relative to foreign ventures and improving the global competitiveness and export performance of its domestic producers. The key challenge was to upgrade the technological development of domestic automotive producers and lift them closer to the top tier of global automotive and parts companies while continuing to attract foreign investment and achieve an acceptable level of WTO compliance.

These goals, particularly the hope to further develop indigenous auto makers and parts suppliers, were also evident in the 11th Five-Year Plan, released in 2006. That Plan also expressed heightened concerns about automobile emissions and fuel efficiency. As a result, a number of parts for "new-energy" vehicles were targeted in industry and investment catalogues released to guide government support during the 11th five-year period. The focus on electric and hybrid vehicles as a means by which China's industry could leapfrog over competitors to achieve global competitiveness intensified over the period, and was particularly pronounced in stimulus measures enacted in 2009 in response to the global downturn.

China uses a wide array of measures to achieve its goals in the automobile and parts sectors. Government support measures available to producers in China include outright grants, preferential tax rates, discounted land, loans from state-owned banks, export credits and guarantees at concessional rates, and access to inputs at subsidized prices. In addition, the government provides vehicle purchase subsidies for public and private purchases of domestically-produced vehicles, particularly new-energy vehicles. Finally, the government continues to play a strong role in guiding foreign investment into China, and has recently announced plans to extend its joint venture requirements for automobile production to the production of key components for new-energy vehicles.

In March of 2011, the National People's Congress approved the 12th Five-Year Economic and Social Development Plan, the blueprint for China's economy from 2011 through 2015. Hybrid and electric vehicles have taken on an unprecedented level of importance in the 12th Five-Year Plan, and prioritizing that segment of the industry provides the key means by which China hopes to become a top-tier global automaker. New-energy automobiles have been identified as one of seven "strategic and emerging industries" in the plan. China aims for these industries to grow by 35 percent per year, and reportedly plans to invest $1.5 trillion in the seven industries over the next five years in order to achieve this goal. By 2030, China aims to be the global leader in each of the seven areas, including new-energy automobiles.

B. Support for the Automotive Industry under the 12th Five-Year Plan

The 12th Five-Year Plan sets out two core sets of goals for the Chinese automotive sector over the next five years. First, the plan aims to improve domestic automakers' capability to produce entire vehicles in addition to parts, and it aims to develop an independent indigenous capacity to produce key components. Second, the plan places particular focus on new-energy vehicles, and it identifies the production of such hybrid and electric vehicles as the key means by which China will be able to develop the technology to leapfrog over its competitors and become a global player in world auto market.

The plan addresses the need to restructure the automotive industry overall, stating that the industry should "strengthen whole vehicle research and development capabilities, realize technical autonomy with regard to key components, and improve energy efficiency, environmental protection, and safety technology."⁵ The plan also identifies the automobile sector as one which should be a "focal point[ ] to promote advantageous enterprises to implement powerful combinations, trans-regional mergers and acquisitions, and increased industry concentration."⁶ The plan also calls for action to promote indigenous brands and the technological transformation of key industries such as the automotive industry.⁷

In addition to continuing China's drive to strengthen and promote its indigenous automobile and parts industries, the 12th Five-Year Plan marks a departure in its aggressive support for a sub-sector of the automotive industry – namely, the hybrid and electric vehicle and parts industry. The plan designates seven industries as "strategic and emerging industries" (SEIs), and "new-energy automobiles" is one of the seven industries.⁸ The plan aims to "vigorously develop" the seven SEIs in order to promote "leapfrog development."⁹ The Government of China will establish special development funds, improve supportive tax policies, and encourage the provision of increased credit support for companies in the seven SEIs.¹⁰ In addition, the Government of China will increase market demand for the industries, develop a supportive infrastructure for new product applications, and accelerate the establishment of industry and technical standards to support the industries.¹¹ Among the new-energy automotive technologies targeted by the plan are "plug-in hybrid electric automobiles, pure electric automobiles, and fuel cell automotive technologies."¹²

When the Chinese government first announced the seven SEIs in late 2010, it stated it would "boost policy support and planning guidance to promote research and development in key technologies and develop the seven strategic sectors into pillar industries to improve industry core competitiveness and economic efficiency."¹³ In discussing the new-energy automotive industry, the State Council's late 2010 Decision of the State Council on Accelerating the Fostering and Development of Emerging Industries of Strategic Importance states:

The decision states that the government's goals will be accomplished through "support by treasury, tax, and financial policies," including setting up special funds for emerging industries, increased investment from the central government treasury, improved tax policies to encourage technological investment, and strengthening of credit support.¹⁵ In addition, the policy explicitly states that supporting the "multinational operations" of enterprises in the seven strategic industries will be a key goal, to be achieved by "[i]mproving export credit, insurance, and related policies, [and] actively giving support to the exploration of international markets for key products, technologies, and services from the emerging industries of strategic importance together with outbound aid ...."

The government aims for the new-energy automotive industry, together with the six other SEIs, to account for eight percent of China's GDP by 2015, up from three percent today – this translates into an annual growth rate of 35 percent over the next five years.¹⁶ After that, the seven SEIs are expected to reach 15 percent of China's GDP by 2020; by 2030, China aims to be the global leader in each of the seven targeted industries.¹⁷ To reach these goals, the Government of China is reportedly planning to invest $1.5 trillion in the seven SEIs over the next five years.¹⁸

The 12th Five-Year Plan is a blueprint for the nation's development trajectory over the next five years. With the blueprint in place, government agencies, provinces, and localities will begin promulgating their own measures to implement the plan. Implementing measures are likely to include more detailed policies regarding funding support, financial and tax policies, technology development, and government procurement. In addition, agencies are likely to revise industry and investment catalogues that are used to guide government support to favored projects and sub-projects to reflect the priorities in the plan. These implementing measures are largely unavailable as of the writing of this report. However, an examination of the measures used to implement China's 11th Five-Year Plan, as well as the 2004 Automotive Industry Development Policy, the 2009 stimulus program for automobiles, and the 2011 plan for the energy-saving and new-energy automotive industry, provide important clues as to how the government's objectives in the 12th Five-Year Plan are likely to be implemented in the months and years to come.

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Footnotes

1 See, e.g., Andrew Szamosszegi, How Chinese Government Subsidies and Market Intervention Have Resulted in the Offshoring of U.S. Auto Parts Production: A Case Study at 10-11.

2 See id. at 11.

3 See, e.g., Wan-Wen Chu, "How the Chinese government promoted a global automobile industry," Industrial and Corporate Change (2011) at 24-25.

4 Accession of the People's Republic of China, WT/L/432 (Nov. 23, 2001) at Section 1(2); Report of the Working Party on the Accession Of China, WT/MIN(01)/3 (Nov. 10, 2011) at paras. 93, 204 – 207, 342.

5 People's Republic of China, Twelfth Five-Year Plan for National Economic and Social Development (approved March 14, 2011), Chapter Nine, Section One.

6 Id. at Chapter Nine, Section Four.

7 See id. at Chapter Nine, Sections Three and Four.

8 Id. at Chapter Ten, Section One.

9 Id.

10 Id. at Chapter Ten, Section Three.

11 Id.

12 Id. at Chapter Ten, Section One.

13 "China to Nurture 7 New Strategic Industries in 2011-15," Gov.cn (October 27, 2010).

14 Decision of the State Council on Accelerating the Fostering and Development of Emerging Industries of Strategic Importance (October 10, 2010) at Section III (VII).

15 Id. at Section VII (I) – (III).

16 Emerging Strategic Industries: Aggressive Growth Targets, China Strategy, HSBC Global Research (October 19, 2010).

17 Id.

18 "More Loans for Key Industries," china.org.cn (March 7, 2011) .

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