Kelly Sims Gallagher, Ph.D. Energy Technology Innovation Project

1. International Technology Transfer in China’s Auto Industry: Implications for Future Energy Development Kelly Sims Gallagher, Ph.D. Energy Technology Innovation Project Belfer Center for Science and International Affairs John F. Kennedy School of Government Harvard University

5. Foreign Investment in China’s Auto Industry: A Complicated Network VW Shenyang Brilliance Honda First Auto Works Shanghai Auto Industry Corp. Ford General Motors BMW Guangzhou Auto Works Chang’An Chery Nissan Toyota Suzuki Beijing Auto Industry Holding Co. Kia Dongfeng Auto Works (former SAW) Tianjin Auto Works ? Hyundai DaimlerChrysler Geely Citroen

6. The Sino-U.S. Joint Ventures

7. Beijing Jeep Corporation (BJC) “We are here to make money – that means with the proper business model in making the JV profitable – and in the meantime perform respective training.” – Wei-Ming Soh, DaimlerChrysler “Top executives in big companies only see China as a market to sell vehicles. They don’t see China as a place to develop vehicles.” – Chinese engineer at BJC Above: The Entrance Gate to Beijing Jeep. Below: Old BJ2020 and newer Jeep Cherokee

8. Shanghai GM factory gate in Pudong, Shanghai Shanghai GM “We did everything we promised to do.” – Phillip Murtaugh, Chairman and CEO of GM China “The foreign companies are not good teachers, but the Chinese companies are not so clever.” -Chinese citizen working for GM China

9. Chang’An Ford “Ford knew that WTO rules prohibited the Chinese government from requiring technology transfer.” – Keith Davey, Director of Business Strategy for the Asia Pacific and Africa, Ford Motor Company Chang’An Ford plant under construction in Chongqing “Ford should be more open technologically because there would be mutual benefit.” –Chinese engineer at Chang’An

10. Comparative Analysis

11. Seven Main Findings • U.S. FDI did not substantially contribute to improving Chinese vehicle technological capabilities because little knowledge was transferred along with the product. • Chinese government failed to design and implement an aggressive, consistent strategy for the acquisition of technological capabilities from foreigners in the automobile industry. • U.S. companies in JV’s are purely profit-motivated – Chinese also seek profits in short term, but most want skills for long term.

12. Findings (cont.) • Chinese firms have acquired good manufacturing skills and also acquired some product adaptation capabilities. Parts suppliers appear to have more advanced capabilities due to local content requirements. • Technologies that were transferred by U.S. firms in the period studied were rarely, if ever, updated once a model was in production, with the emerging exception of SGM. This is now changing due to competitiveness. • Even though technology transfer was purely product, the FDI has contributed to the growth of the industry, which has benefited the Chinese economy in terms of jobs and spillovers. • U.S. firms did not transfer pollution-control technology until required to do so by the Chinese government.

13. Remaining Challenges • Fuel quality • Rate of deployment of advanced technologies (and rate of growth of sales of passenger cars) • Economic growth pressures, and role of auto industry • Lack of incentives for foreign companies to transfer cleaner technologies other than Chinese policy, which is weak • Lack of Chinese technological capabilities to design and manufacture clean technologies themselves • Still relatively weak fuel efficiency standards

14. Remaining Opportunities • The next 50-100 million cars in China • Alternative transportation and modes of mobility

15. Limits to Leapfrogging? • Huge opportunity to “leapfrog” due to existing small base and rapid growth. . . but, opportunity is being missed. Why? • The combined short-term motivation of producing and selling cars is the main common incentive for technology transfer today • There are fairly different incentives for technology transfer on either side of the joint ventures

16. Thank You We gratefully acknowledge general support from: Energy Foundation, William & Flora Hewlett Foundation, David & Lucile Packard Foundation, Shell Exploration & Production, Winslow Foundation For in-use vehicle emissions testing project: U.S. EPA, Energy Foundation China Sustainable Energy Program, Ford China, Ford Asia Pacific, and GM China

17. Research Questions • What role has U.S foreign direct investment played in the development of the Chinese auto industry? • Have the U.S. auto firms helped to deploy cleaner or more advanced technology in China? • What have been the most important barriers to technology transfer from the U.S. to China in the auto sector and why? What have been the best incentives for technology transfer? • What special barriers or incentives will exist for cleaner technology transfer for automobiles, if any?

18. Methodology • Case study approach: 1984-2002 • Interviews with dozens of officials in the joint venture companies and their parent companies in both the U.S. and China • Visits to offices, factories, and research facilities in Shanghai, Chongqing, Beijing and Tianjin • Interviews with numerous government officials in U.S. and China; company public materials and some internal documents • Academic literature and secondary sources (news media, wire services, magazines) • Quantitative analysis using data from CATARC

19. Auto Industry in Chinese Economy • 1.6 million Chinese were directly employed by this industry as of 2003 (not counting the employees of industries that supply the auto industry (i.e. steel, rubber), which are estimated at approximately 36.4 million workers). Auto industry is 3 percent of total manufacturing employment. • The value added by the Chinese auto industry represented 6.3% of the total value added of manufacturing in China in 2003, a tripling of this percentage from its level in 1990 (CATARC 2004).

20. History of Chinese Auto Industry • Little to no manufacturing experience prior to WWII • Tech transfer from Soviets before Sino-Soviet split in 1960 • After Cultural Revolution, no technological capabilities in this sector • Decision to “make or buy” – forced to buy because of weak technological capabilities • Formation of many joint ventures with foreign firms and licensing of technology from them as well, but without formal industrial policy • 1994 Auto Industry Policy – intention to create national industry • Consolidation of industry, but currently 118 manufacturers; all the major ones have formed joint ventures with foreign auto companies • Joining WTO in 2001 effectively reversed many previous policies, but increased competition • 2004 Auto Industry Policy – auto industry as “pillar” industry; create better technological capabilities and consolidate industry

21. Chinese Automakers • Currently 116 automakers in China • Vast majority of output comes from the firms that have formed joint ventures with foreign companies (quasi-exceptions are Chery and Geely) • High profitability • Skills in manufacturing, parts and components, and business development • Weak design and innovation capabilities, especially for advanced engines and system integration

22. Terms of WTO for Chinese Auto Industry • Import tariffs for complete vehicles are to be reduced from the current 80 to 100 percent to 25 percent by July 1, 2006 • Import tariffs for parts and components are to be reduced from 35 percent to 10 percent by the same date • Import quotas on vehicles will be decreased 15 percent per year until they are cancelled in 2005 • Import licenses will also be phased out by 2005. • Majority ownership limits on foreign manufacturers for engines will also be eliminated • Also, provincial governments will be given the authority to approve foreign direct investment projects up to $150 million by 2005 (used to be $30 million) • All of the Chinese government’s requirements regarding technology transfer, maintaining a foreign exchange balance, maintaining a trade balance, and meeting localization standards were eliminated upon China’s entry to the WTO in 2001.

23. 2004 Auto Industry Policy • 10-year update to 1994 policy • Emphasizes need for consolidation of industry (i.e. FAW-Tianjin-Toyota) • Urges more capacity-building and innovation • First articulation of concern about environment and oil imports • More emphasis on (and incentives for) exports

24. 11th 5-Year Plan for Auto Industry • 依托现有基础加快产业自主发展。 • Speed up autonomous development based on the current conditions (Chinese branding) • 依靠技术进步推动产业可持续发展。 • Promote sustainable development by using advanced technologies • 利用市场机制促进产业结构优化升级。 • Optimize and upgrade the industrial structure using market mechanisms

25. Background Data

26. Comparisons

28. Production Mix is Changing Source: CATARC, 2006

29. Vehicles Per Capita

30. Historical

31. BP Statistical Review of World Energy, 2004

32. Oil Imports • China became the second-largest consumer of oil in the world in 2004 • China now imports about 3.5 million bbl/day • China is now the third-largest oil importer after the United States and Japan. • Crude oil import growth has been about 0.5 million bbls/day in recent years. • More than half of China’s oil comes from Middle East • According to the Economist Intelligence Unit, imported petroleum (and related products) cost China US$44.5 billion in 2004, making petroleum-related imports the second-largest category of import behind electrical machinery (EIU DataServices March, 2005) • $15 billion spent over the past five years to acquire more than 100 foreign oil fields and companies (McKinsey Quarterly 2006)

34. Domestic Oil Prices • Chinese domestic prices of gasoline and diesel among the lowest in world. • Government tightly controls prices of gasoline and diesel in domestic market. • Concern about effect on poorer areas and manufacturing. • Refining industry squeezed. Buying crude at world prices, selling refined products at low prices.

35. China Light-Duty Vehicle Fuel Consumption Standards New Continued models models Phase I 7/1/2005 1/1/2006 Phase II 7/1/2008 1/1/2009 Red Line -- Phase II Maximum (2008-2009) 16 Green Line -- Phase I Maximum (2005-2006) 14 12 L/100 km 10 For both Phases, the upper solid line is for 8 Automatic transmissions and the lower dash line is for Manual transmissions . 6 750 1000 1250 1500 1750 2000 2250 2500 Vehicle Test Weight (lbs) Feng An1, Wei Wu2, Yuefu Jin2 and Dongquan He3 ; 1Transportation Consultant 2China Automobile Technology and Research Center 3The Energy Foundation

36. Air Pollution • Motor vehicles are now a leading source of urban air pollution in China’s big cities

37. Chinese Government Policies • First emission standards in 2000 • Catalytic converters required in 2000 • Leaded fuel banned in 2000 • Clean Vehicle Action (alternative fuel vehicle program) started in 1999 • Ministry of Science & Technology (MOST) high-tech (863) R&D started program on clean vehicles in 2001 (US$120 million over 5 years) • New fuel efficiency standards in 2005 • Euro III standards to take effect in 2008

38. Vehicle-Emission Standards

39. Chinese vehicle emission standards Source: He, Kebin, Oct. 2004

40. Carbon Emissions from Chinese Passenger Cars Under Various Scenarios • China is already the second-largest emitter of GHGs in the world • Transportation is currently only responsible for a very small fraction of those emissions, but this sector is likely to be the one with the most rapid growth in emissions during the next two decades

41. In-Use Vehicle Emissions: Tianjin • Fuel Quality Testing • Vehicle Activity Study • In-Use Emissions Testing (Remote Sensing and PEMS) • Project Partners: • ETIP, Harvard • CATARC • ISSRC, UC Riverside • Tsinghua University

42. Preliminary Results

43. Technology Distribution (Preliminary)