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WTO Entry Will Challenge China's Automakers - 2001-09-26


After 15 years of tough negotiations, China is on the verge of joining the World Trade Organization. Membership in the global trade body will unleash a flood of foreign imports and stiff competition. Among those likely to feel the heat are China's auto manufacturers.

Zhu Yanfeng, president of the state-owned car manufacturer, First Auto Works, doesn't mince words when it comes to the challenges he will face when China joins the WTO next year.

"We admit it: we're backward," says the 40-year-old Mr. Zhu. "We're backward in research and development; our profit margins are low; we can't compete with car makers from Germany, Japan and the United States; and we lack talent," he said.

But he also sees WTO membership as a welcome challenge. Mr. Zhu became president of First Auto Works or FAW - in 1999, determined to make the company leaner and more competitive.

"Now that we recognize our weakness, we can begin to change," he said.

To get an idea of the inefficiencies burdening China's carmakers, just stroll through FAW's sprawling grounds, in the northeastern industrial city of Changchun.

FAW employs more than 120,000 workers, most of whom live in what's called the factory district - an area covering more than 20 square kilometers. In addition to subsidizing housing for workers and their families, the company funds some 20 schools from kindergarten to university. FAW has its own hospitals, hotels, stores and even police stations. It pays the pensions of some 40,000 retirees.

And yes, FAW also makes cars. It's been able to sell them because foreign carmakers are kept out of China's market by a large number of barriers. First, foreign cars are slapped with 80 to 100 percent import tariffs, making them twice as expensive for Chinese customers.

Tim Stratford, vice chairman of General Motors China, says that on top of the high tariffs, foreign carmakers must also apply for import licenses, and once approved, find a Chinese company to import their cars.

"The next barrier is once the vehicle is imported, foreign companies aren't allowed to distribute them," he said. "So you have to find a Chinese company to do that for you and often it's a different company than the one that acted as the importer. Then the next barrier is we're not allowed to sell them at retail to the customer. We have to find Chinese companies that will do that. The next barrier is we're not allowed to provide financing."

The list of barriers goes on and on. But Mr. Stratford says all that will change after China entry into the WTO. Under China's agreement with the United States, import tariffs on cars will be slashed to just 25 percent in five years, and non-tariff barriers will gradually be eliminated.

"Which I think shows you how effective the American negotiators were, and it also shows how willing the Chinese have been to open up their markets and become part of the world trading community," he said.

China has more than a hundred carmakers, but in the years following WTO entry, many are expected to go out of business.

Changchun mayor, Li Shu, says that the car industry is a pillar of the local economy, and last year accounted for half of the city's total output.

To protect against a total collapse of the industry, the government is likely to continue to support giant carmakers like FAW.

Yet FAW president, Mr. Zhu, says the company still faces a hard struggle ahead. He says, over the next 10 years, FAW's goal is just to survive in the post-WTO environment and the company will focus on areas where it can be competitive, such as producing mid-size trucks. It will gradually shed non-essential departments and workers, upgrade its technology and build a modern structure.

"I accept the market's choice," says Mr. Zhu. "If I don't make money for the company, I'm out."