Restructuring and Spatial Change of China's Auto Industry under Institutional Reform and Globalization Author(s): Victor F. S.

Sit and Weidong Liu Source: Annals of the Association of American Geographers, Vol. 90, No. 4 (Dec., 2000), pp. 653-673 Published by: Taylor & Francis, Ltd. on behalf of the Association of American Geographers Stable URL: http://www.jstor.org/stable/1515437 . Accessed: 10/10/2011 00:33
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Restructuring of Institutional China's Auto Reform

and

Spatial Industry and

Change under Globalization

Victor

E S. Sit* and Weidong

Liu**

*Department of Geography & Geology, University of Hong Kong **Institute of Geography, Chinese Academy of Sciences

This paper employs an embeddedness approach to study the restructuring and spatial change of China's auto industry since the 1980s. The two major dynamics behind these processes are discussed in detail: (1) institutional reform, which has resulted in a mixed regulation mechanism composed of both market competition and legacies of the past command economy, and which has also allowed more freedom in the decisionmaking of indigenous auto firms, and (2) globalization of production in terms of a huge intlow of foreign direct investment (FDI), mainly in the form of joint ventures. As a result, a new geography of the industry has emerged, with clear features of decentralization of production and a shift of production toward the coastal region. The paper concludes that the gradual institutional reform in China has led to a "path-dependent" development of its auto industry and that auto-producing FDI has been deeply embedded in the Chinese insti? tutional environment. This involvement in China's auto production can be aptly described as "embedded globalization." Key Words: China, auto industry, industrial restructuring, FDI, em? beddedglobalization.

auto industry is one of the sectors most frequently studied by industrial The economists, geographers, and business In the past, the industry was considered analystsa classic example of the geographic evolution of an industry from extreme concentration to marked decentralization 1987). (Schoenberger Before the 1980s, it was a popular strategy for major automakers other than the Japanese to set up branch plants in peripheral regions for both and assembly, which was parts manufacturing best represented by the world car model (Maxcy 1981; Rubenstein 1992). Since the 1980s, however, the industry has experienced a new wave of spatial restructuring due to the spread of "lean production" (Womack et al. 1990). The new just-in-time (JIT) parts-sourcing strategy of lean production tends to cause spatial reconcentration of production, as proximity between assemblers and suppliers can reduce transaction costs. Meanwhile, increasing globalization of pro? duction, mainly in the form of foreign direct hv vestment (FDI) of multinational corporations (MNC), has acted as another major force in the recent spatial restructuring of the industry. The

1980s witnessed a transition from FDI to proteo tionism in the world auto market. Even in the developed countries, defensive measures were used to protect auto sectors (Chaudhuri 1989). For example, Japan was required by the U.S. to practice voluntary export restraints. These mea? sures forced auto-producing MNCs to invest and build cars in host countries, instead of just (CBU) vehicles to exporting complete-built-up them. By the early 1990s, overseas output of maMNCs had accounted for jor auto-producing more than one-third of their total vehicle production. Such FDI inflow has caused significant changes in the geography of auto production in host countries. For example, since the 1980s, Japanese auto transplants have played a key role in the spatial changes of auto production in the U.S. (Mair et al. 1988; Reid 1990). The auto industry shows an obvious oligopolistic feature, as a few MNCs have dominated production and markets. Besides, the industry in safety, constantly evolves new technologies and other aspollution control, energy-saving, of these two factors pects. The combination makes the establishment of a domestic auto pro-

Annals 90(4), Geographers, 2000,p. 653-673 oftheAssociationAmerican of of ? 2000byAssociation American Geographers UK. 350 MA Published Blackwell OX41JF, Oxford, Malden, 02148,and108Cowley Road, Publishers, MainStreet, by

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duction

economies exsystem in emerging tremely difficult. Chaudhuri (1989) has categorized the industry in emerging economies into two models: (1) an independent, domestically owned, private industry, as in South Korea, and (2) a dependent, foreign-owned, subsidiary of MNCs, as in Latin America. Indeed, due to hisreasons, the torical, political, and technological of different latecomers in the industry paths have been quite different. The Latin American auto industry, represented by Brazil and Mexico, has evolved under the dominance of foreign MNCs (Tuman and Morris 1999; Jenkins 1977). As pointed out by Shapiro (1996), "Brazil's auto industry has been largely shaped by the dynamic interaction between state policy and the global auto industry since the 1950s." The Spanish auto industry has followed a slightly different path. It experienced a transition from an independent and domestic market-oriented industry to one dominated by MNCs but oriented toward the European market (Pallares-Barbera 1998). As argued by Lagendijk and Knaap (1993), globalization of the Spanish auto industry has reached the final stage: the complete "takeover" of all auto pro? duction by foreign MNCs, including the main A major reason behind parts manufacturing. this transition was the removal of restraints on the FDI of MNCs by the Spanish government. The development of auto production in South Korea represents a totally different path: it has targeted export from the very beginning, based on careful planning by the Korean government, though it has also relied on foreign auto MNCs for technology and capital (Lee 1996; Chaud? huri 1989). By the 1980s, the country had a successful domestically owned auto industry. Thus, in general, two factors are important for establishing an auto industry in the developing countries. They are, first, dependence upon auto-producing MNCs for technology and capi? tal assistance, and, second, state intervention in the form of industrial policies and regulation. The interaction between these two factors is the major dynamic behind the spatial changes of the auto industries of these countries. China was a command economy in the past and is now in transition towards a managed market econ? omy, leading to a rapid change in the institu? in the country. On the tional environment other hand, the opening and reform since 1978 has made globalization in the of production form of FDI inflow an increasingly important

driving force in the country s economic develand instituopment. Therefore, globalization tional reform are two critical factors for underof the auto standing the spatial development industry in China. In this paper, we will examine the post-1978 spatial changes of China's auto industry under these two factors. First, we establish a theoretical framework on the changing geography of China's auto production. Second, we briefly review the pre-1978 develop? ment of China's auto industry and analyze its re? post-1978 restructuring under institutional form. Third, we examine the recent globaliza? tion of production of China's auto industry in the form of FDI inflow. Finally, we discuss the of geography of the industry as a consequence the recent restructuring and globalization.

An

Embeddedness Auto

Model Industry

of

China's

Increasing globalization has brought forth a critical question: what is the role of nationstates in the age of globalization? While some feel that host localities are losing their economic autonomy vis-a-vis MNCs, others argue that localization and globalization coexist, particularly in the auto industry, as a result of the practice of local content protection and the adoption of JIT delivery. The FDI of MNCs does not often take the form of "isolated" branch plants, but is inserted much more fully into the local economy (Morris 1991; Rawlinson and Wells 1993). This argument, however, is a neoclassical explanation of FDI and globalization. Such an explanation is mechconfined mainly to the market-exchange anism of economic activities. To better understand and explain the FDI of MNCs, recent literature on the subject has turned to an institutionalist approach by borrowing the concept of "embeddedness" from the new economic sociology "Embeddedness" means that economic actions are "embedded in concrete systems of social relations," particularly a network of interpersonal relations (Granovetter 1985). Although the notion was originally used in a local and social (particularly interpersonal relations) context, recent studies have extended it to embrace factors such as government institutions and policies, and have applied it to larger arenas like the nation state. For example, Jacobson et al (1993) employ political em? beddedness to explain the managing responses

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of U.S. MNCs to constraints

created by the U.S. Pavlinek and foreign policies. government's Smith (1998) and Swain (1998) have used the notion of embeddedness to study the FDI of MNCs in postsocialist East and Central European countries. For Yeung (1998), embedded? ness can take place in intrafirm, interfirm, and extrafirm networks. The latter refers to "any relationship between the firm and other institutions embedded in society and space," and these other institutions include the nation state and nongovernmental organizations. No matter how the concept is defined and used, the basic proposition of the embeddedness approach is that market exchange, as defined by neoclassical eco? nomies, is not the only regulation mechanism in economic development; other mechanisms also have a role, perhaps an important one. Among these other mechanisms are social and cultural traditions, state regulation, and governance and societal structure. In the study of the auto industry, the national institutional environment, particularly the na? tion state, has long been considered an impor? tant force to interact with and counterbalance For examglobal forces (Dicken 1998:329-34). under strong government intervention and ple, regulation in Western Europe, the strategies of Japanese automakers and parts suppliers have been different from those in the U.S. (Jones and North 1991; Rawlinson and Wells 1993; Sadler 1994). As a result of high local-content requirements, Japanese assembly transplants in the European Community had to purchase a very high proportion of components from local suppliers, and only a few Japanese autoparts suppliers followed their assemblers to set up transplants there. Compared with the embeddedness ap? proach, however, these studies take institutional factors narrowly. The embeddedness approach incorporates more factors, such as social struc? ture, institutions, polity, and culture, in its exIt recogplanation of economic development. nizes different kinds of embeddedness, including structural (network and social structure), cognitive (patterns of thought), political (the context of political institutional cultural, struggle), (networks of interorganizational relations) and "societal" embeddedness (Jessop 1997; Zukin and DiMaggio 1990). In developing countries such as Brazil, South Korea, India, and China, strong state regulation and governance in the form of policies of direct are common factors in economic intervention

the development of the auto industry (Chaudhuri 1989; Harwit 1995; Dicken 1998; O'Brien and Karmokolias 1994; Tuman and Morris 1999). In China, the nation state's role was absolute before 1978, as the country was then a Even in the early 1980s, command economy still maintained strict the central government control over the auto industry. Raw materials and final products of auto firms (and even joint ventures) were controlled by the central or local authorities and firms were responsible only for production (Yang 1995). The institutional environment in China has been changing rapidly since the mid-1980s, however. The first change of planning power, resulting is decentralization in the weakening of the central government's and the authority in economic decisionmaking of competition among provinces. strengthening Provincial rivalry and protectionism are among the major results. The second change has been the shift toward a market economy and a gradual removal of central planning mechanisms. Strict central control, as illustrated by Yang (1995), has faded. The third change is the appearance of or groups power establishments?conglomerates of firms subordinated to an industrial ministry or a local government, which act as an interest unit to bargain with other power groups (corporations or the central government). The First Auto Works (FAW) group, Second Auto Works In? (SAW) group, and Shanghai Automotive are among the establish? dustry Corporation ments that are becoming more and more indeof the interorganizational network pendent created by the old command economy The fourth is preferential treatment given to Sinoforeign joint ventures and foreign-owned enterprises that are usually granted a two-year exand three-year reduction on taxes. emption This, combined with the first two changes, has the influx of FDI, particularly in encouraged the auto industry As a result, there has been a diversification of ownership, a departure from the earlier domination of state-owned enter? prises. At present, China's auto sector consists of FDI-involved firms, centrally programmed state-owned firms, locally programmed stateowned firms, township enterprises, and private enterprises. Firm ownership is complicated in China. all state-owned enterprises are Theoretically, the same since they are symbolically owned by all the people in the country. But in practice, they are quite different because they are subordi-

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nated to governments of different levels, including the central, provincial, municipal, and even county governments. In this paper, local assemblers refer to firms established and programmed and municipal) by local (provincial govern? ments, in contrast to the centrally programmed assemblers that were established and managed by the central government (i.e., various ministries of the State Council). Township enterowned establishments at prises are collectively the township and village administrative levels. In the auto sector, township enterprises are sector, mainly in the autoparts manufacturing though a few also assemble specialty vehicles. Some township autoparts producers, like the Zhejiang Universal Joint Manufacturing Group, have become very large firms and are viewed as major producers by central authorities. There are also private enterprises, but they are small in scale and mainly serve the aftermarket. neither the stateUnder these conditions, (central planning) nor the neoclasgovernance sical approaches can explain recent developments in China's auto industry. The regulation of economic mechanism now development present in China is a mixture of both the newly adopted market mechanism and the legacies of the past command economy, as well as of other factors such as the state's political concerns and the central-local and local-local government relationships. This complex has been labeled the "socialist market mechanism" by the Chinese government. This broadly defined institutional and the FDI of MNCs are the prienvironment mary driving forces behind the recent restruc? turing and spatial change of China's auto indus? try, leading to a unique path of development countries and other compared to developed emerging countries. The path is also different from that of the postsocialist (since 1990) East and Central European countries, where the auto industry is now dominated by MNCs (Pavlinek and Smith 1998; Swain 1998). Thus, this paper will follow the embeddedness approach to study the post-1978 restructuring of China's auto in? its changing institutional dustry, highlighting environment and the globalization of produc? tion in terms of FDI inflow, and will reveal how these forces have changed the geography of the industry. Based on the above, we have developed an embeddedness framework for investigating re? cent spatial change in China's auto industry (Figure 1). Different from the cases of other

countries where the globalization of production and changes in production patterns, as previare the major forces behind ously mentioned, the spatial changes of auto industries, in China the institutional environment acts as the primary factor. Global forces, notably FDI, have to be embedded in the Chinese institutional envi? ronment, which consists of state industrial policy, legacies of the past command economy, provincial rivalry and protectionism, and political concerns. As will be seen in later sections, the central planning mechanism and political con? cerns were major factors affecting the develop? ment of the auto industry in China before the 1980s. Since then, as a consequence of deepenreforms, provincial rivalry ing of institutional and national industrial policy, as well as market have become more and more imcompetition, portant forces. In addition, macroeconomic pol? icy changes in the country, combined with new FDI policies, have led to increasing globaliza? tion in the auto industry in the form of FDI inThe FDI of autoflow for import-substitution. producing MNCs, however, has been embedded in China's institutional environment as the government's policy has restricted them to joint ventures. It has also been heavily affected by the host regulation structure, industrial policy, and central-local which government relationships, are characteristic features of the Chinese insti? tutional environment. such a By employing model, we hope to reveal that the globalization of auto production in China is not a one-way phenomenon dominated by the wishes of MNCs. Instead, it is a two-way process in which institu? tional reforms in China and the local embed? dedness of MNCs in this changing institutional environment are major dynamics. It should be noted that although lean pro? duction, as mentioned previously, has been an important factor in the recent spatial changes of the auto industry in many countries, no automaker in China has yet adopted complete lean production. Some, like FAW-VW and ShanghaiVW, have selectively adopted JIT delivery At present, suppliers tend to rent a storage center near their assemblers so as to satisfy partial JIT delivery. This new production pattern, therefore, still has little spatial impact on China's auto production, though we believe that it will, as in other countries, become an important force leading to spatial changes in the future. Thus, we will not discuss these productionbased factors in detail in this paper.

China's

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Industry

657

Government Policy

of Legacy Central Planning

Bureaucracy

Local/Provincial Protectionism

Political Concerns

Institutional Environment Reform and

of Changing Geography China's Industry Auto of Embeddedness MNCs Auto-producing

of Globalization Production: Forcesof MNCs

Figure 1. A theoretical framework for the changing geography of China's auto industry.

Prereform Auto

Development 1950-1978 Industry:

of China's

Although the Chinese trial-produced trucks in the 1930s, no commercial production existed before the establishment of the People's Republic of China (PRC). In 1950, the PRC govern? ment approached the Soviet Union, a close ally at the time, for help in building modern industries. As a result, China's first auto assembly plant, FAW, was designed by Russian technicians, following the plant structure of Russia's vertically integrated auto firm. Key manufactur? ing equipment came from the Soviet Union and East European countries, and a large proportion of metal materials needed, particularly steel, were shipped in before 1964 when nearly a local content was achieved. hundred-percent The location of FAW was also a Cold War concern. The most favorable location for auto man? ufacturing in China at the time was coastal devel? Shanghai, which had a comparatively oped machinery industry and auto-parts produc? tion experience. The Chinese government, however, chose inland Changchun in northeast China, near the Soviet Union (Figure 2). Shortly after FAWs opening, there began a rash industrialization in the country?the Great Leap Forward, which encouraged decentralization of central planning power and "grass-roots"

industrialization. Thus, in 1958, more than a hundred small local factories suddenly began to assemble motor vehicles.1 Most were former auto repair shops, with an annual capacity of less than ten vehicles each. But when the central shifted back to a policy of recengovernment tralization, only fifteen of these factories survived in 1960 (Figure 3). In this round of proliffour major local auto assemblers eration, emerged in the cities of Shanghai, Nanjing, Jinan, and Beijing (Figure 4). The end of Sino-Soviet friendship in 1962 deprived China of all "friendly" sources of foreign technology and equipment, and China was then forced to accept two decades of independent auto-production The Sinodevelopment. Soviet split made China antagonistic toward both the two world superpowers, the Soviet Union and the U.S. Its leadership concluded that war might be triggered at any moment, and they adopted a "third line" defense strategy, namely locating new industries in peripheral mountainous regions. To prepare for the defense demand for trucks in times of war, three new as? semblers, the Second Auto Works (SAW) and two heavy-duty truck producers, were built (the FAW was still a fledgling firm with an annual ca? pacity of only 60,000 vehicles). The SAW represented China's first independent technological capability in auto manufacturing, as only 10

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Sit and Liu

Zhengzhou ^ h^F '* >Shly?n f% #*4*

Hmm : oame province of -rtameefctty Kunming

WR"h8U . )A4unGU^fl"J ^ jl Kunmlngv'.^^> ^Gmnatianik, . ?.Guangzhou . ? LNaimirifl/ (S^H

Figure 2.

Provinces of China with locations of provincial capitals and important vehicle-assembly plants.

percent of its total equipment was imported (Editorial Committee 1996: 110). It is an unusual case in the world auto industry, as economic fac? tors were largely irrelevant in its establishment. To ensure that it could elude military attacks in time of war, the SAW was located in Shiyan, a

small, remote town in the mountainous area of northwest Hubei (Figure 4)Assemblers proliferated again from 1967 to 1970 (Figure 3), the result of local initiatives unleashed by the breakdown of central govern? ment control caused by the Cultural Revolution and the shortage of motor-vehicle supply Three new firms, in addition to the existing ones, emerged as important motor-vehicle production sites (Figure 4). They were located in Tianjin, Shenyang, and Wuhan, major transport nodes and substantial market centers.

Restructuring Institutional

under Climate

the since 1978

Year (1956-1997) Figure 3? Number of auto assemblers in China (1956-1997). Source: Yearbookof China's Automotive Industry 1998.

After the Opening and Reform in 1978, the structure of the auto market in China changed markedly as a result of a fundamental transformation of the country from a preoccupation with political struggles and central planning toward economic development through the socialist market economy Demand for light vehi-

China's

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m 9 106S-8O: ? O

Central Firms Local Firms

Central Firms Local Firms

Figure 4. Major auto assembly centers in China before the 1980s. Central firms refer to those established and pro? grammed by the central government, while local firms are those established and programmed by local governments. Source: Editorial Committee (1996) (in Chinese).

cles and cars increased quickly. For example, the number of total motor vehicles in use rose from 1.78 million in 1980 to 13.19 million in 1998 (Table 1), with an annual rate of increase of 11.8 percent. The increase of private vehicles was more rapid (23 percent annually). The produc? tion system that had been built largely for defense purposes was unable to satisfy the new demand. The industry also suffered from diseconomies of scale, narrow model range, low pro? duction capacity, and low technological levels. The shortage soon led to a rise in the number of small assemblers and the growth of legally and illegally imported vehicles. From 1982 to 1985, the number of assemblers in China nearly douthe 1980s, the bled (Figure 3). Throughout number of imported cars was higher than that of domestically produced cars. If illegally imported cars were included, the number would be much higher, as their numbers were equal to the le? gally imported.2 It is reported that illegally im? ported vehicles in 1997 reached 100,000 units, twice as many as legal imports (Mingpao Daily

1998). Changes in demand, combined with in? stitutional changes as described above, has driven the restructuring of the auto industry and its glo? balization of production, mainly in the form of joint ventures with foreign MNCs, absorption of technological transfers, and the importation of vehicles and components. Loose Central Control of Key Assemblers and Spatial Expansion

One important response to market and insti? tutional changes in the auto industry is the transformation of the central management system and corporate organization. In China, the management of the industry is closely related to the command economy and its lingering influence. Table 2 lists the major changes in the con? trol structure of the industry There have been and reconcentration twists in decentralization of the central government's power. In 1964, the Chinese government decided to reorganize the central control system of industries by setting up

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Sit and Liu

Table 1. Motor Vehicles

in Use by Category 1998) (in 1000 units)

in China (1980-

NA: not available. Source:Automotive Industry China (in Chinese and English) 1999. of

industrial trusts, which were to be independent planning units under the State Planning Commission. This was an attempt to coordinate and unify enterprises subordinated to different administrative levels. The China National Automotive Industry Corporation (CNAIC) was one such trial trust, but it was closed soon after the Cultural Revolution began in 1966. In the following three decades, it was dissolved and reestablished several times (Table 2). The inconsistency of the central government's policy had as an industrial prohibited its full functioning trust. The Bureau of Automotive Industry, es? tablished in 1993, somewhat reconcentrated decisionmaking, though it had little control over centrally programmed corporation groups, like the FAW and SAW.3 The removal of the Bureau in 1998, however, does not mean a complete decentralization of planning, as key projects of the industry still require the permission of top leaders through approval of so-called "Premier Projects" or "Vice-Premier Projects." In terms of corporate organization, the cen? tral government had tried, in 1981, to set up auto alliances to unify independent enterprises subordinate to different ministries or local gov? ernments. Although alliances were formed in name, little was achieved because the ownership of the enterprises involved did not change, and

Authority Year 1952-64 1964

Table 2. Changes in the Administrative of the Auto Industry in China Authority Bureau of Automotive Industry, the First Ministry of Machinery Industry China National Automotive Industry Corporation (CNAIC) set up; Bureau of Automotive Industry cancelled CNAIC dissolved The First Ministry of Machinery Industry (the Cultural Revolution period) Bureau of Automotive Industry, the First Ministry of Machinery Industry CNAIC reestablished; Bureau of Automotive Industry cancelled CNAIC dissolved again; China National Automotive Industry Association became the central authority CNAIC set up for the third time CNAIC's administrative function can? celled, and it became a pure business establishment; Bureau of Automotive Industry set up in the Ministry of Machinery Industry Bureau of Automotive Industry cancelled as a result of government reform; no central authority replaced it.

1966 1966-76 1976-82 1982 1987

1989 1993

1998

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Auto

Industry

661

they were still under the control of their original "bosses" (i.e., ministries or municipalities). From the late 1980s onwards, the central au? thority started to use market mechanisms, shifting its efforts toward fostering corporation takeovers or mergers. groups by encouraging The three centrally programmed groups?the SAW, FAW, and China National Heavy-duty Truck Corporation?were ratified in 1987 as independent planning units in the State Planning Commission. Three local corporation groups in Shanghai, Tianjin, and Beijing soon received similar treatment. In 1993, CNAIC became the fourth centrally programmed group (Table 2). These corporation groups now dominate the in? dustry, and more and more small and medium factories in the industry are being taken over by mergers or alliances with these groups. In 1997, the above-mentioned seven (central and local) accounted for 64 percent of corporation groups China's total motor-vehicle production and 93 percent of its car production. Such reform in the central management system and corporate organization makes possible cross-provincial expansion of major indigenous auto firms. Before the mid-1980s, it was difficult and unnecessary for a firm to expand out of its original location because of the traditional plan? and the separation between ning mechanisms and between local government departments a situation of "lock-in." The forgovernments, mation of corporation groups under the new in? stitutional environment has spatially extended auto assemblers. So far, this has key indigenous taken place mainly in the form of takeovers, although there are cases of greenfield investment, such as FAW's investment in Shandong to set up a parts joint-venture with Daewoo, and SAW's investment in Wuhan to build its car assembly center. By the end of 1995, the FAW extended its business to more than ten provinces, whereas ten years before, it was concentrated exclusively in Changchun. SAW is quite similar to FAW. For example, the Hangzhou Auto, Liuzhou ManufacAuto, and Zhengzhou Light-Vehicle turing plants have become subsidiaries of the SAW group. The SAW, however, has shifted most of its new investment towards Wuhan (car assembly) and Xiangfan (car parts and lightvehicle manufacturing) because of locational limitations of its headquarters, Shiyan, where no further flat land is available for industrial use, and because transport connections are inconvenient. The spatial expansion of provincial as-

semblers is much different from the two key centrally programmed firms, since the former have difficulty in solving ownership problems across provincial borders. Most of their takeovers or mergers have occurred within local jurisdictions. There is little evidence of their interprovincial expansion.4

Product Diversification in Car Manufacturing

and the Boom

Before the 1980s, the Chinese government treated the auto industry as a producer-goods sec? tor. In 1980, more than 75 percent of the vehicles produced were goods vehicles (cargo trucks and small-to-medium-sized vans, mostly mid-sized trucks), while the share of cars was less than 2 percent. At that time, the industry was characterized by a shortage of heavy trucks and light vehi? cles and the almost nonexistence of car produc? tion. Product diversification, therefore, has been a significant element in the recent restructuring. During the first half of the 1980s, product di? versification focused on light vehicles and heavy trucks. At first, the central government hoped to depend on the two major centrally pro? grammed assemblers (FAW and SAW) to improve product offerings, and, in 1981, assigned them to develop light vehicles and heavy trucks, This central planning effort was respectively. not effective, however, as the decentralization of planning powers had already begun. A few newly formed local firms, in addition to existing local producers in Nanjing and Beijing, quickly entered light-truck manufacturing in the mid1980s by importing technology and equipment, mainly from Isuzu and Fiat (IVECO). Because of its "lock-in" situation in the old central plan? ning network, which still lingered on in the cen? trally programmed firms, FAW only began the assembly of its independently designed light truckas late as 1991. In 1985-1986, China legally imported 150,000 cars, nearly nine times the number of domestically produced cars in the same period. The sudden increase of car imports made the Chinese government realize the existence of a huge domestic demand for cars and raised concerns over the drain on the country's currency. Thus it decided to quickly expand auto produc? tion. The government also planned to build the industry into one of the pillars of the national economy, and car production was to become the

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Table 3. Major Car Producers in China in 1998

NA: not applicable in 1998. aShanghai-GMstartedcommercialproduction in 1999, with a local content of 40%. In that year, the plant assembled23,000 cars (Buick Regal and Buick Century) and made a profitof RMB 600 million. bHonda establisheda joint venture with Guangzhouin 1998 after PSA withdrewfrom Guangzhou-Peugeot. Source:Yearbook Automotive in of Industry China 1999.

main thrust for such a strategy. To avoid an overscattered pattern, as happened in goods-vehicle the central government aimed to production, limit new entrants into car assembly. In 1988, based on industrial experiences and technological capacity, as well as general regional balance it sanctioned three major car as? considerations, semblers, the FAW, SAW, and Shanghai-VW, and three small assemblers, Beijing-Cherokee, (later Tianjin-Charade, and Guangzhou-Peugeot which was later known as Guangzhou-Honda5), the "Big Three and Small Three" strategy. The restriction was not very successfully implemented, however, and in the early 1990s, two new firms with defense-industry background obtained special permission to produce minicars. Their parent companies were the China Ordnance Industry Corporation and the Guizhou Aviation Industry Corporation. Both had strong bargaining power and close relationships with top government leaders.6 In 1997, a new car asreceived approval from sembler, Shanghai-GM, the central government. Table 3 shows the car producers in China in 1998. Together, major they were expected to have a total production capacity of 1.06 million cars by 2000. The restructuring has resulted in a rapid in? crease of car and light vehicles in total vehicle production. The share of the car rose from 2.4 percent in 1980 to 31.2 percent in 1998, with light vehicles (trucks and buses) increasing from 19.5 percent to 29.3 percent, while mid-size trucks fell from 53 percent to 11.3 percent. Ac-

cordingly, major car and light-vehicle assembly centers, like Shanghai, Tianjin, and Nanjing, have become new centers of vehicle production and are important locations in the geography of China's auto industry.

Economies

of Scale

The development of scale economies is one of the key dimensions of auto restructuring around which the central government has shown much concern since the 1980s. Although the central authority favored big assemblers and discriminated against small operations in an attempt to achieve economies of scale, the results have been uneven. There were still 115 assemblers in 1997, including some 50 joint ventures.7 The average annual output of these assemblers was just 13,700 units. Even the aver? age annual output of the largest eight assemblers was a mere 125,000 units. Shanghai-VW leads in production, with 300,000 units per year, the minimum economic scale for a single-plant onemodel car assembler under mass production (Womack et al. 1990). In truck assembly, FAW and SAW are among the largest single-plant as? semblers in the world, with an annual capacity of 150,000 units each. There are, however, still nearly 90 assemblers that produce only several thousand vehicles each annually. The slow progress in the development of mass auto assembly is largely due to local protec-

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tionism. Local governments have used regulations and policies to favor the purchase of vehi? cles produced within their jurisdiction, which has created protected local markets that result in a pattern of spatially dispersed small and inefficient indigenous assemblers. Local protectionism also operates for large assemblers, including joint ventures. For example, the Shanghai muonce required that every nicipal government Santana model. It city taxi be Shanghai-VW's still levies a lower license tax to Santana buyers who live in its suburban areas. The central gov? ernment also uses protective measures to protect favored firms: with government help, in 1996 and 1997, Shanghai-VW initiated a price war by decreasing the selling price of its Santana by 20 percent. This effort to consolidate the car in? dustry, however, ended just a year later, when the central government stepped in and set a floor for price reductions. The highly protected national market also acts as a constraint to scale economies. China still imposes more than 80-percent tariffs on most imported vehicles. This not only deters international competition, but it also encourages high prices for locally produced vehicles, which in turn induces more domestic entrants. Experience from other emerging economies shows that policies to protect the domestic market must be combined with strict control against new en? trants in order to promote the rapid growth of key firms in the industry (Auty 1996; Waitt 1993; Chaudhuri 1989). China has failed to follow this practice due to the decentralization of planning power and the characteristics of its ad? ministrative system, particularly the separation between and the relative independence of local and government governments departments. Provincial and local governments and state ministries have tried to protect their indigenous auto sector, often bargaining successfully for special permissions that circumvent central gov? ernment regulations.

MNCs to enter the host market relatively freely, while also requiring a strict, and normally very high, local content (Chaudhuri 1989; Lagendijk 1994, 1995). This strategy aims mainly at import substitution, but recently countries such as Brazil, Spain, and Mexico have turned attention to exports through MNC subsidiaries and joint ventures that are not required to achieve high local content but are encouraged to export a proportion of their final product (Dicken 1998: been 332). These countries have consequently auto increasingly involved in the international trade. Another way is to purposively control the entry of MNCs, and to use their resources to foster national auto firms with clear exportoriented goals. Although not many latecomers have achieved such an export-oriented develop? ment, Japan and South Korea do offer successful examples. China seems to be following a middle approach. The Chinese has government announced that it hopes to develop a comparauto industry and to proatively independent mote the export of cars. At the same time, it has allowed many MNCs to enter in the form of joint ventures, the goals of which are import substitution. In this section, we review China's the forces of glo? strategy for harnessing balization in the form of its policy on autorelated FDI, and we examine FDI inflow into the country and its impact on the spatial pattern of the industry.

Government

Policy

on Auto-Related

FDI

Globalization the 1980s:

of Production Inflow of FDI

since

The lack of capital and technology is a major barrier for latecomers wishing to develop their auto industry. To set up partnerships with autoproducing MNCs is a viable solution to this problem. One way to do so, as represented by Brazil and Spain, is to allow auto-producing

After the Opening and Reform in 1978, China resumed technology imports to accelerate the modernization of its auto industry. In the first half of the 1980s, it imported a dozen key for heavy, light, and production technologies the Steyr and Tatra minivehicles, including heavy-truck production technologies from Austria and Czechoslovakia and the Isuzu light-truck and Suzuki and Daihatsu minivehicle produc? tion technologies from Japan. The demand-led increase of imported vehicles in the mid-1980s, however, forced China to adopt a much more open policy to speed up import substitution. The country began to encourage FDI in auto produc? tion by setting up joint ventures with autoproducing MNCs. Until the 1990s, however, China did not have systematic regulations on auto-related FDI inflow. Regulations used in the 1980s included

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on and restrictions localization requirements the import of complete-knocked-down/semiknocked-down (CKD/SKD) parts.8 Strict re? strictions on parts imports and the desire for rapid localization led to some discontent among foreign partners (Harwit 1995). From the early 1990s, the government established a more flexible program that gives firms different preferential tariffs on imported parts according to the lo? cal content they have achieved. For example, car assemblers are given a three-year period in which tariffs on CKD parts is reduced to 50 per? cent, while tariffs on assembled cars may be be? tween 80 percent and 32 percent, according to the level of local content achieved. If firms do not achieve 80-percent local content by the end of the eighth year of production, the preferential tariff is terminated. In 1994, the Chinese government produced the China Automotive Industry Policy, which aims at fostering three or four internationally national auto corporation groups competitive by 2010. This policy offers, for the first time, an integrated approach to auto-related FDI. It sets clear requirements on the formation of joint ventures with foreign partners. Joint ventures are required to establish an internal R&D deproducts, partment, produce international-level and whenever possible, achieve internal foreign currency balance. Moreover, in assembly and engine joint ventures, foreign equity may not exceed 50 percent. Both joint ventures and do? mestic firms producing imported vehicle models must undertake localization to raise the contribution of local parts and processes in assembled vehicles, and the local content is one of the prerequisites for permitting a firm to produce a sec? ond vehicle model. Preferential tariffs also extend to all types of vehicle production and key auto parts production. More recently, new as? sembly joint ventures are required to have a start-up local content of 40 percent and a techcenter set up by the for? nological development China hopes to safeguard eign partner. Thus, the national nature of its auto industry while actively allowing the globalization of its produc? tion by encouraging FDI inflow in an effort to improve its international competitiveness.

ventures. By the end of 1997, there were nearly firms in China. 500 FDI-involved automotive Among them, 80 are assembly joint ventures (including specialist vehicle assemblers), 410 are auto parts joint ventures, and 10 are wholly foreign-owned firms. The cumulative contracted FDI amounted to US$ 7.39 billion. Hong Kong, the U.S., Germany, Japan, France, Italy, South Korea, and Britain are the major sources. Among these joint ventures are eight car assemblers? FAW-VW (in Shanghai-GM, Shanghai-VW, Changchun), SAW-Citroen (in Wuhan), BeijingCherokee, (GuangzhouGuangzhou-Peugeot Honda since 1998), and Chang'an-Suzuki (in and a minicar joint venture beChongqing)tween Guizhou Aviation Industry Group and Fuji Heavy Industry. In 1997, these car joint ventures accounted for 80 percent of the total car production in China. Of the total vehicle production, nearly half came from FDI-involved assemblers. Figure 5 shows the location of 35 majorassembly joint ventures.9 Nearly 60 percent are located in the coastal region, but they do not form a distinct cluster. Car joint ventures are even more dispersed. Each of China's six big regions10 has one car joint venture, except the Northwest. The two emerging clusters of assem? bly joint ventures are in the Yangtze River Delta and the Beijing-Tianjin region, which in 1997, of the accounted for one-sixth and one-seventh total ventures, respectively. This spatial pattern is a result of the interaction between factors such as central government policies, centrallocal relationships, and the decisions of MNCs. In the case of car joint ventures, the govern? ment plays a key role in determining location. For example, the central government acted as a of the first Sinokey party in the negotiation auto joint venture, the Beijing-Jeep foreign project (Jim 1997). The same is true of the project. As early as 1979, the Shanghai-VW central government planned to import a car as? sembly line and to locate it in Shanghai so as to modernize car manufacturing there, and the plan eventually developed into a joint venture with VW (Editorial Committee 1996: 226). in 1987, the central government desigAgain, nated FAW and SAW as major car assemblers among many competitors. Since they lacked sufficient technological capacity to design cars and to build a mass-production assembly plant, they required joint ventures with auto-producing MNCs. The Guangzhou-Peugeot project repre-

FDI Inflow and Its Spatial Distribution Due to strict regulations, China has largely taken auto-related FDI in the form of joint

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bj: mwm HB: Hebei TJ: Tmnlm GZ: Gutzhou X AH: Anhui L-V: Liaht-Vehicie P-V: Passenaer-Vehicle S-V: Specialist-Vehicle M~V: Motor-Vehicle

\f^

HB^hona

BJP-Vgo. TJHyaliCo. TJSanfertflQ^ M-VCo. )Yfdq:Benz(YnnflzhQu) ShanohaWW ghpnghai-QM u.NissanDiese! angheISuzuki Jianajin^^lsuzu,

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Figure 5. Spatial distribution of major auto assembly joint ventures in China by type and model (1997). Source: compiled by the authors from Chinese government reports.

sents a case of less intervention from the central government. Being a test region for reform poli? cies, Guangdong had less scrutiny from the cen? tral government, which was a key factor in the birth of Guangzhou-Peugeot, even through the region had little infrastructure for auto manu? facturing and was less suited for car assembly (Harwit 1995). The two minicar producers were allowed to set up joint ventures with their for? eign technological partners partly due to their defense industry background. Another factor determining the spatial pattern is that a joint venture with existing Chi? nese auto firms is the only available choice for FDI in assembly by MNCs in China. Thus, the location of FDI depends heavily on the locations of existing Chinese firms and the government's approval of these firms' plans for Sinoforeign joint-venture projects. In most cases, it is not auto-producing MNCs that select investment locations freely, but existing Chinese automakers that select the MNC as a joint venture

partner, after obtaining government permission. MNCs have their Although auto-producing own reasons for entering China (e.g., seeking markets, low-wage labor), they generally have little choice with respect to their investment In this sense, auto-related locations. FDI is embedded in the inertia of earlier locational choices by indigenous firms. The Chinese government is, however, more lax with noncar vehicle manufacturing. Thus, in bus and goods-vehicle joint ventures, the strategy of MNCs is the decisive element, since they can select their partners among several candidates. For example, Suzuki chose the Aircraft Industry Corporation as a Changhe joint-venture partner among three minivehicle producers with which it has technology-sharing agreements. Isuzu set up a joint venture with the Jiangling Auto Vehicle Corporation among the more than six assemblers with which it shares technological transfers. The local content requirement has stimu-

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lated the localization of out-sourcing in assem? bly joint ventures. At present, most imported vehicle models have achieved more than 80percent local content (see Table 3). The two joint ventures of VW in Shanghai and Changchun now purchase 90 percent and 85 percent, respectively, of their out-sourcing parts in China. This requirement, particularly a start-up local content of 40 percent, combined with the low of the parts industry in China, competitiveness has also promoted foreign parts suppliers subordinated to or affiliated with auto-producing MNCs to invest in China, a form of embedded investment with a network-like configuration. For example, before the Chinese government GM (Delphi) already approved Shanghai-GM, had 11 parts joint ventures in China. Toyota has been encouraging its affiliated suppliers to invest in China, mainly in Tianjin, since it started negotiation with the Tianjin Automobile Plant for a car joint venture there. In 1995-1996, Toyota and its affiliated suppliers successfully established

seven parts joint ventures in Tianjin. Now auto part joint ventures supply about half of the outsourcing components required by major assem? blers of imported vehicle models in China. of autoparts joint The spatial distribution ventures shows clear features of concentration and coastal-bias (Figure 6). They cluster in the Yangtze River Delta and the Beijing-Tianjin region, as well as in major cities like Guangzhou, and Wuhan. In these Chongqing, Changchun, regions and cities are found nearly two-thirds of the auto parts joint ventures. The reason for this spatial pattern is clear: the major assemblers are located there, and these regions and cities have environbetter infrastructure and investment ments. This indicates that auto parts MNCs tend to locate their investments close to major assem? blers. This is not necessarily a spatial outcome of the adoption of JIT delivery, however, since and FAW-VW have (partly) only Shanghai-VW it. The output of assemblers is not yet adopted high enough to attract suppliers to set up nearby

4?

V?

>

O Figure 6* Spatial distribution of auto parts joint ventures in China (1997). Source: compiled by the authors according to different reports of the Chinese government and the Directory of Parts Suppliersfor Chinese Introduced Vehicle (in Chinese).

China's

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branch plants. Thus, suppliers prefer to establish or rent a storage center close by, as has been done by FAW-VW's suppliers, to satisfy the assembler's requirement of selective JIT delivery.

The Auto

New

Geography

of China's

Industry

The restructuring under deepening institu? tional reform and FDI inflow since the 1980s, as described above, has resulted in significant changes in the geography of China's auto indus? try. The most important are the decentralization of production and the spatial shift of production toward the coastal region. Since the 1980s, auto "de? assembly in China has been experiencing centralization," which, however, is not the same process as that which occurred two decades ago in North America and Western Europe. There, was the result of the spatial ex? decentralization pansion of monopoly firms. In China, decentral? ization is largely due to the rise of new assem? blers in new locations. In 1980, 55 percent of vehicle production in China was concentrated in Changchun and Shiyan, where nearly all mid-size trucks were produced, and another 31 percent came from three cities, Beijing, Nanjing, and Shanghai. The share of total vehicle output in these five cities fell to 65 percent in 1990, and to 49 percent in 1997. New major lo? cations of auto assembly appeared in the 1980s and 1990s, particularly, Chongqing and Tianjin. In 1997, these two cities accounted for 20 per? cent of the total vehicles produced, whereas their share was less than two percent in 1980. Even taking these new locations into account, a decentralizing tendency can also be found in the 1990s. The share of the seven major cities men? tioned above decreased from 74 percent in 1990 to 69 percent in 1997. The gradual institutional transformation, and the over embedded? market diversification, ness of centrally programmed firms in the old planning structure, together with constraints on FDI inflow, are factors behind the decentraliza? tion and the rise of new production centers. In the early 1980s, FAW and SAW, the two cen? firms, had comparatively trally programmed capability than local firms, higher technological but they were more rigidly controlled by the and lacked flexibility in central government For example, FAW was product rationalization. to transfer its improved CA model, a required

mid-size truck, to SAW in the late 1960s, and it had to continue to build its old model until 1987, when its new models were put into pro? duction. In the early 1980s, FAW was selected to design and deby the central government light-truck model, while velop an independent local light-truck producers quickly improved and increased their manufacturing technology transoutput by absorbing foreign technological and fers. The inadequate market-responsiveness lingering central planning practices led to the rapid decline of FAW's market share in the 1980s (Changchun represents more than 90 At the of FAW's vehicle production). percent same time, SAW enlarged its market share due advanced mid-size truck to the comparatively model. Its rapid growth, however, did not last long because of the drop in demand for mid-size and car trucks. Late entrance to light-vehicle manufacturing is another reason for SAW's de? cline in the 1990s. SAW started to produce cars in its joint venture with Citroen as late as 1995, and the output was only 30,000 units in 1997. On the other hand, local initiatives have led lo? cal firms to enter light- and minivehicle produc? transfers and FDI tion through technological MNCs. The latter from foreign auto-producing has resulted in the emergence of Tianjin and as new production centers. FDI Chongqing to become inflow has also helped Shanghai China's largest car production center. By 1997, Shanghai had attracted more than US$ 1.5 billion of FDI in the automotive sector, accounting for one-fifth of the country's total. In general, the globalization of production in the form of FDI inflow has strengthened the decentralization of China's auto production, while at the same time promoting the development of the country's auto industry. The Chinese gov? ernment used FDI as a means to improve vehicle and to enmodels and production technologies scales in order to achieve im? large production port substitution. As a result, before the promulgation of the 1994 Policy, the government had an open, lax approach toward auto-related FDI. Of the 35 major assembly joint ventures in Fig? ure 5, 29 were ratified before 1994- Only half of bethese joint ventures involve cooperation MNCs and the tween leading auto-producing best local assemblers whose aim is long-term and market share; the others are development "hot money," which the result of international adopts a short-term perspective on China's current high-profit, protected market. The latter

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often entered China through collaboration with local governments that hoped to share a slice of the growing auto industry by means of local protectionism (Wang and Liu 2000). Some MNCs also sought out small local firms for cooperative relations when the central government stopped approving large joint ventures. GM's joint venture with Jinbei Automobile Co. Ltd. in Shenyang is one example. Thus, FDI inflow has, to some extent, strengthened the diffused spatial pattern of China's auto production. Another related spatial change is the shift of production toward the coastal areas. Before the 1980s, as a result of the locational policy based mainly on political and Cold War concerns, motor vehicle production was primarily found in inland areas. In 1980, nearly 60 percent of ve? hicles produced still came from inland provinces, largely Jilin and Hubei, but the inland share decreased to 50 percent in 1997. In terms of value added, the inland share is even lower, only 45 percent in 1997. Again, market diversification and rigidity of the centrally pro? grammed assemblers in the 1980s are major reasons behind the shift. The rapid growth of car production in Shanghai and Tianjin and the decline in demand for mid-sized trucks, once the major product of FAW and SAW, have contributed significantly to the shift, reflecting changes in the demand structure towards cars and the consequent emergence of new market centers. At present, Shanghai and Tianjin account for of the total cars built in nearly two-thirds China. FDI inflow is another reason for this shift since, by 1997, 63 percent of the total cumulative auto-related FDI inflow was concentrated in the coastal region. In that year, FDI-involved firms accounted for 80 percent of cars and 50 percent of all vehicles produced in China. The spatial expansion of major indigenous assem? blers like FAW and SAW in the 1990s also has an effect on the shift of vehicle production to? ward the coastal region. For example, most auto firms taken over by FAW are located in the coastal region. The takeover has enabled these firms to continue to expand production, which might otherwise be impossible. These spatial changes have led to a new ge? ography of auto production in China (Figure 7). In the mid-1990s, seven provinces were specialized regions for auto production, according to three indicators: the regional specialization index, the importance of the auto industry in the re? gional economy, and the national role of the

regional auto industry.11 The seven provinces are Shanghai, Beijing, Tianjin, Jilin, Sichuan (mainly in Chongqing, which became a provin? cial administrative unit in 1997), Jiangsu, and Hubei, which in 1996 accounted for 75.5 per? cent of all vehicles produced in China. Only two provinces, Jilin and Hubei, held such distinctions in the early 1980s. The new spatial dynamics caused by the new demand structure, new institutional environment, and FDI inflow, plus inertia of the traditional production centers, have also generated spatial specialization for different types of vehicles. Heavy-duty truck is now mainly located in Changproduction chun, Shiyan, Jinan, and Chongqing; mid-size and goods-vehicles production in Changchun in Beijing, Nanjing, NanShiyan; light-vehicles chang, Chongqing, Changchun, Shenyang, and in (trucks/vans) Tianjin; and mini-vehicles Liuzhou, Chongqing, Tianjin, Xi'an, Harbin, Jingdezhen, and Hefei. They add a new complexity to the overall spatial pattern (Figure 7). The present pattern of car production indicates that the central government's "Three Big and Three Small" strategy has not been achieved, as car production is now concentrated in four cities?Shanghai, mainly Tianjin, and Changchun. Since Shanghai Chongqing, produced more than half of the total assembled cars in 1997 and has set up a second car jointthe city will continue venture, Shanghai-GM, to lead China's car production in the future. The eminence of Shanghai underlines the pull of the market and the impact of the globalization of production in the form of FDI inflow and tech? nology imports. In the next decade, the geogra? phy of China's car production will likely be "one big, four mid-size, and several small." The four "mid-size" centers will be Tianjin, Changchun, Wuhan, and Chongqing, each having an annual capacity of 150,000 cars. Beijing will be a "small" center if it is to be restricted to produc? tion of jeeps, which are not yet popular in China. The future of both Guangzhou and Anshun (in Guizhou) as "small" centers is still uncertain. will produce Guangzhou-Honda Honda's American version of the Accord, with a capacity target of 30,000 units each year. Whether the new venture, with such a small production target, can make a profit is still un? certain, though Honda may benefit from selling CKD parts to it. The involvement of Fuji Heavy Industry in Guizhou's minicar production may not be able to rescue the latter from fierce

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RSI* RegtonalSptdalfsation Index; APR- Ratto of Auto industryOutputin RsgtonalIndustrial Output; RPR-Ratto of RagionaJ Auto industiyOutputin the Country TotaJ. s Figure 7. Regional distribution of China's Auto Industry by category of vehicle (1996). Source: calculated by the authors according to data from Yearbookof China's Automotive Industry (1997).

as Anshun, a peripheral market competition, convenient small city without mountainous is far from an ideal car produc? transportation, tion location.

Conclusion: Embedded

Path-Dependency Globalization

and

of China's In portraying the development auto industry, we have identified two major dynamics (Figure 1) and have revealed the more environ? important role of the institutional It is the new and ment and its transformation. environment, including evolving institutional the mixed regulation mechanisms after the 1978 Opening and Reform, that has facilitated the re? structuring of the industry and encouraged the driven inflow of FDI, and has consequently the spatial change of auto production in China.

The post-1978 institutional changes in China have, however, occurred gradually, unlike in the East and Central European countries, where the change from a socialist to capitalist economy of was more rapid. Thus, the development China's auto industry in the past two decades shows characteristics of "path-dependency," best reflected by the new regulatory structure of the "socialist market," in which the legacies of past regulation and governance structure still play a in significant role. In the 1980s, embeddedness the traditional extra-firm network regulated by the mechanisms central planning prohibited growth of centrally programmed firms, whereas provincial and local firms grew faster, benefitting from their more favorable local institu? tional environment, particularly provincial and local government protection. reform after the 1980s Further institutional has enhanced FDI inflow, but it has also exerted

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remore regulation on FDI. The joint-venture quirement has forced the FDI of auto-producing MNCs to be embedded in China's economic, environment. Autosocial, and institutional MNCs are also embedded in the hisproducing torical context of the development of the indigenous Chinese auto industry. More precisely: (1) the local content requirement has resulted in the localization of of MNCs' globalization and (2) the maximum-equity production; regu? lation implies that auto-producing MNCs cannot develop vehicle assembly and engine manu? facturing in China in forms of takeover or branch plants. As a result, auto-producing MNCs have so far been unable to dominate auto production and its spatial change in China, as they have done in postsocialist East and Central European countries and in many other developof MNCs ing countries. Thus, the involvement in China's auto production can be aptly described as "embedded globalization," that is, the globalization of auto production in China has been a two-way process in which global forces (FDI notably) have had to adapt to the Chinese institutional environment. In spite of the restraints of the institutional the globalization of production, environment, mainly in the form of FDI inflow, is undoubtedly becoming an increasingly important factor in the growth of the auto industry and its geogra? phy in China. The entry of FDI has already helped China to achieve a large and rapid expansion of production capacity and import sub? stitution. It has also led to the rise ofa number of cities as major motor-vehicle production sites, such as Shanghai, Tianjin, and Chongqing. Most of the spatial choices involved, however, are to a large extent affected by official govern? ment preferences and/or the decision of Chinese partners in the joint venture. On the other hand, the 1990s have also witnessed a rapid spa? tial expansion of several key indigenous assem? blers. The key national assembler, FAW, is now producing vehicles in more than ten provinces, whereas before the 1980s, its production was exclusively confined to Changchun. Their ability to spatially disperse was one of the major consequences of the post-1978 institutional changes. Yet the ownership handicap has made it difficult for provincial and local firms to expand across subunit political borders. There is still little evidence for the spatial impacts of the adoption of lean production and JIT delivery, although a couple of assemblers have selectively adopted

these new production processes. At present, it is the institutional transformation that has been the primary force behind the changing geogra? phy of China's auto industry as FDI inflow has been deeply embedded in the Chinese institu? tional environment. As a separate force, FDI, or in that sense, plays a secondary globalization role. According to the embeddedness model, the future development and geography of China's auto industry depends largely on further institutional reform in the country and the responses of MNCs. Two potential factors are thus critical. One is possible changes in the Chinese government's macroindustrial policy on the auto industry; the other is the acceptance of China by the World Trade Organization (WTO). Thus far, the auto industry in China is still at the stage of import-substitution. If it adopts an export-oriented in the next strategy decades, the spatial organization of auto produc? tion will undergo further changes. This is a possible scenario, as there is now a severe overcain China, and the pacity of auto production country is already committed to expanding exports.12 The effect on the locational behavior of FDI-involved auto firms is obvious. ShanghaiVW and Shanghai-GM will enjoy advantages due to their coastal locations, while Chang'anSuzuki and Guizhou-Fuji Heavy will be in unfavorable locations. Even FAW will need to reconsider its spatial expansion strategy and choose more coastal locations for its takeover or branch plant programs. Joining the WTO would have two effects on China's auto industry. One is the gradual reduction of tariffs on imported CBU, which will increase competition from other countries. The other is the further opening of the sector to FDI. Both imply the weakening of government protection, though it is unlikely that the Chinese will rescind the joint-venture regovernment FDI. According quirement on assembly-related to the agreement between the U.S. and Chinese tariffs on imported CBU will be governments, lowered gradually from the present 80 to 100 percent to 25 percent by 2006. Given that the industry in China is now characterized by an numeroverdiffused corporate structure?with ous small assemblers with low productivity, low capability for R&D, and low-quality and highcost final products?a wave of turbulent spatial restructuring and inflow of auto-related FDI will be unavoidable if China joins the WTO. Inof China by the WTO deed, the acceptance

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should force the government to accelerate the restructuring of its auto industry. Auto assem? blers in China (including both indigenous and FDI-involved firms) may adopt the "globalsourcing" strategy when tariffs on auto part imports are reduced. Such a change may result in the closing of many Chinese auto parts pro? ducers, while some may grow to be global sup? pliers.13 These potential new changes may also affect the world auto industry. These topics are areas for future research.

Acknowledgments The authors acknowledge the generous support of the Hui Oi Chow Trust Fund of the University of Hong Kong for this research. They also thank four anonymous referees for their comments and suggestions.

Notes 1. Their production was not recorded by official statistics, but these factories do merit mention in the History of China's Automotive Industry (Editorial Committee 1996). 2. The source of this data is an interview with officials in the Bureau of Automotive Industry, the Ministry of Machinery Industry, China. 3. Centrally programmed corporation group refers to one with a centrally programmed firm being the core, parent, or controlling member, while a local corporation group is one having a locally programmed firm at the core. Each of the former groups has constituent enterprises all over the country, but the latter groups are normally confined to a province. The president of some cen? trally programmed corporation groups, like FAW and SAW, enjoys the administrative rank of viceminister. 4. Due to further institutional reform, cross-provincial border expansion of provincial assemblers in China may be more likely in the near future. According to the Shanghai Economic Daily (1999), Shanghai Automotive Industry Corporation, which is pro? grammed by the Shanghai municipal govern? ment and the Chinese partner of Shanghai-VW and Shanghai-GM, has recently held a 67percent share of Yizheng Auto Plant, a lighttruck assembler in Jiangsu. 5. Guangzhou-Peugeot stopped operation in 1998, and Honda set up a new joint venture with Guangzhou.

6. The transformation of the defense industry was actively supported by the State Council, and the former Vice Premier Zou Jiahua had been a minister responsible for the defense industry. 7. There are actually more than 115 assemblers in China, but many tiny local assemblers are not recognized by the central government and thus are not recorded in the statistical yearbook. In 1997, there were about 80 assembly joint ven? tures in China, but at least 30 were not on the list of the central authority, that is, they are not among the 115 assemblers mentioned above. 8. In the auto industry, CKD/SKD (complete refers to buildknock-down/semi-knock-down) ing cars in a host country based on imported parts or semiproducts (modules). Except for as? sembly, this process has no local content, and it may lead to foreign-currency problems. 9. Here, major assembly joint ventures are those with a total investment of more than US$ 20 million or, if a little less than this amount, having a tie-up with prominent auto-producing MNCs. 10. China was formerly divided into six large regions for administrative purposes, i.e., the Northeast, North, Northwest, East, Middle-South and Southwest. These six regions are still often used on government documents and in academic research. 11. The Regional Specialisation Index measures the extent of a region's share or specialization in a particular industry compared to the whole nation. In this paper, it is calculated by dividing the contribution of the auto industry to a province's total industrial output by the contribution of that industry to national industrial output. A value of 2 is chosen to indicate specialization. The importance of the auto industry in a regional economy is calculated by dividing the autoindustry output of a province by that province's total industrial output. A province is regarded as showing a degree of dependence on the auto in? dustry if its output exceeds 5 percent of the total industrial output of that province. The national role of a regional auto industry is calculated by dividing the auto-industry output of a province by the national output. A region or province is regarded as having a role if it exceeds 3 percent and as having a significant role if it exceeds 7.5 percent. These three measurements are used in combination to generate the three categories of provinces in Figure 7. 12. For example, by 1998, car-production capacity in China reached 1.0 million units per year, but the total car output and sales were only around 500,000 units. 13. Actually, China's national assemblers, e.g., FAW and SAW, have already established a few small assembly plants for mid-sized trucks in Africa and the Middle East.

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Correspondence: Department of Geography and Geology, University of Hong Kong, Pokfolam Road, Hong Kong, email hragvis@hkucc.hku.hk (Sit); Institute of Geography, Chinese Academy of Sciences, Beijing 100101, China, email liuheequn@public.east.cn.net (Liu).