China’s Ministry of Commerce is now working on a revised policy of the “Administrative Methods on Auto Brand Sales,” according to a news report on 21 Century Business Herald, citing an official with the ministry.
In the early years when China had the automotive policy of “market for technology,” the automotive business of production and technology in a joint venture was mainly controlled by the foreign party while the Chinese side was in charge of marketing.
However, during the process of JV development, the foreign party has been more involved in the domestic marketing channels of a joint venture and has tried to borrow the sales network across the country at the lowest cost from the Chinese side.
Before the announcement of the brand sales policy, imported cars were sold in a different channel from those products made in China. Gradually changes took place after China’s entry into the WTO, and imported cars were allowed to be sold through the same network as Chinese cars.
Presently in the Chinese market, many foreign brands such as Audi, BMW, Benz and Shanghai GM are sold in the mixed domestic network like all other Chinese products. As a result the Chinese party has in fact lost its own control over sales in the domestic market.
“Owing to the lack of detailed rules in carrying out the brand sales administration, foreign companies expanded their roles in the Chinese market by getting into the Chinese sales network, consolidating their superiority in the field of brand sales in China,” said Wang Qinhua, director of the Mech-electric and Sci-tech Industry Department under the Ministry of Commerce.
Wang pointed out that the auto brand sales policy has revealed big flaws, which finally results in the loss of rights for the Chinese side to make their voices heard. Overall it has resulted in five negative effects listed below:
(1) Almost all multinational automakers have set up their selling companies, either solely owned or holding, as chief distributors for imported vehicles in China. Foreign auto manufacturers have in this way got a legal right to strengthen their leading position as chief distributors in China’s auto market.
(2) As a core provider for auto products, brands, parts and accessories, maintenance and technology, chief foreign distributors have a monopolized control over the automotive sales business in China. The policy has scarcely protected the interests of Chinese dealers when their profits are gravely at stake.
(3) Multinational automakers have shown more interest in their sales business with better profits than after market services. Consequently Chinese consumers have enjoyed little benefits from the open market in China despite the great reduction of tariffs with quota cancellation for imports.
(4) Foreign manufacturers and their chief distributors in China have actually formed mutual transactions within the company. Some chief distributors have tried to underpay or avoid paying custom’s tariffs, value-added or consumption taxes by making low CIF (cost, insurance and freight) prices for imports, while others attempted to hide more profits overseas by declaring exports at higher prices.
(5) By mixing the sales network for both Chinese products and imports, foreign auto manufacturers have increased their manipulation of the domestic market in China, holding up the growth of joint ventures as well as Chinese cars of independent brands.
Something must be done to change the sales business and improve the environment for the Chinese party in a joint venture. The best choice may lie in the separation of management of auto brands and selling channels. However, this fait accompli seems hard to change, which has challenged public views in the circle.
In 2007 the Ministry of Commerce started a nationwide survey for a whole year in major cities including Beijing, Tianjin, Shanghai, Guangzhou, Shenzhen, and many other provinces. Also, an investigation team went to Japan and South Korea last November. .
According to recent statistics, China produced and sold 8.8 million units of vehicles with a pretax profit of about ¥60 billion last year. But from January to October the imported vehicles reached 260,000 units winning a profit of ¥39 billion, which was equal to 65 percent of the total profits for Chinese automotive products. According to a rough estimate, chief foreign distributors have won profits of about ¥100 billion in the past 3 years.
The inequality between chief foreign distributors and Chinese dealers is something on the surface. The conflict of interests in China’s imports market is so serious that it has threatened national interests. It is time to take measures to regulate and balance the interests of all parties concerned, and build up good industrial and commercial relationships among them, on an equal footing.