MMRCDISCUSSION PAPER SERIES
No. 269

The Role of International Technology Transfer in the Chinese
Automotive Industry
Zejian Li, Ph.D.
Project Research Associate
Manufacturing Management Research Center (MMRC)
Faculty of Economics, THE UNIVERSITY OF TOKYO
July 2009

東京大学ものづくり経営研究センター
Manufacturing Management Research Center (MMRC)
Discussion papers are in draft form distributed for purposes of comment and discussion. Contact the author for
permission when reproducing or citing any part of this paper. Copyright is held by the author.
http://merc.e.u-tokyo.ac.jp/mmrc/dp/index.html

The Role of International Technology Transfer in the Chinese Automotive Industry

Zejian Li, Ph.D. (E-mail: takuken.ri@gmail.com)
Project Research Associate
Manufacturing Management Research Center (MMRC)
Faculty of Economics, THE UNIVERSITY OF TOKYOMay 2009
Abstract
The so called Independent Chinese Automobile Manufacturers (ICAMs), such as CHERY,
Geely and BYD, emerged at the end of 1990's as new entrants to Chinese passenger vehicle
market and have achieved remarkable growth. The phenomenon of these autonomous Chinese
Automakers is drawing increasing attention not only from academia but also from business andgovernment circles.
This paper attempts to clarify the relationship between emergence of ICAMs andInternational Technology Transfer. Many scholars indicate the use of outside supplies (ofengines and other key-parts), as a sole reason for high-speed growth of ICAMs. However, theinternal approach, at a level of how companies act, is also necessary to outline all the reasonsand factors that might contribute to the process. This paper, based on organizational view, starts
from historical perspective and clarifies the internal dynamics of the ICAMs.
The key phenomenon to be considered in the context of internal effects is a long term
undersupply in China's automobile market since 1949. It is important for two reasons: 1)
insufficient amount of investment form the Government and 2) weak technological capabilities.
This paper will focus mostly on the latter one giving an answer to the question "what role hasinternational technology transfer played in the emergence of ICAMs (e.g. CHERY, Geely)?"
This paper provides a brief analysis of the history of Chinese automobile industry within
three main phases: Closed Autonomous Development Period (1949-1984), Transition Period(1985-2000) and Global Economic Period (2001- ). Then, the focus is made on the transition
period and a phenomenon which could be called as " capability lock out” for autonomous
development based on independent design as well as innovations in R&D (research &development), which can be attributed to Chinese automobile makers engaged in joint ventures.
However, in conclusion it becomes clear that as a result of direct or indirect spillover from joint
ventures, ICAMs began to construct the core competitive abilities they needed autonomously.
Keywords
MNE, Technology transfer, Automobile industry, China

1

Ⅰ. Introduction
The purpose of this study is to investigate the chaotic but progressive emergence of Independent
Chinese Automobile Manufacturers (ICAMs) as well as to provide an academic view on therelations between the emergence of ICAMs and international technology transfer from the pointof view of both the firms involved in joint ventures (JV) with major foreign automobile
manufacturers (i.e. VW etc.) and Chinese domestic automobile manufacturers (i.e. FAW etc.).
Many economists have documented the relations between international technology transfer anddevelopment of Chinese automotive industry. For example, Guo and Zhang (2008) have foundout that the technological transfer from the multinational companies has not brought substantive
improvement to Chinese passenger vehicle industry, but only caused a tendency toward evenmore dependency on the foreign technological transformation. Focusing on the change ofmultinational corporations’ investment behavior during different periods of time, Lei and Xu(2006) have concluded that multinational corporations’ investment behavior have changed frommonopoly to competition which helped to improve the international competitiveness of China’s
automobile industry. A similar conclusion can also be found in Jia (2004).
However, most studies have focused on the transferring side (multinationals) but not on therecipient side (Chinese companies). Furthermore, the findings of above mentioned studies showthat a natural expectation of international technology transfer existed in China, which is similar
to the belief that the competitiveness of China’s automobile industry has been upgraded throughadvanced technology transfer and investment behavior transformation. However, as far as
industrialization can not be spontaneous and caused just by outside ripple effect, this paper willconsider more closely the inner nature of “Chinese learning mechanism”, in addition to the roleinternational technology transfer has played in the growth of independent Chinese automobile
manufacturers. They are regarded as new forces of Chinese branding.
Furthermore, to clarify the research questions mentioned above this paper will attempt toanswer the following research questions: (1) How did ICAMs enter the passenger vehicle
market and why? Why does their emergence look like chaotic but progressive for Chinese
automobile industry? (2) What role has international technology transfer played before andduring the ICAMs’ emergence process? What effects did international technology transfer haveon ICAMs’ competitiveness building, if any? (3) Which barriers have been the most importantfor international technology transfer from automotive Sino-foreign joint ventures to ICAMs?
These questions are followed by another one, whether these indispensable key factors necessary
for ICAMs to grow into world-class automakers are available in current situation.
To answer the above mentioned research questions, this paper was divided into the following
2three parts. First of all, we distinguish between independent and non-independent Chinese
automakers. Here we deal with the background and origins of ICAMs, and outline the key
factors that affected their emergence especially in the passenger vehicle market. Though new
entries were forbidden by the industrial policy even few years after promulgation of Auto
Industry Policy (1994), some Chinese indigenous enterprises entered the passenger vehicle
market successfully. For example, CHERY and Geely can be regarded as such a kind of new
players. At same time, we deal with the question what has changed after ICAMs’ emergence.
Second, we review the history of international technology transfer into Chinese auto industry by
the end of 1990s. Finally, we analyze the dynamic changes of relationship between international
technology transfer and the ICAMs’ growth.

Ⅱ. Definition of ICAMs: What does “Independent” mean?
Let us give an overview of an Independent Chinese Automobile Manufacturer (ICAM). If an
automaker (1) has developed its own indigenous brand, and (2) all the technologies needed for
R&D and manufacturing process were not introduced through a form of joint venture withforeign companies, we use the term “ICAMs”. For example, CHERY Automobile, Geely
Automobile, Great Wall Motors, Zhongxing Auto etc. can be regarded as representatives of
ICAMs.
In contrast with them, Non-independent Chinese Automakers simply introduced their foreign
joint venture partners’ existing models as their own new ones. Such companies as Beijing
Motors, Guangzhou Motors etc were provided with brands, passenger vehicle models and all thenecessary technologies, and thus were dependant on their foreign partners.
Based on this definition, more than 20 enterprises (or brands) can be recognized as ICAMs.
Because of the existing industry protection policy (which also served as a strict new entry
restriction for the passenger vehicle market), most of ICAMs had to adjust and unintentionallyconcentrated on trucks (including pickup trucks) and SUVs (Sport Utility Vehicle) as their main
products. Another important problem faced by ICAMs as newcomers was weak design andinnovation capabilities, especially in case of advanced engines and system integration. Until
now, only eight ICAMs have successfully started passenger vehicle manufacturing 1. They are
CHERY, Geely, BYD, Brilliance, Lifan, GreatWall, Hafei and Jianghuai (See FIGURE 1).
1

In 2001, Chinese government amended Motor Vehicles and Trailers—Types—Terms and Definitions
from GB 3730.1-1988 to GB 3730.1-2001. Under this amendment the definition of PASSENGER CAR is
updated as including basic passenger car (i.e. sedan or saloon), MPV (Multi Purpose Vehicle), SUV(Sport Utility Vehicle) and crossover vehicle. For this reason, some local Chinese SUV or MPV
manufacturers, regarded as commercial vehicle manufacturers under former definition, become passenger
car manufacturers since the amendment was approved. In this paper, we do not cover these cases, we areconcerned only with the companies which are permitted to manufacture basic passenger car (i.e. sedan orsaloon). That is why we just focus on these eight passenger vehicle manufacturers.

3

FIGURE 1 The Sales of Passenger Car by ICAMs
400
3501000 Units

300
250
200
150
100
50
0
Chery

Geely

Brilliance

Hafei

GreatWall

BYD

Lifan

Jianghuai

2001

2002

2003

2004

2005

2006

2007

2008

Source: Automotive Information 2002 – 2009, China Automotive Technology & Research Center(CATARC)

FIGURE 1 shows that only few ICAMs have reached suitable scale (supposing that a level of
50,000 units per year is the minimum). Moreover, most of ICAMs’ annual sales are stillcomparable to those of Sino-foreign Joint Venture Companies (See TABLE 1).
In some sense, the word “independent” means “technically isolated” in most cases of ICAMs. In
comparison with Sino-foreign joint venture enterprises, most ICAMs from the very beginning
had no sufficient resources for designing new models and skills in manufacturing. Therefore, we
can say that Sino-foreign joint venture enterprises surpass ICAMs in such aspects as technology,
qualified human resources, facilities and capital.
However most of Sino-foreign joint ventures lack one important characteristic - “autonomousbrand”- which makes introducing new models almost impossible. Besides, it provides the
Non-independent Automakers (most of which are state-owned enterprises) with no opportunity
to bring up their own inner-competitiveness, because most of them are engaged only inassembling process. For this reason, Chinese media claimed that the state-owned automakers
became satisfied with current state of affairs, keeping the assembling of foreign models fromimported parts, but not trying to launch their own brands. As a result, most of state-owned
automakers supported by central government and protected by the industrial policy from thecompetition with new entrants, have fully enjoyed being joint ventures and lost the ability to
become “independent”. In the other words, they have finally become non-independent.

4

TABLE 1

Sales of Top 10 Passenger Vehicle Manufacturer in Chinese Market, 2001-2008 (in 1000Units)

2001
2002
2003
2004
2005
2006
2007
2008
Shanghai
Shanghai
Shanghai
Shanghai
FAW1
241
301
396
354 SAIC-GM 325 SAIC-GM 406 SAIC-GM 495
499
Volkswagen
Volkswagen
Volkswagen
Volkswagen
Volkswagen
FAWFAWFAWFAWShanghai
Shanghai
FAWShanghai
2
125
208
298
300
250
349
461
478
Volkswagen
Volkswagen
Volkswagen
Volkswagen
Volkswagen
Volkswagen
Volkswagen
Volkswagen
Tianjin
FAWFAWShanghai
380
SAIC-GM 111 SAIC-GM 201 SAIC-GM 252
240
345
456 SAIC-GM 445
Automobile
Volkswagen
Volkswagen
Volkswagen
Tianjin
Guangzhou
Guangzhou
Beijing
FAW
4
SAIC-GM
58
95
117
202
234
302
381
366
CHERY
CHERY
FAW
Honda
Honda
Hyundai
TOYATO
TianjinBeijing
Guangzhou
Beijing
Guangzhou
5
DPCA
53
DPCA
85
114
144
230
290
295
356
CHERY
FAW
Hyundai
Honda
Hyundai
Honda
Guangzhou
Chang’an
Tianjin
Tianjin
Guangzhou
FAW
Dongfeng
6
51
65
DPCA
103
130
190
260
282
351
Honda
Suzuki
FAW
FAW
Honda
TOYATO
NissanSAIC
Guangzhou
Chang’an
Chang’an
FAW
Dongfeng
Guangzhou
7
28
59
100
110
189
219
272
306
CHERY
Honda
SuzukiSuzukiTOYATO
Nissan
Honda
CHERY
SAIC
SAIC
Dongfeng
Beijing
Beijing
Geely
Geely
Geely
8
22
50
85
97
158
204
231
295
NissanHyundaiHyundai
Automobile
Automobile
Automobile
CHERY
CHERY
Dongfeng
Aeolus
Geely
Geely
Geely
Geely
9
150
203
―
―
41
76
DPCA
89
220
222
NissanAutomobile
Automobile
Automobile
Automobile
Automobile
AeolusChang’an
Chang’an
Geely
10
40
65
―
―
87
DPCA
140
DPCA
201
218
205
CHERY
Automobile
Ford
Ford
Automobile
Note: 1/ In June 2002, when China FAW Group Corp acquired Tianjin Automotive Xiali Co., the abbreviation of Tianjin Automotive Xiali Co. was changed to Tianjin
FAW.
2/ Since SAIC sold its stock back to Chery in 2004, the abbreviation of CHERY changed from SAIC-CHERY to CHERY.
3/ The sales of Geely Automobile is a sum of all its related subsidiaries, including SMA (Shanghai Maple Guorun Automobile).
4/ Sales of crossover vehicles are not counted.
5/ DPCA is the abbreviation of Dongfeng Peugeot Citroen Automobile Co., Ltd.
6/ Since the data-sources for 2001 and 2002-2008 are different, there may be inconsistency some inconsistency in the figures for 2001 and after 2001.
Source: ‘Annual vehicle Sales and Production of China 2001 (2001 Nian 1-12 Yuefen Qiche Shengchan Xiaoshou Qingkuangbiao)’ INTERNAL COMBUSTION ENGINEPARTS, CHINA INTERNAL COMBUSTION ENGINE INDUSTRY ASSOCIATION, Vol1 2002, pp.41-44; Automotive Information 2002 – 2009, China Automotive
Technology & Research Center (CATARC).

5

Ⅲ． Background of ICAMs’ Emergence: What Stimulated New Entry?
This section gives an insight to the history of Chinese automobile industry. Known as one of the key
industries of Chinese economy, automobile industry had been strictly controlled by the central
government until the Reform and Open Policy were launched in 1979. At that time, every production
activity related to automotives (such as R&D, manufacturing, delivery), was based on the annual planissued by the central government, and no independence or management rights were given to theautomakers.
In this context, the growth of Chinese automobile industry was mostly based on self-reliance policy.
Therefore, the main product lines were trucks and buses. The usage of passenger vehicles was limited
for official business purposes, and was not promoted until 1987 being regarded as a “capitalist
lifestyle”. So people had to wait until 1989 when the first family-cars (or we can call them private car)were released. From Figure 2, we can see that in comparison with trucks the production of basic
passenger vehicles increased very slowly until 1989.
FIGURE 2 Vehicle Production in China (1955-2007) (Million Units)

9.5
9
8.5
8
7.5
7
6.5
6
5.5
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0

100%

0.26
0.24
0.22
0.2
0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0

90%

Total

Basic Passenger Car

70%

1983

1982

1981

1980

1979

1978

1977

1976

1975

1974

1973

1972

1971

1970

1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

1958

1957

1956

1955

80%

60%

Truck

50%
40%
30%
20%
10%

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

1969

1967

1965

1963

1961

1959

1957

1955

0%

Rate of Basic Passenger Car （B）/（A）（Right Axis）

Rate of Rest Types （C-B）/（A）（Right Axis）（A）Total of Vehicle Production（B）Basic Passenger Car（C）Total of Passenger Car

Truck

Vehicle Production of ICANs

Market share of ICAMs （Right Axis）

Source: HISTORY OF CHINA AUTOMOTIVE INDUSTRY 1901~1990, China Communications Press,
1996; Automotive Information 2002 – 2009, China Statistical Yearbook 2001~2008.

6

At a first glance, Chinese central government did not promote passenger vehicle manufacturing
until 1987. In 1983 and 1984 the permission to launch joint venture projects had been given to
Beijing-AMC and Shanghai-Volkswagen respectively, which was somewhat contradicting to thepolicy of product-restriction. Giving this permission the central government hoped to achieve
the objective of import-substitution.
As a result of Self-reliance Policy, being in effect for approximately 30 years before Reform andOpen Policy, Chinese automobile industry became completely isolated from the rest of theworld. For this reason, the vehicles produced by Chinese automakers could not satisfy the userneeds of quantity and quality. After 1980, the import rush was on, and that was especially true
for the passenger vehicles. Indeed, the passenger vehicles had been imported since 1950s 2,
however the volume of import increased rapidly in 1980th that crossed over central
government’s imagination. For example, during the period of 1981-1986, a total number of
183,000 passenger vehicles (of total value 850 million US dollars) were imported. In
comparison, the average annual production by domestic automakers was only 4000 units.
Import of passenger vehicles became the main category of the country’s expenditures in foreign
currency.
For this reason, Chinese government decided to launch an import substitution mechanism. In
1987, the government issued “Notice from State Council of PRC on the Reinforcement ofControlling the Importation of Passenger Vehicles” to authorize China Faw Group Corporation(FAW), Shanghai Automotive Industry Corporation (SAIC), Dongfeng Automobile Company,
Beijing Automotive Industry Corporation, Tianjin Automotive Industry Corporation andGuangzhou Automotive Industry Corporation as the only domestic players for passenger vehicle
manufacturing 3. Through 1980s and 1990s, Chinese government reinforced the limitation of
new entrants to the passenger vehicle market by successive issuing of numerous acts related tothe industry. For example, “Notice on the Regulations of Controlling the Number of Passenger
Vehicle Manufacture (1988)”, “Decisions Concerning the Main Points of China's Current
Industrial Policy (1989)”, “Outline of State Industry Policies for the 1990s(1994)” and“Automotive Industry Policy(1994)”.
As a result, in early 1990s Chinese automobile market changed into an oligopoly led by few
authorized players and strictly protected by both industrial policy and high import duties. All theauthorized players were intended to raise productivity through joint ventures with foreign
corporations. The objectives of import substitution have met with partial success. However, the2For example, Chinese government imported 60 Benz cars in 1956.-Chen Zutao and Ouyang Min, My
car life, People Press,2005,p81-82.
3State Council of PRC, “Notice on the Regulations of Controlling the Number of Passenger Car
Manufacture (Chinese Pinyin: Guanyu Yange Kongzhi Jiaoche Shengchandian de Tongzhi)”, 1988.

7

price of products made by these joint ventures was much higher than the normal level in the restof the world, and extremely higher than the income level of a normal Chinese household (SeeTABLE 2).
TABLE 2 Price of Some Brief Model in Chinese Market In 1990s
Model
Price(Year)
Rate of Price Via GDP per Capita*(= 6079 RMB)
Audi 10045.54
289,000（’94）
Rex
10.33
62,800（’94）
Hongqi CA7560
85.54
520,000（’95）
Xiao Hongqi
36.19
220,000（’97）
Cherokee2021
30.93
188,000（’97）
Santana 2000
27.14
165,000（’97）
Santana
22.21
135,000（’97）
Jetta
22.21
135,000（’97）
22.21
Fukang（Citroën ZX） 135,000（’97）
Peugeot 505
22.21
135,000（’97）
Charade10.94
66,500（’97）
Alto
9.87
60,000（’97）
Note: * means data of 1997.
Source: Chen Jin, Growth strategies of the Chinese automotive manufacturers, Sinzansha Publisher Co.,
Ltd., 2000, P64, National Bureau of Statistics of China.

For this reason, in the early 1990s, the automobile demand was mainly supported by state
officials or state-owned companies, not by households. The high price of vehicles was the mostimportant factor restraining household demand at that time. The average price of most vehicles
was higher than 130,000 RMB which is 20 times more than the GDP per Capita in 1997. In
addition, smuggling passenger vehicles in 1990s greatly exceeded the legal import (SeeFIGURE 3).
FIGURE 3 The Importation of China though 1990s

250

1000 Units

200
150

139.326
115.884

100
68.82655.05450
31.846064.03848.71869.66328.81

15.92314.40527.527

1990

1991

1992

1993

57.94234.41324.346

1994

1995

Legal Importation

1996

36.09232.01928.33418.04614.167

1998

1999

1997

Smuggling

Source: Zheng Zuoshi, Qiche Fengzi Lishufu (The Madman for Automobile: LiShufu), China Citic Press, 2007, P75.

8

Generally speaking, the motorization of a country is quite smooth, after its GDP per Capita
surpasses 1000 US dollars. After 1994, both Chinese GDP and GDP per Capita showed a rapid
growth (See FIGURE 4).

FIGURE 4 GDP and GDP per Capita of China after 1990s
RMB per capita
16000
14000
12000
10000
8000
6000
4000
2000
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Billion RMB
20000
15000
10000
5000
0

GDP per Capita

GDP

Source: National Bureau of Statistics of China.

TABLE 3 Possibility Analysis on China’s Motorization
The beginning of motorization in depended countries
U.S.A

GermanyJapan

1910s～20s

1950s

1960s

550 Dollars

4500 DM

410,000～430,000 Yen

Ford Model T

VW1200Exp

Corolla, Sunny

Annual average per capita

500 Dollars

3800 DM

380,000 Yen

incomeⒷaverage of 1914-23（1958）（1966）

Ⓐ/Ⓑ

1.1

1.2

1.1

Period of speeding up
Price of public carⒶ

Case study of China around 2000
Price of promotion car by

About 100,000 RMB

joint venture①（Toyota Vios 105,000 RMB，Honda Fit 99800 RMB）
About 40,000 RMB

Price of ICAMs’ vehicles ②（Geely Haoqing 29990~42990 RMB）
China

PekingTianjin

Shanghai

Guangdong

GDP per Capita(RMB)③

8622

25523

20154

37382

13730

①/③

11.60

3.92

4.96

2.68

7.28

②/③

4.64

1.56

1.98

1.07

2.91

Source: Weekly economist, Vol.2004.9.28, P25, National Bureau of Statistics of China Author edited.

Meanwhile, in the late 1990s, Chinese market attracted attention of most world automakers who
revealed their plans to enter this market with a high potential to growth. In 1998 and 1999,
Honda and GM used their last opportunity to enter Chinese market successfully, before thecountry’s entry to WTO. Honda founded a joint venture with Guangzhou Auto, and GM in
9cooperation with its partner Shanghai Auto located one of the plants in Shanghai.
In the middle of the year 2000, when Chinese GDP per Capita came close to 1000 US dollars,
the government and most joint venture automakers started paying attention to the production of“Family Cars (or Public Cars)”. Many automakers planed to promote products worth 100,000
RMB and specified as “Family Cars” to influence motorization in China. However in 2001 theincome level of Chinese households was still at a low level, and only in some advanced areas
like Shanghai, Peking and Tianjin, motorization became possible (See TABLE 3).
The foreign companies were not the only ones to recognize the opportunities of Chinese market
in late 1990s – Chinese domestic companies recognized them as well. Particularly, in 1990s, thehigh rate of profits in the industry of passenger vehicles attracted all domestic companies, which
had potentiality and capability (See FIGURE 5). Additionally, the high prices for joint ventures’products and high potential demand from households gave domestic producers the best chance
to enter the segment of vehicles priced under 100,000RMB, which joint venture automakers did
not intend to develop (See TABLE 3).

FIGURE 5 Profit Margin in U.S and in China
20.00%
15.00%
10.00%
5.00%
0.00%
GM

Daimler-Chrysler
1999

Ford

FAW-VW

FAW Car

2000

Note: Here, Profit margin is counted by the rate of total profit via total sales.
Source: Gan Chunhui, Dai Rong, Li Surong, The industrial organization analysis of Chinese car industry,
http://ati.nstl.gov.cn/car/baogao/images/2005/12/8/38816.doc.

Since 1997, CHERY and Geely planed to enter passenger vehicle market with main products
priced under 100,000RMB, which was 1/2 or 2/3 price of existing similar models produced byjoint venture automakers. Though these domestic companies were not authorized as automakers
due to the limitations in automobile industrial policy enacted in 1994, before China’s entry to
WTO (1997-2003), they nevertheless tried to enter the market by gaining support from local
governments (like CHERY), or by taking over small state-owned automakers (like Geely).
However, both strategies could just give the domestic companies an authorization to produce
buses and trucks, but not passenger vehicles. Under such conditions, some companies tried to
produce and sell passenger vehicle models legally registered as microbuses 4.
4

For further detail, can see Zejian Li(2007), Relation between Chinese Auto-Product Management and10

Ⅳ. Competitiveness Strengthening Strategy of ICAMs: How Did They Build
Their “Knowledge”? (CHERY & Geely’s Case Study)
As we mentioned before, in late 1990s the market of vehicles priced under 100,000 RMB wasneglected by joint venture automakers and potential demand from households supported by
gradual growth of GDP per Capita gave domestic companies an opportunity to enter it. On theother hand, the entry of domestic automakers into the low-end market (where the product priceis less than 100,000 RMB) coupled with their intention to produce a cheap product provoked
price competition among manufacturers. Moreover, the low-price strategy has further escalatedcompetition in the whole market and caused a phenomenon of price drop and rapid market
expansion.
Since 2000, Chinese passenger vehicle market became one of the world's fastest-growing
automobile market—the annual sales of new vehicles grew from 2.06 million units in 2000 to
7.27 million units in 2006, showing a 23.4% average annual growth rate—and attracted
automakers from all over the world with its potential for growth and profits. Due to this growth
numbers of domestic automakers, including CHERY and Geely have expanded rapidly (SeeFIGURE 1).
Based on the survey of more than 100 Chinese firms since 2005, this section explores thequestion of how ICAMs managed to build their “knowledge”. This time, we especially focus on
the role the international technology transfer has played in the ICAMs’ competitivenessstrengthening process. First, let us provide more details about CHERY and Geely.
CHERY, officially known as CHERY Automobile Co., Ltd., “was founded in 1997 by five of
Anhui's local state owned investment companies with an initial capitalization of RMB 1.752
billion. Plant construction commenced on March 18, 1997, in Wuhu (City), Anhui Province,
China. The first car was produced on December 18, 1999. This represents a milestone in
Chinese manufacturing history because it was the first car produced by a totally Chinese owned
and managed company” 5. CHERY had sold 3,810,000 units in 2007 in contrast with just 87,000
units in 2004. In 2007, CHERY Automobile sold 119,800 units in overseas markets, including
Russia. Overseas expansion, especially in Russia, Southeast Asia, and Middle East, has becomea very important determinant of growth for CHERY.
Geely, official known as Geely Group Co., Ltd., was founded on November 6, 1986. “Geely
made its debut in manufacturing parts of refrigerator-evaporator, which was located in
Huangyan, Luqiao, Taizhou city, Zhejiang Province. In 1989, Geely entered the production of
Entry to the Automobile Industry of Domestic Companies, Chery and Geely, THE JOURNAL OF ASIAN
MANAGEMENT STUDIES NO.13, pp.207-220, June 2007.
5
http://www.cheryglobal.com/about_chery.jsp.

11

advanced decoration materials and manufactured the first magnalium bent board in China. In
April 1994, Geely set its foot in motorcycle industry, and the same year in June it manufactured
the first scooter motor in China. The total sales volume reached 60,000 units in 1995 and
200,000 units in 1996, thus Geely became the main motorcycle manufacturer in China”. 6“In May 1996, Geely Group Co., Ltd was organized. In March 1997, Geely entered theHigh-education industry. Now the Group has three colleges, including Beijing Geely University– one of the private-owned universities possessing an independent right to authorize High
Education Diploma in Beijing city”. 7“In 1997, Geely set its foot in automobile industry. On August 8, 1998, the production of first
Geely Car was launched in Linhai City, Zhejiang Province. On November 9, 2001 andDecember 26, 2001, China State Economic and Trade Commission (hereafter as SETC) had
approved Geely Automobile JL6360, HQ6360, MR6370, and MR7130 series to be listed in
SETC automobile products public catalogue. Geely automobile became the first private
enterprise approved as an automobile manufacturer in China” 8.
TABLE 4
Parameters

HQ6360 (Geely) V.S. TJ7101(Tianjin Xiali)
HQ6360
TJ7101

Photo

Maker
Geely
Tianjin Xiali
Length-Width-Height(mm)3650/1615/1410
3680/1615/1385
Wheelbase (mm)
2340
2340
Engine376Q
TJ376QE
Engine displacement (cc)993
993
Weight(Kg)1170
815
Source: Li Zejian (2007), Relation between Chinese Auto-Product Management and Entry to the
Automobile Industry of Domestic Companies, CHERY and Geely, THE JOURNAL OF ASIAN
MANAGEMENT STUDIES NO.13, pp.207-220, June 2007.

Most of CHERY and Geely’s first generation products were thought to be a copy (or imitation)of existing vehicles or a hodgepodge of different products (See TABLE 4 & TABLE 5),
especially that was true for the exterior design. This placed both companies under the scrutinyof intellectual property disputes with foreign automakers. However, as we will see below, thispoint of view was mainly based on the empirical observations and was strongly affected byvisual likeness.

6

http://www.geely.com/english/about/intro.htm.
http://www.geely.com/english/about/intro.htm.
8
http://www.geely.com/english/about/intro.htm.
712

What is the cause of such a resemblance between ICAMs’ products and other existing models?
The new entry limitations forced domestic companies to take an unusual way to enter passenger
vehicle market. Without sufficient technology accumulation needed for original R&D, qualified
human resources and capital, ICAMs, including CHERY and Geely, sought to design newmodels using reverse engineering tools, outsourcing of design or introducing technology andknow-how through product line acquisition. However, as we have already mentioned above,
unoriginal design caused numerous intellectual property rights problems before 2003.
TABLE 5 QQ(CHERY) V.S. Matiz (GM-Daewoo)
Parameters
QQ
Matiz
Drive System
FF
FF
Length-Width-Height(mm)3550/1508/1491
3495/1495/1482
Wheelbase (mm)
2348
2340
Engine
SQR372MPI/DA-465QMPI
M-Tec/B1OS1Engine Displacement (cc)812／1051
796／995
850
840
Weight（kg）
140
Top Speed（km/h）
≦135
Tire
175/60R13 77H
155/65R13
Suspension (Front)
MacPherson Strut
MacPherson Strut
Suspension (Rear)
Independent Suspension
Non-independent Suspension
Fuel Consumption
4.2（60km/h）
4.0（90km/h）（L/100km）
Source: Li Zejian (2006), The Growth Strategy of Emerging Chinese Domestic Automakers: Focus
on CHERY and Geely, Master’s Thesis, Kyoto University, March 2006. (MIMEO).

Therefore, to avoid conflicts with foreign automakers, it became extremely important toenhance original design and concept for all ICAMs. Here we use the case of Chery to show how
ICAMs managed to increase the original capabilities of product design and R&D. The same
phenomenon can also be traced in Geely’s case.
(a) High Quality Proficient Experts Headhunting
The first stages of knowledge acquisition (especially design and R&D know-how) included
hiring of Chinese engineers working for major global automakers and related companies
through headhunters and other types of intermediaries.
Besides, a number of foreign experts were also invited to work in China. For example, CHERY
has invited about 30 overseas experts with broad experience in such companies as GM, Ford,
Visteon, Daimler Chrysler, Du Pont, TRW, and Motorola. These experts brought advanced
technologies and know-how to CHERY and then diffused their knowledge throughout the whole
company by means of the on-the-job training. That was especially effective in the case of young
engineers who can absorb the useful knowledge directly and quickly.

13

Name

Xu, M

Xin, J

Gu, L

Yuan, T

TABLE 6 List of High Level Proficient Experts in CHERY
Post
Job Experience
Oversea Chinese Experts – about 30 people
Director of Automotive Engineering Engine Expert, Ph.D. of Engineering
Institute of CHERY, Chief Leader of (Hiroshima University), Worked for GM,
R&D
Ford, Visteon
Vice Director of Automotive Engineering
Institute of CHERY, Leader of Engine Worked for Honda (U.S.A)
Durability & Hybrid Car
Crash Test Expert, Ph.D. of Modern
Vice Director of Automotive Engineering
Mechanics (University of Science andInstitute of CHERY, Leader of Digital
Technology
Beijing,
Northwest
Crash Test
University), Worked for Ford
Studied in Beijing University of
Aeronautics and Astronautics, Ph.D. ofVice President (Parts Procurement)
Engine (Centre National de la Recherche
Scientifique)

Qi, G J
Sun, G C
Yuan, Y B
Li, M
Zhu, X C
Gu, Y
Kang, L M
Hu, F

Feng, J Q

Vice Director of Automotive Engineering
Institute of CHERY,
Leader of Worked for DaimlerChrysler AG
Automotive Body-In-White
Vice President (CFO)
Worked for DuPont (China) as CFO
Chassis Research
Worked for TRW Automotive
Electronic Driving Research
Worked for Motorola
Transmission Research
Back to CHERY from Australia
Vice President of CHERY Subsidiaries
Worked for Fuji Japan(Die & Molt)
Chinese Experts from FAW – about 150 people
Chief Engineer, Engine Project Manager
FAW
Gratitude from Automotive Engineering
Vice Chief Engineer, Project Leader of(Tsinghua University)， FAW， Retired
Engine Co-project with AVLfrom DongFeng Motors in 1995
The First Engine Designer of New China,
Vice Chief Engineer, Designer of
He Designed 6102 Gasoline Engine for
CAC372 Engine for QQ0.8L
JieFang 141 Truck

Terada, S
Kawano, K
Kim, U S
GermanExperts

Foreign Experts – about 40 people
Worked 30 years for Mitsubishi Motors
Plant Manager, Operation Management
as Plant Manager
Director of Plant KAIZEN
Worked 40 years for Mazda Motors
Vice Chief Engineer
Ricardo Company
Manufacturing Technology Support

Unknown

Others Domestic Engineers
Gratitude
from
Automotive
Lu, J H
Vice President (R&D)
Manufacturing (Tsinghua University)
Worked for Foton Motors sales Co. as
Li, FVice President (Sales)
Vice President
Total
In 2006, CHERY had 18,000 employees, including nearly 4000 engineers. Furthermore, 1,500
engineers were directly involved in R&D.
Note: Each rank/title corresponds to 2004 year’s position.
Source: Li Zejian (2008), Analysis on the competitiveness of Chery Automobile: focus on aspect ofreinforcement in R&D, Annals of the Society for Industrial Studies, Japan (23) [2007],
pp.103-115, June 2007.

In addition to 30 foreign experts, CHERY has also invited more than 150 Chinese experts andengineers form FAW, which was supposed to hire more engineers than any other state-owned
14automaker. These highly skilled professionals started the work in R&D and manufacturing
departments of CHERY. By the end of 2006, CHERY had 18,000 employees, including 20%(which is approximately 4000 people) of engineers, and 1500 of them were directly related to
R&D. (See TABLE 6)(b) Joint-Development Project and Design Outsourcing
Besides to the human resource policy, the most important methods for CHERY to acquire
technology and know-how were co-operation projects on joint-development and design
outsourcing. Most of ICAMs were similar to CHERY’s case. They preferred the tie-up
cooperation in joint development and introduced the necessary knowledge from foreign
professional engineering corporations.
For instance, in 2001, CHERY started joint development project on 18 high level engines with
AVL, which is the world's largest privately owned and independent company for thedevelopment of powertrain systems with internal combustion engines as well as instrumentationand test systems 9. In the above-mentioned case of joint development CHERY wanted to acquire
not just 18 ready-made engines, but also the knowledge on how to design an original high levelengine and improve its properties continuously.
A special training program for CHERY’s specialists was organized by AVL and a group of guest
engineers was sent to AVL to acquire technical knowledge of processes. After hard daily work
they had to recall all the details, record them and report to CHERY’s head office. Based on theworking records of these guest engineers, CHERY has established its own development
standards and launched the development of an original engine by its own.
For the design outsourcing, CHERY chose way of taking the cooperation with outsourcing

destination by sending a team of CHERY engineers to that company and let their engineers workwith CHERY engineers together. As soon as CHERY’s engineers were able to understand andmaster certain parts of a project they were entrusted to fulfill these functions by themselves, andonly the operations they could not comprehend were outsourced. Having repeated this process
several times, CHERY acquired more knowledge, technologies and know-how needed forenhancing original design capabilities.
(c) Original Affiliated Supplier Chain Construction
When CHERY and Geely made their first attempt to enter passenger vehicle market with thefirst generation product they depended on existing part suppliers subordinated to joint venture9

http://www.avl.com/wo/webobsession.servlet.go?app=bcms&page=view&nodeid=400013015.

15

automakers. For example, in 2002 Geely relied on the parts from Tianjin Xiali’s suppliers at a
maximum rate of 95% to produce Haoqin 10. CHERY procured parts from the suppliers affiliatedwith ShanghaiVW for its first generation sedan product which called WindCloud.
However, the procurement of essential parts from competitor's affiliates put CHERY and Geely
into dilemma because they had to compete with the companies from which they procured
essential parts, like engines or chassis. As new entrants they depended on low-price strategy togain competitiveness in passenger vehicle market, but relatively high prices of parts fromcompetitor reduced potential profit. This stimulated CHERY and Geely to build their own
affiliated network of suppliers as quickly as possible.
By the end of 2004, there were approximately 200 part suppliers which had business
relationship with Geely. Meanwhile, Geely gained 50% control in 100 companies andsuccessfully founded their own stable system of part suppliers. As a result, the dependence on
supplies from Tianjin Xiali’ affiliates decreased from 95% to 1% in 2004.
Using the above-mentioned methods gave ICAMs an opportunity to enhance original design
capabilities and made them close to the target of gaining more competitiveness. What isremarkable that ICAMs were not at the same growth level; they entered the market at different
moments and had various management structures. However, the necessity to gain and enhanceoriginal R&D capabilities was apparent for all of them. Under the severe competition between
both joint venture automakers and forerunners there has no room in passenger vehicle market
for new local participants, such as CHERY and Geely, especially because their strategy was tocopy and market the existing low-end models.

Ⅴ. Discussion: The Role of International Technology Transfer
ICAMs demonstrated rapid growth rates not only in domestic market also in international
market. In 2007, ICAMs reached 31% share of domestic market, which was the highest recordin history. CHERY is a good example with the sales of 3,810,000 units in 2007, compared withjust 87,000 units in 2004. In 2007, CHERY also sold 119,800 units to overseas markets,
including Russia. (See FIGURE6)

10

Sun Zhishan, Jili Liantiao Shangde Jingzhengli (Geely’s competitiveness on supplier chain), CHINALOGISTICS, pp53, 2007 vol.7.

161000 U nits

FIGURE 6 Car Export Top 3
150
100
50
0
2004

2005

2006

2007

Chery
Geely
Great Wall

There is no doubt that the expansion demonstrated not only in domestic but also in overseas
markets, especially in Russia, Southeast Asia, and Middle East became possible due to thegrowth of Chery’s original capabilities in design and R&D. However, at same time, global
automakers have achieved considerably more expansion through the establishment ofSino-foreign joint ventures (SEE TABLE7).
TABLE 7 Global Automakers’ Operations in China
Global Automaker
Sino-Foreign Joint Venture(Sales, locally produced passenger
vehicles in 2007&2008)
JV: BMW Brilliance Automotive Ltd.

JV: Beijing Benz-DaimlerChrysler Automotive Co.

No longer has any JV, but licensed two companies to produce its
vehiclesNo longer has any JV

JV: Shanghai General Motors Corp.

JV: Shanghai GM Dongyue Motors Co.

JV: Shanghai GM (Shenyang) Norsom Motors Co.

17

JV: SAIC-GM-Wuling Automobile Co.

JV: Jiangling Motors Corp.

JV: Changan Ford Mazda Automobile Co.

JV: Honda Automobile (China) Co.

JV: Dongfeng Honda Automobile (Wuhan) Co.

JV: Guangzhou Honda Automobile Co.

JV: Beijing Hyundai Motor Co.

JV: Dongfeng Yueda Kia Automobile Co.

JV: Hunan Changfeng Motor Co.

JV: Soueast (Fujian) Motor Co.

18

JV: Zhengzhou Nissan Automobile Co.

JV: Dongfeng Motor Co. /Dongfeng Nissan Passenger
Vehicle Co.

JV: Dongfeng Peugeot Citroen Automobile Co.

JV: Jiangxi Changhe Suzuki Automobile Co.

JV: Chongqing Changan Suzuki Automobile Co.

JV: Tianjin FAW Toyota Motor Co.

JV: Sichuan FAW Toyota Motor Co.

Changchun Fengyue Company of SFTM

JV: Guangqi Toyota Motor Co.

JV: FAW-Volkswagen Automotive Co.

JV: Shanghai Volkswagen Automotive Co.

19

Source: PricewaterhouseCoopers, 2009 GUIDE TO CHINA’S AUTO MARKET,

http://www.nxtbook.com/nxtbooks/crain/an2537706532BMMMPB_china/

If we take a look at the sales of 14 global automakers in Chinese market we can see that in 2008
Volkswagen was the top seller with approximately 1 million units. The following four players TOYOTA, GM, HONDA, and HYUNDAI - sold 500 thousand units, a half of Volkswagen’s. In
addition, NISSAN sold 361 thousand units, approximately the same volume as that of CHERY.
In 2008, CHERY, the top ICAM automaker, reported a slight decrease in sales of cars (356thousand units in 2008 and 379 thousand units in 2007). Geely, the second largest ICAM
automaker, sold 221 thousand units in 2008.
From the data presented we can say that despite the rapid expansion ICAMs achieved in recent
years, global automakers operating Sino-foreign joint venture still keep domination over them.
The economic activities performed by the above-mentioned Sino-foreign joint ventures remain
the key factor in Chinese market. Therefore, we would suggest that their operations, regarded asa main pattern of international technology transfer to China, have strong and consistent effect on
the development of Chinese automotive industry.
Having discussed the case of CHERY, we outlined the methods by which ICAMs acquired
original capabilities on design and R&D. The role that international technology transfer playedin this process can not be ignored. In this section we analyze the role of both direct and indirectinternational technology transfer (SEE TABLE8).
TABLE8 the Role of International Technology Transfer in Chinese Automotive Industry
Receiving Side
Positive EffectIndirect Pathway

CHERY, Geely(Spillover)(R&D, Manufacturing, Sales)

Spreading
Type1

Side
Direct Pathway

Tpye2

Negative EffectSino-foreign JVstate-owned automakers(Manufacturing, Sales)(R&D)

CHERY, Geely(R&D, Manufacturing)

Note: Type1 refers Interior Technology Transfer in NMEs. Type2 refers Technological Consulting andOutsourcing.

First, we should mention that it is impossible to provide absolutely clear borders isolate positive
and negative effects of international technology transfer. Therefore TABLE8 is based only on an
empirical analysis.
20

As we have found out, before GM was permitted to locate Shanghai General Motors Corp, a JV
between GM and SAIC Motors Corp, the other global automakers (i.e. Volkswagen and
Peugeot) were purely profit-motivated to work in the Chinese market. For this reason, only
insignificant knowledge related to R&D was transferred with their products. Consequently, local
state-owned automakers started to look for short-term profits and were satisfied with thisposition. Even though technologies were rarely transferred in this period, skills in
manufacturing, part supply and sales were developed due to foreign direct investment. We
consider it as a positive effect as type 1 in TABLE8.
By contrast, this kind of FDI also caused a suspension of R&D activities by existing local
passenger vehicle automakers. For example, SAIC Motors Corp had to abandon the original
product of its SHANGHAI brand, in order to meet localization standards of SANTANA. Afterthe founding of Shanghai GM, the competition between Sino-foreign JVs quickly escalated.
Some R&D projects carried out by Sino-foreign JV project were only limited to productadaptation and localization. Due to the absence of original passenger vehicle R&D projects
within Sino-foreign JVs and state-owned automakers, engineers directly involved in R&D
shifted to ICAMs, such as CHERY and Geely. We consider this as a negative effect ofinternational technology transfer as type 1 in TABLE8.
Additionally, we consider it as a positive effect of a spillover of technological and R&D
capabilities to ICAMs. For example, Kaking Technology Co., Ltd. is a good case to explain thiseffect. Kaking Technology Co., Ltd., as a subsidiary of CHERY, undertook over 60% of
CHERY’s design work before 2005. The founders of this company are former team-members of
Dongfeng Technology Center which had undertaken R&D projects for XiaoWangzi andmodification works for Citroen Elysee. The former is an original passenger vehicle product ofDongfeng Motor Co. and the latter is a product manufactured by Dongfeng Peugeot Citroen
Automobile Co.
Based on the spillover from Sino-foreign joint ventures ICAMs acquired basic technologicalcapabilities in R&D, manufacturing and sales. As we have mentioned before, after CHERY had
successfully entered passenger vehicle market, they preferred to use the Type 2, as technological
Consulting and Outsourcing (SEE TABLE8) as a main way to improve their technologicalcapabilities in R&D and manufacturing.
As a conclusion of the whole analysis we would suggest that even though international
technology transfer (as an important external factor) had a number of positive effects on
ICAMs’ development, the building of managerial capabilities for system integration (as aninternal factor) became the main aim for all ICAMs.

21

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