Annals of Business Administrative Science 8 (2009) 21–42
Available at www.gbrc.jp

Online ISSN 1347-4456 Print ISSN 1347-4464©2009 Global Business Research Center

Analysis of the Dynamic Relationship between the
Emergence of Independent Chinese Automobile
Manufacturers and International Technology
Transfer in China’s Auto Industry

Zejian LI
Manufacturing Management Research Center
Faculty of Economics, the University of Tokyo
E-mail: takuken.ri@mmrc.e.u-tokyo.ac.jp

Abstract: This paper examines the relationship between the emergence of independent Chinese
automobile manufacturers (ICAMs) and International Technology Transfer. Many scholars indicatethat the use of outside supplies is the sole reason for the high-speed growth of ICAMs. However, itis necessary to outline the reasons and factors that might contribute to the process at thecompany-level. This paper is based on the organizational view. It examines and clarifies theinternal dynamics of the ICAMs from a historical perspective.
The paper explores the role that international technology transfer has played in theemergence of ICAMs. In conclusion, it is clear that due to direct or indirect spillover from joint
ventures, ICAMs were able to autonomously construct the necessary core competitive abilities.
Keywords: Marketing, International Business, Multinational Corporations (MNCs), Technology
transfer, Chinese Automobile industry

1. Introduction
The purpose of this study is to investigate the chaotic

but progressive emergence of independent Chinese
automobile manufacturers (ICAMs). It will also
provide an academic view of the relationship between
21

Li

the

emergence

international

neither spontaneous nor caused just by an outsidetechnology transfer, from the points of view of bothripple effect, this paper will focus on the internalof the firms involved in the joint ventures (JV), that is,

aspects, that is, the nature of the “Chinese learning

fromautomobile

mechanism” and the role of international technology

manufacturers’ (i.e., VW, etc.) and the Chinesetransfer in the growth of independent Chinese

domestic automobile manufacturers’ (i.e., FAW, etc.)

automobile manufacturers. These manufacturers arepoints of view.

regarded as the new forces of Chinese manufacturing

both

of

the

ICAMs

major

and

foreignManyeconomists

have

documented

theTo clarify these issues, this paper will attempt torelationshipbetweeninternational

technology

answer the following questions: (1) How and why didtransfer and the development of the Chinese

ICAMs enter the passenger vehicle market? Why was

automotive industry. For example, Guo and Zhang

their emergence chaotic but progressive for the(2008) discovered that technological transfer from

Chinese automobile industry? (2) What role has

multinational companies has not brought a substantial

international technology transfer played in the

improvement to the Chinese passenger vehicle

ICAMs’ emergence process? What effects, if any, did

industry, but has caused even more dependency oninternational technology transfer have on theforeign technological transformation. Focusing on thecompetition building of ICAMs? (3) What are thechange over time in the investment behavior oflargest barriers faced during international technology

multinational corporations, Lei and Xu (2006) havetransfer from automotive Sino-foreign joint venturesconcluded that the investment atmosphere has

to ICAMs? These questions are followed by another,changed from one of monopoly to one of competition,that is, whether the key factors indispensable to thewhich has helped to improve the international

growth of ICAMs into world-class automakers arecompetitiveness of China’s automobile industry. Jia

present in the current situation.

(2004) reached a similar conclusion.

To answer these questions, this paper was

However, most studies have focused on thedivided into three parts. First, we distinguish between

transferring side (multinationals), not on the recipient

independent

side (Chinese companies). The findings of theautomakers. We elaborate on the background andaforementioned studies indicate that the expectation

origin of ICAMs and outline the key factors thatof international technology transfer exists in China, asaffected their emergence, especially in the passenger

does the belief that the competitiveness of China’s

vehicle market. Although new entrants were banned

automobile industry has improved through advancedby the industrial policy a few years after thetechnology

behavior

implementation of the Auto Industry Policy (1994),

transformation. However, since industrialization issome Chinese indigenous enterprises entered thetransferandinvestment

22

and

non-independent

ChineseEmergence of independent Chinese automobile manufacturers

passenger vehicle market successfully. CHERY andCHERY Automobile, Geely Automobile, Great Wall

Geely can be regarded as examples of these newMotors, Zhongxing Auto, etc. can all be regarded asplayers. We also deal with the question of what

ICAMs.

changed after the emergence of ICAMs. Second, we

Non-independent Chinese automakers simply

review the history of international technology transfer

introduce their foreign joint venture partners’ existing

to the Chinese auto industry until the end of themodels as their own new ones. Companies such as

1990s. Finally, we analyze the dynamic changes of

Beijing Motors, Guangzhou Motors, etc. were

the relationship between international technology

provided with brands, passenger vehicle models, andtransfer and the growth of ICAMs.

all the necessary technologies, and thus were

2. Definition of ICAMs: What does

dependant on their foreign partners.
On the basis of this definition, over 20“Independent” mean?

enterprises (or brands) can be recognized asIf (1) the automaker has developed its own

ICAMs. Because of the industry protection policy

indigenous brand, and (2) all the technologies(that also served as a strict entry restriction for thenecessary for R&D and the manufacturing process

passenger vehicle market), most ICAMs concentrated

were not introduced through a form of joint venture

on trucks (including pickup trucks) and SUVs (Sportwith foreign companies, we use the term “ICAM.”

Utility Vehicles) as their main products. AnotherFigure 1. Passenger car sales by ICAMs

400
350

1000 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).

23

22

―

―

Geely
Automobile

―

―

8

9

10

24

59
50

Guangzhou
Honda

SAIC
CHERY
AeolusAutomobile
Geely
Automobile
40

41

65

Chang’anSuzuki85

95

Tianjin
FAW

DPCA

111

208

301

SAIC -GM

2002
Shanghai
Volkswagen
FAW Volkswagen

SAIC
CHERY
Geely
Automobile
AeolusAutomobile

Chang’anSuzukiDPCA

Guangzhou
Honda
Tianjin
FAW

SAIC -GM

2003
Shanghai
Volkswagen
FAW Volkswagen

65

76

85

100

103

114

117

201

298

396

CHERY

DPCA

Geely
Automobile

Chang’anSuzuki

Guangzhou
Honda
Beijing
Hyundai
Tianjin
FAW

SAIC -GM

2004
Shanghai
Volkswagen
FAW Volkswagen

87

89

97

110

130

144

202

252

300

354

140

150

Geely
Automobile
DPCA

158

189

190

230

234

Dongfeng
NissanCHERY

250

Shanghai
Volkswagen
FAW Volkswagen
Beijing
Hyundai
Guangzhou
Honda
Tianjin
FAW
240

325

SAIC -GM

2005

DPCA

Geely
Automobile
Dongfeng
NissanFAWTOYATO

290

Beijing
Hyundai
Guangzhou
Honda

201

203

204

219

260

302

345

349

406

CHERY

Shanghai
Volkswagen
FAW Volkswagen

SAIC -GM

2006

Geely
Automobile
Chang’an
Ford

Beijing
Hyundai

Dongfeng
NissanGuangzhou
Honda
FAW
TOYATOCHERY

FAW Volkswagen
Shanghai
Volkswagen

SAIC -GM

2007

218

220

231

272

282

295

381

456

461

495

Geely
Automobile
Chang’an
Ford

Beijing
Hyundai

Guangz hou
Honda

Dongfeng
Nissan

205

222

295

306

351

356

366

FAW
TOYATO
CHERY

445

478

499

SAIC -GM2008
FAW Volkswagen
Shanghai
Volkswagen

Note: 1/ In June 2002, when China FAW Group Corp acquired Tianjin Automotive Xiali Co., the abbreviated name of Tianjin Automotive Xiali Co. was changed to Tianjin
FAW.
2/ Since SAIC sold its stock back to CHERY in 2004, the abbreviated name of CHERY changed from SAIC-CHERY to CHERY.
3/ The sales of Geely Automobile is the 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 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)’ (2002). Internal Combustion Engine
Parts, China Internal Combustion Engine Industry Association, 1, 41–44; Automotive information 2002–2009. China Automotive Technology & Research Center(CATARC).

28

51

Guang zhou
Honda
SAIC
CHERY

6

7

53

DPCA

5

58

SAIC -GM

80

125

241

4

3

2

1

2001
Shanghai
Volkswagen
FAW Volkswagen
Tianjin
Automobile

Table 1. Sales of top 10 passenger vehicle manufacturers in the Chinese market, 2001–2008 (1,000Units)LiEmergence of independent Chinese automobile manufacturers

problem faced by the newcomer ICAMs was weak

impossible.

Further,these

non-independent

design and innovation capabilities, especially in theautomakers

(most

which

are

case

enterprises)

have

of

advancedenginesandsystemofnostate-owned

opportunities

tointegration. Until now, only eight ICAMs havedevelop inter-competitiveness because most of themsuccessfullyvehicleare engaged only in the assembly process. The

manufacturing 1 : CHERY, Geely, BYD, Brilliance,

Chinese media claims that state-owned automakers

Lifan, Great Wall, Hafei, and Jianghuai (see Figure

are satisfied with the current state of affairs, that is,1).

with the assembly of foreign models from imported

begun

passenger

Figure 1 illustrates that only a few ICAMs haveparts, not the launch of their own brands. Most

reached a suitable scale (assuming a minimum levelstate-owned automakers are supported by the centralof 50,000 units per year). Moreover, most ICAMs’

government and are protected (from competition byannual sales are still comparable to those of

new entrants) by industrial policy; these automakers

Sino-foreign joint venture companies (see Table 1).

enjoy being joint ventures and have lost the ability to
become “independent.” In the other words, they are

The word “independent” seems to mean“technicallyisolated”

in

the

case

non-independent.

ofICAMs. Compared to Sino-foreign joint venture

3. Background of the emergence ofenterprises, most ICAMs did not have either
sufficient resources to design new models or skills in

ICAMs: What stimulated new entry?

manufacturing. Sino-foreign joint venture enterprises

This section provides an insight into the history of the

surpass ICAMs in such aspects as technology,

Chinese automobile industry. As one of the key

qualified human resources, facilities, and capital.

industries in the Chinese economy, the automobile

However, most Sino-foreign joint ventures lackindustry was strictly controlled by the central

one important characteristic—an “autonomous brand.”government until the Reform and Open Policy wasThis makes the introduction of new models almost

implemented in 1979. At that time, all production1

activities related to automotives (such as R&D,

In 2001, the Chinese government amended Motor
Vehicles and Trailers—Types—Terms and Definitions
from GB 3730.1-1988 to GB 3730.1-2001. Under thisamendment, the definition of “passenger car” is updated
as including basic passenger cars (i.e., sedans or saloons),
MPVs (Multi Purpose Vehicles), SUVs (Sport Utility
Vehicles), and crossover vehicles. For this reason, somelocal Chinese SUV or MPV manufacturers, regarded ascommercial vehicle manufacturers under the previous
definition, have become passenger car manufacturers
since the amendment was approved. In this paper, we do
not cover these cases; we are concerned only with thecompanies that are permitted to manufacture basic
passenger cars. That is why we just focus on these eightpassenger vehicle manufacturers.

manufacturing, and delivery) was based on the annual
plan issued by the central government, and no
independence or management rights were given to theautomakers. In this context, the growth of the Chinese
automobile industry was mostly based on a policy ofself-reliance. The main product lines were trucks andbuses. The use of passenger vehicles (regarded as
25

Li

Figure 2. Vehicle production in China (1955–2007) (million units)
9.5

100%

9

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

8.5
8
7.5
7

80%
70%
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983

6.5

90%

6
5.5

Total

Basic passenger car

60%

Truck

5

50%

4.5
4

40%

3.5
3

30%

2.5
2

20%

1.5
1

10%

0.5

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）

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

0%
1955

0

Source: History of China automotive industry 1901–1990 (1996). China Communications Press; Automotive
information 2002–2009, China Statistical Yearbook 2001–2008.

belonging to a “capitalist” lifestyle) was limited to

grantedto

Beijing-AMC

official business purposes, and was not promoted

Shanghai-Volkswagen

until 1987. The first family-cars (or “private cars”)

respectively. This was somewhat contradictory to thewere released in 1989. From Figure 2, we can see that,policy of product restriction. By granting thisin comparison with trucks, the production of basic

permission, the central government hoped to achieve

passenger vehicles increased very slowly until 1989.

the objective of import substitution.

in

1983

and

to

and

1984,

At a glance, the Chinese central government did

As a result of the self-reliance policy, which had

not promote passenger vehicle manufacturing until

been in effect for approximately 30 years before the1987. Permission to launch joint venture projects was

Reform and Open Policy, the Chinese automobile26

Emergence of independent Chinese automobile manufacturers

Table 2. Prices of some short-lived models in the Chinese market in the 1990s
Model

Price (Year)

Rate of price via GDP per capita*(= RMB 6079)

Audi 100
289,000 (’94)
Rex62,800 (’94)
Hongqi CA7560
520,000 (’95)
Xiao Hongqi
220,000 (’97)
Cherokee 2021
188,000 (’97)
Santana 2000
165,000 (’97)
Santana
135,000 (’97)
Jetta135,000 (’97)
Fukang (Citroën ZX)
135,000 (’97)
Peugeot 505
135,000 (’97)
Charade66,500 (’97)
Alto60,000 (’97)
Note: * means data of 1997.
Source: Chen (2000), p. 64, National Bureau of Statistics of China.

45.54
10.33
85.54
36.19
30.93
27.14
22.21
22.21
22.21
22.21
10.94
9.87

industry was completely isolated from the rest of theImportation of Passenger Vehicles” to authorize

world. For this reason, vehicles produced by Chinese

China Faw Group Corporation (FAW), Shanghai

automakers could not satisfy user needs by way of

Automotive Industry Corporation (SAIC), Dongfeng

either quantity or quality. The import rush, especially

Automobile Company, Beijing Automotive Industry

for passenger vehicles, began after 1980. AlthoughCorporation,passenger vehicles had been imported since the

Corporation, and Guangzhou Automotive Industry

2

Tianjin

Automotive

Industry

1950s, the volume of import increased rapidly in the

Corporation as the only domestic players in passenger

1980s, and even exceeded the central government’s

vehicle manufacturing. 3 Through the 1980s andexpectations. For example, during the period

1990s, the Chinese government reinforced the

1981–1986, a total of 183,000 passenger vehicles (oflimitations of new entrants in the passenger vehicle

total value, US$ 850 million) were imported. In

market by the successive issuing of numerous acts

comparison, the average annual production ofrelated to the industry. Examples of these acts are

domestic automakers was only 4000 units. The“Notice on the Regulations of Controlling the Number

import of passenger vehicles became the country’sofmain expenditure in foreign currency.

“Decisions Concerning the Main Points of China’s

Passenger

VehicleManufacture(1988),”For this reason, the Chinese government decided

Current Industrial Policy (1989),” “Outline of Stateto launch an import substitution mechanism. In 1987,

Industry Policies for the 1990s (1994),” andthe government issued the “Notice from State Council“Automotive Industry Policy (1994).”of PRC on the Reinforcement of Controlling the3

2

For example, the Chinese government imported 60 Benz
cars in 1956. Chen and Ouyang (2005), pp. 81–82.

27

State Council of PRC, “Notice on the Regulations ofControlling the Number of Passenger Car Manufacturers(Chinese Pinyin: Guanyu yange kongzhi jiaoche
shengchandian de tongzhi),” 1988.

Li

Figure 3. Importation in China through the 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

36.09257.94234.41324.3461994

1995

32.0191996

Legal importation

1997

28.33418.04614.167

1998

1999

Smuggling

Source: Zheng (2007), p. 75.

Figure 4. GDP and GDP per capita in China, 1991–2005
RMB per capita
1500

Billion RMB
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0

1200
9000
6000
3000
0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
GDP per capita

GDP

Source: National Bureau of Statistics of China.

As a result, in the early 1990s, the Chinese

authorized players intended to raise productivity

automobile market was an oligopoly, led by a few

through joint ventures with foreign corporations. Thisauthorized players and strictly protected by both

importindustrial policy and high import duties. All the

success. However, the price of products made by
28

substitution

policymet

withpartialEmergence of independent Chinese automobile manufacturers

these joint ventures was higher than levels in the rest

In the late 1990s, the Chinese market attracted theof the world, and much higher than the income levels

attention of global automakers, who revealed plansof the normal Chinese household (see Table 2).

to enter the market because of its high growth

For this reason, in the early 1990s, automobile

potential. In 1998 and 1999, Honda and GM

demand was mainly supported by state officials andsuccessfully used their last opportunities to enter thestate-owned companies, not by households. The highChinese market, before the country’s admission to

price of vehicles was the largest constraint on

the WTO. Honda founded a joint venture withhousehold demand. The average price of most

Guangzhou Auto, and GM, in cooperation with its

vehicles was higher than RMB 130,000, which waspartner, Shanghai Auto, located one of its plants inmore than 20 times the GDP per capita in 1997. In

Shanghai.

addition, the smuggling in of passenger vehicles inIn the middle of the year 2000, when the Chinese

the 1990s greatly exceeded legal import (see Figure

GDP per capita was close to the US$ 1,000 mark, the3).

government and most joint venture automakers
Generally speaking, the motorization of astarted to focus on the production of “family cars”

country is quite smooth after its GDP per capita(or “public cars”). Many automakers planned tosurpasses US$ 1,000. After 1994, the Chinese GDP

promote products specified as “family cars,” worthand GDP per capita experienced rapid growth (seeRMB

Figure 4).

China. However, in 2001, the income levels of

100,000,

toinfluencemotorization

Table 3. Possibility analysis of China’s motorization
The beginning of motorization in depended countries
U.S.A
GermanyJapan
Period of speeding up
1910s–20s
1950s
1960s
550 Dollars
4,500 DM
410,000–430,000 Yen
Price of public carⒶ
Ford Model T
VW1200Exp
Corolla, Sunny
Annual average per capita
500 Dollars
3800 DM
380,000 Yen
incomeⒷaverage of 1914–1923(1958)(1966)Ⓐ/Ⓑ
Price of promotion car by
joint venture①
Price of ICAMs’ vehicles②
GDP per Capita (RMB)③
①/③
②/③

1.1

1.2

1.1

Case study of China around 2000
About RMB 100,000(Toyota Vios RMB 105,000, Honda Fit RMB 99,800)
About RMB 40,000(Geely HaoQing RMB 29,990–42,990)
China
Beijing
Tianjin
Shanghai
Guangdong
8622
25523
20154
37382
13730
11.60
3.92
4.96
2.68
7.28
4.64
1.56
1.98
1.07
2.91

Source: Weekly Economist, (2004 September 28), p. 25, National Bureau of Statistics of China, author edited.

29

in

Li

Figure 5. Profit margins in the U.S. and China
20%
15%
10%
5%
0%
GM

DaimlerChrysler

Ford
1999

FAW-VW

FAW Car

2000

Note: Here, Profit margin is calculated as total profit as a percentage of total sales.
Source: Gan, Dai, & Li, (2002).

Chinese households still were low, and motorization

enacted in 1994, before China’s entry to the WTO

became possible only in some advanced areas like

(1997–2003), they tried nevertheless to enter the

Shanghai, Beijing, and Tianjin (see Table 3).

market by gaining support from local governments

Foreign companies were not the only ones to(e.g., CHERY), or by taking over small state-owned

recognize the opportunities in the Chinese market inautomakers (e.g., Geely). Both strategies would givethe late 1990s; Chinese domestic companies

the domestic companies authorization to produce

recognized them as well. In the 1990s, the high ratebuses and trucks, but not to produce passenger

of profits in the passenger vehicle industry attracted

vehicles. Under these conditions, some companies

domestic companies that had potential capabilities

tried to produce and sell passenger vehicle models(see Figure 5). Additionally, the high price of thelegally registered as microbuses.4

joint venture products and the high potential demand

4.

from households gave domestic producers the best

RMB

100,000,

which

joint

strengthening

strategy of ICAMs: How did they build

opportunity to enter the segment of vehicles priced
underCompetitivenesstheir “Knowledge”? (Case study ofventureCHERY and Geely)

automakers did not intend to enter (see Table 3).
CHERY and Geely had been planning to enter the

As mentioned earlier, in the late 1990s, the market forpassenger vehicle market since 1997 with products

vehicles priced under RMB 100,000 was neglected bypriced at under RMB 100,000 (which was 1/2 to 2/3

joint venture automakers; potential demand fromof the price of the models produced by joint venture

households supported by the gradual growth of GDP

automakers). Although these domestic companies

per capita gave domestic companies an entry

were not authorized as automakers due to theopportunity. On the other hand, the entry of domestic

limitations of the automobile industrial policy

430

For further details, see Li (2007a),

Emergence of independent Chinese automobile manufacturers

automakers into this low-end market, coupled withtotally Chinese owned and managed company.” 5

their intention to produce a cheap product, provoked

CHERY sold 3,810,000 units in 2007, in contrast withprice competition among manufacturers. Moreover,just 87,000 units in 2004. In 2007, CHERY

the low-price strategy further escalated competition

Automobile sold 119,800 units in overseas markets,in the entire market and caused the phenomena ofincluding Russia. Overseas expansion, especially inprice drop and rapid market expansion.

Russia, Southeast Asia, and the Middle East, has

Since 2000, the Chinese passenger vehicle
markethas

become

one

of

the

become a very important determinant of CHERY’sworld’s

growth.

fastest-growing automobile markets—annual sales of

Geely, official known as Geely Group Co., Ltd.,

new vehicles grew from 2.06 million units in 2000 to

was founded on November 6, 1986. “Geely made its

7.27 million units in 2006, demonstrating a 23.4%

debut

average annual growth rate—and has attracted

refrigerator-evaporators. It was located in Huangyan,

automakers from all the world over with its potential

Luqiao, Taizhou city, Zhejiang Province. In 1989,

for growth and profits. Due to this growth, theGeely entered the production of advanced decoration

number of domestic automakers, including CHERY

materials and manufactured the first magnalium bent

and Geely, has expanded rapidly (see Figure 1).

board in China. In April 1994, Geely entered theinmanufacturing

parts

of

Based on a survey of more than 100 Chinese

motorcycle industry, and in June of the same year, it

firms that have been in operation since 2005, thismanufactured China’s first scooter motor. Its total

section explores how ICAMs managed to build theirsales volume reached 60,000 units in 1995 and“knowledge.” We focus on the role that international

200,000 units in 1996. Geely thus became the maintechnology transfer has played in the competitivenessmotorcycle manufacturer in China.6

strengthening process of ICAMs. First, let us provide“In May 1996, Geely Group Co., Ltd wasmore details about CHERY and Geely.
CHERY,

officiallyknown

re-organized. In March 1997, Geely entered the
as

CHERY

higher-education industry. The Group now has three

Automobile Co., Ltd., “was founded in 1997 by fivecolleges, including Beijing Geely University—one ofof Anhui’s local state-owned investment companies,

China’s privately-owned universities that possesses

with an initial capitalization of RMB 1.752

the independent right to authorize the High Education

billion. Plant construction commenced on March 18,

Diploma in Beijing city.7

1997, in Wuhu (City), Anhui Province, China. The“In 1997, Geely entered the automobile

first car was produced on December 18, 1999. This

industry. On August 8, 1998, the production of therepresents a milestone in Chinese manufacturing5

http://www.cheryglobal.com/about_chery.jsp
http://www.geely.com/english/about/intro.htm
7
http://www.geely.com/english/about/intro.htm
6

history because it was the first car produced by a31

Li

Table 4. HQ6360 (Geely) vs TJ7101 (Tianjin Xiali)
Parameters

HQ6360

TJ7101

Geely
3650/1615/1410
2340
376Q
993
1170

Tianjin Xiali
3680/1615/1385
2340
TJ376QE
993
815

Photo

Maker
Length-width-height (mm)Wheelbase (mm)EngineEngine displacement (cc)Weight (kg)
Source: Li (2007a).

Table 5. QQ (CHERY) vs Matiz (GM-Daewoo)
Parameters
Drive System
Length-width-height (mm)Wheelbase (mm)EngineEngine displacement (cc)Weight (kg)
Top speed (km/h)
Tire
Suspension (Front)
Suspension (Rear)
Fuel consumption (L/100 km)
Source: Li (2006).

QQ

Matiz

FF
3550/1508/1491
2348
SQR372MPI/DA-465QMPI
812/1051
850≦135
175/60R13 77H
MacPherson Strut
Independent suspension
4.2 (60 km/h)

FF3495/1495/1482
2340
M-Tec/B1OS1
796/995840
140
155/65R13
MacPherson Strut
Non-independent suspension
4.0 (90 km/h)

China.”8

first Geely Car was launched in Linhai City, Zhejiang
Province. On November 9, 2001 and December 26,

Most of CHERY and Geely’s first generation

2001, China State Economic and Trade Commission

products were thought of as either copies of existing(hereafter SETC) approved the Geely Automobile

vehicles or hodgepodges of different products (seeJL6360, HQ6360, MR6370, and MR7130 series to be

Tables 4 and 5). This was especially true for exterior

listed in the SETC automobile products publicdesign. Both companies were placed under thecatalog. Geely Automobile became the first private

scrutiny of intellectual property disputes with foreign

enterprise approved as an automobile manufacturer in

automakers. However, as we will see below, this point
832

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

Emergence of independent Chinese automobile manufacturers

Table 6. List of high-level proficient experts in CHERY
Name
Post
Oversea Chinese experts – about 30 people
Director of Automotive Engineering
Xu, M.
Institute of CHERY, Chief Leader of
R&D
Vice
DirectorofAutomotive
Engineering Institute of CHERY,
Xin, J.
Leader of Engine Durability &Hybrid Car
Gu, L.

Vice
DirectorofAutomotive
Engineering Institute of CHERY,
Leader of Digital Crash Test

Yuan, T.

Vice President (Parts Procurement)

Vice
DirectorofAutomotive
Engineering Institute of CHERY,
Leader of Automotive Body-In-White
Sun, G. C.
Vice President (CFO)
Yuan, Y. B.
Chassis Research
Li, M.
Electronic Driving ResearchZhu, X. C.
Transmission Research
Vice
Presidentof
CHERYGu, Y.
Subsidiaries (Die & Molt)
Chinese Experts from FAW – about 150 people
Chief Engineer, Engine Project
Kang, L. M.
Manager
Qi, G. J.

Hu, F.

Vice Chief Engineer, Project Leaderof Engine Co-project with AVL

Feng, J. Q.

Vice Chief Engineer, Designer of
CAC372 Engine for QQ0.8L

Foreign Experts – about 40 people
Plant
Manager,
Operation
Terada, S.
Management
Kawano, K.
Director of Plant KAIZEN
Kim, U. S.
Vice Chief Engineer
GermanManufacturing Technology Support
experts
Others Domestic Engineers
Lu, J. H.

Vice President (R&D)

Li, F.

Vice President (Sales)

Job experience
Engine Expert, Ph.D. of Engineering(Hiroshima University), worked for GM,
Ford, Visteon
Worked for Honda (U.S.A)
Crash Test Expert, Ph.D. of Modern
Mechanics (University of Science andTechnology
Beijing,
Northwest
University), worked for Ford
Studied in Beijing University of
Aeronautics and Astronautics, Ph.D. of
Engine (Centre National de laRecherche Scientifique)Worked for DaimlerChrysler AG
Worked for DuPont (China) as CFO
Worked for TRW Automotive
Worked for Motorola
Back to CHERY from Australia
Worked for Fuji Japan

FAW
Gratitude from Automotive Engineering(Tsinghua University), FAW, retired
from DongFeng Motors in 1995
The first engine designer of New China,
he designed 6102 gasoline engine for
JieFang 141 Truck
Worked 30 years for Mitsubishi Motors
as Plant Manager
Worked 40 years for Mazda Motors
Ricardo Company
Unknown
Gratitude
from
Automotive
Manufacturing (Tsinghua University)
Worked for Foton Motors sales Co. as
Vice President

Total
In 2006, CHERY had 18,000 employees, including nearly 4,000 engineers. 1,500 engineers weredirectly involved in R&D.
Note: Each rank/title corresponds to the year 2004 position.
Source: Li (2007b).

of view was based on empirical observation and was

the ICAMs’ products and other existing models? The

strongly affected by visual likeness.

new entry limitations forced domestic companies toWhat was the cause of the resemblance between

take an unusual approach in entering the passenger
33

Li

vehicle market. Without the necessary technology

company by means of on-the-job training. This was

accumulation required for original R&D, qualified

especially effective in the case of young engineers

human resources, and capital, the ICAMs, including(who are capable of absorbing useful knowledge

CHERY and Geely, designed new models by using

directly and quickly).

reverse engineering tools, outsourcing design, andIn addition to the 30 foreign experts, CHERY

introducing technology and know-how throughinvited more than 150 Chinese experts and engineers

product line acquisition. However, as we havefrom FAW (FAW was supposed to have employedmentioned above, this imitative design caused

more

numerous intellectual property rights problems before

automaker). These highly skilled professionals

2003.

commenced work in the R&D and manufacturing

engineers

than

any

other

state-owned

Therefore, to avoid conflict with foreign

departments of CHERY. By the end of 2006, CHERY

automakers, it became extremely important to

had 18,000 employees, 20% (that is, approximately

enhance original design and concepts for all

4,000 people) of whom were engineers, and 1,500 of

ICAMs. We study the case of CHERY to illustrate

whom were directly related to R&D (see Table 6).

how ICAMs managed to increase their capabilities oforiginal product design and R&D. The same(b) Joint-development projects and design

phenomenon was demonstrated in the case of Geely.

outsourcing
Besides the human resource policy, CHERY acquired(a) The headhunting of high quality proficienttechnology and know-how via co-operation projects

expertsof joint-development and design outsourcing. Most

The first stage of knowledge acquisition (especially

ICAMs operated in a similar fashion. They preferreddesign and R&D know-how) included hiring Chinese

the tie-up cooperation of joint development andengineers who were working for major global

introduced the necessary knowledge from foreign

automakers

professional engineering corporations.

andrelatedcompanies,

through

headhunters and other types of intermediaries.

For instance, in 2001, CHERY initiated a joint

A number of foreign experts were also invited todevelopment project with AVL of 18 high-level

work in China. For example, CHERY invited about

engines (AVL is the world’s largest privately-owned

30 overseas experts with broad experience in such

independent company in the development ofcompanies as GM, Ford, Visteon, Daimler Chrysler,

power-train

Du Pont, TRW, and Motorola. These experts broughtengines and instrumentation and test systems). 9 In

systemswithinternal

combustion

advanced technologies and know-how to CHERY and9then diffused their knowledge throughout the34

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

Emergence of independent Chinese automobile manufacturers

this joint development project, for the purpose ofventure automakers. For example, in 2002, Geely

improving its capabilities, CHERY wanted to acquirerelied on parts from Tianjin Xiali’s suppliers (at a

not just the 18 ready-made engines, but also the

maximum rate of 95%) to produce HaoQing. 10

knowledge of how to design an original high-level

CHERY procured parts from suppliers affiliated toengine.

ShanghaiVW for its first generation sedan product,

A special training program for CHERY’s

which was called WindCloud.

specialists was organized by AVL, and a group of

However, the procurement of essential parts fromguest engineers was sent to AVL to acquire technicalcompetitors’ affiliates caused a dilemma for CHERY

knowledge of the process. After a full day’s work,

and Geely because they had to compete with thethey were required to recall all the details, record

very companies from which they procured essential

them, and report to CHERY’s head office. Based onparts like engines and chassis. As new entrants, they

the working records of these guest engineers, CHERY

dependedestablished its own development standards andcompetitivenesslaunched the development of its own original engine.

market. Relatively high prices of parts fromFor design outsourcing, CHERY chose tooncompetitors,alow-price

strategyinpassenger

thehowever,

reduced

their

to

gain

vehiclepotential

cooperate with an outsourcing destination by sending

profit. This motivated CHERY and Geely to build

a team of CHERY engineers to the outsourcing

their own network of affiliated suppliers as quickly

company. As soon as CHERY’s engineers were able

as possible.

to understand and master certain aspects of a project,

By the end of 2004, there were approximately 200

they were entrusted to fulfill these functions by

parts suppliers who had business relationships withthemselves; only the operations that they could not

Geely. Meanwhile, Geely gained 50% control of 100

comprehend were outsourced. Having repeated thiscompanies and successfully founded its own stableprocess several times, CHERY acquired more of thesystem of parts suppliers. As a result, the dependence

knowledge, technology, and know-how necessary foron Tianjin Xiali affiliates for supplies decreased

enhancing original design capabilities.

from 95% to 1% by 2004.
Using

(c)

Originalaffiliatedsupplier

chain

these

methods,

ICAMs

gainedtheopportunity to enhance original design capabilities

construction

and improve competitiveness. What is remarkable isWhen CHERY and Geely made their first attempt tothat although ICAMs were not at the same growthenter the passenger vehicle market with their firstlevel since they had entered the market at different

generation products, they depended on the existingtimes and had different management structures, theparts suppliers who were subordinated to joint
10

35

Sun, Jili, & Shangde (2007).

Li

need to gain and enhance original R&D capabilities

achieved further expansion through the establishment

was common to all of them. In light of the fierceof Sino-foreign joint ventures (see Table 7).

competition between the joint venture automakers

If we take a look at the sales of 14 global

and their forerunners, there was no room in theautomakers in the Chinese market, we see that inpassenger vehicle market for new local participants

2008, Volkswagen was the top seller withsuch as CHERY and Geely, especially because theirapproximately 1 million units. Toyota, GM, Honda,

strategy was to copy and market existing low-end

and Hyundai sold 500 thousand units each, that is,models.

half of Volkswagen’s sales. In the same year, Nissan

5.

Discussion:

The

role

sold 361 thousand units, approximately the sameofvolume as that of CHERY. In 2008, CHERY, theinternational technology transfer

top ICAM automaker, reported a slight decrease in

ICAMs demonstrated rapid growth rates in both thesales (356 thousand units in 2008 vs 379 thousand

domestic and the international markets. In 2007,

units in 2007). Geely, the second largest ICAM

ICAMs accounted for a 31% share of the domestic

automaker, sold 221 thousand units in 2007.

market,which

in

From the presented data, we can say that despite

history. CHERY is a good example, with sales of

the rapid expansion that ICAMs have achieved in

3,810,000 units in 2007, compared to just 87,000

recentunits in 2004. In 2007, CHERY also sold 119,800

Sino-foreign joint ventures still dominate ICAMs inunits to overseas markets, including Russia (seetheir markets. The economic activities of these

Figure 6).

Sino-foreign joint ventures remain the key factor in

There

is

was

no

the

doubt

highestthat

recordtheyears,

globalautomakers

operatingexpansion

the Chinese market. Their operations, which mainly

demonstrated not only in domestic but also in

involve international technology transfer to China,

overseas markets, especially in Russia, Southeast

have a strong and consistent effect on theAsia, and the Middle East, was made possible by thedevelopment of the Chinese automotive industry.

growth of CHERY’S original capabilities in design

Using the case of CHERY, we have outlined theand R&D. At the same time, global automakers

methods by which ICAMs acquired original

1000 Units

Figure 6. Top 3 car exports
150
100
50
0
2004

2005

2006

36

2007

Chery
Geely
Great WallEmergence of independent Chinese automobile manufacturers

Table 7. Global automakers’ operations in China
Global automaker(Sales, locally produced passenger
vehicles in 2007 and 2008)

Sino-foreign joint venture

JV: BMW Brilliance Automotive Ltd.

JV: Beijing Benz-DaimlerChrysler Automotive Co.

No longer has any JV, but has 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.

JV: SAIC-GM-Wuling Automobile Co.

Source:Automotive
news:
2009
guide
to
China’s(2009). http://www.nxtbook.com/nxtbooks/crain/an2537706532BMMMPB_china/

37

auto

marketLi

Table 7 (continued). Global automakers’ operations in China
Global automaker(Sales, locally produced passenger
vehicles in 2007 and 2008)

Sino-foreign joint venture

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.

Source:Automotive
news:
2009
guide
to
China’s(2009). http://www.nxtbook.com/nxtbooks/crain/an2537706532BMMMPB_china/

automarketcapabilities of design and R&D. The role thatFirst, we should mention that it is impossible tointernational technology transfer played in this

distinguish clearly the positive and negative effects ofprocess cannot be ignored. In this section, we analyze

international technology transfer. As a result, Table 8

the role of both direct and indirect international

is based only on empirical analysis.

technology transfer (see Table 8).
38

Emergence of independent Chinese automobile manufacturers

Table 7 (continued). Global automakers’ operations in China
Global automaker(Sales, locally produced passenger
vehicles in 2007 and 2008)

Sino-foreign joint venture
JV: Hunan Changfeng Motor Co.

JV: Soueast (Fujian) Motor Co.

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.

Source:Automotive
news:
2009
guide
to
China’s(2009). http://www.nxtbook.com/nxtbooks/crain/an2537706532BMMMPB_china/

automarket

Before GM was permitted to create Shanghai

non-significant knowledge related to R&D wasGeneral Motors Corp, that a JV between GM andtransferred with their products to their Chinese

SAIC Motors Corp. Other global automakers (e.g.,

operations. Local state-owned automakers, in theVolkswagen and Peugeot) were motivated purely bymeanwhile, were looking for short-term profits and,profit to operate in the Chinese market. Only

as a result, were satisfied with this position. Even
39

Li

Table 7 (continued). Global automakers’ operations in China
Global automaker(Sales, locally produced passenger
vehicles in 2007 and 2008)

Sino-foreign joint venture
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.

Source:Automotive
news:
2009
guide
to
China’s(2009). http://www.nxtbook.com/nxtbooks/crain/an2537706532BMMMPB_china/

automarketthough technologies were hardly transferred during

Corp. had to abandon its original product under its

this period, skills in manufacturing, parts supply, andShanghai brand in order to meet the localization

sales were developed due to FDI (foreign direct

standards required for the Santana. After the founding

investment). We consider this a Type 1 positive effect,of

as listed in Table 8.

Sino-foreign JVs quickly escalated. Some of theOn the other hand, this FDI caused a suspension

ShanghaiGM,thecompetition

among

R&D projects undertaken by Sino-foreign JV projectsof the R&D activities of existing local passenger

were

vehicle automakers. For example, SAIC Motors

localization. Due to the absence of original passenger
40

limitedtoproduct

adaptation

andEmergence of independent Chinese automobile manufacturers

Table 8. Role of international technology transfer in the Chinese automotive industry
Receiving side
Positive effectIndirect pathway(Spillover)Spreadingside

Negative effect

CHERY, Geely(R&D, Manufacturing, Sales)Type 1Sino-foreign JV(Manufacturing, Sales)Type 2CHERY, Geely(R&D, Manufacturing)state-owned automakers(R&D)

Direct pathway

Note: Type 1 refers to interior technology transfer in NMEs. Type 2 refers to technological consulting and outsourcing.

vehicles for R&D projects within Sino-foreign JVs

use Type 2 technological consulting and outsourcing

and state-owned automakers, engineers directly(see Table 8) to improve its technological capabilities

involved in R&D shifted to ICAMs like CHERY and

in R&D and manufacturing.

Geely. We consider this to be a Type 1 negative effectInof international technology transfer.

conclusion,eventhoughinternational

technology transfer (as an important external factor)

The spillover of technological and R&D

had a number of positive effects on the development

capabilities to ICAMs is considered a positiveof ICAMs development, the building of managerial

effect. For example, Kaking Technology Co., Ltd., acapabilities and system integration (as an internal

subsidiary of CHERY, undertook over 60% of

factor) became the main aim of all ICAMs.

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ABAS: Annals of Business Administrative ScienceVol. 8 December 2009

CHIEF EDITOR

Junjiro Shintaku, the University of TokyoEDITORIAL BOARD

Makoto Abe, the University of Tokyo
Takahiro Fujimoto, the University of Tokyo
Makoto Kasuya, the University of Tokyo
Nobuo Takahashi, the University of Tokyo
Technical Editor: Maki Nishida, Global Business Research Center

ABAS: Annals of Business Administrative Science is published annually by Global
Business Research Center, Marunouchi, Chiyoda-ku, Tokyo, JAPAN. http://www.gbrc.jp