The State of China’s Automobile Sector

Amidst the uncertainty regarding the trade war’s impact on Chinese industry, the automobile sector in China will remain profitable

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Bhavana Giri, Research Intern, Institute of Chinese Studies

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  Photo: Visual China

Automobile sector in China is the largest in the world when measured by the number of units produced. Apart from domestic production, people’s demands for all kinds of vehicles in China are met by Joint Ventures (JV). For a foreign company to establish a JV, it is required to enter into a 50-50 partnership with a Chinese company in order to start production in China; a similar arrangement is required for foreign companies to export automobiles to China.

Automobiles from the US are one of the most significant exports to China, ranking just behind aircraft and agricultural output. With a trade value of more than $10 billion, this sector is of great significance to the ongoing trade war. Currently, the automobile sector in China is witnessing a downfall in output growth when taken as whole which is driven by a drop in the production of gasoline based automobiles. However, in the long run, China’s drive to lead in global production of new energy vehicles (NEVs) is slated to offset this downturn, even if the trade war continues. Additionally, the upper hand China has in the automobile joint ventures will also help to recover from the downfall. In contrast, the resilience of China’s NEV sector will adversely impact the competitiveness of its American counterpart.

Demand side conditions are highly favourable and will continue to be so. Three decades ago bicycles were the most popular mode of transport in China and most cars needed to be imported. Today, however, Chinese car makers are producing more cars than any other country in absolute terms. As can be seen from the data, the production of automobile in China increased from 9 million units in 2007 to 23 million in 2018. To be sure, economic conditions are currently turbulent in China.

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Observers predict that China’s GDP will decelerate in the near future and its leaders have urged precaution in this regard. The automobile sector, however is poised to remain buoyant, despite macroeconomic woes. The Chinese government intends to prioritise the preservation of automobile demand and supply by providing subsidies and exempting consumers from purchase tax on electric vehicles. These subsidies will ensure that there will be no significant shock to the automobile sector.

China has become the biggest giant in the production of electric cars and bikes. With Domestic Value Addition (DVA) of more than 80 per cent, and a strong grip over the production of essential inputs such as batteries, the sector enjoys a substantially strong footing. Recent falls in automobile stock prices should not obscure this fact.

To the rest of the world, it may appear that China has struggled to make progress in automobile manufacturing. However, the situation has changed drastically with recent developments. China now possesses massive potential for substituting imported automobiles with electric vehicles. With trade talks in a state of disarray and the heightened possibility that China will reapply auto tariffs, it is also likely that automakers will be incentivised further to produce in China. With the exception of the luxury segment, which is less easily substituted, China’s automobile sector is likely to withstand the headwinds it currently faces. Moreover, with the Chinese government establishing stricter norms for controlling carbon emissions and attempting to reduce pollution in cities, the scope for domestic companies to defeat automobile giants such as Toyota, BMW, etc has escalated. The Chinese government is also granting special manufacturing permits to companies which are working to develop NEVs.

The electric vehicle world sales database shows that in 2018, 2.1 million units of electric vehicles were sold which is almost 64 per cent higher than that of 2017. China has advanced its position in this particular segment and has a share of almost 56 per cent of the total sales. Although companies like Tesla, Toyota, etc. are also developing electric vehicles they lack the cost advantage China has, and are, thus unable to capture the market. Several subsidies and tax cuts provided on purchases of electric vehicles further boost demand in the highly populated cities of China. This is illustrated by the fact that profits for BYD jumped 632 per cent jump in 2019. On the other hand Tesla, which is exporting to China in an increasingly hostile trade environment, lost nearly $700 million in the first quarter in 2019, despite robust demand.

Another factor that will support China’s automobile sector is technology transfer. Most automobile production in China happens by way of Joint Ventures (JV) between Chinese and foreign companies, which allows local companies to acquire know-how. The Chinese have also acquired automobile technology by heavily investing in foreign-based automobile companies. Therefore, China’s automobile sector is unlikely to reel in the long-run. Moreover, China is less dependent on foreign value addition than it used to be – its contribution to processing and non-processing value addition process in the production of automobiles is uninterruptedly increasing.

The optimism expressed above does not apply to the American automobile industry, however. To a large extent, US-based automobile companies are dependent on revenues from the Chinese market that their JVs enjoy and are, thus, highly vulnerable to disruptions in bilateral relationship between two nations. For example, automobile giant BMW, is not introducing a new model because of the environment of uncertainty created by the trade war. US automobile companies are experiencing sluggish production while on the other hand Chinese NEV start-ups and companies are scaling up their production.

Unlike others, the automobile sector in China will likely remain profitable irrespective of ongoing trade contestations and tensions, due to the Chinese government’s encouragement to develop NEVs.  China’s NEV companies are poised to emerge as leaders in markets all around the world, as they race ahead their counterparts from the US, Japan, and Germany.

What will China do if there is an India-Pakistan War?

In a hypothetical scenario of a new India-Pakistan war, what would China, the ‘deeper than deepest sea and sweeter than honey’ friend of Pakistan, do?

Muhammed Kunhi, Research Associate, Institute of Chinese Studies, Delhi

As a total shift from its conventional approach towards Pakistan sponsored terrorist attacks, days after Jaish-e-Muhammed (JeM) attack on Central Reserve Police Force (CRPF) convoy in Pulwama which killed over 40 paramilitary personnel, India responded with airstrikes on biggest terrorist camp in Balakot in the Khyber-Pakhtunkhwa province of Pakistan.

Indian media reports stated that the retaliatory action for Pulwama, carefully planned with credible intelligence, occurred in the early hours of 26 February and killed more than 350 terrorists by dropping 1000 kg Israeli Precision Guided Munitions (PGM). Some of them claimed that India destroyed at least six terrorist camps inside Pakistani territory and Pakistan Occupied Kashmir (PoK) by employing 12 Mirage 2000 jets, made by Dassault Aviation of France.

In an official statement, government of India declared that Pakistan’s persistent denial of existence of terrorist training camps inside its territory had forced India to take a “non-military preemptive action” against JeM camps in the light of a credible intelligence on JeM’s plan for conducting “another suicide terror attack in various parts of the country”.

Though Pakistan rejected India’s claim of heavy casualties as its “self-serving, reckless and fictitious claim” in the context of its upcoming general election, Pakistan accepted that the Indian military aircrafts violated the Line of Control (LoC) and dropped some amount of payload inside its territory. The director general of Pakistani Inter-Service Public Relations (ISPR), Major General Asif Ghafoor, tweeted that the “Indian aircrafts’ intrusion across LoC in Muzafarabad Sector was 3-4 miles. Under forced hasty withdrawal aircrafts released payload which had free fall in open area. No infrastructure got hit, no casualties.

India’s use of air power – unconventional

Whatever was the casualty and damage to Pakistani military, Indian Air Force’s breaching of LoC to attack a terrorist camp inside Pakistan is a total diversion from India’s conventional approach towards employing air power against terrorist threats from Pakistani territory. It is for the first time since 1971 war that the Indian Air Force has crossed the LoC to attack a target inside Pakistan. In the past, even during the Kargil War in 1999 and when Pakistan sponsored terrorists attacked Indian parliament in 2001, India exercised restraint in employing air power against Pakistan.

Many observers are arguing that India’s airstrike in Balakot will send a clear message to Pakistan that the continuation of proxy war against India would come at a price. Whether Pakistan is willing to learn that lesson is a major question. Definitely, Indian Air Force’s crossing of LoC is a declaration that there will be serious repercussions if Pakistan is planning to continue its proxy war against India.

Challenges dominant discourse

Interestingly, India’s new airstrike on Pakistan, which is theoretically a ‘military action’, though India claims it is a ‘non-military action’ as it is not carried out against any military. The latest developments directly challenge the dominant discourse that India and Pakistan must refrain from challenging each other militarily given the imminent threat of escalation and nuclear war.

Former Pakistan President Pervez Musharraf’s recent statement that “if we would attack India with one atomic bomb, then the neighboring country could finish us by attacking with 20 bombs” clearly shows that the nuclear-war against India is not a popular option within Pakistani strategic thinking as many in India assume. They (Pakistanis) are well aware of India’s military capability and, now, also its willingness to take any risky military action.

Setting aside the nuclear conundrum, the important question is what would a humiliated Pakistan respond? Assessing the current mood of the nation and approach of the present government, it can be said that if Pakistan chooses any retaliatory military action for Indian airstrike on Balakot it would escalate the situation in the subcontinent. At the same time, India will not consider nuclear war as an option until there is a survival threat to it. Hence, we need not expect more than a conventional war, or perhaps a limited border war.

What would China do?

In a hypothetical scenario of a new India-Pakistan war, what would China, the ‘deeper than deepest sea and sweeter than honey’ friend of Pakistan, do? Expressing concern over growing tension in the subcontinent, various countries, including China and the United States, urged both India and Pakistan to “exercise restraint”. In his regular press conference, responding to a question of Chinese response to Indian airstrike on Pakistan, Chinese Foreign Ministry spokesperson Lu Kang said “we hope the two sides will exercise restraint and take actions that will help stabilize situation in the region and improve bilateral relations instead of doing the opposite”. He added that “terrorism is a global challenge that calls for cooperation between countries so as to create enabling conditions and a favorable atmosphere for necessary international cooperation”.

Past experiences tell us that unless there is a credible challenge to its core interests, China will not militarily intervene in another country’s war. In the past, even in 1965, when the tension between India and China was at its maximum, China’s military involvement in India-Pakistan war was limited to creating some disturbances in India’s Himalayan frontier. This time, China has enormous economic and strategic interest in Pakistan, which includes multi-billion dollar China-Pakistan Economic Corridor and Gwadar Port. Additionally, in terms of numbers, China’s trade with India is many times larger than its trade with Pakistan. Since India is not a grave threat to China, it would not consider harming a well-developed trade relationship with India by getting embroiled in the Indian subcontinent’s conflicts.

Considering the depth of Sino-Pakistan friendship and its strategic value for China, it may be assumed that China will not totally abandon Pakistan if the new tension in the subcontinent leads to a war, especially when a growing proximity between the United States and India is quite evident. It will not be a direct military involvement either. The Chinese help to Pakistan will be in the form of weapon-supply and in various other forms of non-military assistance. China will use the opportunity to increase its arms exports to Pakistan without risking its trade relationship with India.

Unlimited Xi Presidency in China: Implications for India

Jabin T. Jacob, PhD, Fellow, Institute of Chinese Studies

What does the removal of term limits for the Xi Jinping presidency in China mean for the developing world and, in particular, for South Asia?

One possibility is there could be a demonstration effect. China’s decades-long rapid economic growth has been a source of envy and inspiration for many countries in the developing world. Some like Vietnam, for instance, have used China as a model in launching its own opening up and reforms process. Other countries, including many in South Asia, have seen Beijing as an alternative to the West for financial resources and capital.

With Xi’s latest move, an ambitious autocrat could try to sell the idea to his people or elites that matter that he – and he alone – holds the solutions to a country’s problems.

And often, as in the case of President Abdulla Yameen in the Maldives, who has imposed a state of emergency in the island nation, they will do so with considerably less finesse than Xi. Continue reading “Unlimited Xi Presidency in China: Implications for India”

India Becoming a Threat in Chinese Imagination

Hemant Adlakha, professor of Chinese at Jawaharlal Nehru University, New Delhi and Honorary Fellow, Institute of Chinese Studies (ICS), Delhi.

As the new year gets underway, and Chinese foreign policy analysts join their counterparts around the world in assessing the events of 2017, the emerging international relations (IR) discourse in Beijing is quite a revelation — at least to the Japanese and Indian strategic affairs community.

While most Chinese believe Japan to be the second biggest threat to China’s “peaceful rise,” according to a few Chinese experts, the rising global profile of India, especially under the “right-wing” nationalist Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP), has gone unacknowledged. Continue reading “India Becoming a Threat in Chinese Imagination”

Book Review: Xi Jinping’s China

Jabin T. Jacob, PhD, Fellow, Institute of Chinese Studies

Jayadev Ranade. 2018. Xi Jinping’s China (New Delhi: Knowledge World Publishers). pp. xi+394. Rs. 1,400. ISBN: 978-93-86288-90-5

This work is a collection of pieces written by the author in various online platforms and as part of other edited volumes. The reader does not have the benefit of an introduction that ties in all the chapters together but the fact that the book releases right after the conclusion of 19th Congress of the Communist Party of China (CPC) in Beijing in October certainly helps provide context.

All the big issues are covered here – from Xi Jinping’s rise to power as General Secretary of the CPC and his consolidation of power over the past five years, the murky details of the fall of Xi’s rival Bo Xilai, and China’s military reforms and reorganization. Alongside, a host of relatively arcane issues such as China’s annual sessions of its equivalent of a national parliament and Xi’s new rules for propaganda, media control – thought control, no less (the infamous Document No. 9) – are also examined. Continue reading “Book Review: Xi Jinping’s China”

A Secret Visit, Sino-Tibetan dialogue and Related concerns

Tshering Chonzom, PhD, Associate  Fellow, Institute of Chinese Studies

Credible sources have confirmed that Samdhong Rinpoche, a prominent Tibetan leader, recently visited Gyalthang (redubbed as Shangri La recently), his hometown in Yunnan province of China. According to the source, the purpose of the visit was to meet his family. In all likelihood, the visit took place sometime in November; specifically mid-November, according to the article in The Wire that first broke the news about the visit. Earlier, on November 6, the Dalai Lama appointed Samdhong Rinpoche, along with Sikyong Lobsang Sangay (the current president of the Central Tibetan Administration, or CTA, in Dharamsala) as his trusted “representative” or “personal emissary” for an indefinite period.

Samdhong Rinpoche preceded Lobsang Sangay as head of the CTA and played an instrumental role in pushing for the Dalai Lama’s middle way approach (MWA) during his tenure as president. It was during his leadership of the CTA that Sino-Tibetan talks resumed in 2002, after almost a decade of impasse. He also has a close bond with the Dalai Lama; Samdhong Rinpoche’s residential quarters are located within the premises of the Dalai Lama’s residence in Dharamsala.

So, given Samdhong Rinpoche’s recent trip to China, is a formal Sino-Tibetan meeting in the offing? Is it possible for China to take up the Tibet issue so promptly just after the 19th National Congress of the Chinese Communist Party? Continue reading “A Secret Visit, Sino-Tibetan dialogue and Related concerns”

The Many Ironies of India-China Economic Relations

Jabin T. Jacob, PhD, Fellow, Institute of Chinese Studies

Pickpockets are not uncommon in crowded places in India. Victims are generally realists and tend to resign themselves to their misfortune quickly often not even bothering to go to the police. Not so, however, actor-turned-politician Manoj Tiwari, head of the Delhi unit of India’s ruling party, the Bharatiya Janata Party. When he lost his iPhone Seven Plus at a demonstration, he promptly complained at the local police station. Politicians in India are often able to get the police to expend extra effort on their behalf, so Tiwari’s response was not really surprising.

What was surprising was the fact that the politician had lost his phone at a protest against Chinese-made goods organized by an affiliate of the BJP’s parent organization, the right-wing hyper-nationalist Rashtriya Swayamsevak Sangh. And as American as Steve Jobs might have been, the iPhone is the quintessential made-in-China product.

Such ironies are a dime a dozen in the India-China relationship. Continue reading “The Many Ironies of India-China Economic Relations”