On December 20 2006, the National Development and Reform Commission (NDRC) of China issued its Notice on Opinions of Adjustment of the Auto Industry Structure (the 2006 Notice) in response to continued overcapacity in the Chinese auto market. The 2006 Notice aims to help slow down the economy to a sustainable level (much like recent policies in respect of land), consolidate an extremely fragmented industry, and encourage the development of domestic Chinese auto champions.
Overcapacity is an issue that continues to bother the Chinese auto industry. Since 2004, market demand has slowed but production is expected to increase until 2010. Over 2 million vehicles are under construction and the overall production capacity in China will exceed 10 million vehicles by the end of 2007.
Another big concern for the Chinese government is that most Chinese auto manufacturers are still lacking strong research and development ability. Many manufacturers rely on technical licences and CKD assembly arrangements, which could harm the long-term development of the industry. For a number of years, the Chinese government encouraged technology innovation and development of national brands. The 2006 Notice stressed once again that domestic manufacturers should put efforts into R&D and focus on the national brands.
The 2006 Notice provides several measures to improve the auto industry, particularly to address the two concerns raised above. The 2006 Notice imposes further limitations on the new complete-vehicle projects, stating that any existing complete-vehicle manufacturer that wishes to set up a new plant in a new place will need to show that its output for the previous year has reached 80% of its approved capacity. An enterprise without an approved or filed capacity must meet the minimum output thresholds listed in the 2006 Notice.
Given the overcapacity on the special vehicle market, no new project approvals will be granted to make semi-trailers, dump trucks, tankers, transport vans, and or box/stake trucks for the next two years.
The 2006 Notice encourages domestic manufacturers have their own trade marks and to prominently display these trade marks on the front of vehicles. They are also required to implement a brand-based sales strategy and use their own trade marks for new models.
Specific sanctions are imposed for Sino-foreign joint ventures that do not live up to their promises, such as suspension of the construction of any new plant and the application for listing new products in the auto catalogue.
The 2006 Notice stresses again that the Chinese auto industry be consolidated. It urges local governments to support trans-regional mergers across product groups to form large, internationally competitive domestic manufacturers. To accelerate consolidation, mergers of auto manufacturers and conversion into branches will not be subject to the new restrictive requirements set out in the 2006 Notice.
For the most part the 2006 Notice is vague and short on specifics. This, as usual, gives NDRC much room of discretion in interpreting and enforcing the policies.
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