April 17, 2018

China is opening up its car market. Here’s why

China, by far the largest automobile market in the world, announced this week it would start to gradually open up its car industry to foreign investment by removing existing limits to foreign ownership of car ventures. Shanjun Li, Kenneth L. Robinson Professor of economics and policy at Cornell University, says that the time was ripe for Chinese regulators to change the existing incentives in favor of domestic firms and open up competition.


Li says:

“Removing the ownership cap represents a significant policy shift for both Chinese and international automakers. Beyond the current trade frictions between Washington and Beijing, this policy change might be motivated by at least the following two factors:

“First, Chinese domestic automakers have improved dramatically in their technology know-how during the past decades and the quality of the products measured by J.D. Power’s quality indices is now converging to that observed in the U.S. market. They are in a better position than ever to compete directly with international rivals for the domestic and international markets.

“Second, there has been an active debate in China regarding the perverse incentives these types of policies may have created for domestic firms and many believed that the government has protected the so-called ‘infant industries’ for too long to the detriment of these industries.

“The policy in the long run not only could provide stronger incentives for domestic producers to improve their efficiency but also weed out many small and inefficient producers that are viable only because of various forms of government support including direct subsidies.

“Much like what happened after foreign automakers such as Volkswagen and Honda entered the U.S. market in the late 1970s, these transplants are likely to stimulate competition and raise quality standards. In the end, allowing foreign ownership benefits domestic consumers who can enjoy better-quality, more variety and lower prices.”


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