China's dalliance with foreign automakers wasn't meant to work like this.
The plan was simple: Overseas car companies would clamor for a stake in what is now the world's biggest auto market. Beijing should let them in only if they formed joint ventures with local factories. Once an alliance was consummated, Chinese carmakers could strip the foreign partner of its technological expertise before heading out to conquer the world.
As anyone who's been stuck in a traffic jam on Beijing's Second Ring Road would quickly notice, things have turned out a bit differently.
More than three decades after the first major venture was established, all but one of China's top 10 best-selling cars last year were essentially foreign designs, according to the state-run China Daily. Volkswagen sells more cars there than it does in any other country.
As a result, while China is the world's biggest producer of cars, in the world of exports it's a minnow. In fact it's worse than that: In automotive production, one of the biggest and most sophisticated areas of manufacturing, a country that likes to think of itself as the world's workshop is a net importer.
That backdrop helps explain the desire of Beijing's National Development and Reform Commission to shake up the rules. The government is looking to change the 50 percent cap on foreign companies' stakes in auto ventures, NDRC Chairman Xu Shaoshi told Bloomberg News in an interview Sunday.
Don't get too excited. The last time the government proposed lifting the ownership ceiling, resistance from local car plants killed off the measure. But there's good reason for the NDRC's economic planners to keep pushing for reform, even in the teeth of domestic opposition.
The current setup works brilliantly for individual Chinese car companies, but is a dreadful deal for the industry as a whole. Protected by the joint venture rules, local businesses don't need to do the hard work of developing cars that people actually want to drive, and can instead sit back and collect tolls on their foreign partners' intellectual property.
Technology transfers haven't happened the way they were intended. One reason is that know-how tends to be embedded as much in the unwritten culture of companies as it is in patents and equipment.
Another is that the idea fails to account for the dynamic nature of manufacturing. There's no fixed pool of automotive skills that China can acquire through joint-venture agreements. Instead, there's a multi-billion dollar race to get and maintain an edge on the competition. By and large, foreign automakers have used the cash flows from Chinese sales to invest in research and development, thus further entrenching their own technological advantages.
Local companies have been too busy hitching a ride on their partners' spending to keep up. The entire Chinese automotive industry spent about $5.2 billion on R&D in the latest fiscal year, according to data compiled by Bloomberg. Volkswagen alone laid out almost three times as much.
Compare those numbers to revenues and an interesting pattern emerges. Of China's major venture partners, only Changan spent more than 2.5 percent of net sales on R&D , leaving the likes of FAW, SAIC and GAC well below the median 4.4 percent of the 18 offshore companies in Gadfly's analysis.
By contrast, Great Wall and BYD, which missed out on the joint-venture binge , look much more healthy. Each spent enough relative to sales last year to put them ahead of the likes of Mazda and Hyundai and on a par with Toyota.
Perhaps it's a coincidence that those two have been by far the most effective in exports, but it doesn't look that way. If China's auto industry wants to become a world-beater, it needs to stop sucking at the teat of foreign partners and stand on its own two feet.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Bloomberg doesn't have R&D figures for BAIC. The figures don't represent all of the spending in foreign partnerships as the Chinese partners account only for their equity share of R&D expense.
BYD has a small venture with Daimler that's produced a few thousand electric vehicles under the Denza brand since 2014.
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