STUMBLING TOWARD CAPITALISM: THE STATE, GLOBAL PRODUCTION NETWORKS, AND THE UNEXPECTED EMERGENCE OF CHINA’S INDEPENDENT AUTO INDUSTRY By Crystal Whai-Ku Chang A dissertation submitted in partial satisfaction of the requirements for the degree of Doctor of Philosophy in Political Science in the Graduate Division of the University of California, Berkeley Committee in charge: Professor John Zysman, Chair Professor Kevin O’Brien Professor Laura D. Tyson Professor J. Nicholas Ziegler Fall 2011 STUMBLING TOWARD CAPITALISM: THE STATE, GLOBAL PRODUCTION NETWORKS, AND THE UNEXPECTED EMERGENCE OF CHINA’S INDEPENDENT AUTO INDUSTRY © 2011 by Crystal Whai-Ku Chang ABSTRACT Stumbling Toward Capitalism: The State, Global Production Networks, and The Unexpected Emergence of China’s Independent Automakers by Crystal Whai-ku Chang Doctor of Philosophy in Political Science University of California, Berkeley Professor John Zysman, Chair The auto industry has long been of interest to political scientists because of the crucial role the state has played in brokering investment into local firms and coordinating relationships between suppliers and assemblers. In Japan and Korea, a centralized and institutionalized policymaking apparatus is often credited with establishing a globally competitive domestic auto industry without the need for foreign direct investment (FDI). Yet in China, where the policymaking apparatus is fragmented and decentralized, FDI was the primary policy tool used to infuse capital, technology, and management expertise into the backwards state-owned auto sector. Despite the central government’s staunch support of state-owned firms, the most globally competitive domestic automakers in China today are not the traditional state-owned firms, but a group of new domestic firms with no ties to the central government or foreign automakers. Contrary to those scholars that credit the Chinese party-state with the modernization of China's auto industry, this dissertation argues that one of the sector's most significant developments - the emergence of independent Chinese automakers - was not the outcome of well-executed industrial policies, as was the case in Japan and Korea. Rather, the ability of China’s independent automakers to overcome financial, technological, and regulatory barriers to entry was largely shaped by China's accession to the World Trade Organization, the economic initiative of local governments, and China's integration into an increasingly fragmented global automotive production networks. This dissertation also explores the consequences of China's new appetite for cars, such as growing oil imports and greenhouse gas emissions, and assesses the prospect of vehicle electrification as a way to solve the country's dire energy and environmental problems. This research examines from a sectoral perspective the inherent limitations to China's fragmented and decentralized approach to policymaking. Though this approach has been one of the primary drivers of economic growth up to now, it will hinder not only necessary consolidation in the Chinese auto industry, but the next stage of China’s economic transition. 1 FOR SYMON, LILY, JOSEPHINE, AND DOUGLAS, WITH ALL OF MY LOVE AND APPRECIATION i TABLE OF CONTENTS ACKNOWLEDGEMENTS iv LIST OF TABLES V LIST OF FIGURES vi LIST OF ACRONYMS vii CHAPTER 1: INTRODUCTION RE-EVALUATING THE ROLE OF THE CHINESE STATE IN INDUSTRIAL DEVELOPMENT 1 1.1 A brief introduction to the Chinese auto industry 3 1.2 Conceptualization of key terms and categories 4 1.3 The research puzzle 6 1.4 The argument in brief 8 1.5 Research design and methodology 15 1.6 Roadmap of dissertation 17 1.7 Conclusion 18 CHAPTER 2: “MUDDLING THROUGH” ORIGINS AND EVOLUTION OF INDUSTRIAL POLICY IN THE CHINESE AUTO INDUSTRY 20 2.1 China’s auto sector development in comparative perspective 21 2.2 Phase I (1949-1977): Auto sector policy under the central plan 24 2.3 Phase II (1978-1991): Policy experimentation in the reform era 26 2.4 Phase III (1992-2000): Internal debate over the future of the state-owned sector 32 2.5 Phase IV (2001-present): China cautiously embraces the market 35 2.6 The failure to transform traditional SOEs into globally competitive firms 40 2.7 Conclusion 46 CHAPTER 3: LOWERING THE BARRIERS TO ENTRY ACCESSION TO THE WTO AND THE FRAGMENTATION OF GLOBAL PRODUCTION NETWORKS 47 3.1 China’s accession to the WTO and consequences for the domestic auto industry 48 3.2 The fragmentation of global production networks, the lure of the Chinese market, and the advantages of backwardness 56 3.3 The low-cost production model of independent automakers 61 3.4 Conclusion 66 ii CHAPTER 4: HARNESSING THE ECONOMIC ASPIRATIONS OF THE LOCAL STATE CASE STUDIES OF CHINA’S FOUR LEADING INDEPENDENT AUTOMAKERS 68 4.1 The role of the local state 69 4.2 Typology of China’s independent automakers 72 4.3 Case studies of China’s four leading independent automakers 74 4.3.1 Chery Auto 75 4.3.2 Great Wall Auto 80 4.3.3 BYD Auto 84 4.3.4 Geely Auto 88 4.4 Conclusion 91 CHAPTER 5: MANAGING THE CONSEQUENCES OF CHINA’S AUTO CONSUMPTION THE PROMISE AND CHALLENGE OF VEHICLE ELECTRIFICATION 93 5.1 Impact on China’s oil consumption and greenhouse gas emissions 95 5.2 China’s fragmented energy governance: Why widespread adoption of EVs is unlikely 98 5.3 China as a laboratory for global EV collaboration 108 5.4 Conclusion 118 CHAPTER 6: CONCLUSION STUMBLING TOWARD CAPITALISM 120 6.1 Argument revisited 120 6.2 China’s auto industry: Prospects and implications for the global auto industry 122 6.3 China’s energy policy and vehicle electrification: Problems ahead 124 6.4 China’s variety of capitalism: Limits of the decentralized approach to policymaking 125 6.5 Directions for future research 126 REFERENCES 128 APPENDIX A: PARTIAL LIST OF CHINA’S INDEPENDENT AUTOMAKERS 140 APPENDIX B: 2009 MAP OF AUTOMOTIVE PRODUCTION FACILITIES IN CHINA 141 APPENDIX C: EXAMPLES OF IP INFRINGEMENT BY CHINESE INDEPENDENT AUTOMAKERS 142 APPENDIX D: LIST OF FIELD INTERVIEWS (2007-2010) 143 APPENDIX E: CHINA’S QUEST FOR OIL AT HOME AND ABROAD 149 APPENDIX F: CHINA’S FUEL EFFICIENCY AND EMISSION STANDARDS 154 iii ACKNOWLEDGEMENTS Writing this dissertation has been a long and difficult journey, and one that would not have been possible without the guiding light of faculty, friends, and family. I would first like to extend my deepest gratitude to my chair, mentor, and friend, John Zysman. John has always been there not only to help me see the forest for the trees, but also to show me the channels through which academics can contribute to the “real world”. I am incredibly indebted to Laura D’Andrea Tyson, who has taught me not only about international business strategy, but also about integrity and the art of teaching. I am grateful to Kevin O’Brien for his knowledge of China field and invaluable advice over the years. I would like to thank J. Nicholas Ziegler for introducing me to some of most insightful books in comparative political economy, which have inspired my own work. Other distinguished members of the Berkeley faculty –Andrew Janos, Steve Weber, Laura Stoker, Pradeep Chhibber, and M. Steve Fish– have profoundly shaped my thinking as a scholar. I am forever grateful to those individuals I interviewed for this project who were willing to speak with me frankly and at length about their views on the Chinese auto industry. I would like to recognize the following people for their insights: Phil Murtaugh, Lu Jian, Yang Jian, Kevin Huang, King Lam, Lu Feng, Frank Wang, Kevin Zhang, Sunny Bai, Kevin Chen, Zhou Liqun, Brian Yao, James Huang, Wu Lei, Steven Ribet, Zhang Gengshen, Bill Russo, Zhou Liqun, Wolfgang Wagner, and Li Xianjun. My fieldwork in China would not have been possible had it not been for the generous support of the UC Pac Rim Research Program, Richard S. Liu, the Center for Chinese Studies, and the Charles and Louise Travers Department of Political Science. My research and graduate school experience were deeply enriched by my friends and colleagues at Berkeley. I could not have finished this project without the sincere dedication and emotional support of my writing group partners, Celeste Arrington and Danielle Lussier. I would like to extend loving gratitude to my dearest friends, Robin Higashi and Veronica Herrera, without whom I could not have endured the tediousness and loneliness of graduate school. I have also benefited tremendously from my intellectual interactions with Abraham Newman, Kenji Kushida, Bart Watson, Margaret Boittin, Roselyn Hsueh, Mark Dallas, and Rachel Stern. My family has provided the life raft that has carried me on this journey. My father, Symon Chang, has instilled in me a life-long passion for learning and an appreciation for honest hard work. My mother, Lily Chang, has shown to me that what one perceives as an obstacle is simply a problem in need of a solution. My sister, Josephine Chang, has always been there to pick me up and hold my hand when I stumble. My grandmothers, Chih-Len Peng and Peiwu Wang Chang, have taught me the meaning of resilience and the honor of my heritage. Last but not least, I am eternally grateful to my husband, best friend, and partner in crime, Douglas Cohen. Without his unconditional love, patient support, and contagious laughter, I would have lost my way long ago. Doug continues to remind me that filing this dissertation is not the end, but rather the beginning. iv LIST OF TABLES 1.1 Funds Raised by Private Chinese Automakers in Foreign Stock Markets (2002-2007) 2.1 Origins of China’s Traditional State-Owned