How will ownership in China's industrial sector evolve with WTO accession?

China Economic Review 12 (2001) 137 – 161

How will ownership in China’s industrial sector evolve with WTO accession? Guy Shaojia LIUa,*, Wing Thye WOOb a

Department of Economics and Finance, Brunel University, Uxbridge, Middlesex UB8 3PH, UK b Department of Economics, University of California, Davis, CA 95616, USA

Abstract What changes will WTO accession bring to China’s industry? Will it cause large state firms to be stronger or weaker, and if so, how? The paper applies the market structure theory to develop a tool called the market-share testing principle to answer these questions and to analyze ownership evolution in China’s industry. Our main finding is that many large state firms will survive, and their survival strategy will involve changing from being wholly state-owned and state-controlled to diluted state ownership and reduced state control. This partnership with the private sector will get them the funding, technology, and improvements in corporate governance that will enable them to grow. WTO membership will accelerate the emergence of a greatly diversified ownership structure. D 2001 Elsevier Science Inc. All rights reserved. Keywords: WTO accession; China’s industry and reform; Market structure; Ownership evolution

1. Introduction China has experienced three generations of enterprise reform over the last 20 years. The first generation started with Shishun experiment in 1980 by focusing on restructuring incentive systems for state firms and releasing autonomy to managers together with development of a product market outside the plan system (Hay, Morris, Liu, & Yao, 1994). The second generation of the reform focused on the development of both product and factor markets, and property-rights reform. In contrast, the distinction of the third

* Corresponding author. E-mail addresses: [email protected] (G.S. Liu), [email protected] (W.T. Woo). 1043-951X/01/$ – see front matter D 2001 Elsevier Science Inc. All rights reserved. PII: S 1 0 4 3 - 9 5 1 X ( 0 1 ) 0 0 0 4 8 - 7

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generation of the on-going enterprise reform is to corporatize state-owned enterprises (Lin, 2001) and create a diversified ownership structure in the industry by implementing a 2-R reform strategy: retain state ownership in strategic sectors for large enterprises, and retreat from state control of small- and medium-size firms that operate in highly competitive markets. The strategy has resulted in a more diversified ownership structure in the industrial sector: wholly state-owned firms (44% of total industrial sales in 1997), collectiveowned firms (26% of the sales), mixed state- and private-owned firms (24% of the sales), and wholly private-owned firms (6% of the sales) (Liu & Gariano, 2001). What will industry ownership structure evolve to in the future: converge to predominantly private-owned industry in the short run or remain in the current equilibrium of a mixed ownership structure in the long run? This is an important issue in the on-going debates on the pace of China’s reform by two schools of reform economists: experimental and convergence schools (Sachs & Woo, 2000). How will China’s entry into WTO affect the pace of ownership evolution, especially since competition will be intensified in sectors that are currently monopolized or dominated by large state firms that are essential in retaining the sustainability of the diversified ownership structure in the post-WTO-entry industry? Clearly, the pace of ownership evolution will depend largely on the competitiveness of the large state firms against their international rivals. Can Chinese large state manufacturing enterprises survive the impact of international competition brought by WTO entry? This is the focus of our paper. The WTO accession for China implies further economic restructuring and institutional reform in line with world trading norms — open, transparent, and fair for every trading party in every sector. It will subject China to international trading rules that will affect domestic enterprises, especially those incumbent state firms with dominant power in their home markets. This means that state incumbents will be placed directly in confrontation with foreign rivals, since WTO forces all member countries to lift trade barriers to foreign imported goods in their home markets. As a result, not only will WTO accession change the market type from a closed one to a more open and easily accessed market, but also will change the market share structure of the industry by bringing new entrants to the domestic market. Some disturbance brought about by WTO accession on incumbent firms’ market share was experienced by Eastern European countries (Hare, 2000). Therefore, understanding the current market type and its share structure is essential in assessing any future changes in the industry ownership structure that may be experienced following WTO entry. This is because a market share change embeds all information on firms’ competitiveness: increasing productivity, cost efficiency, product quality, promoting brand names, etc., which will all be conducive to increasing sales and so increasing market share. Based on this, our assessment of China’s large firms’ competitiveness will focus on investigating changes in the current market share structure, the type of market they operate in, and the ability of the domestic incumbents as a group to deter new entrants in order to retain the existing market share structure so as to preserve their market positions once the market type is changed in favor of new entrants.

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To infer the future ability of firms to compete with rivals on the basis of changes in their current market share is subject to the market type of the firms remaining unchanged. Thus, to identify which markets will remain unchanged in terms of its type after the WTO accession becomes essential in carrying out our investigation. Basically, we classified markets into three types according to the degree of its openness: the internationally integrated type of market with easy access and lower trade barriers, the segmented type with effective trade-barriers to separate the domestic market from the international one but foreign entry through foreign direct investment (FDI) is relatively easy, and the insulated type with strict control over foreign entry through FDI and the higher tariff to imports. We selected some industries as samples and examined their market types and share structure change over time, with particular emphasis on changes in state-owned firms. These industries include the shipbuilding industry, the household appliances sector, the bicycle sector, and the automotive industry. In the next section we will discuss in more detail our methods used to assess the impact, and then applying the method to look at how WTO accession will impact the current market structure of the selected industries and the competitiveness of state incumbents in deterring potential foreign entrants. Having done this, conclusions will be drawn in the final section about the implications for ownership change in future.

2. Method of assessment — the market share testing principle 2.1. Limit of cost comparison Assessing state-owned firms’ competitiveness after China’s entry to WTO can be a complicated task that requires a lot of information and a thorough understanding of the industry to be appraised. Many studies have made attempts to assess potential impacts on the Chinese industry once China joins WTO (Chen, 2000; Fan, 2000; SETC, 2000). Most of these studies generally take a descriptive approach. Often, issues are treated too broadly and ambiguously or very general conclusions are drawn; for instance, it is quite common to assess the competitiveness of an industry by comparing the costs of domestic producers vis-a`-vis international ones in a static way. A static comparison of costs is helpful but not sufficient to assess the competitiveness of an industry. This is because the level of costs is an endogenous variable at a given state of competition (Hay & Liu, 1997). Firms will choose a cost level based on the intensity of market competition. However, different markets have different states of competition and therefore different cost levels. A firm is a dynamic entity with the capability to learn and to adapt. It would be meaningless to just look at the cost level of a firm but not its ability to react to changes in the market. Secondly, costs are the private information of a firm. It is not easy for outsiders to observe the true level of these costs. Some firms may take advantage of the situation and make use of such high-cost information to bargain with the government for more favorable industrial policy. This

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suggests that we have to be careful in using firms’ cost data to interpret the cost competitiveness of an industry. Thirdly, costs are not the only determinant in deciding a firm’s growth potential and its market share, especially when product differentiation is taken into account. It is thus insufficient to assess the competitive capability of a firm by just looking at its cost information. Given the limitations of cost data, an alternative quantifiable indicator that is observable and sufficient for the assessment purposes of this study is thus needed. 2.2. Market share — a measure of competitiveness In the study of industrial organization, three major determinants of market share have been identified. First is cost efficiency, in which Hay and Liu (1997) developed the following model si ¼ a þ b

ci : c

It states that the market share of firm (si) is a function of its cost efficiency (ci) relative to the industry average (c¯). The model implies that the lower a firm’s costs are relative to its rivals, the higher that firm’s market share will be. Secondly, Sutton (1991) explains market share concentration as the result of sunk costs (setup costs for business, such as advertisement costs),  0:5 S N¼ F where the number of firms in the market (N) is determined by sunk costs ( F) and market size (S), so that higher sunk costs mean less firms and so higher market share. Sunk costs are regarded as a measure of market barriers that can be built up through heavy advertising of a brand name, quality reputation, and a network of sales, etc. Thirdly, Sutton (1998) developed a compelling theory with support of empirical evidence to explain how R&D can determine market share: C ¼ f ðRÞ j aðb; sÞ which means that the market share concentration (C ) is a positive function of R&D intensity (R), which is a summary description of an industry’s relevant technological characteristics, only if the responsiveness of demand to technology improvements (a) is high. The responsiveness, a, is influenced by the effectiveness of R&D in raising product quality (b) and the degree of substitution effect on rival products (s). These three models address the theoretical foundations for using market share as a sufficient measure of the competitiveness of a firm, since they embed all information about the firm’s cost efficiency, technological advance, and informative advantages for its product(s).

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As a result, the market share growth of a certain product can be driven either by one, or even all, of the above comparative advantage(s). In this sense, any information on changes in a product’s competitiveness will be captured by an increase or decrease in its market share. The higher the comparative advantage the product has, the greater is its competitiveness, which in turn will translate into a larger market share. Empirically, a robustly positive relationship of a firm’s market share with its cost efficiency and productivity has been identified for industries in developed economies (Hay & Liu, 1997). Economists have also found that the quantity of a product sold is positively related to the intensity of informative advertisement, indicating that there is an advantage in making information available to the market (Benham, 1972). For the impact of technological advances on the market, Intel and Microsoft’s products are the best examples; technologically advanced products from these two companies have dominated the world market for computer chips and word-processing software, respectively. The empirical evidence suggests that if a firm raises its output and does so much more quickly than its rivals in a market with free access, the market share of the firm will increase, thereby indicating the stronger competitiveness of the product in one of the three areas discussed here: costs, technology, or information. Therefore, a change in market share is a powerful and sufficient indicator of a firm’s competitiveness in manufacturing its products for the market, and in particular, a signal of its ability to deter, or compete with, new entrants. 2.3. Market type Although the market-share test is simple and powerful, it cannot be directly applied to China, since firms in the country are segmented by tariff barriers (World Bank, 1997), which have resulted in the creation of two separate markets: domestic and export; competitiveness in one does not necessarily mean competitiveness in the other. With WTO accession, tariffs will either be lifted or lowered to an insignificant level, and the two different markets will then be integrated into one. In other words, China’s domestic firms are free to sell to the international market and international rival firms are also free to sell in China. If this occurs, a change in market share will be meaningful in showing the true nature of a firm’s competitive ability after WTO accession. Now our problem is to estimate the competitiveness of a firm before WTO accession. This requires us to use current segmented-market-share information to predict the future changes in market-share structure if both the domestic and export markets were integrated. For this assessment, one question that needs to be addressed in this instance is: is current information sufficient in predicting future changes in the market-share structure after WTO entry? The following attempts to shed light on this question. First, we classify China’s industries into four market types: 2.3.1. Type I: the internationally integrated market This market is not protected by tariffs, and foreign entry is easy or relatively free either via direct selling or through FDI. Therefore, the domestic and export markets are not segmented. Firms operating in this sector are already involved in direct competition with international

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rivals. For instance, the shipbuilding industry with an 8% tariff rate and the computer harddisk drive manufacturing business with a 6% tariff rate can be classified as being in the Type I market (see Appendix B for tariff rates). 2.3.2. Type II: the segmented market This market is protected by effective tariffs that segment the sector into two separate markets: domestic and export. The market is open to foreign entry through FDI but not by direct selling. Firms operating in this sector compete with each other in the domestic market, but are not confronted by direct importers in their home market. It is a one-way competition. Firms compete in the international market by exporting a significant proportion of their sales, but there is no reverse competition from international rivals to affect their domestic sales. An example of this type of sector is China’s bicycle industry, with a 25% tariff rate, and its color-television manufacturing sector, with a 35% tariff rate. Both sectors are highly export-oriented, e.g., in the bicycle industry exports accounted for more than 60% of total sales in 1998. 2.3.3. Type III: the insulated market This market is insulated both by the higher tariff protection and by the strict limit to foreign entry via FDI. Firms in the industry compete mainly with domestic rivals. Since the industry is neither export-oriented nor is entry open to foreign firms, the sector does not have to meet foreign firms head-on. Most of those industries regarded by the Chinese government as being of strategic importance fall into this category. A few large state-owned firms in the petrochemical, telecom, and auto sectors dominate their respective sectors where they are protected from foreign competition. 2.3.4. Type IV: the closed monopolist market1 The closed monopolists refer to firms operating in a natural monopoly sector which is not open either to foreign entry via FDI or for market competition through ownership control. There are a few industries in China still in this sector type, such as China’s mail service, its water supply business, and railway transportation. For these industries, not only are they monopolists but their ownership and corporate control are not subject to market competition, or even through joint ventures. Of these four types of market, our rough estimation for 1998 showed that each market type accounted very approximately for some 20% of GDP in Type I, 36% in Type II, 34% in Type III, and 10% in Type IV. It is expected that more GDP will be produced under the Type I market, since Type I is the market that will be promoted as a result of WTO entry in order to change the market type with a closed trading system to the one with an internationally integrated open system. This implies that Types II and III industries will be seriously affected by WTO entry, as their market types will be forced to be more open and integrated with the

1

Since this type of market is not effected by WTO accession, it is ignored in the rest of discussion.

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global system. If the change of market type takes place, how a firm and its market power will be impacted will then be the central concern of our assessment. 2.4. The market share-testing claims In each type of market, suppose there are three groups of players or competitors according to the following configurations:   

Domestic incumbents that include state firms and other nonforeign-controlled firms; Foreign incumbents who enter the market to gain the tariff-jump favor via sole investment, joint-stock or joint-venture with domestic firms; and Potential foreign entrants who will consider entry after China’s WTO accession.

Comparing the market share performances between two groups of incumbents — the domestic and the foreign firms — can inform us about what would happen to the domestic competitors if a third party — the potential foreign entrant — enters the market. This is because the difference between foreign incumbents and WTO-induced foreign entrants in terms of their technological capability and international business experience is marginal. To formalize this idea, we develop three claims, which enables us to identify the ability of a firm or a group of firms to compete in the market when the market type is changed by WTO entry. Claim 1: In the Type 1 market, WTO accession will not change this type of market since the market has already been almost fully opened to international competition. Domestic incumbents will still be competitive after WTO accession if they have retained or regained their existing market shares over time from foreign incumbents, or achieved significant growth in their exports. A rise in the market share of domestic firms or dramatic growth in their exports will signal the firms’ ability to compete with their international rivals and retain their market position after WTO accession. Claim 2: In the Type 2 market, domestic incumbents will remain competitive after the WTO accession if the firms have retained or regained their existing market share from foreign incumbents, and achieve strong export growth over time as well. Because the domestic incumbents have already been involved in competition with foreign firms both in the home market and in the overseas market, then an increase in the market share of the domestic incumbents will signal their ability to compete with international rivals for the markets after WTO accession. Although WTO accession will make this type of market more internationally integrated by removing the tariff barriers, the accession will not cause significant disturbances that reshape the market structure or threaten the survival of domestic incumbents (see the proof of this claim in Appendix A).

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Claim 3: If domestic incumbents compete among themselves or even with foreign incumbents in the Type 3 market, a change in the market share of the domestic firms will signal their ability to adapt to the challenge of different states of competition. But whether their adaptation will be sufficient to meet a new type of market competition is subject to further investigation. The market-share theory alone is insufficient to draw conclusions about firms’ survival ability after WTO accession. In short, in the Type III market the market-share test is essential but not sufficient to assess the competitiveness of an industry after WTO entry. The competitive ability has to be assessed on the basis of both a current change in market share and the potential to improve.

2.5. The model To be concise about the claims above, we further simplify the situation to two firms: one is a domestic incumbent and another is a foreign incumbent. They have both exports and domestic sales but the latter is treated as ‘‘importers,’’ e.g., for Mainland-located Taiwanese bicycle firms, their sales to the local market in excess of the tariff-free quota are subject to the import tax. Thus, we specify sd to denote market share of a domestic incumbent with both marginal costs of production at cd and technology of xd; let sf be the share of a foreign incumbent with marginal costs of cf and technology of xf. The foreign incumbent has sales costs of cf + t, where t is an import tariff rate, to the domestic market, or it remains cf if it exports. According to Hay and Liu (1997) and Sutton (1991, 1998), the market share(s) or a change in the share (Ds) is a function of costs (c) and technology (x): sd = sd(cd, xd) with @sd/@cd < 0 and @sd/@xd > 0, and sf = sf(cf, xf) with @sf/@cf < 0 and @sf/@xf > 0. Therefore, our claims can be described concisely as follows. For the Type I market with t = 0, if a change in the market share of a domestic firm is d f (cd, xd)>Ds1 (cf + t, xf), where greater than the change of the foreign rival, denoted by Ds1 subscript  1 denotes prior to WTO entry and + 1 denotes post-WTO entry, then it has d (cd, xd) > Ds+f 1(cf, xf), since the costs and technology remain unchanged before and after Ds+1 the entry. d f x (cd, xd) > Ds1 (cf + t, xf) holds and Dqd  If in the Type II market with t > 0, Ds1 1 x f f dx (cd, xd) > Dq f  1(c , x ), where Dq  1 denotes the export growth of the domestic incumbent x d d d f f f and Dqf  1 is the export growth of the foreign incumbent, then Ds+1(c , x ) > Ds+1(c , x ), since the faster export growth shows more competitiveness at t = 0, see a formal proof in Appendix A. x d d d f f f For the Type III market with t > 0 and qd  1 = 0, even when Ds1(c , x ) > Ds1(c + t, x ) holds, it is insufficient to show what will happen to the domestic incumbent’s market share when the tariff rate t falls to t = 0. The theoretical claims provide us with a simple and effective tool to sufficiently test the competitiveness of an industry in China after the WTO accession. The three claims form what is called a market-share testing principle, which allows us to identify the ability of a firm or an industry to maintain its market position or structure against the post-WTO-entry competition.

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3. Which industries and state-owned firms can survive after WTO accession? By applying the market-share testing principle, we can look at the market type and the share structure of an industry and then assess the competitiveness of state-owned firms, or a group of domestic firms, after WTO entry. The analysis is made using selected sectors for each type of market. 3.1. The Type I market: China Shipbuilding Industry Group Company (CSIGC) The shipbuilding sector in China includes ocean-ship manufacturing, waterway-ship manufacturing, fishing-ship manufacturing, marine machinery, and equipment manufacturing and vessel repair. CSIGC is the largest state-owned shipbuilding company group in China, and third largest in the world. Of its 76 subsidiaries, 25 are shipyards2, 36 equipment manufacturers, and 15 are suppliers of marine instruments, making CSIGC a highly vertically integrated entity. In 1998, the company had a total staff of 210,000 throughout China. The company operates in a market that is relatively internationally integrated. First, entry is open and easy. Since 1996, 83 foreign firms (12% of the total number) have entered the Chinese market.3 Secondly, the tariff on imported vessels is negligible, only 8% for imported ships (see Appendix B). Thirdly, nearly half of the total number of ships built by the company are for orders from the overseas market (see Table 1). Therefore, the impact of international competition on the company’s sales performance and the choice of its competition strategy will be quite significant. For example, the competition between South Korea and Japan — CSIGC’s major foreign rival — for dominance on the world shipbuilding market has resulted in a continuous fall in the price of new ships since 1996. The crunch in 1998 showed that not only did new ship prices fall by more than 20%, the currency of both South Korea and Japan were also devalued dramatically. This posed a great challenge to CSIGC’s market position. Such intense competition in pricing drove the company to take very tough cost-cutting measures, where its costs were brought down by more than 10% in 1998. The aggressive cost-cutting and price-setting strategy, driven by the international competition, led the firm to be ultracompetitive even in its domestic market, resulting in many domestic firms being unable to compete with such aggressive, competitive prices and exiting from the market. The number of shipyards decreased from 706 (with employment of 300,000) in 1996 to 307 (with 240,000 workers) in 1998.4 While cutting costs, the company emphasized continuing improvements in cost efficiency and productivity. These moves helped to increase the company’s domestic market share from 2 See page III-150 of China Machinery Industry Yearbook 1999, the key companies of the group include Hu Dong Shipyard, Jiangnan Shipyard, Guangzhou Shipyard International, Dalian Shipyard, Bouhai Shipyard, Shanghai Shipyard, and Tianjin Shipyard. 3 China Markets Yearbook 1999, pp., 898 – 904, p. 912, City University of HK Press. 4 China Machinery Industry Yearbook (CMIY) 1999, pp. 233 – 334, pp. 356 – 360; CMIY 1997, pp. III-173, III-279.

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Table 1 How competitive is China shipbuilding industry company group? Domestic market share (%) Export as % of total ships built (%) Averaged size of ships exported (1000 tons) Output in ship tons (million tons) Output in number of ships Sales (billion RMB) Net value of export (US$ million) Profits (RMB million) Number of workers Productivity of labor (ship ton per worker)

1994

1996

1998

77 34 120 1.6 194 13.5 310 270 237,648 7

77 45 210 1.9 169 18.1 840  240 230,505 8

87 44 230 2.2 126 22.6 640 460 213,139 11

Sources: Statistical Table of Enterprise Scale, Labor and Wages, and Financial Performance in China Machinery Industry Yearbook (CMIY) 1999, 1997 and 1995.

76% to 85% over a 4-year period, and to its achieving profits of RMB 456 million (Chinese yuan) in 1998. Although export sales were severely affected by the Asian financial crisis, the size of ships exported has been increasing, from 12,000 tons to more than 20,000 tons, and labor productivity rising by 37% between 1996 and 1998 (see Table 1). One consequence of market competition is to allow efficient firms to grow and ultimately to dominate the market. This is exactly what happened to CSIGC, which has grown considerably via international competition to become the dominant firm in the industry. At present, the shipbuilding industry has evolved to a dominant-firm market structure in which state firms retain a strong dominance in the market with almost 80% of the market share, compared with 16% of private firms and 4% of overseas Chinese invested firms in 1997.5 In view of the analysis above, WTO accession will not impact on such an internationally competitive industry or the market leader position of the state-owned firm, CSIGC. Such a high degree of competitiveness of the firm is largely attributable to the introduction of international competition in the past. 3.2. The Type II market 3.2.1. Household appliances sector The household appliances sector has been open to foreign companies for more than 10 years with effective tariffs for imports. At present there are about 60 foreign firms competing with domestic firms in the market. For example, foreign refrigerator manufacturers, including Siemens, Panasonic, and Sharp, account for about 10% of the total market in recent years (SETC, 2000), and they compete mainly with a dominant player, Haier. The markets for refrigerators, color televisions, and other household appliances were dominated by foreign imports in the 1980s but the domestic firms have regained 5

China Markets Yearbook 1999.

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Table 2 Market share of Chinese domestic color TV manufacturers Year

1983

1986

1988

1994

1996

1997

Market share

15%

35%

45%

51%

75%

81%

Source: Development Research Centre of the State Council, 2000.

market share gradually over time (see Table 2 for changes in market share of domesticbrand-named color TVs). In the color TV sector, the state firm, ChangHong, dominates the market, with 25% of the market share in 1998, 23% in 1997, and 22% in 1996.6 In 1998, the TV sector sold 40.88 million TV sets, of which 16% of the total sales were exports; the exports increased by 14% from the previous year. In contrast, direct imports fell to 0.7% of the total sales in 1998 from 1% in 1997.7 Although the sector has been protected by a 35% tariff rate for color TVs and 20% for black and white ones, the stronger performance over time in raising both its domestic market share and export volumes signals the high ability of the industry and the dominant state-owned firms to compete with foreign firms. The market for other household appliances, including refrigerators, washing machines, and air conditioners, also exhibits a similar pattern of competition development. The top four domestic manufacturers took 37% of the market share in 1995 and 69% in 1998. Of the four dominants, the top one is Haier, a collective-owned (public holding) enterprise that entered the refrigerator business in 1985 and was listed on the stock market in 1992. The firm started with only 0.3% market share and had to compete with some 30 refrigerator manufacturers.8 Its share grew to 7% in 1994, and then 32% in 1998 (see Table 3-1). To compete in the overseas market, the exports of other household appliances have increased by 500% over 4 years, from US$700 million in 1994 to US$3.5 billion, which was 55% of the entire sales of the sector in 1998 (see Table 3-1). The table also shows the clear pattern of the mixed ownership structure in the top-four-firm group of the industry: Haier is a collective-ownership-controlled publicly listed company, Ke Long is a town-village-ownership-controlled publicly listed company, and Chun Lan and Xiaotian Er are state-ownership-controlled publicly listed companies. Fierce market competition has driven all these firms to dilute their ownership control in exchange for public funds to finance their growth, which has resulted in ownership evolution from a pure, single structure to a mixed one regardless their origins. This indicated that the mixed ownership structure appears not only in the interfirm level (within the industry) but also in the intrafirm level (within the firm), and the ownership convergence to the mixed equilibrium has been strengthened over time as shown by the continuous growth of their market shares. WTO accession is not expected to change the mixed ownership structure of the industry very much since not only did the top four firms regain their market shares from their foreign 6 7 8

China Electronic Industry Yearbook (ZGDZGYNY) 1999 (p. 181), 1998 (p. 197), 1997 (p. 116). China Electronic Industry Yearbook (ZGDZGYNY) 1999 (pp. 182 – 183). China’s Light Industry Yearbook 1986 (pp. 194 – 196).

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Table 3 (1) Market shares of four dominant corporations in household appliances industry

Year

Total export Total sales of Haier Chun Lan Ke Long Xiaotian of industry industry (%) (%) (%) Er (%) (US$ 100 million) (RMB 100 million)

1994 1995 1996 1998

7.3 11.5 14.3 31.8

n.a. 14.1 13.2 16.4

n.a. 9.4 9.0 12.9

n.a 2.7 3.4 7.8

7.2 23.9 27.5 35.1

349.6 377.0 428.8 511.6

Sources: China’s Light Industry Yearbook 1995 (pp. 287, 60), 1997 (pp. 232 – 34), 1999 (pp. 206 – 208, p. 40). (2) The domestic incumbents regain market shares from foreign rivals in China’s household appliances sector 1996 1998 (%) (%) Total of domestic In which, state-owned firms Total of foreign and Chinese overseas In which, the foreign firms

52 38 48

58 40 42

31

20

Sources: China Electronic Industry Yearbook 1999 (pp. 92), 1997(pp. 64). (3) Strengthening competitiveness by investing more in technology in the household appliances sector 1992 1994 Investment per firm in 1.6 technology (RMB million) Technology-upgrading 5.1 investment as % of total sales Aggregated growth in technology investment of the sector (%)

1996

1998

3.8

6.5

8.6

6.5

7.7

5.2

70

15

44

Sources: China Machinery Industry Yearbook 1999 (pp. 356 – 372), 1997 (pp. III, 279, 302), 1995 (pp. III-263, 282), 1993 (pp. III-216, 228).

competitors, whose share declined from 31% in 1996 to 20% in 1998 (see Table 3–2), but they also experienced stronger export performance over time and continue to invest in technology (see Table 3-3). Overall, our optimistic view about the future competitiveness of both state-controlled and other ownership-controlled domestic firms after WTO entry is based on both their stronger export performance in recent years and the continuing growth of their market shares, which signals their ability to adapt to the challenges of competition — something essential for retaining the market position after WTO accession. 3.2.2. The bicycle sector Established in 1917, the bicycle sector is one of the oldest industries in China. By 1949, there were about 100 bicycle factories producing some 15,500 bicycles a year. Today, China

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has become the world’s largest bicycle-manufacturing country, with an annual production capacity of 62.7 million bicycles9 and exports accounted for 40% of the world’s bicycle trade since 1992.10 The sector had 942 firms with employment of 240,000 in 1996, compared with 1070 firms with 300,000 workers in 1994.11 Of these firms, some 65% are fringe firms producing less than 15,000 bikes a year. This indicates that technical barriers to entry to the market is low, and only a little training is required for a person to be able to put a whole bike together by using hand tools, showing the contestable feature of the industry. The competitive nature of the industry has forced firms to start reform at a much earlier stage than other industries. The reform began in the beginning of the 1980s, with the introduction of production autonomy and bonus incentives to state firms to stimulate them to produce more. In the late 1980s, the reform moved further forward when export decision autonomy was given to firms; by 1989, there were 13 firms with export licenses.12 From 1990, the focus of enterprise reform shifted from management system reform to market-oriented reform. In response to this new development, the bicycle industry has been commercialized in two ways: (1) restructuring the state firms for corporatization and (2) opening market entry to foreign investors. For example, in 1992 the Shanghai Bicycle Factory (denoted by ‘‘Shghai bicycle’’ in Appendix C) took over Shanghai Pigeon Bicycle Factory, Wuxi Bicycle Factory, and Hefei Bicycle Factory to form the state-owned corporate group Forever. Shanghai No. 3 Bicycle Factory (denoted by ‘‘Shghai No. 3’’ in Appendix C) took over Shanghai No. 2 Bicycle Factory and merged with Shanghai No. 4 Bicycle Factory (denoted by ‘Shghai No. 4’ in Appendix C) to form the state-owned corporate group Phoenix in 1993. Meanwhile, there were eight new entrants who obtained production permits in 1991; 2 years after the foreign entrant quota was raised, the number of foreign firms hit 164, with total annual capacity of 15 million bicycles. Of these 164, 102 were joint ventures and 62 were solely foreign-owned.13 But foreign firms, including those owned by Chinese overseas, dropped to 132 in 1996.14 The open entry resulted in fierce competition between foreign entrants and domestic stateowned incumbents. In 1993, two state-owned bicycle firms announced bankruptcy, the first time in the history of China’s bicycle industry. In the same year, Shenzhen China Bicycles (denoted by ‘‘Shnzhn China’’ in Appendix C), a company owned by Hong Kong Chinese overseas, became one of the top 10 dominant firms in the sector, breaking the stateownership-dominant structure of the top 10 firm group. Table 4 constructed from Appendix C shows an interesting development pattern of the ownership structure of the top 10 firm group over time. As the table shows, the market is getting more and more concentrated but state firms are losing shares to their foreign rival

9

China Statistical Yearbook 1998 (p. 447). China Light Industry Yearbook 1999 (pp. 132 – 133). 11 China Markets Yearbook 1999, p. 894. 12 China Light Industry Yearbook 1990 (pp. 211 – 212). 13 China Light Industry Yearbook 1992 (pp. 232 – 233), 1993 (pp. 199 – 201), 1994 (pp. 159 – 161), 1995 (pp. 239 – 240). 14 China Markets Yearbook 1999, p. 894. 10

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Table 4 Change of importance of state firms in the top 10 group over time

1992 1994 1996 1997 1998 1999

State-owned incumbents in the top 10 bicycle firms

Foreign entrants (HK/Taiwan) in the top 10 bicycle firms

No. of firms

Market share % of industry sales

No. of firms

Market share % of industry sales

Total of top 10 firms’ market share as % of total industry sales

9 8 8 6 3 4

40 43 43 35 23 21

0 1 1 3 5 4

0 4 8 13 26 31

45 52 54 53 57 63

entrants. In the beginning of the development of the market, the structure was dominated by state ownership, except for one collectively owned shareholding firm (Gold Lion). Gradually, market competition drove inefficient firms to lose their market shares and efficient ones to grow, regardless of their ownership. Thus, it can be seen that competition has diversified the ownership structure of the top 10 firms to the present one characterized by a mixed state- and non-state ownership pattern. Moreover, the competition has reshaped the market structure, making it more concentrated, where the output of the top 10 soared from 45% in 1992 to 62% in 1999, providing evidence for the view that a firm’s market power does develop from competition. Both ownership diversity and frequent changes of companies in the top 10 firm group also indicate the intense competition in the sector. In 1997, Phoenix’s profits were squeezed to only 0.74 yuan per bicycle, close to a zero profit rate.15 Other foreign firms also suffer from highly intense competition; for instance, Shenzhen China Bicycle lost RMB 654 million in 1998.16 In fact, the whole sector was in the red in 1998, chalking up losses of RMB 576 million in total.17 Such fierce competition among foreign and state incumbents has driven costs down to a level which is unsustainable for many firms. Many have exited from the market, and the number of large- and medium-sized producers dropped from 405 in 1993 to 125 in 199818 (see Fig. 1A). In addition, China’s bicycle industry exported more than 70% of its total output in 1998 and 1999, and exports rose by 39.5% from 12.62 million bikes in

15

Computed from Phoenix’s Annual Report on Profits divided by the quantity produced, and the quantity was from China Light Industry Yearbook 1998 (pp. 190 – 91). 16 From Shenzhen China Plc’s Annual Report in 1999, listed on Shenzhen Stock Market. 17 Statistical Yearbook of China 1999. 18 Firms with annual sales of more than 5 million RMB a year are included, China Light Industry Yearbook 2000.

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Fig. 1. (A) Competition drives prices too low to remain in China’s bicycle market. (B) Export more bicycles to international market.

1995 to 18.12 million bikes in 1999. Phoenix alone exported 1.3 million bikes in 1998 and 975,000 bikes in the first half of 2000, an increase of 43.8% compared to 1999.19 As a result, the competitiveness of the Chinese bicycles in the international market is without doubt. The location chosen by foreign manufacturers to produce bicycles for the world market signals further the cost comparative advantage of firms located in China. For instance, Zhejiang Wheel sold 100% of its made-in-China products to the overseas market. Thus, the competitiveness of the industry as a whole will remain in the post-WTO entry. Although the analysis above shows that the bicycle industry as a whole will not be affected drastically by WTO accession — even if the 25% tariff is lifted, it does not necessarily mean that the diversified ownership structure in the sector can be sustained after the accession. As Table 4 shows, the number of state firms in the top 10 group has dropped gradually, and the market share of both Forever and Tianjing bicycles (denoted by ‘‘Tngj bicycle’’ in Appendix C) has declined. These are worrying signs about their sustainability in the post-WTO-accession environment. The same is true for the largest Chinese bicycle firm, Phoenix. The company has shown a lack of new initiative and momentum to further increase its market share since 1996; in fact, its market share declined from 13% in 1998 to 10% in 1999 (see Appendix C). 19

Jie Fang Daily, No. 18662, 26th July 2000, p. 4.

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Table 5 An oligopoly market structure, and competition for total market shares among the top five firms Name of corporation

1998 (%)

1996 (%)

1994 (%)

First Automotive Words (FAW) Shanghai Automotive Industry Corporation (SAIC) Dong Feng Auto Corporation (DFAC) Tiangjin Auto Industry Corporation (TAIC) The Military Equipment Industry Corporation (ChangAn)

18 15 12 10 7

17 14 11 10 5

13 9 14 9 4

Sources: China Machinery Industry Yearbook 1999, 1997, 1996; China’s Auto Market Almanac 1999 (pp. 35 – 70). Figures in the table show total market share including all types of vehicles made by each firm.

It is to be expected that the impact of WTO membership will be more severe on state firms than on foreign incumbents since the restrictions on some foreign incumbents to sell their bikes to the domestic market will be lifted after the accession. This will certainly place state firms in a much more difficult position as they will then have to confront the expected surge in domestically made foreign bikes in the home market. Competition between the foreign firms and state incumbents will inevitably intensify. Therefore, after WTO accession, the outlook for state firms in this sector is pessimistic, since they have been continuously losing market share to their foreign rivals in recent times (see Table 4). The growth of private firms in the top 10 firm group (see Table 4) indicates a path of ownership evolution, which is similar to the household appliance sector, move from a single state ownership structure to a diversified or mixed structure. Since China’s largest stateowned bicycle firms, Phoenix and Forever, have been losing their market shares to the foreign rivals in recent years, it raises doubt about the sustainability of state ownership in the sector after WTO accession. Therefore despite the removal of tariffs upon WTO accession, there will not be too much disturbance in the industry, the sustainability of the diversified ownership structure will be called into question, and the answer will be greatly dependent on how soon and to what extent the government takes further reform measures to improve the running of the state-owned incumbents. Otherwise, the ownership convergence will inevitably be towards a private dominant structure and WTO accession will further accelerate the pace of the evolution. 3.3. The Type III market: auto manufacturing industry China’s automotive industry, dominated by a few large state-owned firms, is regarded as a pillar sector for the country and its success will be of strategic importance to the reform and to the economy. In 1998, the sector produced 1.6 million vehicles, valued at 3.2% of GDP 20, and employed 1.98 million people. The profit then was RMB 5.8 billion.21 The Chinese auto industry has a very tight control over FDI (that is only restricted to state controlled foreign-joint ventures and the number of joint ventures are limited by the central government planning). Within the strict control over foreign entry, the industry has developed 20 21

Statistical Yearbook of China 1999 and China Machinery Industry Yearbook (CMIY) 1999. China Auto Industry Yearbook 1999 (p. 240).

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to a tight oligopoly structure, with a few large state-owned firms dominating the market. The largest vehicle manufacturer is First Automotive Works (FAW), with a total market share of 17.8% in 1998 (including all types of vehicles); the second largest manufacturer is Shanghai Automotive Industry Corporation (SAIC), with a market share of 14.5% in 1998; and the third is Dong Feng Auto Corporation (DFAC), with a 12% share (see Table 5). These top five firms have been increasing their market share concentration via competition in recent years. For example, the top five had 49% of the total market in 1994, and 62% in 1998. The industry has been heavily insulated from international competition by both high tariff rates on imported vehicles at a range between 30% and 100% (see Appendix B) and strict control over foreign entry via FDI (such as wholly foreign-owned firms are not allowed). The exports are negligible, only 658 cars exported in 1998 (see Table 8). With China’s pending entry to WTO, the ability of this state-ownership dominant industry to survive has become a central concern for two reasons. First, the industry is regarded as an infant sector that is lacking the learning-by-doing effect. Mass car production only began in the second half of the 1980s, the result of a joint venture with German and French car manufacturers. In the period 1988 to 98, the industry produced a total of 2.5 million cars, far less than the 5.8 million cars a year that is the average annual output of a leading foreign firm. The more cars produced over time, the higher the learning-by-doing effect is and hence the lower the unit costs that can be achieved. For example, Table 6 shows a decrease in steel consumption per vehicle made by China’s FAW over time, indicated a learning-by-doing effect on cost saving. Added to the lack of the learning-by-doing effect, another lack is economies of scale in which the domestic firms are far lower than their foreign rivals (see Table 7). Because of the ‘‘two lacks,’’ it is widely believed that China’s auto industry is not competitive, since their foreign rivals have higher productivity, producing 20–40 cars per worker a year, while the Chinese could only manage 2–4 vehicles per worker (Yang, 1999). The lower productivity seems to explain well why the average unit cost of a vehicle is higher in China, at about US$11,500, which is 40–50% more expensive than their international counterparts of a similar make (SETC, 2000). In view of this, the domestic auto firms are not capable of competing with imported cars. Therefore, the future of the industry after WTO entry is indeed bleak. This is a pervasive view of the automotive industry in China. How credible is this pessimistic view about the future of the industry? Are the top five state firms so incompetent and incapable of competing with international rivals after WTO entry? Liu (2001) argued that although WTO accession may be detrimental to the current state of China’s automobile manufacturers, this does not mean that the firms do not have the ability to adapt to a new and more competitive playing field. From a dynamic point of Table 6 The more the FAW produces the more the materials inputs will be saved FAW’s steel consumption per vehicle (unit: ton)

1994

1995

1996

1997

1998

2.9

2.2

2.3

2.2

1.8

Sources: China’s Auto Industry Yearbook 1999 (pp. 312 – 13), 1998 (pp. 112 – 13), 1997 (pp. 117 – 18), 1996 (pp. 122 – 23), 1995 (pp. 129 – 30).

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Table 7 The output gap between China’s largest firms and their foreign rivals Foreign rivals

Output in 1998 (million)

Output in 1998 (million)

Chinese auto firms

GM Ford Toyota Volkswagen Daimler-Chrysler

7.5 7.1 5.3 4.8 4.5

0.29 0.24 0.19 0.15 0.12

FAW Shanghai Automotive Group DongFeng Automotive Group Tianjin Automotive Group ChangAn Automotive Group

Sources: CMIY 1999 for Chinese manufacturers, and Economic Daily 1999 for foreign firms.

view, the ability to adapt is more important in determining the future success of a firm than the current state of its business. Evidence supporting the argument above, shown in Liu’s study, was the ability of the industry to choose a right strategy to deter foreign entry via direct selling. In the beginning of the 1990s, the Chinese car industry had neither quality nor technology when compared with imported cars. But, surprisingly, the industry managed to regain market share from the importers. Sales of imported cars fell sharply from 41% of the total sales in 1994 to 3.4% in 1998 (see Table 8), and this dramatic change was achieved at the same time that car tariffs decreased from 110–150% in 1994 to 80–100% in 1998 (Yang, 1999). Table 8 shows how imported cars are driven out of the market. The incumbents, who are those foreign-joint state-owned firms (or state controlled joint ventures), used homemade foreign cars to compete with imported foreign cars. This ‘‘foreign-hit-foreign’’ strategy has Table 8 How to regain the car market: the foreign-hit-foreign strategya Imported Homemade Total Homemade foreign foreign foreign ‘‘Red-flag’’

Homemade other domestic

Total homebrand

Export

6485 1.54

0 0.0

1994 Quantity sold Market share (%)

173,097 41.1

241,154 57.3

414,251 98.5

1996 Quantity sold Market share (%)

58,382 13.0

368,124 81.9

426,506 94.9

9760 2.2

13,215 2.9

22,975 5.1

628 0.1

1998 Quantity sold Market share (%)

18,016 3.4

481,604 91.7

499,620 95.1

14,951 2.8

10,548 2.0

25,499 4.9

658 0.1

86 0.02

6399 1.52

The number of homemade foreign cars were the sum of Santana, XiaLi TJ, Audi, Jetta, Citroen, Cherokee, and Alto. Source: China Auto Market Almanac 1999. China’s Machinery Industry Yearbook, 1994 (pp. 18 – 20; pp. I-20 – I25); 1995 (p. 18); 1997 (pp. S-43 – S45; III-157 – 166); 1999 (pp. 623 – 634; pp. 213 – 227). a Figures only include cars, but not other vehicles. For all homemade foreign cars, they are manufactured by foreign joint-venture subsidiaries that have their state-owned-parent company as the controlling shareholder. Cars with the brand name of Red Flag are made by FAW’s controlled subsidiary company that has been listed on China’s stock market.

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been extremely successful in helping China’s technologically backward auto industry to regain its market share as well as to deter import entrants. With China’s pending entry into WTO, the implications of the success of China’s entrydeterring strategy are clear. First, China’s car market has already been dominated by foreign cars, and new importers have to confront products that they have already competed with in the international market. Secondly, even with a lower tariff rate, there is no guarantee that new importers will not experience a repeat of imported cars being driven out of the Chinese market. Thirdly, if the incumbents have been able to play the ‘‘foreign-hit-foreign’’ strategy to help them regain the market, there is no reason why they cannot use the same strategy, or create a similar one, to deter new entrants even if tariff protection is lower. These three implications suggest that to use this foreign-hit-foreign strategy for entry deterrence, state incumbents will further strengthen their cooperation with their foreign partners in the post-WTO-entry era. This will inevitably result in the dominant state-owned firms diluting their ownership control in exchange for technology to enable them to compete in the market, and hence force the evolution of ownership to the mixed structure of foreignjoint state ownership at the intrafirm level. This view is evidenced by the number and market share of foreign joint state firms, which increased significantly in the industry, and contrasts sharply with a decrease in both state- and collective-owned firms (see Table 9). Between 1992 and 1998, the number of foreign joint state firms increased by 4.7 times with an average growth rate of some 4% per annum over the period. With China’s pending entry into WTO, it is expected that in order to survive the more fierce competition more state-owned firms will abandon single ownership control by allying themselves with technologically advanced foreign firms, and therefore, making the mixed ownership with foreign firms more prevalent in the post-WTO-entry era. The implication of the allying-with-foreign-firm strategy is clear from an ownership reform perspective: state ownership in the industry will remain after WTO entry, but the neoclassical Table 9 Growth of foreign joint firms and total market shares in the auto industry 1992

1993

1994

1995

1996

1997

1998

Market share as % of the total industry State-owned 71 62 Collective-owned 8 3 Foreign jointa 16 16

66 7 21

63 7 25

60 7 21

57 8 27

42 6 26

1470 761 134 2442

1480 699 169 2479

1385 676 194 2423

1393 648 222 2474

1190 490 254 2426

Number of firms State-owned Collective-owned Foreign-joint Total

1519 963 44 2555

1501 839 86 2462

Source: China Automotive Industry Yearbook 1993, 1994, 1995, 1996, 1997, 1998, and 1999. Market share figures include all types of vehicles made by firms. a Foreign joint firms are those foreign joint state-owned firms, since they are the joint-venture subsidiaries that have their state-owned parent company as the controlling shareholder.

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type of single state ownership will become marginalized. Instead, mixed foreign and state ownership will be dominant.

4. Conclusions In terms of the three types of markets, we have selected some industries as examples to illustrate how important market-share changes over time can illustrate the competitiveness of China’s large firms after WTO entry. The shipbuilding industry is an example of the Type 1 market; the household appliances sector and the bicycle sector are examples of the Type 2 market; and the automotive industry is an example of the Type 3 market. One finding is that market competition introduced by two decades of economic reform has selected winners and losers. Such winners including China’s shipbuilding industry company group and those of the leading incumbents in the household appliance sector. These internationally competitive firms will survive the impact of WTO accession, since they have grown through fierce competition with foreign rivals in the market. This means: first, open competition with international rivals will be conducive to fostering a sustainable industry and company. This has been shown by the success of the Chinese leading firms in the Types I and II markets. Secondly, China’s entry to WTO will further differentiate efficient firms from less efficient firms in terms of their growth, implying that the WTO accession will accelerate the growth of competitive firms but at the expense of less efficient firms. The gains that will be brought by WTO accession are that a few large firms will grow further and faster, but the costs will be that those less-efficient firms will be selected out of the market. There are both types of firms in the market and so a remaining question for further research is to assess if the social costs of selecting out a large number of less efficient firms will be higher or lower than the gains of the faster growth of a small number of efficient firms after WTO accession. Moreover, it is interesting to point out that, for China’s auto industry, its fate is not as pessimistic as is widely believed in China. China’s auto dominant incumbents have proved their ability to regain market share from foreign importers in the 1990s. The strategy of ‘‘foreign-hit-foreign’’ will still be the entry-deterring strategy for post-WTO-entry competition. As a result of this strategy the industry will inevitably have more state-owned firms allied with foreign-owned private firms, thus speeding up ownership evolution towards a mixed structure of ownership shared with foreign firms. This implies that the current whole state ownership will eventually be marginalized. This suggests that although a considerable number of China’s large state-owned manufacturing firms will survive after WTO entry, their survival strategy will be changed from that of a wholly state-owned entity to mixed state and private ownership control in exchange for funding, technology, and improvements in corporate governance in support of business growth. This will inevitably accelerate ownership evolution towards a diversified structure that is expected to be more prevalent in the post-WTO-entry era. Although the diversified ownership structure created by China’s reform will, in general, be sustainable in the foreseeable future after China’s entry into WTO, it does mean that every

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sector or industry will remain a mixed structure. Private-ownership dominant industry is likely to appear, as we have seen in the bicycle industry, once all market entry barriers are forced to be lifted by WTO accession. Finally, we understand of course the limitations of our use of the changes in gross market share to test the competitiveness of a firm, such as the effect of product differentiation and the growth of niche markets on market share measurement. Future research should focus on developing other leading indicators of post-WTO impact so that they can be used together with our market-share testing principle to predict the situations in other transition economies when they join WTO.

Acknowledgments We are grateful to the seminar audience at EAI of National University of Singapore for their valuable comments on the earlier version of the paper. We are most indebted to Professor John Wong at EAI and the referees of the paper.

Appendix A. Proof of Claim 2 in Section 2 Suppose, there are three firms in two markets: a domestic market and an overseas market. One firm is called a foreign firm located in the overseas market with the constant marginal costs of cf. If this foreign firm decides to sell its product to a new market, called the domestic market, it will face (Eq. (1)): cf þ t > cd

ð1Þ d

where t is a tariff rate on imports to the domestic market and c is the marginal costs of the second firm, a home incumbent, in the domestic market. Thus, to be cost competitive, the foreign firm (an entrant to the domestic market) can choose two strategies: either produce at cf + t  cd, or invest in the domestic market to achieve cf-d  cd, where cf-d is the costs of the foreign firm to produce in the domestic market. However, if the foreign entrant enters the market and hires local labor force to produce, it could have either cf-d < cd or cf-d = cd. But the head-to-head competition would drive the cost levels of the two firms to converge to cf-d = cd, if the domestic firm wants to survive the competition. According to Hay and Liu (1997) and Sutton (1991, 1998), each firm’s market share (denoted by s) is a function of both cost efficiency and technology advances (denoted by x), it then has s = s(cf-d, xf) with @s/@cf-d < 0 and @s/@xf>0 for the foreign entrant (which has xf as its technology), and s = s(cd, xd) with @s/@cd < 0 and @s/@xd>0 for the home incumbent (which has xd as its technology at the first stage), together with foreign firm’s more advanced technology than the home firm, xf > xd, it then has sðcf d ; xf Þ > sðcd ; xd Þ:

ð2Þ

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Eq. (2) states that at the first stage the foreign firms will gain more market share than the domestic incumbent firms do, since the former is more advanced in technology than the latter. Given all else unchanged or equal, the domestic home firm can show its technology has improved to be at almost the same level as the foreign entrant at stage two, xd = xf, if each firm’s market share in the domestic market becomes sðcf d ; xf Þ  sðcd ; xd Þ:

ð3Þ

In the overseas market with constant demand, the domestic home firm competes with the third firm, called a foreign potential entrant firm with the costs of cf-p (Note: the third firm operates in the overseas market but has an interest in entering the domestic market). When the domestic home firm has higher export growth, or higher growth of market share in the overseas sector (Dsd-o) than the foreign potential entrant (Dsf-p-o) in the same sector then Dsdo ðcd ; xd Þ > Dsf po ðcf p ; xf p Þ:

ð4Þ

It implies that, cd  cf-p and xd = xf-p. The identical advance of technology between the home (exporting) firm and the foreign potential entrant firm can be explained, on the one hand, competition in the overseas market having driven the advance of technology between the foreign entrant and the foreign potential entrant to converge to xf = xf-p, and on the other hand, inequality (3) shows xd = xf. Combining Eqs. (3) and (4) shows, if imported tariffs (t) are lifted, the foreign potential entrant with the costs of cf-p will still not be competitive in the domestic market since it has cd < cf-p and xd = xf-p [the implication of inequality (4)]. Therefore, the foreign potential entrant will stay out of the domestic market after tariff t is lifted, if it can observe that the domestic home firm has growth in both domestic market share and exports. The same conclusion can hold if we modify inequality (3) as a result of xd  xf but cd < cf-d. This indicates that domestic demand is more responsive to price changes and so the cost efficiency is more important than the product technology advance in determining sales and so the market share.

Appendix B(4). China’s import duty on some popular goods, 1998–2000 Name of Goods

Tariff No.

Tariff rate (%)

Color TV Black & white TV Washing machines Electric fans Air conditioners Refrigerators Coffee makers Toasters

85.28 85.28 84.5 84.14 84.15 84.18 85.16 85.16

35 20 20 – 35 15 25 18 – 30 35 35

G.S. Liu, W.T. Woo / China Economic Review 12 (2001) 137–161 Irons Hair dryers Water heaters Electric rice cookers Bicycles Scissors Spoons Computers Fax machines CPUs Hard disk drives Vessels Cars ( < 2500 cc) Cars (>2500 cc) Trucks (>8 tons weight) Trucks (5 – 8 tons) Trucks ( < 5 tons) Buses (>30 seats) Buses (10 – 30 seats) Toys

85.16 85.16 85.16 85.16 87.12 82.14 82.15 84.71 85.17 85.42 84.71 89.01 87.03 87.03 87.04 87.04 87.04 87.02 87.02 95.01

159 35 35 35 35 25 18 18 9 – 15 12 3 6 8 80 100 30 40 50 50 70 10

The tariffs listed here are M.F.N. rates. Source: Customs Import and Export Tariff of the People’s Republic of China, 1998, 1999 and 2000, compiled by the Office of the Customs Tariff Commission of the State Council of China, the Department of Laws and Regulations of the Customs General Administration of China.

Appendix C. Who survives longer: can a diversified ownership structure be sustainable in the bicycle sector after WTO accession? A competitive evolution of market share and ownership structure of the top 10 firm group 1992–1999 1992

Firms:

1993

Ownership: Market share (%): Firms:

Shghai bicycle State 8.2 Phoenix

Shghai No. 3 State 9.2 Gold Lion

Tngj bicycle State 6.5 Forever

Gold Lion Shareholding 5.6 Five-Goats

1994

Ownership: Market share (%): Firms:

State 12.6 Phoenix

Shareholding 5.6 Forever

State 8.4 Gold Lion

Ownership: Market share (%): Firms: Ownership:

State 12.3 Phoenix State

State 6.6 Forever State

Market share (%):

14.0

8.2

Shareholding 5.5 Shunde Chinese overseas 7.6

State 5.4 Tngj bicycle State 4.6 Qilu Incall State

1996

4.8

160 1997

1998

1999

G.S. Liu, W.T. Woo / China Economic Review 12 (2001) 137–161 Firms:

Phoenix

Shunde

Forever

Qilu Incall

Ownership:

State

State

State

Market share (%): Firms:

13.9 Phoenix

Chinese overseas 10.1 Shunde

7.7 Forever

Ownership:

State

3.7 Zhejiang Wheel Private

Market share (%): Firms:

13.5 Shunde

Ownership:

Chinese overseas 16.7

Market share (%):

Chinese overseas 11.4 Phoenix State

State 6.6 Jie An Te Chinese overseas 7.2

10.6

6.3 Zhejiang Wheel Private 6.5

Source: Constructed from data from China’s Light Industry Yearbook 2000, 1999 (pp. 123 – 33), 1998 (pp. 190 – 91), 1997 (pp. 170 – 71), 1996 (pp. 169 – 71), 1995 (pp. 239 – 40), 1994 (pp. 159 – 61), 1993 (pp. 199 – 201), China Markets Yearbook 1999 (pp. 3740), City University of HK Press; China Statistical Yearbook, 1997, 1998 (pp. 445, pp. 447).

Five-Goats State 5.5 Tngj bicycle State

5.0 Five-Goats State 4.5 Anyang Eagle State 4.5 Anyang Eagle State 3.4 Shnzhn BouAn Chinese overseas 4.4

Tngj bicycle No. 2 State 2.6 Shnzhn China Chinese overseas 4.4 Anyang Eagle State

Anshan bicycle State 2.1 Anyang Eagle State 3.9 Anshan bicycle State

4.5 Gold Lion

3.7 Zhejiang Philip State 3.0 Jie An Te

Shareholding 4.3 Tngj Bicycle State

Anyang Eagle State 2.5 Anshan bicycle State 3.5 Shnzhn China Chinese overseas 3.5 Tngj Bicycle State

2.7

3.4 Jie An Te

Chinese overseas 3.0 YoungQi

Shnzhn BouAn Chinese overseas 2.5 MeiliDa

Chinese overseas 4.2

Chinese overseas 3.3

Chinese overseas 2.6

Zhejiang Philip State 1.7 Zhejiang Philip State 3.1 Zhejiang Philip State 3.4 Five-Goats

Shghai No. 4 State 1.7 Haier Man State 2.6 Lunan bicycle State

State 2.6 Haier Man

3.3 Anshan Bicycle State 2.6 Gold Lion

State

Shareholding

2.4 Tngj Bicycle State

2.3 Zhenjiang LiPa Private

2.6

2.5

G.S. Liu, W.T. Woo / China Economic Review 12 (2001) 137–161 Forever State 5.2

Shenzhen BouAn Chinese overseas 4.7

161

Guangdon Shaoqin State

JngSu Goodboy Private

Anyang Eagle State

Shghai JuFen Joint-venture

3.0

2.5

2.2

2.1

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