Foreign direct investment

China’s auto policies: Playing the long game

Michael Enright

Published 08 April 2025

Beijing turned China into the world’s largest auto producer and exporter by a decades-long concoction of industrial policies, protectionism, technological change, and a willingness to allow “off-plan” development. While foreign firms were vital to the industry’s rise, many are now falling behind as Chinese firms rose. International investors will have to tread carefully in dealing with the challenges of China’s long game of state-backed industrialization.

The auto industry has long been a focus of China’s industrial policy. It was the subject of China’s first specific national development plan after its economic opening in the 1980s and continues to receive close attention and protection from Beijing. Government ownership, absorbing foreign technology and know-how, industry concentration, protectionism, favoritism for local companies, and massive state support have all been used to support the industry. The goal from the start has been to develop strong Chinese auto producers able to succeed on the domestic and international markets.

Government ownership has been a hallmark of China’s auto sector since the 1950s. The central government founded First Auto Works (FAW) in 1953 and Second Auto Works (Dongfeng) in 1969. Guangzhou Automobile Group (GAC, 1955), Shanghai Automotive Industry Corporation (SAIC, 1955), Nanjing Automobile Corporation (NAC, 1947), and Beijing Automotive Industry Corporation (BAIC, 1958) were formed later through takeovers and mergers of private companies by local governments.¹ FAW, Dongfeng, SAIC (which absorbed NAC), GAC, and BAIC are still among China’s leading car companies.

China has continually sought to acquire technology and expertise from foreign auto companies. FAW initially sourced technology, designs, and equipment from the Soviet Union and other Eastern Bloc countries. In the 1960s and 1970s, Chinese firms received support from Eastern European, Western European, and Japanese firms to develop commercial vehicles. In the 1980s and 1990s, as China started opening its economy, China sought to trade market access for technology and expertise. Selected foreign companies were allowed at most two joint ventures in which they could own a maximum of 50%.² They were told where they could set up; which local companies would be their partners; and that they would have to transfer technology, train Chinese workers, engineers, and managers, and ramp up local content. The first of dozens of Sino-foreign joint ventures were BAIC-American Motors (1983), SAIC-Volkswagen (1984), and GAC-Peugeot (1985). By 1991, an internal Chinese report indicated that the foreign presence had already moved China’s auto industry ahead by 30 years and had transformed China’s machinery, chemical, electrical, and instrument industries.³

Chinese auto policies in the 1990s and 2000s called for concentration of the industry into two or three leading companies that would achieve large scale by 2000 and international competitiveness by 2010. They were to be supplemented by six to seven other significant automakers and numerous competitive parts makers.⁴ Despite the focus on the joint ventures of government-owned enterprises, private companies like Great Wall (founded in 1984), Geely (1986), and BYD (1995) were able to leverage financing from local banks and from Chinese, Hong Kong, or US stock exchanges to develop outside the original plans. As of 2009, there were roughly 145 auto producers in China, most operating below efficient scale according to Chinese officials.⁵

Tariffs, local content rules, and other restrictions have been protected the Chinese industry. Average tariffs on finished autos exceeded 200% in the 1980s and early 1990s. Tariffs were revised to 110% to 150% in 1994, lowered after China’s WTO entry in 2001 to reach 25% in 2006, and then further reduced to 15% in 2018. Beyond these averages, imported large autos and sport utility vehicles (SUVs) have faced total taxes of over 100% since 2008.⁶ To build a local parts industry, China set tariffs on auto parts higher than 100% in the 1980s and 1990s and imposed strict local content rules on Sino-foreign joint ventures. After China entered the World Trade Organization, tariffs on auto parts were brought down to 10% in 2006 and then further reduced to 6% in 2018.⁷

China’s auto policies, the expansion of roads and highways, the increasing affluence of Chinese consumers, and the investments of local and foreign firms resulted in a dramatic rise in China’s auto output. The number of passenger cars produced in China went from 5,200 in 1985 to around 40,000 in 1990, 604,677 in 2000, 13.9 million 2010, 21 million in 2015, and over 31 million in 2024.⁸ In that last year, China’s 32% share of global unit production was higher than those of the US, Japan, India, and South Korea, the next leading producers, combined.⁹

Despite explosive industry growth, China’s goal of developing local companies that could succeed at home and abroad with indigenous designed and branded vehicles remained elusive. In 2004, only 2% of the cars produced by SAIC or its joint ventures were developed in China as 98% were GM or Volkswagen models. As late as 2019, despite great progress in engineering, manufacturing, and marketing, industry analysts claimed that the major state-owned auto companies had yet to develop their own competitive brands.¹⁰

The situation has changed dramatically with the emergence of electric vehicles. EVs were listed as a priority project in the 10^th Five Year Plan in 2001. In 2007, Wan Gang, an engineer who had once been employed at Volkswagen-Audi, became China’s Minister of Science and Technology. He reportedly convinced China’s leaders that China was unlikely to catch up with the major global players in internal combustion engine-powered autos but could lead in EVs.¹¹ Central and local government support for EVs soon involved strategic planning, subsidies, emissions standards, EV infrastructure, limiting new ventures to EVs, access to foreign technology, and state-backed protectionism.¹² Tesla, one of the world’s most advanced EV companies, was allowed the first 100% foreign-owned auto company in China in 2018, after promising to become a driver of technology in the Chinese EV supply chain and to export a large portion of Tesla’s Chinese product. By 2022, China accounted for 56% of Tesla’s global output and about 40% of China-made Teslas were exported.¹³

Central-government subsidies for EVs in China have been estimated at US$231 billion from 2009 to 2023, including R&D subsidies, direct subsidies for buyers (62% of total subsidies from 2009 to 2017), exemptions from the 10% sales tax, subsidies for EV makers (including capital injections for money-losing players) and battery suppliers, preferential government procurement, and subsidies for EV infrastructure.¹⁴ Average subsidies to EV buyers from the central government went from US$14,000 in 2018 to US$12,000 in 2020, US$6,600 in 2022, and US$4,800 in 2023 before being phased out. Some local governments added subsidies of their own. Subsidy programs favored Chinese auto companies and companies using Chinese EV batteries, giving them a strong advantage over foreign firms. A “credit system” on emissions standards was used to force auto companies to invest in EVs.¹⁵ EV sales in China went from 3.2% of the market in 2017 to 5.4% in 2020 and 41% in 2024, a year in which China accounted for nearly 70% of global EV sales.¹⁶

China’s EV policies have supported China’s local and private firms as well as government-owned enterprises. One such firm, BYD, received international attention when Warren Buffett’s Berkshire Hathaway invested US$232 million in 2008 to help supercharge EV development. By 2024, BYD accounted for 34% of China’s EV sales. They were followed in EV share by Geely (8%), SAIC (7%), Tesla (6%), and Changan (6%). Tesla, which opened the first 100% foreign-owned auto venture in China in 2019, was the only foreign brand in the top 10. BYD accounted for 16% of total China auto sales (EV and ICE) in 2024. Other leading brands in the total market included Volkswagen (12%), Geely (8%), Toyota (7%), Changan (6%), and Chery (6%).¹⁷

As EV sales grew, the share of foreign brands in the China market nosedived, from 64% in 2020 to 59% in 2021, 44% in 2023, and 35% in 2024. In 2024 alone, sales of German brands in China fell 13.3%, Japanese brands 17.7%, and US brands 23.1%.¹⁸ Volkswagen and GM, traditionally the two most successful foreign auto companies in China, have been hit particularly hard.¹⁹ While analysts have criticized the foreign firms for underestimating the Chinese companies and EV technology in general, their inability to benefit from Chinese government programs and subsidies clouded the case for early investment in China EV development. The dramatic increase in the Chinese EV market also took place during the pandemic period when foreign executives could not visit their Chinese ventures. More recently, foreign firms have been playing catchup, with some investing in Chinese EV makers to gain access to EV technology.²⁰

Increases in EV capacity and the decline in ICE car sales in China have left a sizable overhang of capacity, part of which is already being exported. 78% of China’s 4.9 million car exports (overall vehicle exports were 5.9 million) in 2024 were ICE autos²¹ The leading export brands were Chery, SAIC, Changan, Geely, Great Wall, BYD, BAIC, Tesla, JAC, and Dongfeng – all Chinese brands except Tesla.²² Some fear that the capacity overhang and expected increases in EV capacity could lead to China undercutting and dominating the world auto market.²³

China’s auto sector benefited from long-term government policies, company strategies backed by the government or at least state-run finance, and favoritism toward Chinese firms. It was helped by technology and know-how from foreign companies. It also benefited from “off-plan” development, as many local and private auto producers only became part of national plans after achieving a measure of success in local markets. The combination of Chinese policies, China’s market size, foreign investment, and policy flexibility made China the world’s leading ICE auto producer by 2009. Even so, local Chinese companies had not achieved the international competitiveness with their own brands and designs that China’s leaders had long desired. It was only with the advent of a new technology, EVs, where the initial lead of foreign companies was not so large as in ICE vehicles, that major industrial policy programs, including massive subsidies, combined with aggressive firm strategies, consumer demand, and the capabilities acquired through the previous 70 years, came to the fore.

For major international auto companies, the question now is how to try to regain position in the Chinese market and how to safeguard their position in their home and third markets. Some have invested in Chinese companies as a form of “reverse technology transfer” and have started exporting from China. Another question is whether they will stick with their Chinese joint venture partners when existing agreements come up for renewal. Most have done so, though with some buying or selling controlling stakes. For foreign governments, the question is how to deal with a potential flood of Chinese vehicles onto world markets. Some have taken a page out of China’s playbook, using variations of protectionism, forced technology transfers, subsidies, and efforts to shift the market to favored vehicles. However, this may prove challenging for economies traditionally focused on protecting consumers rather than producers. Even so, the European Union, where imports from China account for around 25% of EV sales, has placed tariffs of between 8% to 35% on EVs imported from China, while the US slapped a 100% tariff on China-made EVs. It is yet to be seen whether “reciprocal tariffs” under the Trump administration will reflect China’s present auto tariffs or the rates that were in place when the industry emerged as a world leader.

Though China’s auto industry has not developed as China’s leaders planned, it shows that long-term policy commitment, technological change, massive state resources, and the influence of the Chinese Communist Party-state have an enormous impact. The story suggests one cannot dismiss the potential that other Chinese initiatives, such as the Belt and Road Initiative and Made in China 2025, will reshape the global economy, even if these grand plans may be behind schedule today. Major international companies will have to tread carefully, and governments outside of China will have to deal with state-backed industrialization in the world’s second-largest economy as well as their “home companies” whose allegiance may be more complex than one might hope. Companies and governments with shorter time horizons than China’s will find responding to China’s development strategy particularly challenging.

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