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Introduction:
Nowadays, the motor market in China keeps growing and growing. The
demand for cars is increasing rapidly. Great Wall and Geely are two major local
brands in China. Great Wall claimed that their operating margin had increased
from 20% to 27% in the previous years because they started to produce new
sport utility vehicles apart from producing lorries.
As to compete with other companies, Geely sells cars at the price less
than half of the price of the competitors. Though the price is low, the car looks
similar to BMW and Benz, which are some popular brands. Thus, Geely
attracts many buyers.
Geely‘s competitors, Denway Motors reported that they had a six-month
backlog in orders for the cars. Together with Brilliance China Automotive
Holdings, they claimed that the motor market in China would keep on growing
steadily in the future.
As the motor market in China will grow further, many foreign companies,
for example, Ford Motor and Nissan will invest in this market. However, the
Chinese government, to avoid a foreign takeover of a potentially huge industry,
restricts the foreign companies to form 50-50 joint ventures with the local
companies.
Analysis:
Since the 1970s, the Chinese government has implemented an open door
policy and economic reforms. It has added more “market elements” into its
economy. People had more freedom in buying, owning and selling their
properties. Firms could decide what goods to be produced and the price they
would charge. However, compared with Hong Kong, China seems to have a
long way to go to become a market economy.
In this case, the Chinese government puts restriction on foreign
investment. The foreign companies must combine with local companies. The
government does not want the foreign companies to monopolize the motor
market in China. So as to protect its own companies, it adopts this measure.
We can see that, the government in China still plays an important role in
solving the problems of resources allocation. The proportion of command
economy is still greater than that of the market economy. Therefore, China is
still called a command economy. On the other hand, as China has entered the
World Trade Organization, further opening of China is expected.
Since China has planned to change into market economy and carried out
different approaches, the demand for cars in China increases rapidly.
(D1
D2 Fig.1) Although the supply of cars increases due to investments of
the foreign manufacturers, it still cannot meet the demand. There is an excess
demand in the motor market in China. The market price is lower than that
equilibrium price (P1 < Pe Fig.1), quantity demanded is greater than the quantity
supplied. Therefore, there will be an upward pressure on price. (P1
P2
Fig.2)
P
S1
S2
Excess demand 1
P1
Excess demand 2
0
Q1
D1
Q2
D2
Q
Fig.1
P
S1
S2
P2
P1
D1
0
Q1
D2
Q2
Q
Fig.2 Cars
Moreover, as the production cost of cars is cheaper in China while that of
the foreign countries are higher. The price of the local brands is relatively lower
than the foreign ones. Also, the local brands and the foreign brands are
substitutes that can be replaced by each other. As consumers prefer local
brands rather than foreign brands because of cheaper price and high qualities,
the demand for the cars of local brands increase. (S1
S2) The demand
curve for the cars of foreign brands will shift to the left, from D1 to D2.
P
S1
P2
P1
D2
D1
0
Q1
Q2
Q
Great Wall/Geely (China’s local brands)
P
P
D2
0
D1
Q
Toyota Motor/Benz/BMW/Nissian
(Competitors of other countries, i.e. foreign brands)