NATIONAL INNOVATION SYSTEM IN CHINA: CASE STUDIES OF CHINA’S AUTO INDUSTRY WITH A COMPARISON TO KOREA
YANLE MA
MSc. in International Economics & Business Faculty of Economics
University of Groningen
Supervisor
:
ARJEN VAN WITTELOOSTUIJNJuly 2005
ABSTRACT
Since 1950s, China’s Auto Industry has gained great achievements in the past 50-year development, but it still has not built up its indigenous science and technology base, the technological development has still heavily depended on introducing advanced technology from multinational enterprises by forming joint ventures. This is not good for the long-run development of China’s auto industry. The existing problems thus inspire me to study China’s auto industry and to give some workable advice for building up indigenous technology capability. Through comparison with Korea, the leader of catch-up economies, both industry-level and enterprise-level, I give some workable advice for the further technology development of China’s auto industry: 1) generally, the Chinese government should modify its industry policies to provide more opportunities for build-up indigenous science and technology base. And the emphasis of government policies should shift from promoting the “Big Three, Small Three” to encouraging and supporting indigenous technology activities. 2) concerning the individual enterprise, build-up of technology should base on in-house R&D and actively learning, more attention should be paid to assimilation capability and innovation of imported technologies, not merely introducing and blindly copying them.
INTRODUCTION
Overview of the Chinese Economy
It is no doubt that China has gained great success in the past years. Since the open-door reform policy initiated by Deng Xiaoping in December 1978, Chinese economy has experienced a pronounced development: comparing with the annual average growth rate of 3% of the world economy for the 1985-2000 period of time, Chinese economy has grown at an average annual rate of more than 9% over the same period (Annual Report, 2002). China has performed remarkably in the context of developing economies in general, and transitional economies in particular. As Lardy (2002) argued, in recent years, few developments in economic globalization have been more important than the sudden emergence of China as a trading nation and a leading FDI recipient. Moreover, after membership of the WTO, the process of China’s integration to the global economy certainly has more significant repercussions, given the sheer size of China’s population and market. China is playing more and more important role in the world economies.
The whole environment seems quite bright for the development of Chinese economy as well as China’s auto industry. China’s auto industry is currently experiencing impressive growth. During the past two decades, the average annual growth rate has been 15% (Feng, 1999). In the Asia region, China has been the second largest car-producing nation after Japan and before Korea since 1997.1 The volume has increased in an incredible speed (see table 1.1). But on the other hand, other evidence shows that the technological development of China’s auto industry isn’t always smooth and still has some difficulties. It has experienced about fifty-year development, but it still have not built indigenous science and technology base, the mainly form of technology development is introducing advanced technology abroad
1 http://www.oica.net/htdocs/Main.htm
by forming joint ventures with multinational enterprises (MNEs) (Lu & Feng, 2004).
Almost 90% domestic enterprises gain technology form Joint venture including the
“Big Three”, (First Auto Work, Second Auto Work, Shanghai Automobile Industry Corporation) which is highly promoted and supported by Chinese government (Annual Report, 2002). Moreover, Amsden (1989) argued that high levels of FDI are associated with low levels of domestic skill formation, because MNEs often supplant domestic technology providers and reduce the need for more domestic innovation.
Introducing foreign technology in China’s auto industry has indeed reduced the incentive of indigenous Chinese technological innovation in China’s auto industry, and this may hurt the economic prospects of the industry in the long term. By taking into account the market share, the foreign brands takes up around 90% of the total market share. The indigenous brands have little place in the Auto market. For example, Hongqi (Red Flag), as the core indigenous brand, only take up 2.37% of the market share (Annual Report, 2002). More important, The Chinese government’s policies towards the auto sectors are inconsistent and sometimes contradictory, local governments who own most of the Chinese auto enterprises have been resistant to central government intervention to strengthen the sectors (Gallagher, 2003). The current situation and existing problems of China’s auto industry thus inspire me to study the technological development of China’s auto industry. Moreover, a comparison between China’s and Korea’s auto industry will be analyzed in order to find workable ways for its further development.
--- Insert Table 1.1 Here ---
I choose NIS as my theory foundation and use it to limit the discussion of main elements, because I assume that NIS is important for the technological development of China’s auto industry; and the differences of technological developments between China and Korea can be explained by NIS differences. More important, NIS plays a
critical role in Chinese economy. Putting China’s auto industry into Chinese NIS can give us a more comprehensive map to analyze its technological development.
Moreover, technology backwardness is the common problem for all developing economies. The acquisition and creation of advanced technologies are the common dreams of these catch-up economies (Liu 1999). For the catch-up economies, the main objective of their NIS is to build up indigenous science and technology base (OECD 1999), so NIS approach try to solve technology backwardness of catching-up economies, which rightly meet the current existing problems in China’s auto industry.
Korea, owning similar cultural backgrounds with China, is assigned as the leader country of the catch-up economies in the OECD’s NIS project. So a comparison between China and Korea under NIS approach seems more fruitful to learn the experiences of rapid catch-up and industrial development and provide some workable advice for the further technology development of China’s auto industry.
The essay proceeds in the following processes. In chapter 2, the theories of NIS are discussed. In addition, an analytical framework is provided. Chapter 3 is my data and methodology section; I show you the process of my data collection and the method of multiple case studies. The following chapter is the main part of my thesis; I present the history of China’s Auto Industry, the existing problems and underlying reasons.
More important, a comparison between China’s auto industry and Korea’s auto industry under the NIS framework are provided in both industry-level and enterprise-level. Finally, the last chapter contributes to the key findings and workable advice; in addition, limitations of my research are discussed in order to give more hints for the further research in this field.
NATIONAL INNOVATION SYSTEM
There are two main contents in this chapter. First, I will discuss theories of NIS to give you a general overview of my theoretical background. Then I will introduce an analytical framework to show you the main elements I will analyze further.
Concept and Theory of NIS
There are three big names in this field through the development and mature of NIS theory: Christopher Freeman (1987; 1988; 1995), the first scholar who systemically develops the concept of NIS by analyzing Japanese case; Bengt-Ake Lundvall (1988;
1992), developing NIS and successfully applying NIS theory to Denmark case; and Richard Nelson (1988; 1993), the famous scholar carrying on a competitive research to test the NIS in 15 countries.
Concept of NIS. Theories on innovation have gradually expanded their focus and complexity, beginning with the individual enterprise or entrepreneur, broadening out to the environment and industry in which the firm operates and finally encompassing the national system of regulations, institutions, and human capital and government programs as well (Kim, 1999). NIS perspective attempts explain an increasingly complicated bundle of actors, behaviors and flows, it is useful ask ourselves firstly what do we mean by NIS.
NIS is a mature and well-developed concept. Like other concepts, different scholars have their different definitions and different emphases. If we input the formula
‘national innovation system’ in ‘Google’, you end up with a total of more than 18.400.000 references. Going through the references you will find that many of them are related to innovation policy efforts at the national level while others are references to new technological innovations and contributions to social science.
The first people to develop NIS concept is Freeman. Freeman (1987) defines NIS as
“the network of institutions in the public and private sectors whose activities and
interaction s initiate, import, modify and diffuse new technologies.” Moreover, he analyses NIS through the case study of Japanese NIS. Lundvall (1992) applies NIS to Denmark case and defines NIS as “the elements and relationships, which interact in the production, diffusion and use of new and economically usefully knowledge, and are either located within or rooted inside the borders of a nation state”. Moreover, he develops the NIS concept further in 2000 and argues that NIS should be both social and dynamic. This refers to both the nature of the institutions that make up the system as well as the linkages and flows connect them to one another. Nelson (1993) defines NIS as “the set of institutions whose interactions determine the innovative performance of national firms”. He discusses those three terms—national, innovation, and system separately and makes a comparative research of NIS among 15 countries.
OECD has devoted to studies of the NIS in the past years. In OECD project on NIS (1994; 1999), NIS is defined as a network of institutions in the public and private sectors whose activities and actions initiate, import, modify and diffuse new technologies (OECD, 1994). Niosi et al (1993) points that NIS is explained as a function of government policy at the national level; formal state regulation and informal coordination, R&D funding and the resultant public stock of knowledge would develop homogeneity and linkage among national agents of innovation. It seems obvious that different authors mean different things when referring to NIS, but it is not really problematic because almost all authors studying NIS are centrally emphasizing on technological innovation on one hand, and interested in organizational and institutional change on the other hand (Niosi, 1993).
I choose OECD’s definition at last because it is easy to understand and it includes the needed elements in my research. More important, this definition is used in the OECD’s NIS project, which includes an empirical research covered almost all the countries. The OECD project on NIS has involved two tracks: 1) general analysis involving all countries; 2) more in-depth analysis of specific aspects within focus groups. Each focus group has leader countries with the most advanced methodologies, data sets and special research and policy interests cooperating in six areas: innovative
firms2, innovative firm networks3, cluster4, mobility of human resources5, organizational mapping6 and catching-up economies (OECD 1999). The last focus group researches the NIS in developing countries, termed as cutch-up economies and the leader country is Korea. The main research theme is how to build up own technology and science base, which meets my center interest. In order to learn more experiences from OECD’s NIS project, I keep company with the concept of NIS defined by OECD.
NIS in Developing Economies. NIS, which seeks to enhance a country’s innovative and technological capacity, already quite popular in developed economies as discussed above, but has more recently come under sustaining examination in the context of developing countries. Lall (1992) is the first scholar to apply the NIS to developing countries. He develops a framework to investigate the determinants of Technology development, categorizing the determinants under incentives, factor markets and institutions, and derives the role of policy by identify the market failure that may arise in technological learning. The framework is based on the nation level
2 Innovative firms (lead countries: Canada, France). This focus group aimed at defining characteristics of firms that favor (or hamper) innovative activities, with a view to determining how government policy can directly or indirectly help increase the stock of innovative firms.
3 Innovative firm networks (lead country: Demark). This focus group analyzed and compared the networking activities of innovative enterprises in participating countries through a coordinated enterprise-level survey based on a new methodology.
4 Cluster (lead country: Netherlands). This focus group addressed two main questions: To what extent and in which respects do clusters differ in their innovation performance and mechanisms of knowledge transfer? What policy recommendations can be derived from a “cluster approach” to technology and innovation policy?
5 Mobility of human resources (lead countries: Norway, Sweden) this focus group examined the role of the mobility of human resources in the circulation of knowledge within an NIS. Their work involved the production of comparable stock and mobility data for three countries (Finland, Norway and Sweden) which have access to labor registry data, with special emphasis on the highly educated in natural sciences and engineering.
6 Organizational mapping (lead country: Belgium). This focus group carried out a qualitative comparison of NIS institutional profiles and a quantitative comparison of networks of R&D collaboration at international level, based on existing databases.
Source: OECD, Managing National System of Innovation, 1999
rather than the specific leading enterprises. It emphasizes on the national technological capability, which is the complex of skills, experience and effort that enables a country’s enterprises to efficiently buy, use, adapt, improve and create technologies (Lall, 2000). He argues that national capability is more than a sum of individual firm capabilities while the individual enterprise remains the fundamental units of technological activities.
For the catch-up economies, there are mainly three steps to catch up with developed economies: acquire foreign technology, then use and diffuse the imported technology, at last improving and developing own technology (Lu & Feng, 2004). Moreover, successful economics and industrial development is intimately linked to a nation’s capacity to acquire, absorb and disseminate modern technologies. So for the developing economies as the technological followers, the key to “catch-up” and closing the “technological gap” between technological leaders, the developed economies is to import existing technology and create the indigenous capabilities to utilize and improve on those technologies. Whereas in developed economies, their NIS serves the role of maintaining or improving an already established level of competitiveness and growth, developing countries are faced with the task of
“catch-up” (Feinson, 2003). It is more important to consider the role of the science sector in the context of creating or improving a developing nation’s absorptive capability, because science is not a simple process of introducing then copying, but a dynamical process of changing and upgrading (Feinson, 2003).
Analytical Frameworks
This section, I form a comparative framework for the two countries’ auto industry under the NIS framework to see the NIS effect to their technological development.
It includes two important elements: the theoretical part of NIS framework and the empirical part of China’s and Korea’s auto industry. I explain more details in the following section.
General Comparative Framework. It is obvious that my analytical frameworks include two countries’ auto industry in general and their NIS effect to the technological development of their auto industry. Figure 2.1 is my general comparative framework, which link theory and data together and aimed to analyze the effect of NIS to the two countries’ auto industries and provide some workable advice to the technological development of China’s Auto Industry.
--- Insert Figure 2.1 here ---
By knowing the general comparative framework, let us take a close look at the main elements, which are included in the theory and data.
Theory: NIS Theoretical Framework. Essentially in my opinion, NIS is an institutional set-up. Its main function is to stimulate learning activities and lead technological development. For example, governments should focus on enacting and revising the suitable policies which are helpful for the technological development; the individual enterprises should pay more attention on their R&D departments, which can provide technological capabilities of the whole enterprises; universities should educate the people and provide professional and advanced technology.
In Pavit’s (1994) framework, there are mainly four actors involving in the technological learning activities:
1) Business firms, especially those investing in changing-generating activities.
2) Universities and similar institutions, providing basic research and related training.
3) A mixture of public and private institutions, providing general education and vocational training.
4) Governments, financing and performing a variety of activities that both promote and regulate technical change.
The main actors are similar with OECD’s NIS project in 1999; mainly five actors directly involved in scientific and technological innovation in the network of institutions of NIS:
1) Governments (local, regional, national and international, with different weights by country) that play the key role in setting broad policy directions.
2) Bridging institutions (research councils and research associations) which act as intermediaries between governments and the performers of research.
3) Private enterprises and the research institutes they finance.
4) Universities and related institutions that provide key knowledge and skills.
5) Other public and private organizations that play a role in the NIS (public laboratories, technology transfer organizations, joint research institutes, patent offices, training organizations etc).
These five actors above compose an integrated system of economic and institutional agents directly promoting the generations and use of innovation in a national economy. In addition to the direct actors, political and social institutions also affect learning, searching and exploring activities. So the direct actors are embedded within in the political and social institutions. The actors and linkages of NIS are summarized in Figure 2.2.
--- Insert Figure 2.2 here ---
Data: China’s and Korea’s Auto Industry. I have discussed the main elements of NIS above. In my analysis which related to auto industry, there are two tracks in my discussion:
1) General NIS effect of industrial level, which focus on the linkages between different institutional actors and technology transfer.
2) Special analysis by focusing on the individual enterprises to compare different strategies they take to develop their technology, as there are two most popular used strategies of technology development in auto industry: introducing technology by forming joint ventures and self-reliance by developing in-house R&D.
The data of auto industry can be roundly divided into two parts: data of China’s auto industry and data of Korea’s auto industry. Moreover, I treat the whole auto industry as the broad cases. Under the broad cases, there are individual enterprises, which termed as narrow cases. The focus enterprises are served for the aims of finding suitable strategies for their technological development. I divide them into two groups to examine their different ways to develop science and technology base. One group gains technology through joint ventures with the multinational enterprises, the representative cases I choose is Daewoo in Korea and Beijing Jeep Corporation, Shanghai GM, and Chang’An Ford in China; the other group gains technological capability by emphasizing in-house R&D from the beginning: Hyundai in Korea and Hafei (Harbin Industry Group), Jili (Geely Holding Group) and Qirui (Chery Automobile Co.,Ltd) in China. The components of the data are summarized in Figure 2.3.
--- Insert Figure 2.3 here ---
Analytical Frameworks. I discuss the general framework, the theoretical framework and the main elements of the data individually, here I conclude with an analytical framework of my research. Not all elements of NIS are included due to the real situation of China’s auto industry and the data’s availability. I firstly make a general comparison of NIS effect to the two countries’ auto industry; then I focus on NIS actors of governments and individual auto enterprises to explain the trade-off between in-house R&D and introducing technology from joint ventures. Moreover, China, as the catch-up economies, the innovation is more like learning process, so more elements of learning process are discussed. The details are summarized in Figure 2.4.
The aim of my general comparison of the two countries’ auto industry under the NIS framework is to show that NIS differences can explain technological development in their auto industry. Korean better-developed NIS, at least partly, induces a better-developed auto industry comparing with China. Concerning the comparison of individual enterprises, more emphasis is paid on their different strategies to develop technology. I focus on the current debates between the trade-off between in-house R&D and technology transfer from foreign enterprises by forming joint venture. The underlying reasons are: There are still debates on the way of technological development in China’s auto industry, some insist on keeping introduce technology through joint ventures with the multinational enterprises (1994 auto policy; Feng, 1999; Zhang & Taylor, 2001); others opposed it strongly and argued that we should build our indigenous science and technology base by in-house R&D and learning by doing (Sun, 2002, Gallagher, 2003, Lu & Feng, 2004). In practice, these two different thoughts induce two different strategies for the technological development of individual enterprises: forming joint ventures with foreign enterprises and in-house R&D. Chinese government devoted themselves in the introducing technology from foreign enterprises since the later 1980s, much more emphasis is paid to forming joint ventures, in-house R&D is thus neglected for a quite long time. As the previous researchers argued, important differences are existed at the national level in policies and institutions affecting the rate, direction, and the characteristics of technological
activities in a nation’s firm and industries (Freeman, 1988; Lundvall, 1988; Nelson, 1993).
--- Insert Figure 2.4 Here ---
DATA AND METHODOLOGY
Data
My data is sourced from previous publications and papers from our university’s electronic data base, EconLit & Business Source Premier, more than ten sorts of Journal are covered and used to review the previous literatures, such as Journal of Management Studies, Oxford Review of Economic Policy, Research Policy, Academic of Management Journal, Administrative Science Quarterly, Journal of International Economics etc; Annual reports and Yearbooks by governments, universities, R&D institutes, professional consulting agencies and professional scholars; websites of the individual enterprises, the two countries’ auto industry and the international research organizations of auto industry. These literal data are both in English and Chinese. I translate Chinese into English based on my own understanding and language background. Moreover, I have sent emails to these six focus enterprises in China, only Jili and Qirui reply me with detailed information. And they arranged me telephone interviews with their senior managers and technological engineers.
Under my father and his friends’ help, I managed about 10 telephone interviews of the senior managers and technological engineers in the “Big Three, Small Three”
enterprises in China at last. So the data not only includes the quantitative and qualitative data, but also includes the professional discussions and debates, which I have obtained from my interviews.
Methodology
I select case studies, particularly, multiple-case studies, as my research methods. Yin (1993, 2002) defined case study as an empirical inquiry which investigates a contemporary phenomenon within its real-life context, especially when the boundaries between the phenomenon and context are not clearly evident. Case study research includes both single and multiple case studies. And multiple case studies are always termed as comparative case method as a distinctive form of multiple case studies (Yin, 2003). Multiple-case design has distinct advantages and disadvantages in comparison to single-case designs. The evidence from multiple cases is often considered more compelling, and the overall study is therefore regarded as being more robust (Yin, 2003). At the same time, the cases of multiple-case studies are not as representative and unique as the sole case of the single-case studies. Moreover, the conduct of multiple-case studies requires more time and investment.
With the help of the information above, I choose multiple-case studies at last; five factors create a rationale for using case studies. (1) The research include an important part of the history of China’s auto industry, its situation has altered through the changes of the macro and micro environment and the government policy etc. a traditional quantitative research can’t reflect these important elements. (2) The paper deals with detailed enterprise-specific constructs that quantitative research can’t easily obtain and analyze. (3) In-depth case studies can reveal managerial intentions and causalities in complex issues such as R&D capabilities transfer. (4) Through my current readings of previous research, case studies are popularly used and seem as effective methods in this field. (5) The main part of my research is a comparison between China’s auto industry and Korea’s under my theoretical framework of NIS.
Moreover, the comparison between the individual enterprises serve the purpose to compare the two existing conflicting ways to build up technologies, In-house R&D or technology transfer from MNEs, so multiple-case studies are more suitable for my research.
CASE STUDIES
A short introduction of the history of China’s auto industry is helpful for our comprehensive understanding of its technological development. So I firstly introduce the history of its fifty-year development and pay more attention on the existing problems. Then I make the comparison between these two countries’ auto industry both industry-level and enterprise-level.
China’s auto industry
Auto industry is important to developing countries. Most of developing countries adopt industrialization strategies usually selected auto industry as one of the prime candidates for launching industrialization, so is China. The Chinese government views auto industry as “pillar industry” since 1986. Chinese industrial policy places strong emphasis on developing China’s auto industry. China’s auto industry has gained a lot of progresses: China has become the five biggest Auto market in the world and the second biggest Auto Market in Asia (Zhao, 2005). The Auto business is growing in China as a considerably higher rate than the GDP. China is seemed as the world’s fastest-growing auto market tantalizes automakers with its potential for growth and profits by many advanced economies. For example, Volkswagen, Europe’s largest car company, now sells more cars in China than it does in its home markets of Germany (Lienert, 2005).
But on the other hand, china auto industry still hasn’t build up its indigenous science and technology base (Lu & Feng, 2004). Almost 90% enterprises (Anural report, 2002) in China’s auto industry gain technology form Joint ventures including the “big three”, (First Auto Work, Second Auto Work, Shanghai Vehicle Factory) which is promoted and supported by Chinese government. It still heavily depends on the technology transfer from the MNEs by forming joint ventures. After China’s
membership of WTO, this problem become more critical, because China has to modify its previous policy7, which limit the competition of the MNEs to entering Chinese market. So the traditional development environment of China’s auto industry under heavily protection fromgovernment policy is changed. China has to open its market to foreign competitors.
One important note I want to point out here is that the technology backward problem in China’s auto industry in my discussion mainly refers to the car industry, since China’s Main technology development problem of not build-up technology and science base is in car industry (Lu & Feng, 2004). The manufacturing of passenger car needs much more technology comparing with traditional auto sectors. Moreover, the competitions of passenger cars are more serious due to the market demands, the car makers have to adopt the changing trend, put more new elements into technology and meet the new and changing demand of consumers. More important, due to the almost 30-year (1950s-1978) emphasis on traditional auto sector of truck the traditional auto sectors are well developed. Almost all the brands of truck in China’s market are Chinese brands (Lu & Feng, 2004). In addition, they do not belong to the high-technology sectors as car industry, the importance of technological development of the traditional auto sectors are notequal to car industry.
History of China’s Auto Industry Since 1950s. The China’s auto industry has developed for fifty years since 1953. The post-Mao8 development of China’s auto industry can be roundly divided into two stages. The first stage is the “closed”
learning period from 1953 to 1978. The government announces that industry emphasis is on truck (Lu & Feng, 2004). As the plan economies, government plan has particular importance. So it seems logic that Chinese truck is well-developed due to the 30 years highly attention paid to it, as well, the less well-developed of car can attribute to this
7 According to a law stipulating that an individual foreign investor may not own more than 50% of Chinese manufacturers, must partner with Chinese companies to enter the market.
8 Mao Zedong.: first Chairman of P.R China
government policy; and car is almost neglected in the first stage. Actually, there are also some learning and introducing advanced technology from Former Soviet Union, but the main trend is close because of the deteriorated relationship with Former Soviet Union in the 1960s. The second stage is the “open” learning period from the late 1970s till now. As my research mainly focus on car industry, which began to develop in the second stage, so more attention is paid to the second stage. Meantime, the general information of the first stage is also provided in order to give a historical background of the China’s auto industry. Besides, I also pay my attention to the existing problems and how they formed.
1) “Close” Learning Period: 1953-1978
Due to lack of production capability and experiences, China, at that time, was an agrarian society with little industrial base, so Chinese government had made several attempts to introduce foreign experiences in order to achieve the goal of industrialization. Mao wanted the capacity to transport rural products and military supplies. Under the help of Former Soviet Union, China started the First Automotive Works in Changchun in the 1950s and the first four-tonne Jiefang (Liberation) truck rolled off the assembly line in 1956, marking the birth of China’s auto industry.
Moreover, China and the Former Soviet Union achieved an agreement to introduce Soviet automotive technology and assembly lines to produce medium trucks with a project capacity of 30, 000 units (Zhang & Taylor, 2001). The combination abundant labor supply and technological transfer from Soviet Union helped China to realize its economic objectives during its first “five-year economic plan period” (1953-1957) (Zhang & Taylor, 2001). Since 1958, many provinces and cities built auto and component factories under the center government plan. In 1958, the FAW produced the first Chinese-brand car, Dongfeng (east wind), followed by a series of 39 Hongqi (red flag) models, which were designed especially for official use and based on Daimler Benz’s 200 model (Zhang & Taylor, 2001).
From the middle of 1960s to the end of 1970s, China’s auto industry experienced four
“five-year economic plan”. As the relation with the Soviet Union deteriorated in the 1960s, the foreign collaboration came to a sudden stop and Mao halted all foreign technology transfer and assistance into China. (Gallagher, 2003) and promoted the national industrial policy of self-reliance. The China’s auto industry was thus cut off from technology and foreign investment for a crucial 20 years-years in which Japanese and Korean auto industry built up their indigenous capacity (Gallagher, 2003). Under this policy, a few large automakers were founded independently.
Among them, the establishment of Second Auto Works (SAW) was thought as a brand-new step in the development of China’s auto industry; because only 1% of the facility was imported, the rest was wholly domestic design and development.
However, due to the interruption of the Cultural Revolution (1966-1976), the foundation of SAW was delayed almost ten years.
During the ten-year Cultural Revolution period, all regions had their ambitious plans to join auto industry, and nearly every province boasted an automotive plant. In a consequence, by 1976, the numbers of auto factories had more than quadrupled to 1,950 and some plants produced only a few thousand or a few hundred vehicles annually (Harwit, 2000). The production ran at low level of productivity and efficiency and the production cost could not be met without huge government subsidies. The central planning created another problem: lack of product scope. Taken FAW as example, between 1959 and 1981, the FAW produced a mere 1,542 units, on average sixty-seven units per annum. In 1961, only one unit came off the line.
Production costs could not be net without huge central government subsidies.
Moreover, there as no need for the producer FAW to consider production costs or think of profits since the buyer was the government. Allocation of resources from materials supply to end-product delivery was central planned (Zhang & Taylor, 2001).
In one word, the auto industry at that time is characterized by fragmented production system nation-wide, diseconomies of scale and a lack of product scope. Moreover, no passenger cars were produced during the Cultural Revolution. The pace of
technological change in the China’s auto industry was slow compared with Korea’s and the gap began to widen from the 1970s onwards.
2) “Open” Learning Period: 1979 Till Now
Since the late 1970s, in revitalizing the Chinese economy in the aftermath of the Cultural Revolution, Deng Xiaoping decided to open China to outside. The government began to focus on economic construction. Due to the opening to outside world, the tourist trade created a huge demand for cars to serve as taxis (Harwit, 2000). In order to meet the market demand, more attention and resources were shifted from so-called gongche (official cars) to mini cars. As mentioned before, Chinese vehicle producers were truck-makers rather than car-makers in the first period, so that they could not meet the demand. Therefore, the early 1980s began an unusual increase in car imports. (Table 3.1)
--- Insert Table 3.1 Here
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Chinese government worried about merely reliance on imports and wished to acquire car production capability. Introducing technology from developed countries is a popular way used by the developing countries to decrease the gap and catch up with advanced economies; China decided to introduce advanced technology from multinational enterprises through joint ventures or technology licenses. Consequently, the first major joint venture -the Beijing Jeep joint venture, was formed between the state-owned Beijing Automobile Industry Corporation (BAIC) and American Motors Corporation (AMC) in 1984. Shortly afterwards, a second joint venture was formed between the Shanghai Automotive Industry Corporation (SAIC) and VW in the same year. These joint ventures started their production by assembling cars with semi-knockdown (SKD) and complete knockdown (CKD) parts imported from
foreign makers. Moreover, Chinese government also licensed technology from foreign enterprises. Chang’An licensed technology from Suzuki in 1983 and Tianjin Automotive Industry Corporation licensed technology from Daihatsu in 1986 (Gallagher, 2003). In the 1990s, two new joint ventures were formed: one between FAW and VW and the other between French Citroen and SAW. As a result, annual production exceeded 1 million units with more than 120 models of vehicles. The unbalanced emphasis on mainly trucks was corrected (Feng, 1999). All these technology transfer focused on cars and these joint ventures helped reduce the financial burden imposed by the imports of completed foreign cars. More important, as the auto industry is capital and technology-intensive, joint ventures became a channel for attracting foreign investment.
In 1994, Chinese government issued the first real industrial policy for the auto industry. One of the most important policies was that “Big Three, Small Three”9was proposed, the government only supported and protected the focused enterprises, other enterprises in the same or related industries were thus neglected even limited. Though China was transacting from plan economies to market economies, the tradition of central plan was still pervasive. The enterprises had to apply the quota and permission of production from the government. Based on the “Big Three, Small Three” policy, it is more difficult for other enterprises to develop and obtain production permission from government. Another important policy is protecting all manufacturers located in China including joint ventures. This policy encouraged the forming of joint ventures but still limited the equity of foreign enterprises to less than 50%. More and more MNEs entered in Chinese market by joint ventures and acquired a high market share in a relative short time, though the initial aim is to introduce, use and diffuse the
9 The “Big Three” are First Auto Work in Changchun, Second Auto Work in Hubei, Shanghai Vehicle Factory, The “Small Three” are Beijing Jeep, GuangZhou Peugeot and Tianjin Automotive Corporation. The aim of this
policy is focus most of government’s main energies and investment on those six enterprises.
advanced technology. Under the government policy, the MNEs actively involve in the establishment a joint venture with domestic enterprises and the veritable flood of investment into CAI during the 1990s is huge. General Motors made the largest single foreign investment ever into China when it established its $1.2 billion joint venture.
Although the $1.2 billion figure is often reported, GM’s total registered capital in China was actually only $350 million, which is still very large by comparison with other foreign investors (Sun, 2001). Also in 1997, Honda took over Peugeot’s troubled joint venture with Guangzhou Auto Company and Ford entered into negotiations with Chang’ An in 1999. According to government statistics, total agreed investment into the auto and related industries from all sources totaled nearly $60 billion during the 1990s. To put this in perspective, total investment from 1953 to 1989 equaled only $1 billion, and 88%of that amount was invested during the mid to late 1980s (Gallagher, 2003).
Existing Problem. Joint ventures become a popular formation in China nowadays, but CAI has not gained much knowledge from the foreign enterprises that essentially selected what would be transferred and how, without necessarily teaching their Chinese partners anything significant. The only requirement for the foreign enterprises was to get the technology into production and there were no specific stipulations on technology transfer. For example, while the government wished to increase passenger cars, at late as 1990 very few were actually being produced-only accounting for less than 10% of total vehicle output (Zhang, 2002). There existed many differing views within the government about whether China should try to foster its own domestic industry or whether it was too late to catch up with the foreign enterprises. As joint ventures have become the most popular formation of China’s auto enterprises, almost all of them are pursuing joint ventures with MNEs and neglecting own in-house R&D. And the little attention to human capital and absorption capability make the assimilation of imported technologies inefficiently.
More important, as the technologies are tacit and need a process of learning by doing, the government’s assumption of direct copy and use is not scientific.
Comparison: China’s auto industry Vs Korea’s auto industry
Korea, as the neighbor of China, shares the similar culture with China.
Both China and Korea has decided to develop their auto industry since 1950s, after about fifty year’s development, both of them has gained great success, also experienced various difficulties and failures. Korea has made the most significant progress in the catch-up economies and is now exporting cars to developed countries;
Korea is the only country which insists on investing on R&D for product development at the beginning of the development of auto industry, retains management control in joint venture with MNEs and has ambitious export targets. Korea has become the fifth auto making country producing 2.5 million vehicles and 1.0 million exports in 1995.
China’s auto industry is also growing very rapidly. Passenger cars developed extraordinally from less than 15% of total vehicle production in 1996 to almost 50%
of total vehicle production in 2004 (Lienert, 2005). Demand in China is highly price sensitive. High duties on imported cars and government protection policies give the domestic car producers a big price advantage. One of the greatest differences of technological development between China’s and Korea’s auto industry is Korea has built up its indigenous technology and science base but China has still heavily depended on introducing advanced technology (Lu & Feng 2004; Sun, 2002). Korea develops its indigenous technology and owns some big famous brands in the world nowadays, for example, Hyundai have been the sixty largest automakers in the world and own reputed brands. I have discussed about China’s lack of indigenous technology before and the emphasis in this section is to compare the two countries’
auto industry under the NIS framework, to see what make the differences in technological development. I suppose the elements in NIS framework can explain the technological differences in auto industry and use NIS framework to narrow down my focus. More important, I pay more attention on the individual auto enterprises to see their strategies for technological development and the NIS actors’ effect to them. The underlying reason is due to the current debates on introducing technology by forming
joint ventures or developing in-house R&D capability. The evolution and current state of the automobile industry in the emerging economies are not identical, so is Korea and China. The objective of this section is to do a comparative analysis of the auto industries in these two countries and identify underpinning factors and workable ways, which can lead to further technological development of China’s auto industry.
The following section composes two parts: I firstly compare the two countries’ auto industry generally; then I analyze my focus enterprises individually.
General Comparison of two countries’ auto Industry
1. FDI Inflows
Both countries lacked of technological capabilities at the beginning of their economic development and import foreign technology from start of the development. As the catch-up economies, both of them view FDI as one of the most important ways to gain advanced technology from developed economies. The details of their FDI inflows are summarized below:
--- Insert Table 4.1 Here
---
From the Table 4.1 above, we can find apparently, FDI inflows are increasing generally in both China and Korea. China has attracted more FDI than Korea due to its large domestic market. Since 1993, China has been the second largest FDI recipient in the world and the single largest host country among the developing economies and in 2002. China has become the largest FDI recipient in the world. By mid-1997, about 200 of the world’s 500 largest transnational corporations have invested in China (Sun, 2002). But the Korea’s relative FDI/GDP rate has reduced while China’s has increased. This is due to their FDI policy. Korea restricted FDI but
encouraged imports of capital goods and informal transfer while China encouraged FDI.
2. R&D Investments
R&D investments represent the indigenous R&D efforts in these two countries to monitor, screen, select, implement and improve transfer technologies (Pavitt, 1994).
We can see from the table that the Korea’s R&D share is lower than China’s before 1980s but much higher than China’s since 1985, which means R&D is more and more emphasized in Korea than in China. More important, Korea’s R&D share increase steadily comparing with decrease of R&D share in China. So Korea has a relative better R&D investment and environment for technological development of its auto industry nowadays.
--- Insert Table 4.2 Here ---
3. Industry Evolution
The evolution of the auto industry in the two countries has some similarities and significant differences. The Korea auto industry has begun production since the early 1960s. It initially gained experiences through imported turkey plants and then expanded by local through own R&D effort. There are three large diversified Korean enterprises: Daewoo, Hyundai and Kia, so the main resource and product design capability was concentrated on their hands. As a result, it is easier to achieve economy of scale, which is crucial important to auto industry characterized of mass production.
From the beginning, Both Korean government and individual auto enterprises paid high attention on in-house R&D and develop indigenous capabilities. Moreover, Korean government policies is clearly outward orientation, Korean enterprises were
encouraged to export to other countries including developed countries. In consequence, they were exporting 2,400,000 units in 200510. To sum-up, industry evolution has been driven by the need to grow and export by passing through the stages of imported turkey plants and expand by local, which keep Korean enterprises owning management control. Exported-orientation makes Korea’s auto industry more international trend and insists on in-house R&D and master management control helped Korean enterprises build up its indigenous technological capability.
China’s auto industry has a different evolution. Unlike Korea, passenger cars have been paid little attention and gain a little percentage of total production before 1980s due to the government planed whole industry emphasis on truck production. More important, comparing with highly concentration of Korea’s auto industry, China’s auto industry has always been highly fragmented, in 1979 there were 130 assemblers producing about 500,000 vehicles (Feng, 1999). China’s auto industry used the strategy of introducing foreign technology through joint ventures and technology licensing, which is popularly used by the developing countries to catch up with developed countries. The difference was that they were forced to give managerial control to international partners. Comparing with Korea, Chinese government proposed import-substitution policy. In-house R&D was neglected in a long time and the emphasis was blindly paid on copy and imitation. To sum-up here, China’s auto industry evolution was strongly influenced by government policies. Highly fragmented structure and little attention on in-house R&D were the huge thrust on further development of China’s auto industry. Moreover, the relatively weak Chinese managerial control in joint ventures made the learning and innovation more passively comparing with Korea.
4. Government Policies and their effects
10 www.auto.sohu.com
Generally, developing countries can acquire technology in three ways: imitation of foreign capital goods: foreign direct investment and foreign licensing. The government can influence these strategies in a variety of ways including: FDI policies, foreign licensing regulations, intellectual property rights regimes and the purchase of technologies for public enterprises (Feinson, 2003).
The Korea’s government policy “long-term Automotive Industry Promotion Plan” in 1974 could lead more rapid growth of KAI indigenous technology capability.
Moreover, Korean government has played a more positive role than China. This is because the Korean government has always supported as well as disciplined the Korea’s auto industry to reach its three goals: transferring technology into Korea’s auto industry, using and diffusing the imported technology by local auto industry and exporting to other countries. Comparing with Korea, the Chinese government also has ambitious to pulling all the levers to promote an indigenous pillar industry. However, the direct results of these policies have not matched what the policymakers expected (Wang, 2002). Let us firstly take a look at Korea’s policies.
1) Knowledge Transfer-Restricted FDI. The first goal was to promote the flow of technology into the auto industry. Comparing with the traditional route of promoting foreign direct investment (FDI) and foreign licensing, Korea did not follow them but rather concentrated on turnkey factories. The auto industries imported turkey plants, and then expanded by local auto enterprises (Kim, 1999). Moreover, Korea kept restrictions on FDI because Korean government thought the mature technologies could be obtained through other methods, most notably reverse engineering, and because this would allow Korea to maintain independence from developed countries and their technologies (Kim, 1999).
2) R&D Policy. The second goal is to promote the assimilation of imported technology throughout local industry (Feinson, 2003). In order to achieve this goal, the Korean government should create an environment by policy support that was
amenable to in-house R&D. In house R&D helps build up capacity within enterprises so they can acquire, use and diffuse technology from both local and foreign enterprises. Korean government funded R&D centers and motivated enterprises to establish centers of their own. Between 1970 and 1987 the number of private R&D centers jump from 1 to 604 and spending on R&D in the manufacturing sector increased from US$22 million to US$1.4 billion. Strong social adsorptive capacity, substantial investment in R&D and a stable economic and political environment helped to move Korea to the stage where it was able to begin innovating (Feinson, 2003).
3) Outward Orientation.
The Korean government adopted a strong policy of outward orientation in order to compensate for their small domestic market. Export targets were seen as crucial to each enterprise’s success, and the government promoted a number of incentive policies to help keep their enterprises competitive. These include tariff-free access to imported intermediate inputs, automatic access to bank loans for working capital for all export activities and unrestricted access to foreign capital goods (Feinson, 2003).
The outwards orientation was crucial to improve Korea’s innovative capability. The strong international competition forced substantial investment in technological efforts (Kim, 1999). Korea has consistently pursued exported oriented strategy from the outset under limited size of local demand. It began to export car in 1976 and the export’s share of production increased to peak to 53% in 1988 (Hyun, 1998).
In order to compare, let us have a look at the same issues in China.
1) Knowledge Transfer-Joint ventures. Comparing with Korea, China’s auto industry introduces technology by following the traditional route of forming joint ventures and foreign licensing. Almost all the auto enterprises formed joint ventures with foreign enterprises including the “Big three, Small Three”. The positive side is that it has helped the technology flow from developed countries to China and provided a direct
access to get touch with the advanced technology. But it does not mean that we can absorb, use and diffuse these imported technologies suitably and completely. And the actual situation in China shows that the lack of absorption ability impedes the assimilation of imported technologies. Moreover, introducing technology from advanced countries reduces the incentive of the self-R&D and the effect of joint ventures is not as good as the government expected.
2) R&D Policy. In fact, China does not have definite policies concerning R&D, though Chinese government has ambitious aim to build up indigenous science and technology base (Zhu, 1997). In-house R&D is paid lower attention in China’s government policy comparing with Korea’s. This is due to government’s naïve thought about technology transfer, they assumed FDI is the most effective strategy for CAI to catch up with advanced countries and we can absorb, use and diffuse the imported technology automatically, so the emphasis is blindly put on importing technology.
3) Import Substitution11. By contrast, China promoted import substitution policy.
Government subsidies and high tariff barriers are involved in to protect local industries and hence import substitution policies are not favored by advocates of free trade. The tariff rate on automobiles was set at 180-220% before 1986. Concerning the non-tariff barriers, China applies restrictive import licensing to a number of product categories including motor vehicles, key parts of vehicles, crane lorries, vehicle types, motorcycles and key parts of motorcycles. Moreover, the procedures and criteria for the licenses are not transparent. As to the import quota, 89 items of auto products are subject to quotas, which represent 60% of Chinese machinery and electronic products. Furthermore, only 6 ports in China have been designated for complete car imports (Wang, 1999).
11 Import substitution is a trade and economic policy based on the premise that a developing country should
attempt to substitute products which it imports (mostly finished goods).
5. Corporation structure
Chaebols12 is a conglomerate of businesses, usually owned by a single family in Korea. Chaebols has been a major force of both technologies upgrading and manufacturing in the Korean economy from the end of the Korean War2 through to today. Chaebols is a particular characteristic of Korea. The government intentionally created Chaebols to bring the economy of scale in mature technologies, and in turn to develop these ‘strategic industries’ and to lead exports and economy (Kim, 1999).
Furthermore, where Korea differs from other developing countries in promoting big business was in the discipline the Chaebols by penalizing poor performers and rewarding only good performers. The government asked the Chaebols to enter targeted industries, like auto industry, increase export and reduce unemployment;
Chaebols in return received the government’s subsidies, like cheap capital and relatively insulted domestic market, from both foreign and domestic competitors. In consequence, it led Korea to obtain one of the most concentrated economies in the world (Kim, 1999). For instance, Kim (1999) pointed out that Hyundai, Daewoo and Kia takes more than 90% of the car market share in Korea.
More important, Chaebols created closely knit assembler-supplier structure for KAI (Mukherjee & Sastry, 1996). The automobile assembler enterprises belong to large chaebols and have affiliate firms within the Chaebols supplying them with parts, machinery, software, information and even financing.
Such a Chaebol does not exist in China as well as the close assembler-supplier relations within the same Chaebol. The main enterprise supported by Chinese government is SOE. Due to the lack of effective encouragement and punishment policy, SOEs are involved in inefficiency and laggard of progress. And the so-called
12 Means conglomerates in English.
“Guanxi” (personal network) is particularly important in SOEs. The employees belong to the managerial department mainly come from the networks of government officers and the education level and human capital is relatively low comparing with Korea. Moreover, CAI is quite fragmented comparing with Korea, which led to very smaller economies or diseconomies of scale. In 2000, China’s car annual production is only 60,000 vehicles per plant while the global standard is above 300,000 since the 1990s (Greeven, 2004).
6. Education and Investment in Human Capital
The absorptive capability is crucial for using and diffusing imported technology and developing indigenous capability (Kim, 1991). Korea’s achievements have been, at least partly, attributed the nation’s strong absorptive capability from a high level of general education (Kim, 1999). By the 1980s, education represented 22% of the national budget and public spending accounted for 1/3 of total spending on education.
The investment actually provided great returns as Korea’s literacy rate grew from 22% in 1953 to close to 100% by the 1980s (Feinson, 2003). The highly attention paid to education ensured the technological engineers to understand the local plants and imported technology deeply and comprehensively enough to not only maintain them, but to revise, mature and reproduce them.
Comparing with Korea, education has long been a major bottleneck of China’s overall development and scant input constitutes the bottleneck of education. Chinese government has made a great effort on education development and gain historical progress though it still has an apparent distance comparing with other countries including Korea. During 1952 to 1978, only two years saw the funding injection for education account for more than 3% of the GDP. The other 25 years saw the annual percentage fluctuate somewhere between 1.24 and 2.67. The situation improved quite a lot after 1979, with the average rate being 3.3%. And it reached 4.08% and 4.3% in 1999 and 2000 respectively (Yang, 2002). In 2002, the total educational expenditure
of the whole country reached 548 billion RMB, representing an increase by 18.16%
compared with a 463 billion of 2001 (Sun, 2002). Meanwhile, the enrollment in the various levels of the formal education system has increased rapidly. In the case of higher education, enrollment has been double since 1985 and the student-teacher ratio rose steadily. The details are summarized in table 4.3.
--- Insert Table 4.3 Here ---
Enterprise-level Comparison. As I mentioned before, my focus enterprises, coming from both Korea and China can divided into two groups due to their different strategies for their technological development: independent strategy and introducing technology by forming joint ventures with MNEs. All kinds of strategies concerning different aspects are crucially important for individual enterprise including technological aspects. Like what Burgelman argues, “Variation, selection, retention, and competition occur inside the organization and provide a process-based description for strategy making. These processes, approached with discipline, intuition, and intent, provide the opportunity for managers to break the bonds of environmental determinism and forge destiny. Strategy, then, is indeed destiny. The different strategies, which the auto enterprises choose, induce the different results of their technology development. Here, I do not emphasize on exploration more about the underlying reason for their choices, my attention is paid to show you the effects of the different strategies.
The division of the two different strategies is due to the current debates in China about the two practical strategies for technological development. Opposing traditional attitudes of emphasizing on forming joint ventures with MNEs to catch up with advanced countries (1994 auto policy; Feng, 1999; Zhang & Taylor, 2001), some of the scholars including the entrepreneurs argue an independent strategy emphasizing
on in-house R&D (Sun, 2002, Gallagher, 2003, Lu & Feng, 2004). They argued that the formation of joint ventures reduce the incentive of the in-house R&D. Blandly introducing then copying technology can not realize the really technological development in China’s auto industry, because science is not a simple process of introducing then copying, but a dynamical process of changing and upgrading. The right way should be import existing technology and create the indigenous capabilities to utilize and improve on those technologies, what the JVs do is only importing technology, and ignoring the more important step of build up indigenous technology capabilities.
In addition, the discussion of independent enterprises and the comparison with joint ventures are the new elements in my research comparing with current research, which pay much more attention to joint ventures in China’s auto industry and ignore indigenous innovative enterprises. I want to study them equally and balance the unequal emphasis. For Korea’s part, I investigate Hyundai and Daewoo in order to provide the advanced experiences and workable advices for the further technological development of China’s auto enterprises. As Korea’s auto industry is highly concentrated, the output share of three main enterprises, Hyundai, Daewoo and Kai, is 95% of the total output in Korea auto industry (Kim, 1998). As Kai is acquired by Hyundai in 1998, so I only study Hyundai and Daewoo. Let us firstly discussion the Korean cases.
Korea’s cases
1. Self-Reliance: Hyundai
Hyundai is one of the two largest chaebols and the largest and most successful automakers in Korea, decided from the start to maintain its managerial autonomy and eventually to achieve technological autonomy through its own R&D. Similar with any other catch-up economies, Hyundai imported technology at the beginning. But unlike
others, Hyundai has transformed itself from a mere assembler of Ford to a designer and exporter of its own cars and engines in less than three decades (Kim, 1998).
Hyundai’s technological development has experienced four steps:
1) Assimilation of Assembly Operation. Hyundai acquired a production capability from its eight-year (1968-1976) experience in the assembly of Ford models. Hyundai entered an assembler agreement with Ford to assemble a Ford compact car on a self knocked-down (SKD) basis. According to this agreement, Ford transferred SKD technology in a packaged form to Hyundai with explicit information, including blueprints, technical specifications and production manuals. In addition, Ford provided training for Hyundai’s engineers at Ford sites and dispatched ten Ford personnel members to Hyundai. As the result, Hyundai upgraded both tacit and explicit knowledge related to auto assembling (Kim, 1999).Meantime, Hyundai accelerated plant construction by setting an ambitious goal in an attempt to minimize production lead time. Hardworking engineers, technicians and construction workers live together in makeshift quarters on the plant site, toiling 16 hours a day and seven days. Given the high intensity of efforts, Hyundai recorded the shortest time, 6 months, between groundbreaking and the first commercial production among the 118 Ford assembly plants around the word.
2) Development of a “Koran” Car under License. Hyundai’s second jump based on government’s “long term Plan for Promotion of the Auto Industry”. This radical policy required the auto industry shift from assembly production of foreign cars on a CKD basis to the development of local design “Korean” cars (Kim, 1999). Under the direction of this policy, after the termination of alliance with Ford, Hyundai rejected alliances with MNEs and decided to obtain foreign technologies from many different sources in unpackaged form in order to maintain independence from MNEs. During this period, Hyundai approached 26 enterprises in 5 countries for various technologies: 10 in Japan and Italy for style design, 4 in Japan and the USA for equipment in a stamping shop, 5 in the UK and Germany for casting and forging
plants, 2 in Japan and UK for engines and 5 in UK and the USA for components plant (Kim, 1999). In this stage of process, Hyundai focused on the acquisition of engineering capabilities and sent its diligent engineers to the developed countries learning the skills and know-how. On the basis of production and engineering capability, Hyundai launched the development of its own cars and successfully developed its first model Pony with 90% percent local content in 1975.
3) Development of an Advanced Car under Limited License. Hyundai’s third major jump came in the early 1980s. Due to the limited market, Hyundai wanted to turn the domestic-market-oriented auto business into a largely export-oriented one by developing the more advanced car and triple its production capability. Hyundai made a heavy investment to develop the next generation FF (front engine, front wheel drive) car to sell to North American. In order to diversify its technology sources and keep independence, Hyundai cooperated with several carmakers for FF technology:
Volkswagen, Ford, Renault and Alfa Romeo (Kim, 1999). With the background of developing and manufacturing the Pony since 1975, Hyundai had a sufficient technology base to absorb FF car design and manufacturing without foreign engineering assistance. Through great effort, Hyundai completed it FF plant in 1985 and tripled its production capability from 150,000 units to 450,000 units per year. And its FF Excel began to export to the US market in 1986 and became the best-selling import car in US in 1987 with the sale of 263,610 (Kim, 1999).
4) Becoming Independent. The fourth jump in technological learning took place in 1994, when the fiercely independent Hyundai unveiled Accent, the first subcompact car design on its own. Although FF Excel had gained a successful achievement in the later 1980s, the other foreign suppliers of technology sources did not want to share their newest technology, so Hyundai can not keep updating its car quality to match the market demands and the competition of other carmakers. It was time for Hyundai to develop an extensive R&D network to expand its absorption capability. In 1984, Hyundai organized a taskforce with a vision of developing a state-of-the-art engine.
However, none of the team members had any direct experience in engine design, and no car with an electronically controlled engine was available locally from which Hyundai engineers could learn. Before the engine project was officially launched in 1984, more than 300 R&D engineers have received training overseas. Those team numbers collected all available English and Japanese literature on engines and transmissions to enhance their knowledge base. Hyundai then employed engineers have working experiences in MNEs. From 1984, the R&D process experienced a series of difficulties and errors, even the managers and engineers themselves began to doubt Hyundai’s capability to develop a competitive engine. For example, the team had to scrap 11 more broken Prototypes before 1 survived the test. There were 288 engine design changes, 156 changes in 1986 alone (Kim, 1999). 97 test engines had to be made before Hyundai refined its natural aspiration and turbo charge engines (Kim, 1999), 53 more engines for durability improvement, 88 more for developing a car, 26 more for developing its transmissions before Hyundai perfected them in 1992 (Kim, 1999). As a result of sustaining R&D efforts and learning experiences from the failures, Hyundai successfully design its own brands “Accent”, “Avante”, “Sonata II”
and “Grandeur”.
Building up indigenous R&D in Hyundai. The most important experience for Hyundai’s success is keeping independent and paying highly attention on in-house R&D. Hyundai have never forgotten to keep its independence and manage to self-reliance through all kinds ways. Actually, when Hyundai developed its first model Pony with 90% percent local content in 1975, Hyundai had pay highly attention to R&D efforts. In 1984, Hyundai established the Advanced Engineering and Research Institute. In addition, Hyundai also established joint R&D laboratories with local universities. Moreover, Hyundai opened Hyundai American Technical Center, Ins. (HATCI) opened in 1986. Following, Hyundai set up a technical center in Frankfurt to monitor technological developments in Europe and to design and engineer new cars for the European market (Kim, 1999). In 1997, Hyundai established a R&D center in Japan and entered Japanese market meantime.
