Crazy Car Production Days of Guangdong: Introduction

Today on China Car History the first in a new series: Crazy Car Production Days of Guangdong (CCPDoG™). In 1995 something new was happening in China’s southern Guangdong Province. To attract more investment the local government drastically eased the requirements for Sino-foreign car making joint ventures.

Many car maker wanted to make cars in China. Local production would allow them to avoid the heaven-high import taxes on cars, which ranged from 60 to 80%. But getting permission to do so wasn’t easy.

A foreign car maker had to form a joint venture with a Chinese entity. Under central-government laws these joint ventures had to comply with trillions of complicated rules concerning ownership, localization rates of parts, foreign exchange, investment, product development, and whatnot more.

Guangdong simply threw all these rules into the South China Sea. The central government was, at least initially, supportive of the scheme, which it considered as an experiment. In Guangdong however, far away from the cold cold capital, it wasn’t an experiment at all. It was very real.

The new rules attracted a lot of attention and it didn’t take long before the first deals were signed. Chrysler for example signed a joint venture deal with Sanxing to make the Dodge Caravan in Guangdong.

The rules extended to complete knock-down (CKD) production, where a full kit of parts is shipped from one country for final-assembly into a car in another country.

CDK production was a gray area when it came to the law. Rules by the central government stipulated that CKD production was allowed at the start of a joint venture, to get it up steam. Gradually however the localization rate of parts had to go up to 60%. But under the Guangdong ‘expiriment’ that rule no longer applied, so joint ventures could theoretically continue CKD production for ever.

And then there was the real shady side of all the Guangdong fun. Under the new rules the ‘making’ in ‘car making’ was very loosely defined, and enterprising entrepreneurs saw a way to get around import taxes without actually making or assembling cars in China.

What they did was this: companies would send a shipment of cars to China. The cars would miss some crucial parts like the wheels, mirrors, or door handles. This was enough to classify these cars as car parts, avoiding the import taxes. Companies would then send the missing parts in another container. Both containers would end up in a shed in Guangdong were they would be reunited into a working car and could be sold as a China-made vehicle.

The only problem was that the Guangdong government could not get rid off one crucial requirement by the central government: every car maker had to have a car-making license, issued by Beijing. Without the license there could be no car production. And the mandarins in the capital would never issue a license to a shady outfit in Guangdong.

So the entrepreneurs went looking like madmen for companies with a car making license. They found them in Guangdong; tiny car makers, bus makers, tractor makers, everything would do. But at one moment all the willing  Guangdong car makers were taken, so our entrepreneurs went looking over the provincial border.

Under the central government’s rules a car makers with a license can produce cars everywhere in China, not just in its own province. This opened the door for a peculiar system where car makers in other provinces ‘leased’ their licenses to these Guangdong entrepeneurs.

A company in Datong, far north in Shanxi province, had a license and was making small buses. The Guangdong guys would approach this company and ask if they wanted to earn some extra cash. Sure they wanted that and a deal was made where the Guangdong guys would use the Datong license to ‘produce’ cars in Guangdong. The license holder had nothing to do with the actual production and would continue making its own vehicles just like it used to, while earning some extra cash.

So who was behind all this? Most of the money and cars arrived via Hong Kong. The enterprising entrepreneurs were usually based in Hong Kong too, with good connections in Guangzhou. They dealt with two kind of parties:

1. Official manufacturers who knowingly used the Guangzhou rules as a way to avoid import taxes, operating on the edge of legal and illegal, usually via shell-companies that were based in Hong Kong as well. These companies hailed mainly from Japan, Taiwan, and a few from Europe.
2. Car traders. This is the most bizarre part of the whole story. A trader, could be from everywhere, bought a shipload of cars, which could be from everywhere too. The original manufacturer of the cars was not involved, knew nothing about it. So trader X from Germany would buy a few dozen Opels in Brazil, ship them to Hong Kong, make a deal, ship them on to Guangdong, sell them on the Chinese market as China-made, grab the cash, and move on.

Now the best part is that under central government rules every car made by a car-license-holding company had to have a badge with the company’s name and a badge with the company’s designation. In China every car maker gets a government designation, like BJ for Beijing and DF for Dongfeng. The Guangdong companies could not get around this, whatever car they made in whatever way had to have a badge! And this is how we can still recognize these cars today, otherwise they would be un-discernible from imports.

All this frenzied activity and fuzzy rules led to a totally crazy world where cars of all kinds would suddenly appear on Chinese roads with Chinese badges on them. And it is at this world we are looking at in this series. Just a few examples of how crazy it was:

There could be two or more variants of the Camry (European, North American, etc), ‘made’ by two different companies. Honda was negotiating an official joint venture deal to make cars in China while at the very same time the Oddyssee was ‘rolled of the line’ in Guangdong. Chrysler tried to make the Neon with Beijing Auto but the Neon was actually already made down south by another company, without Chrysler knowing anything about it. And so it went on and on. We are discovering more of these crazy ‘Guangdong’ cars almost every day. We will show them all.

Naturally, in the end the whole thing got completely out of hand. The real joint ventures started to complain, the central government was loosing import tax revenues, and the Guangdong  government was forced to admit it had lost control.

The central government decided it was crack down time. The crack down began in 1998 with a general campaign against smuggling, called the “9898 Smuggling Case”. One area of particular focus was the tax-free import of car parts, which was now labeled as “smuggling”.

Containers were confiscated and people were arrested. Without parts there could be no car production and the scheme fell apart fast. Factories closed overnight and the cars simply disappeared from the market. From then on any import of any car parts into Guangdong was forbidden. When the central government hits, it hits hard.

It was all a well-meant idea, killed by too much ‘entrepreneurial spirit’. This of course happens often in China, and not just in the car industry. By the sheer scale and number of companies involved make the Crazy Car Production Days of Guangdong stand out, and definitely worth this series.

The cars are coming soon…