Many emerging countries such as Brazil, Mexico, China, etc. regard the growth of a domestic automobile industry as vital for their economies. Some of its major benefits are:
- it substantially raises the technical skills and standards of the labor force and of the country as a whole,
- provides means of acquiring new, state of the art technologies,
- provides well paid jobs, increasing the middle class,
- produces domestically a much needed product, with high value added content, a product that can be also exported. Exports provide hard currency (dollars, yen, German marks). In contrast, imports create a hard currency drain.
Our modern society's love story with the automobile is not ending, it's just beginning on a truly global scale. The automobile, an unique product of high technology and sophistication, provides instant gratification when we ride in it, increases our mobility, transports us to our jobs, helps us in our chores and businesses, makes our daily life easier and more productive. We can't imagine our industrialized world without the convenience of automobiles. That's why, as more and more countries develop, the world use of cars will rapidly increasein the years to come. For the foreseeable future, the most rapid growth in automobile purchasing and manufacturing will be in the emerging countries of Asia, Eastern Europe and Latin America.
It all started at the end of the 19th century, shortly after the internal combustion motor was invented, in the industrialized countries of that time: Germany, France and England. In the first half of this century, as more countries industrialized, they developed their own auto industries.
In the United States the revolutionary assembly line manufacturing methods introduced by Henry Ford, the innovative management methods of large, complex organizations and economies of scale developed by Alfred P. Sloan at General Motors, the strong demand for cars of people living and working in a rapidly developing economy, produced the biggest auto industry in the world. In the 1930's the world demand for cars increased so much that auto manufacturers from the U.S.A., England and Germany became major international exporters and manufacturers.
After the Second World War the need for cars grew unabated. Sensing the vital importance of this industry, Japan, and later South Korea, rapidly developed substantial automobile industries. The Japanese companies in particular, Toyota, Honda, Nissan, etc., started to produce at a reasonable price, highly reliable and fuel efficient cars.
Starting in the 1970's, and through the '80's and '90's, as the oil prices continued to increase, the high quality, fuel efficient Japanese cars made substantial inroads in the American and international automobile markets, becoming some of the world's top rated and most sought after. In 1992 the United States ranked second to Japan as the leading country producing passenger cars, light trucks, and commercial motor vehicles.
The increased international competition in the auto industry has generated many important technical innovations: higher fuel efficiency, use of alternative fuels, cleaner exhaust cars, the use of new materials, sophisticated electronics, new safety features such as air bags, etc. These developments have been extremely beneficial to the world consumers. Cheaper, better, cleaner, more affordable cars are continuously developed, rejuvenating the industry and insuring that, in one form or another, automobiles will be with us for many years to come.
The continuing and accelerating high level of competition will ensure that only the best managed and most technologically advanced automobile manufacturing companies will survive. That's why, the study of how they compete in one of the fastest developing regions of the world - Asia, is extremely relevant for future engineers and engineering managers.
The GLOBETECH simulation has the following main objectives:
It is our sincere hope that through all participants' cooperation in this endeavor, all the above objectives will be achieved by the end of the simulation.
The role of the Background Information is to establish the reference framework in which the simulation will take place. Besides reading the Background Information, student teams are encouraged to do their own in depth research of the country/company the are representing, using the suggested bibliography, or their own sources.
The main ingredients for a successful simulation are: the teams depth of knowledge of the discussed subject, and their total identification with the party they represent: government officials or private companies.
Eastern Asia, between India and Mongolia
Area:
Total area 9,596,960 sq km, land area 9,326,410 sq km comparative area slightly larger than the U.S..
Land boundaries:
Land boundaries total 22,143.34 km. China's bordering countries and their contribution to China's overall land boundary are: Afghanistan 76 km, Bhutan 470 km, Burma 2,185 km, Hong Kong 30 km, India 3,380 km, Kazakhstan 1,533 km, North Korea 1,416 km, Kyrgyzstan 858 km, Laos 423 km, Macau 0.34 km, Mongolia 4,673 km, Nepal 1,236 km, Pakistan 523 km, Russia (northeast) 3,605 km, Russia (northwest) 40 km, Tajikistan 414 km and Vietnam 1,281 km.
Coastline:
China's coastline is 14,500 km.
International disputes:
China's international disputes are: boundary with India; bilateral negotiations are under way to resolve disputed sections of the boundary with Russia; boundary with Tajikistan in dispute; a short section of the boundary with North Korea is indefinite; involved in a complex dispute over the Spratly Islands with Malaysia, Philippines, Taiwan, Vietnam, and possibly Brunei; maritime boundary dispute with Vietnam in the Gulf of Tonkin; Paracel Islands occupied by China, but claimed by Vietnam and Taiwan; claims Japanese-administered Senkaku-shoto (Senkaku Islands/Diaoyu Tai), as does Taiwan.
Climate:
The Chinese climate is extremely diverse; tropical in the south to subarctic in the north.
Terrain:
China's terrain is made up of mostly mountains, high plateaus, deserts in west; plains, deltas, and hills in east.
Natural resources:
China's natural resources are coal, iron ore, petroleum, mercury, tin, tungsten, antimony, manganese, molybdenum, vanadium,
magnetite, aluminum, lead, zinc, uranium, hydropower potential (world's largest).
Environment:
Current issues are:
air pollution from the overwhelming use of coal as a fuel, produces acid rain which is damaging forests;
water pollution from industrial effluent; many people do not have access to safe drinking water; less than 10% of sewage receives treatment;
deforestation, estimated loss of one-third of agricultural land since 1957 to soil erosion and economic development; desertification;
natural hazards, frequent typhoons (about five per year along southern and eastern coasts);
damaging floods; tsunamis; earthquakes
International agreements: party to - Antarctic Treaty, Biodiversity, Climate Change, Endangered Species, Hazardous Wastes, Marine Dumping, Nuclear Test Ban, Ozone Layer Protection, Ship Pollution, Tropical Timber, Whaling; signed, but not ratified - Antarctic-Environmental Protocol, Law of the Sea.
Note: China is the world's third-largest country (after Russia and Canada).
Population: 1,190,431,106 (July 1994 est.).
Population growth rate: 1.08% (1994 est.).
Life expectancy at birth:
Total population 67.91 years; male 66.93 years, female 68.99 years (1994 est.).
Nationality:
Noun: Chinese (singular and plural), adjective: Chinese
Religions:
Daoism (Taoism), Buddhism, Muslim 2%-3%, Christian 1% (est.) Note: Officially atheist, but traditionally pragmatic and eclectic.
Languages:
Standard Chinese or Mandarin (Putonghua, based on the Beijing dialect), Yue (Cantonese), Wu (Shanghainese), Minbei (Fuzhou), Minnan (Hokkien-Taiwanese), Xiang, Gan, Hakka dialects, minority languages.
Literacy:
Age 15 and over can read and write (1990), total population 78%, male 87%, female 68%.
Labor force:
567.4 million by occupation agriculture and forestry 60%, industry and commerce 25%, construction and mining 5%, social services 5%, other 5% (1990 est.).
Conventional long form: People's Republic of China, Conventional short: form China,
Local long form: Zhonghua Renmin Gongheguo, local short form: Zhong Guo.
Abbreviation: PRC ; Digraph: CH
Type: Communist state. Capital: Beijing.
Administrative divisions:
23 provinces (sheng, singular and plural), 5 autonomous regions* (zizhiqu, singular and plural), and 3 municipalities** (shi, singular and plural); Anhui, Beijing Shi**, Fujian, Gansu, Guangdong, Guangxi*, Guizhou, Hainan, Hebei, Heilongjiang, Henan, Hubei, Hunan, Jiangsu, Jiangxi, Jilin, Liaoning, Nei Mongol*,
Ningxia*, Qinghai, Shaanxi, Shandong, Shanghai Shi**, Shanxi, Sichuan, Tianjin Shi**, Xinjiang*, Xizang* (Tibet), Yunnan, Zhejiang.
Note: China considers Taiwan its 23rd province.
Independence:
221 BC (unification under the Qin or Ch'in Dynasty 221 BC; Qing or Ch'ing Dynasty replaced by the Republic on 12 February 1912; People's Republic established 1 October 1949).
Constitution: Most recent promulgated 4 December 1982.
Legal system:
A complex amalgam of custom and statute, largely criminal law; rudimentary civil code in effect since 1 January 1987; new legal codes in effect since 1 January 1980; continuing efforts are being made to improve civil, administrative, criminal, and commercial law.
Suffrage:
18 years of age; universal.
Executive branch:
Chief of state President JIANG Zemin (since 27 March 1993); Vice President RONG Yiren (since 27 March 1993); election last held 27 March 1993 (next to be held 1998); results - JIANG Zemin was nominally elected by the Eighth National People's Congress chief of state and head of government (de facto) DENG Xiaoping (since 1977) head of government Premier LI Peng (Acting Premier since 24 November 1987, Premier since 9 April 1988) Vice Premier ZHU Rongji (since 8 April 1991); Vice Premier ZOU Jiahua (since 8 April 1991); Vice Premier QIAN Qichen (since 29 March 1993); Vice Premier LI Lanqing (29 March 1993) cabinet State Council; containing 28 ministers and 8 state commissions and appointed by the National People's Congress (March 1993).
Legislative branch:
Unicameral National People's Congress (Quanguo Renmin Daibiao Dahui) elections last held March 1993 (next to be held March 1998); results - CCP is the only party but there are also independents; seats - (2,977 total) (elected at county or xian level).
Judicial branch:
Supreme People's Court.
Political parties and leaders:
Chinese Communist Party (CCP), JIANG Zemin, general secretary of the Central Committee (since 24 June 1989); eight registered small parties controlled by CCP. Other political or pressure groups: such meaningful opposition as exists consists of loose coalitions, usually within the party and government organization, that vary by issue.
Member of: (International Organizations)
AfDB, APEC, AsDB, CCC, ESCAP, FAO, IAEA, IBRD, ICAO, ICFTU, IDA, IFAD, IFC, ILO, IMF, IMO, INMARSAT, INTELSAT, INTERPOL, IOC, ISO, ITU, LORCS, MINURSO, NAM (observer), PCA, UN, UNCTAD, UNESCO, UNHCR, UNIDO, UNIKOM, UN Security Council, UNTAC, UNTSO, UN Trusteeship Council, UPU, WHO, WIPO, WMO, WTO.
Beginning in late 1978 the Chinese leadership has been trying to move the economy from the sluggish Soviet-style centrally planned economy to a more productive and flexible economy with market elements, but still within the framework of monolithic Communist control. To this end the authorities switched to a system of household responsibility in agriculture in place of the old collectivization, increased the authority of local officials and plant managers in industry, permitted a wide variety of small-scale enterprise in services and light manufacturing, and opened the economy to increased foreign trade and investment.
The result has been a strong surge in production, particularly in agriculture in the early 1980s. Industry also has posted major gains, especially in coastal areas near Hong Kong and opposite Taiwan, where foreign investment and modern production methods have helped spur production of both domestic and export goods.
Aggregate output has more than doubled since 1978. On the darker side, the leadership has often experienced in its hybrid system the worst results of socialism (bureaucracy, lassitude, corruption) and of capitalism (windfall gains and stepped-up inflation).
Beijing thus has periodically backtracked, retightening central controls at intervals. In 1992-93 annual growth of GDP has accelerated, particularly in the coastal areas - to more than 10% annually according to official claims.
In late 1993 China's leadership approved additional reforms aimed at giving more play to market-oriented institutions and at strengthening the center's control over the financial system. Popular resistance, changes in central policy, and loss of authority by rural cadres have weakened China's population control program, which is essential to the nation's long-term economic viability.
National Product:
GDP - purchasing power equivalent - $2.61 trillion (1993 estimate based on a 1990 figure from the UN International Comparison Program, as extended to 1991 and published in the World Bank's World Development Report 1993; and as extrapolated by use of official Chinese growth statistics for 1992 and 1993).
National Product real growth rate: 13.4% (1993).
National Product per capita: $2,200 (1993 est.).
Inflation rate (consumer prices): 17.6% (December 1993 over December 1992).
Unemployment rate: 2.3% in urban areas (1992); substantial underemployment.
Budget: deficit $15.6 billion (1993).
Exports:
$92 billion (f.o.b., 1993) commodities: textiles, garments, footwear, toys and crude oil. Partners: Hong Kong, US, Japan, Germany, South Korea, Russia (1993).
Imports:
$104 billion (c.i.f., 1993) commodities: rolled steel, motor vehicles, textile machinery and oil products. Partners Japan, Taiwan, US, Hong Kong, Germany, South Korea (1993).
External debt: $80 billion (1993 est.).
Industrial production: growth rate 20.8% (1992).
Capacity 158,690,000 kW, production 740 billion kWh, consumption per capita 630 kWh (1992).
Industries:
Iron and steel, coal, machine building, armaments, textiles, petroleum, cement, chemical fertilizers, consumer durables, food processing.
Agriculture:
Accounts for 26% of GNP; among the world's largest producers of rice, potatoes, sorghum, peanuts, tea, millet, barley, and pork; commercial crops include cotton, other fibers, and oilseeds; produces variety of livestock products; basically self-sufficient in food; fish catch of 13.35 million metric tons (including fresh water and pond raised) (1991).
Illicit drugs:
Illicit producer of opium; bulk of production is in Yunnan Province; transshipment point for heroin produced in the Golden Triangle.
Economic aid:
Donor to less developed countries (1970-89) $7 billion recipient US commitments, including Ex-Im (FY70-87), $220.7 million; Western (non-US) countries, ODA and OOF bilateral commitments (1970-87), $13.5 billion.
Currency: 1 yuan (& yen;) = 10 jiao.
Exchange rates:
Yuan (& yen;) per US$1 - 8.7000 (January 1994), 5.7620 (1993), 5.5146 (1992), 5.3234 (1991), 4.7832 (1990), 3.7651 (1989).
Note: Beginning 1 January 1994, the People's Bank of China quotes the midpoint rate against the US dollar based on the previous day's prevailing rate in the interbank foreign exchange market.
Fiscal year: calendar year
Total about 64,000 km; 54,000 km of common carrier lines, of which 53,400 km are 1.435-meter gauge (standard) and 600 km are 1.000-meter gauge (narrow); 11,200 km of standard gauge common carrier route are double tracked and 6,900 km are electrified (1990); an additional 10,000 km of varying gauges (0.762 to 1.067-meter) are dedicated industrial lines.
Highways:
Total 1.029 million km, paved 170,000 km, unpaved gravel/improved earth 648,000 km; unimproved earth 211,000 km (1990).
Inland waterways: 138,600 km; about 109,800 km navigable.
Pipelines:
Crude oil 9,700 km; petroleum products 1,100 km; natural gas 6,200 km (1990).
Ports:
Dalian, Guangzhou, Huangpu, Qingdao, Qinhuangdao, Shanghai, Xingang, Zhanjiang, Ningbo, Xiamen, Tanggu, Shantou.
Airports:
Total 330, usable 330, with permanent-surface runways 260,
with runways over 3,659 m fewer than 10, with runways 2,440-3,659m 90, with runways 1,220-2,439 m 200.
Telecommunications:
Domestic and international services are increasingly available for private use; unevenly distributed internal system serves principal cities, industrial centers, and most townships; 11,000,000 telephones (December 1989); broadcast stations - 274 AM, unknown FM, 202 (2,050 repeaters) TV; more than 215 million radio
receivers; 75 million TVs; satellite earth stations - 4 Pacific Ocean INTELSAT, 1 Indian Ocean INTELSAT, 1 INMARSAT, and 55 domestic.
There are primarily three types of enterprises with foreign investment (foreign-invested enterprises) in China: wholly foreign-owned ventures, contractual joint ventures and equity joint ventures. As of the end of 1991, there were about 42,000 approved foreign-invested enterprises in China. Representative offices are also popular vehicles for establishing ties between foreign firms and the Chinese market. Other types of business establishments include consignment sales and service centers established to marketforeign company products and to service those products, and foreign bank branches.
Representative Offices:
For foreign companies, the most common way to establish a permanent presence in China is to register as a representative office. Registration legitimizes business operations in China and allows a foreign company to establish a permanent presence in the Chinese market. Although representative office personnel cannot directly sign contracts or receive fees or income in China, they can perform market research, consulting, or liaison type work. A foreign company must first find a sponsor organization that will approve its application to establish an office. An application is then submitted to the State Administration for Industry and Commerce (SAIC) for review and registration.
Equity Joint Ventures:
Under Chinese law, equity joint ventures are limited liability companies. Normally, the foreign partner of an equity joint venture must contribute at least 25 percent of the capital although there are no limitations on the number of partners in a venture. Profits are distributed according to each partner's capital contribution. Upon successful completion of the pre-approval screening, the Ministry of Foreign Economic Relations and Trade (MOFERT) or a corresponding authority will normally make a decision on approval within 90 days. Depending on the scope of the venture, the contract period may be decided by negotiation among the parties or in accordance with sector specific regulations. The foreign investor may not recover its investment until liquidation or sale of the venture.
Contractual Joint Venture:
Under the law governing contractual joint ventures, often called cooperative joint ventures, the parties determine the form of operation through the negotiation of a contract. Generally, the parties agree to operate jointly like partners or to form a new limited liability company. There are no set government requirements on the duration of the venture, on the amount of capital the foreign investor must contribute, or on how profits are to be distributed. If ownership of the fixed assets of the venture reverts to the Chinese partner at the end of the
contract term, the foreign investor may recover its share of the investment during the term of cooperation. Assuming successful completion of the required pre-approval procedures, MOFERT or a corresponding local authority will make a decision on approval within 45 days.
Wholly Foreign-owned Ventures:
Approval of a wholly foreign-owned venture depends on whether the enterprise is deemed to benefit the development of China's national economy. The Chinese government prefers enterprises which employ advanced technology and equipment to manufacture products that are important to the national economy and are not produced in China. Ventures which export a large portion of their products also are more likely to be approved. MOFERT is responsible for approval of wholly foreign-owned ventures, although other national and local authorities typically participate in the pre-approval screening steps required before the application documents are forwarded to MOFERT for approval. Because the foreign investor is the sole operator of a wholly foreign-owned venture, it is responsible for guiding its application through the Chinese bureaucracy.
EXPORTING
In October 1992, the United States and China signed an agreement on market access for exports to China. The agreement reduces tariffs for selected products; requires China to systematically publish its import and export related laws and guidelines; reduces China's reliance on import quotas and other restrictions; eliminates China's use of import substitution policies; and requires that more sales and marketing information be made available to foreign exporters.
China's stated policy is to bring its trade system into line with international standards. Thus, the degree of central control over Chinese business entities may differ widely between industries and regions. National foreign trade companies that are responsible for goods tightly controlled by the central plan are still preeminent in their areas. In other sectors, however, local foreign trade companies, industry and trade companies, manufacturers and other entities have increased ability to deal directly with foreigners. Additionally, many Chinese business organizations have established offices in Hong Kong, Macau and other locations outside of China, allowing them to import goods outside the central planning controls. Foreign companies seeking to negotiate contracts in China may contract MOFERT or its local branch to ascertain which Chinese organizations are authorized to directly negotiate and conclude specific types of foreign trade transactions, or may ask a prospective partner for written evidence of its ability to directly engage in foreign trade.
The Chinese government encourages barter, compensation trade and processing arrangements because Chinese buyers sometime lack control over foreign currency needed to import goods. The Chinese government issues testing, labeling and certification standards which may increase documentation required for entry of goods into China and may require time consuming inspection.
Agents and Distributors:
There are few regulations specifically applying to the conduct of agents and distributors in China. Contracts between foreign companies and Chinese entities acting on their behalf are governed by general contract laws and regulations. A number of experienced foreign trading companies and consultants, most likely located in Hong Kong or a major coastal Chinese city, represent a wide variety of foreign manufacturers in China. Also, certain foreign-invested enterprises are vehicles for distribution within China.
Chinese trading corporations, under the present trade regime, are still primarily export oriented, but handle purchasing transactions for Chinese end users with no direct links to foreign manufacturers. Agreements between foreign companies and Chinese entities to establish consignment sales and service centers are
increasingly common. Trade shows and trade missions are also useful ways to begin marketing a foreign product in China. Direct hiring of Chinese individuals as sellers and agents is constrained, in part, by existing labor laws and policies, and the linkage between social and welfare benefits and employment with a Chinese entity.
Import Restrictions:
Under the October, 1992 agreement, China agreed to eliminate licensing requirements, quotas, controls and other restrictions for many key U.S. export sectors over a five-year period commencing on December 31, 1992. China has promised to publish a list of all organizations that are responsible for authorizing or approving imports whether through license review or approval, and will publish procedures and criteria for the approval of import licenses. In addition, approval of import licenses will not be contingent upon the transfer of technology to China or the existence of competing Chinese suppliers. Moreover, China has promised not to subject any products to any import substitution measures in the future.
Import Duties:
China adheres to the Harmonized System (HS) for tariff classification purposes. There is a general tariff rate and a minimum tariff rate granted to nations which have concluded tariff agreements with China, such as the United States. Pursuant to the October, 1992 agreement, China promised to significantly reduce tariffs on a number of important U.S. produced goods. Foreign companies or foreign-invested enterprises importing materials to produce goods to be exported may often obtain an exemption from custom duties. Foreign representative offices can sometimes obtain favorable tariff treatment on certain materials imported for office use.
COMMERCIAL POLICIES
Free-Trade Zones:
The central government has approved five free-trade zones. These are located in the municipalities of Shanghai and Tianjin, the city of Dalian in Liaoning Province, the city of Haikou in the Hainan Island Special Economic Zone (SEZ), and within the Shenzhen SEZ. The zones offer duty-free entry for imported materials used in production within the free-trade zones. Bonded warehouse areas have also been approved for cities such as Guangzhou in Guangdong Province and Dalian.
Exchange Controls:
China has a two tiered currency system in use: foreign exchange certificates (FEC) and renminbi (RMB). The RMB is not convertible into foreign currency, and is used for internal commerce, but not for the purchase of imported goods. The FEC is convertible into foreign currency at government controlled rates and was designed to be used for the purchase of imported goods. Thus, control of FEC is a key issue for any Chinese entity wishing
to conduct foreign trade. The State General Administration of Exchange Control (SGAEC) is responsible for currency exchange issues while the Bank of China is the only bank authorized to conduct foreign exchange business. Foreign-invested enterprises must maintain a separate FEC account with the Bank of China and repatriation of foreign exchange profits is regulated by the Bank and the SGAEC. Foreign-invested enterprises must generally balance their FEC receipts and expenditures. Swap centers administered by the SGAEC allow foreign-invested companies to exchange RMB earnings for FEC. SGAEC still sets the swap range and amount in most cases.
Regulatory Policies:
The central government imposes production quotas and sets prices on key commodities. Under the current five-year economic plan and annual plans, the State Planning Commission and its local branches control many of the important purchasing and investment decisions made by Chinese enterprises. In recent years, however, the amount of non-plan commercial activity has grown dramatically. In many industries, market-oriented business practices are increasingly prevalent.
FOREIGN INVESTMENT
Total U.S. investment in China is approximately US$ 5 billion. Oil, coal, and hotel and property development projects accounted for large amounts of investment initially. More recently, investment funds have shifted to manufacturing ventures. Ventures using advanced technology or focusing on exports are generally more
encouraged than consumer product and service sector projects. Potential investments go through a multi-tiered screening process often involving a number of government clearances at both the national and local levels. Implementation of national investment laws at the local level can vary widely. Generally, the five SEZs (Shenzhen, Zhuhai and Shekou in Guagdong Province, the Hainan SEZ, and the Xiamen SEZ in Fujian Province) provide good investment incentives and have established streamlined approval procedures. Many of the major cities on China's coast have economic and technical development zones offering incentives similar to those existing in the SEZs.
INTELLECTUAL PROPERTY RIGHTS
In January of 1992, China and the United States reached an
agreement on intellectual property rights under which China pledged to make significant changes in its copyright and patent laws. China also promised to enact legislation governing the control of trade secrets.
Copyrights:
Pursuant to the January, 1992 agreement, China agreed to accede to the Geneva Phonograms Convention and the Berne Convention for the Protection of Literary and Artistic Works. On October 15, 1992, China's accessions to the Berne Convention and the Universal Copyright Convention took effect. Also, China will treat computer software as a literary work under its copyright law and will protect computer software for a period of 50 years. Copyright protection will be offered to foreign copyright holders in other Berne Convention member states should their works be first published outside of China. Protection will also be extended to works in existence before China's new obligations become effective.
Patents:
To qualify for patent protection in China, the property involved must not have been publicly disclosed worldwide or used in China prior to the time of filing. China now provides patent protection for pharmaceuticals and other chemical products in addition to providing process protection for those categories of goods. The length of patent protection is 20 years. In addition, compulsory licenses are not generally allowed unless the proposed user has made reasonable efforts to obtain authorization from the rights holder on reasonable commercial terms. Contracts for the licensing or assignment of patent rights held by a foreign entity to a Chinese entity are subject to the examination and approval of MOFERT or its local branches.
Trademarks:
In China, the SAIC is responsible for trademark registration matters. Foreign companies filing applications to register their trademarks must use a Chinese trademark agent affiliated with organizations such as the China Council for the Promotion of International Trade (CCPIT). China follows the first to file rule of protection. The initial length of protection is 10 years. A trademark registrant which licenses its trademark must file a copy of the licensing contract with the SAIC.
TAXATION
The United States and China have an agreement for the avoidance of double taxation which applies to the taxation of Americans and U.S. companies doing business in China. Apart from the relevant Chinese tax laws, foreign companies and individuals may be alert to various types of administrative regulations and decrees, at both the local and national levels, that may change the amount of tax foreign companies pay on their income produced in China.
Corporate Taxes:
A new income tax law for foreign-invested companies took effect in July, 1991. Under the new law, wholly
foreign-owned ventures, equity joint ventures and contractual joint ventures pay a combined national and provincial tax of 33 percent of pre-tax income. Depending on the location, purpose, length and profit reinvestment plans of a foreign-invested venture, there are opportunities to lessen, defer or exempt income from taxation. Foreign partners of foreign-invested companies should be on notice that taxes in the form of periodic benefits payments to Chinese workers or to the Chinese partner itself may measurably increase the tax burden of the foreign-invested enterprise.
Foreign companies that do not have joint venture investments, but have established an office or place of business in China to engage in production or business operations, also pay a tax of 33 percent of the amount of profit before income tax. Consignment sales and service centers established by a Chinese entity to market a foreign company's products, or to maintain or sell spare parts for the foreigner's products, are subject to the 33 percent tax. In addition, foreign companies which perform construction work or provide labor services in China are deemed to have a taxable establishment in China and are subject to income tax.
A foreign enterprise which has no establishment or place of business in China, but derives profits, interest, rental, royalties and other income from sources in China, pays a withholding income tax of 20 percent of the revenue amount. However, profit repatriated by a foreign investor from a foreign-invested enterprise is exempted from further income taxation. Royalties received for selected types of technical know-how are taxed at a reduced rate of 10 percent of the revenue amount or may be exempted from income taxation.
Foreign company representative offices which engage solely in liaison activities within China on behalf of their head offices normally have no Chinese source income and therefore do not pay income tax, although a tax return must be filed. Offices of foreign service companies such as consultants, accountants, banks and trading companies that derive income from their services may be taxed on their income.
Consolidated Industrial and Commercial Tax:
The Consolidated Industrial and Commercial Tax (CICT) applies to the production of industrial and agricultural goods, commercial retailing, and service, transportation and communications activities conducted in China. The tax is levied on the gross amount of proceeds received from the sale of goods and services at each stage of production when the taxable goods and services are transferred from one entity to another. The typical CICT rate is five to 10 percent, although the rates range from 1.5 to 69 percent. Taxpayers importing goods pay CICT on the amount of their purchases.
Personal Income Taxes:
Americans temporarily residing in China for up to 183 days in a calendar year are exempt from Chinese personal income tax on services performed in China, but paid outside of China. Only actual days spent in China are counted and days of temporary absence are excluded. Individuals residing in China and subject to income tax pay progressive rates ranging from five to 45 percent of their wages and salaries earned in China. Compensation for personal services, royalties, interest, dividends and other forms of income are taxed at a flat rate of 20 percent. Per diem or periodic allowances paid to employees of foreign companies in China are normally considered taxable income, but company expenditures such as lodging, business entertainment costs and transportation costs are not personal income for the employee.
REGULATORY AGENCIES
The following list includes some of the more important agencies and policies foreigners should be aware of when doing business in
China:
U.S. Embassy in the People's Republic of China
Beijing
Xiu Shui Bei Jie 3
100600, Beijing, People's Republic of China
Telephone: (861) 532-3831
Telex: AMEMB CN 22701
To mail from the United States:
U.S. Embassy - Beijing, PRC
PSC 461, Box 50
FPO AP San Francisco 96521-0002
Embassy of the People's Republic of China
in the United States
2300 Connecticut Avenue, NW
Washington, DC 20008
Telephone: (202) 328-2500
American Chamber of Commerce for China
Beijing Hotel
East Change Avenue, No 33
Beijing, PRC
Telephone: (861) 5007766
U.S.-China Business Council
1818 N Street, NW Suite 500
Washington, DC 20036-5559
Telephone: (202) 429-0340
South Asia, bordering the Arabian Sea and the Bay of Bengal, between Bangladesh and Pakistan.
Area:
Total area: 3,287,590 km2, land area: 2,973,190 km2, comparative area: slightly more than one-third the size of the US.
Land boundaries:
Total 14,103 km, Bangladesh 4,053 km, Bhutan 605 km, Burma 1,463 km, China 3,380 km, Nepal 1,690 km, Pakistan 2,912 km
Coastline: 7,000 km.
International disputes:
Boundaries with Bangladesh and China; status of Kashmir with Pakistan; water-sharing problems with downstream riparians, Bangladesh over the Ganges and Pakistan over the Indus.
Climate:
Varies from tropical monsoon in south to temperate in north.
Terrain:
Upland plain (Deccan Plateau) in south, flat to rolling plain along the Ganges, deserts in west, Himalayas in north.
Natural resources:
Coal (fourth-largest reserves in the world), iron ore, manganese, mica, bauxite, titanium ore, chromite, natural gas, diamonds, petroleum, limestone.
Environment:
Droughts, flash floods, severe thunderstorms common; deforestation; soil erosion; overgrazing; air and water pollution; desertification dominates South Asian subcontinent; near important Indian Ocean trade routes.
Population growth rate: 1.86% (1993 est.).
Life expectancy at birth:
Total population: 58.12 years, male: 57.69 years, female: 58.59 years (1993 est.).
Nationality:
Noun: Indian(s), Adjective: Indian.
Religions:
Hindu 82.6%, Muslim 11.4%, Christian 2.4%, Sikh 2%, Buddhist 0.7%, Jains 0.5%, other 0.4%.
Languages:
English enjoys associate status but is the most important language for national, political, and commercial communication, Hindi the national language and primary tongue of 30% of the people, Bengali (official), Telugu (official), Marathi (official), Tamil (official), Urdu (official), Gujarati (official), Malayalam (official), Kannada (official), Oriya (official), Punjabi (official), Assamese (official), Kashmiri (official), Sindhi (official), Sanskrit (official), Hindustani a popular variant of Hindu/Urdu, is spoken widely throughout northern India
Note: 24 languages each spoken by a million or more persons; numerous other languages and dialects, for the most part mutually unintelligible.
Literacy:
Age 15 and over can read and write (1990), total population:48%, male: 62%, female: 34%.
Labor force:
284.4 million by occupation: agriculture 67% (FY85).
Conventional long form: Republic of India
Conventional short form: India.
Digraph: IN Type: federal republic Capital: New Delhi
Administrative divisions:
25 states and 7 union territories*; Andaman and Nicobar Islands*, Andhra, Pradesh, Arunachal Pradesh, Assam, Bihar, Chandigarh*, Dadra and Nagar, Haveli*, Daman and Diu*, Delhi*, Goa,Gujarat, Haryana, Himachal Pradesh,Jammu and Kashmir, Karnataka, Kerala, Lakshadweep*, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Orissa, Pondicherry, Punjab, Rajasthan, Sikkim, Tamil Nadu, Tripura, Uttar Pradesh, West Bengal.
Independence: 15 August 1947 (from UK).
Constitution: 26 January 1950.
Legal system:
Based on English common law; limited judicial review of legislative acts; accepts compulsory ICJ jurisdiction, with reservations.
Suffrage: 18 years of age; universal.
Elections:
People's Assembly: last held 21 May, 12 and 15 June 1991 (next to be held by November 1996).
Executive branch:
President, vice president, prime minister, Council of Ministers.
Legislative branch:
Bicameral Parliament (Sansad) consists of an upper house or Council of States (Rajya Sabha) and a lower house or People's Assembly (Lok Sabha).
Judicial branch: Supreme Court.
Leaders:
Chief of State: President Shankar Dayal SHARMA (since 25 July 1992); Vice President K.R. NARAYANAN (since 21 August 1992)
Head of Government: Prime Minister P. V. Narasimha RAO (since 21 June 1991).
Member of:(International Organizations)
AG (observer), AsDB, C, CCC, CP, ESCAP, FAO, G-6, G-15, G-19, AfDB, G-24, G-77, GATT, IAEA, IBRD, ICAO, ICC, ICFTU, IDA, IFAD, IFC, ILO, IMF, IMO, INMARSAT, INTELSAT, INTERPOL, IOC, IOM (observer), ISO, ITU, LORCS, NAM, ONUSAL, PCA, SAARC, UN, UNAVEM II, UNCTAD, UNESCO, UNIDO, UNIKOM, UNOMOZ, UNTAC, UPU, WFTU, WHO, WIPO, WMO, WTO.
India's economy is a mixture of traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of support services. Faster economic growth in the 1980s permitted a significant increase in real per capita private consumption. A large share of the population, perhaps as much as 40%, remains too poor to afford an adequate diet. Financial strains in 1990 and 1991 prompted government austerity measures that slowed industrial growth but permitted India to meet its international payment obligations without rescheduling its debt. Policy reforms since 1991 have extended earlier economic liberalization and greatly reduced government controls on production, trade, and investment.
National Product:
GDP - exchange rate conversion - $240 billion (FY93 est.).
National Product real growth rate: 4% (FY93 est.).
National Product per capita: $270 (FY93 est.).
Inflation rate (consumer prices): 11.9% (1992 est.).
Unemployment rate: NA%
Budget:
Revenues $39.2 billion; expenditures $41.06 billion, including capital expenditures of $10.2 billion (FY92).
Exports:
$19.8 billion (f.o.b., FY93 est.) commodities: gems and jewelry, clothing, engineering goods, leather manufactures, cotton yarn, and fabric partners: USSR 16.1%, US 14.7%, West Germany 7.8% (FY91).
Imports:
$25.5 billion (c.i.f., FY93 est.) commodities: crude oil and petroleum products, gems, fertilizer, chemicals and machinery. Partners: US 12.1%, West Germany 8.0%, Japan 7.5% (FY91).
External debt: $73 billion (March 1992).
Industrial production:
Growth rate 2.5% (FY93 est.); accounts for about 25% of GDP.
Electricity:
82,000,000 kW capacity; 310,000 million kWh produced, 340 kWh per capita (1992).
Industries:
Textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery.
Agriculture:
Accounts for about 30% of GDP and employs 67% of labor force; principal crops - rice, wheat, oilseeds, cotton, jute, tea, sugarcane, potatoes; livestock - cattle, buffaloes, sheep, goats, poultry; fish catch of about 3 million metric tons ranks India among the world's top 10 fishing nations.
Illicit drugs:
Licit producer of opium poppy for the pharmaceutical trade, but some opium is diverted to illicit international drug markets; major transit country for illicit narcotics produced in neighboring countries; illicit producer of hashish.
Economic aid:
US commitments, including Ex-Im (FY70-89), $4.4 billion; Western (non-US), countries, ODA and OOF bilateral commitments (1980-89), $31.7 billion; OPEC bilateral aid (1979-89), $315 million; USSR (1970-89), $11.6 billion; Eastern Europe (1970-89), $105 million.
Currency: 1 Indian rupee (Re) = 100 paise
Exchange rates:
Indian rupees (Rs) per US$1 - 26.156 (January 1993), 25.918 (1992), 22.742 (1991), 17.504 (1990), 16.226 (1989), 13.917 (1988)
Fiscal year:1 April - 31 March.
61,850 km total (1986); 33,553 km 1.676-meter broad gauge, 24,051 km 1.000-meter gauge, 4,246 km narrow gauge (0.762 meter and 0.610 meter); 12,617 km is double track; 6,500 km is electrified.
Highways:
1,970,000 km total (1989); 960,000 km surfaced and 1,010,000 km gravel, crushed stone, or earth.
Inland waterways:
16,180 km; 3,631 km navigable by large vessels.
Pipelines:
Crude oil 3,497 km; petroleum products 1,703 km; natural gas 902 km (1989).
Ports:
Bombay, Calcutta, Cochin, Kandla, Madras, New Mangalore, Port Blair (Andaman Islands).
Airports:
Total: 336, usable:285, with permanent-surface runways:205 with runways over 3,659 m:2, with runways 2,440-3,659 m:58, with runways 1,220-2,439 m: 90.
Telecommunications:
Domestic telephone system is poor providing only one telephone for about 200 persons on average; long distance telephoning has been improved by a domestic satellite system which also carries TV; international service is provided by 3 Indian Ocean INTELSAT earth stations and by submarine cables to Malaysia and the United Arab Emirates; broadcast stations - 96 AM, 4 FM, 274 TV (government controlled).
The most common business entity used by foreign investors in India is the locally incorporated company. Branches, sole proprietorships and partnerships are essentially closed to foreign companies. Foreign investors may participate in either public or private companies. Private companies must restrict the transfer of their shares, limit the number of shareholders to 50 and prohibit any invitation to the public to subscribe for shares.
Public companies are those with more than 25 percent of their shares publicly owned; those that own more than 25 percent of the equity of a public company; those with a turnover of more than Rs 100 million in any one year.
Public and private companies must register the memorandum and articles of association with a state registrar of companies. Foreign corporations may interact with Indian businesses in three other ways. The most common form of interaction is the licensing of technology, where no equity capital is involved. The foreign firm can sell its technology for a lump-sum payment and royalties based on sales. The second form of cooperation involves the direct purchase of designs and drawings. These forms of interaction are especially popular with the Indian government. They satisfy government policies designed to increase the amount of technology flow into the Indian economy. The third form of collaboration is joint venture arrangements which account for 15 to 20 percent of all foreign collaboration approved by the Indian government. The foreign firm may receive lump-sum and royalty payments for technology transfer as well as dividends.
Representative or liaison offices may be opened in India with approval by the Reserve Bank of India. These offices cannot accept orders or sign contracts and no profits can be generated by this
type of office. Branch office activities in India may result in legal liability being imposed directly on foreign home offices for business activities in India. Franchising arrangements in India are very rare.
EXPORTING
Agents and Distributors:
Agent-principal relations are governed by sections 182 to 238 of the India Contract Act. The types of commercial agents recognized under Indian law are brokers, auctioneers, del credere agents, and insurance agents.
Premature revocation or termination of an agreement by the principal without just cause requires that compensation be paid to the agent. Agent-principal relations may be terminated prematurely if the agent is guilty of misconduct in the discharge of duties. Depending on the agent-principal contract, the agreement may be terminated upon: expiration of the contract term; death or incapacity of the agent; death or incapacity of the principal; completion of the business; impossibility of execution by reason of law or destruction of the subject matter.
Companies choosing an agent for the Indian market should make sure that the agent has an office, or is located in Delhi. This will increase the chance that they receive up-to-date notice of policy changes and government procurement notices. The agent should be the main distributor since Indian law does not permit foreign companies to have marketing subsidiaries in India. The exclusive agency agreement is the most common type of agreement in India.
Import Restrictions:
India's import licensing policy was designed to conserve foreign exchange and promote import substitution, but has been relaxed for the current five-year period. Under a new Import-Export Policy announced April 1, 1992, and effective for five years, most goods have become freely importable, no longer requiring import licenses. A sharply curtailed negative list remains in effect which: bans three items outright; bans all consumer items and computers valued at less the Rs 150,000 (US$5,000); restricts 68 items and reserves eight products for import by public sector trading companies. The revised policy has also abolished requirements that all goods be imported by the end-user, allowing imports for stock and sale by distributors and wholesalers.
Indian import controls still apply to some industrial items and most consumer goods. As a result, companies interested in the Indian market should become familiar with the licenses or other controls necessary for the import of their particular products.
Import Duties:
Import duties are applied to almost all goods entering India. The tariff system is based on the Harmonized System (HS) with most tariffs being charged on an ad valorem basis. Tariffs are in the 40 to 60 percent range for basic raw materials, 60 to 100 percent for semi-processed goods, and 100 percent and above on finished and consumer goods. Luxury items can be taxed at rates up to 110 percent. Companies should check import duties for their particular product because rates are product specific.
Documentation:
Shipments to India require a commercial invoice, a packing list and bill of lading. A certificate of origin is not required on imports originating in the United States.
In 1991, the government liberalized the number of industries open to foreign investment, loosened approval requirements and allowed majority foreign equity ownership. There are frequent changes in the regulations governing equity percentage permitted and the industries open to foreign participation. Companies wishing to enter the Indian market should make efforts to obtain the most up-to-date information.
Foreign investment is encouraged in large-scale projects, projects that will have a favorable impact on the Indian balance of payments position, and investment that will bring new technology to India. The government has designated a list of 34 high-priority industries open to foreign investors.
Rules and regulations governing foreign investment in India stipulate:
Incentives:
No specific tax incentives exist to attract foreign investment. However, there are incentives available to Indian companies with some share of foreign ownership. Tax and non-tax incentives may be granted to businesses that will increase Indian exports. For example:
Some non-tax incentives are offered by the state governments. Examples of these include the availability of land on concessional terms, facilities for business use, and water and power at reduced rates.
COMMERCIAL POLICIES
Free-Trade Zones:
India has six export processing zones. These facilities provide duty exemptions under certain conditions for the manufacture of export items. The zones are the Kandla Free-Trade Zone in Gujarat, the Santa Cruz Electronics Export Processing Zone (SEEPZ) in Bombay, the Madras EPZ in Madras, the Falta EPZ in West Bengal, the Cochin EPZ in Kerala and the New Okhla Industrial Development Area (NOIDA) EPZ.
Exchange Controls:
The Reserve Bank of India (RBI) administers India's extensive foreign exchange controls and regulations. All foreign exchange transactions are subject to the control and approval of the RBI, including the transfer of profits and dividends. Controls on outflows of foreign funds are stringent due to India's foreign exchange shortage. The Indian government provides no guarantees against inconvertibility. Companies with 40 percent or more foreign equity are subject to certain provisions of the Foreign Exchange Regulations Act.
Regulations governing the remittance of dividends state that the foreign currency outflow due to dividends may not exceed export earnings and that automatic approval is granted on preference and equity shares up to certain limits. There are no limitations applied to interest payments on foreign loans although there are limits applied to the repatriation of capital. There is a cap on royalties paid under technology licensing agreements equal to eight percent of export sales or five percent of domestic sales. Businesses can consult the Exchange Control Manual of the Reserve Bank of India for all rules and regulations governing India's foreign exchange controls regime.
INTELLECTUAL PROPERTY RIGHTS
Patents:
Patents in India are protected under the Patent Act of 1970. The Act protects foreign companies on the same basis as Indian nationals as long as there is reciprocity of protection. An invention must be original, be the result of ingenuity, and have utility. India's Patent Act grants patent protection for 14 years from the date of filing. Stringent compulsory licensing provisions have the potential to render patent protection virtually meaningless. India's Patent Act prohibits patents for any invention intended or capable of being used as a food, drug or relating to substances prepared or produced by chemical processes. The process by which drugs, foods and related items are produced is patentable, but the patent term for these processes is limited to the shorter of five years from the grant of patent or seven years from patent application filing.
Trademarks:
Trademarks are protected under The Trade and Merchandise Marks Act of 1958 which establishes the rights for the first user of the trademark. Trademarks are registered for seven years with renewal of the registration allowed for an additional seven-year period. Permission from the Reserve Bank of India must be obtained by foreign or Indian companies with 40 percent or more non-resident interest to use a trademark.
India is a member of the Universal Copyright Convention and the Berne Convention for the Protection of Literary and Artistic Works. The Copyright Act 1957 provides protection during the author's life, plus 50 years after death.
TAXATION
Corporate Taxes:
Indian corporate tax rates are high and the pertinent laws complex. The standard corporate income tax rates are 45 percent for public companies, 65 percent for branches of foreign companies and 50 percent for all other companies. If companies utilize tax incentives available to them, the typical rates vary between 30 and 50 percent. The tax rates are lowest for widely held companies incorporated in India. Companies are strongly encouraged to employ a tax specialist familiar with the Indian tax structure. A 25 percent tax is levied on dividends paid to non-resident corporate bodies, with a minimum 30 percent tax being applied if the non-resident is not a corporation. Interest is taxed at a rate of 25 percent, with a 3.125 percent surcharge. Royalties are taxed at a rate of 30 percent.
Personal Income Taxes:
A resident of India is considered to be an individual who spends at least 183 days in India during a given year. Residents are taxed on a progressive sale ranging from 20 to 30 percent on their worldwide income. Non-residents are taxed only on the income arising from sources within India.
Other Taxes:
There is a five percent sales tax applicable to most goods along with excise taxes on alcohol, drugs, automobiles, cosmetics, cigarettes and air conditioners. States also levy sales taxes ranging from four to 10 percent. A number of luxury, real estate and other taxes may also apply.
Tax Treaties:
The United States and India have signed a treaty to avoid double taxation.
REGULATORY AGENCY
The Office of the Chief Controller of Imports and Exports (CCI& E) in the Ministry of Commerce issues import licenses.
U.S. Embassy in India
New Delhi
Shanti Path, Chanakyapuri 110021
Telephone: (91 11) 600651
Telex: 82065 USEM IN
Indian Embassy in the United States
2107 Massachusetts Avenue, NW
Washington, DC 20008
Telephone: (202) 939-7000
Indian Chamber of Commerce
445 Park Avenue, 18th Floor
New York, NY 10022
Telephone: (212) 755-7181
Southeastern Asia, bordering the South China Sea, between Vietnam and Indonesia.
Area:
Total area: 329,750 sq km, land area: 328,550 sq km, comparative area: slightly larger than New Mexico.
Land boundaries:
Total 2,669 km, Brunei 381 km, Indonesia 1,782 km, Thailand 506 km.
Coastline:
4,675 km (Peninsular Malaysia 2,068 km, East Malaysia 2,607 km).
International disputes:
Involved in a complex dispute over the Spratly Islands with China, Philippines, Taiwan, Vietnam, and possibly Brunei; State of Sabah claimed by the Philippines; Brunei may wish to purchase the Malaysian salient that divides Brunei into two parts; two islands in dispute with Singapore; two islands in dispute with Indonesia.
Climate:
Tropical; annual southwest (April to October) and northeast (October to February) monsoons.
Terrain: coastal plains rising to hills and mountains.
Natural resources:
Tin, petroleum, timber, copper, iron ore, natural gas, bauxite.
Environment:
Current issues: air and water pollution, deforestation, natural hazards, subject to flooding.
International agreements: party to - Endangered Species, Hazardous Wastes, Marine Life Conservation, Nuclear Test Ban, Ozone Layer Protection, Tropical Timber; signed, but not ratified - Biodiversity, Climate Change, Law of the Sea.
Note: Strategic location along Strait of Malacca and southern South China Sea.
Population growth rate: 2.28% (1994 est.).
Life expectancy at birth:
Total population 69.15 years, male: 66.26 years, female: 72.18 years (1994 est.).
Nationality:
Noun: Malaysian(s), adjective: Malaysian.
Ethnic divisions:
Malay and other indigenous 59%, Chinese 32%, Indian 9%.
Religions:
Peninsular Malaysia Muslim (Malays), Buddhist (Chinese), Hindu (Indians) Sabah Muslim 38%, Christian 17%, other 45% Sarawak tribal religion 35%, Buddhist and Confucianist 24%, Muslim 20%, Christian 16%, other 5%.
Languages:
Peninsular Malaysia Malay (official), English, Chinese dialects, Tamil Sabah English, Malay, numerous tribal dialects, Chinese (Mandarin and Hakka dialects predominate) Sarawak English, Malay, Mandarin, numerous tribal languages.
Literacy:
Age 15 and over can read and write (1990 est.)
total population: 78%,male: 86%, female: 70%.
Labor force: 7.258 million (1991 est.).
Conventional long form: none, conventional short form: Malaysia, former Malayan Union.
Digraph: MY
Type: Constitutional monarchy.
Note: Federation of Malaysia formed 9 July 1963; nominally headed by the paramount ruler (king) and a bicameral Parliament; Peninsular Malaysian states - hereditary rulers in all but Melaka, where governors are appointed by Malaysian Pulau Pinang Government; powers of state governments are limited by federal Constitution; Sabah- self-governing state, holds 20 seats in House of Representatives, with foreign affairs, defense, internal security, and other powers delegated to federal government; Sarawak - self-governing state, holds 27 seats in House of Representatives, with foreign affairs, defense, internal security, and other powers delegated to federal government.
Capital: Kuala Lumpur.
Administrative divisions:
13 states (negeri-negeri, singular - negeri) and 2 federal territories* (wilayah-wilayah persekutuan, singular - wilayah persekutuan); Johor, Kedah, Kelantan, Labuan*, Melaka, Negeri Sembilan, Pahang, Perak, Perlis, Pulau Pinang, Sabah, Sarawak, Selangor, Terengganu, Wilayah Persekutuan*.
Independence: 31 August 1957 (from UK).
Constitution: 31 August 1957, amended 16 September 1963.
Legal system:
Based on English common law; judicial review of legislative acts in the Supreme Court at request of supreme head of the federation; has not accepted compulsory ICJ jurisdiction.
Suffrage:
21 years of age; universal.
Executive branch:
Chief of state Paramount Ruler JA'AFAR ibni Abdul Rahman (since 26 April 1994); Deputy Paramount Ruler SALAHUDDIN ibni Hisammuddin Alam Shah (since 26 April 1994) head of government Prime Minister Dr. MAHATHIR bin Mohamad (since 16 July 1981); Deputy Prime Minister ANWAR bin Ibrahim (since 1 December 1993) cabinet Cabinet; appointed by the Paramount Ruler from members of parliament.
Legislative branch:
Bicameral Parliament (Parlimen), Senate (Dewan Negara) consists of a 58-member body, 32 appointed by the paramount ruler and 16 elected by the state legislatures House of Representatives (Dewan Rakyat) elections last held 21 October 1990 (next to be held by August 1995); results - National Front 52%, other 48%; seats - (180 total) National Front 127, DAP 20, PAS 7, independents 4, other 22; note - within the National Front, UMNO got 71 seats and MCA 18 seats.
Judicial branch: Supreme Court.
Member of: (International Organizations)
APEC, AsDB, ASEAN, C, CCC, CP, ESCAP, FAO, G-15, G-77,
GATT, IAEA, IBRD, ICAO, ICFTU, IDA, IDB, IFAD, IFC, ILO, IMF, IMO,
INMARSAT, INTELSAT, INTERPOL, IOC, ISO, ITU, LORCS, MINURSO, NAM,
OIC, UN, UNAVEM II, UNCTAD, UNESCO, UNIDO, UNIKOM, UNOMOZ,
UNOSOM, UNTAC, UPU, WCL, WHO, WIPO, WMO, WTO.
The Malaysian economy, a mixture of private enterprise and a soundly managed public sector, has posted a remarkable record of 8%-9% average growth in 1987-93. This growth has resulted in a substantial reduction in poverty and a marked rise in real wages. Despite sluggish growth in the major world economies in 1992-93, demand for Malaysian goods remained strong, and foreign investors continued to commit large sums in the economy. The government is aware of the inflationary potential of this rapid development and is closely monitoring fiscal and monetary policies.
National product:
GDP - purchasing power equivalent - $141 billion (1993 est.).
National Product real growth rate: 8% (1993 est.).
National Product per capita: $7,500 (1993 est.).
Inflation rate (consumer prices): 3.6% (1993).
Unemployment rate: 3% (1993).
Budget:
Revenues $19.6 billion; expenditures $18 billion, including capital expenditures of $5.4 billion (1994 est.).
Exports:
$46.8 billion (f.o.b., 1993 est.) commodities electronic equipment, petroleum and petroleum products, palm oil, wood and wood products, rubber, textiles partners Singapore 23%, US 15%, Japan 13%, UK 4%, Germany 4%, Thailand 4% (1991).
Imports:
$40.4 billion (f.o.b., 1993 est.) commodities, machinery and equipment, chemicals, food and petroleum products. Partners: Japan 26%, Singapore 21%, US 16%, Taiwan 6%, Germany 4%, UK 3%, Australia 3% (1991).
External debt: $18.4 billion (1993 est.).
Industrial production:
Growth rate 13% (1992); accounts for 43% of GDP.
Electricity:
Capacity 8,000,000 kW, production 30 billion kWh, consumption per capita 1,610 kWh (1992).
Industries:
Peninsular Malaysia rubber and oil palm processing and manufacturing, light manufacturing industry, electronics, tin mining and smelting, logging and processing timber Sabah logging, petroleum production Sarawak agriculture processing, petroleum production and refining, logging.
Agriculture:
Accounts for 17% of GDP Peninsular Malaysia: natural rubber, palm oil, rice, Sabah mainly subsistence, but also rubber, timber, coconut, rice. Sarawak: rubber, timber, pepper; deficit of rice in all areas.
Illicit drugs:
Transit point for Golden Triangle heroin going to the US, Western Europe, and the Third World despite severe penalties for drug trafficking.
Economic aid:
Recipient US commitments, including Ex-Im (FY70-84), $170 million; Western (non-US) countries, ODA and OOF bilateral commitments (1970-89), $4.7 million; OPEC bilateral aid (1979-89), $42 million.
Currency: 1 ringgit (M$) = 100 sen.
Exchange rates:
Ringgits (M$) per US$1 - 2.7123 (January 1994), 2.5741 (1993),
2.5474 (1992), 2.7501 (1991), 1.7048 (1990), 2.7088 (1989).
Fiscal year: calendar year.
Peninsular Malaysia 1,665 km 1.04-meter gauge; 13 km double track, government owned Sabah 136 km 1.000-meter gauge, Sarawak none.
Highways:
Total 29,026 km (Peninsular Malaysia 23,600 km, Sabah 3,782 km, Sarawak 1,644 km) paved NA (Peninsular Malaysia 19,352 km mostly bituminous treated) unpaved NA (Peninsular Malaysia 4,248 km).
Inland waterways:
Peninsular Malaysia 3,209 km, Sabah 1,569 km,
Sarawak 2,518 km.
Pipelines: Crude oil 1,307 km; natural gas 379 km.
Ports:
Tanjong Kidurong, Kota Kinabalu, Kuching, Pasir Gudang, Penang, Port Kelang, Sandakan, Tawau.
Airports:
Total: 113, usable: 104, with permanent-surface runways: 33, with runways over 3,659 m: 1, with runways ,440-3,659 m: 7, with runways 1,220-2,439 m: 18.
Telecommunications:
Good intercity service provided on Peninsular Malaysia mainly by microwave radio relay; adequate intercity microwave radio relay network between Sabah and Sarawak via Brunei; international service good; good coverage by radio and television broadcasts; 994,860 telephones (1984); broadcast stations - 28 AM, 3 FM, 33 TV; submarine cables extend to India and Sarawak; SEACOM submarine cable links to Hong Kong and Singapore; satellite earth stations - 1 Indian Ocean INTELSAT, 1 Pacific Ocean INTELSAT, and 2 domestic.
Four types of businesses may be set up in Malaysia: private companies, public companies, branches of foreign companies, and sole proprietorships/partnerships.
Three types of companies may be incorporated: a company with limited shares, a company limited by guarantee, and an unlimited company with or without share capital. In companies limited by shares, the liability of a member is limited to a specific amount.
In companies limited by guarantee, the liability of a member is limited to a specific amount undertaken to be contributed to assets after a company's termination. Private companies (Sendirian Berhad or Sdn. Bhd.) may be limited or unlimited. Private limited companies restrict the right to transfer shares, limits its membership to no more than 50, and prohibits public sale of its shares or invitation to the public to deposit money with the company. Public limited companies (Berhad or Bhd.) are companies whose shares may be offered to the public. These companies can be listed on the stock exchange.
Foreign companies, partnerships, and sole proprietorships must register with the Registrar of Companies (ROC) before they can be established in Malaysia. Companies must pay registration fees on the amount of authorized capital, as well as stamping and filing fees. The Companies Act requires that the secretary and a minimum of two directors must have their principal residence in Malaysia, and company auditors must be approved by the government.
EXPORTING
Agents and Distributors:
The marketing of goods in Malaysia is most commonly undertaken by trading companies that operate sales outlets in the principal cities. Although agents need not register with the government, Malaysian companies holding a manufacturing license must submit agreements for approval by the Ministry of Trade and Industry.
The larger trading companies, including some U.S.-owned firms based in Malaysia, provide a wide array of marketing services. They import for their own account; maintain inventories of goods and spare parts; sell or process independent orders for delivery to customers; provide maintenance services; and sell to wholesalers and retailers. A few of the small- and medium-sized companies offer the same services but most operate as indent merchants, placing and handling import orders for the accounts of others.
Distribution methods vary. Large department stores may operate as retailer/importer and also import through orders placed with trading companies representing foreign suppliers. Retail dealers specializing in food and other such goods are similar. Most foreign goods moving in, and out, of Sabah and Sarawek are handled by trading firms headquartered in Singapore and peninsular Malaysia. The area is served through branch sales outlets or by salespeople who make frequent visits to small local dealers and distributors or end-users. A nominal amount of trade is conducted between foreign suppliers and local East Malaysian importers and distributors. Branch sales offices of Malaysian and Singaporean trading firms are often given autonomy in arranging import
transactions with foreign suppliers.
Agency agreements may be for fixed or indefinite terms. Distributorship agreements are generally for indefinite periods. Premature termination of fixed-term contracts by the principal allows the agent to claim compensation for losses. Reasonable notice of termination must be given, however specific durations for reasonable notice periods are undefined under Malaysian law. Indemnification may be claimed by the agent if the termination was wrongful or reasonable notice was not given.
Import Restrictions:
Imports from South Africa and Israel are prohibited, and imports from the People's Republic of China require special permits. Knives, radio communication equipment, and firecrackers are prohibited for security reasons, and pornographic materials are also banned. Special permits are needed for the import of munitions, automobiles, chemicals, certain pharmaceuticals, plants, soil, tin ore and certain essential foodstuffs. There are severe penalties for importing illegal narcotics.
Import Duties:
Malaysia has adopted the Harmonized System (HS) for the classification of products. Duties ranges from two to 60 percent, and are generally levied on an ad valorem basis. Malaysia's average tariff level, however is 15 percent, which is low for a developing country. There is a surtax as part of the customs duty, and is charged on certain imports. As a rule, luxury goods are heavily taxed, but goods such as raw materials, essential foodstuffs, and pharmaceutical products are subject to reduced duties. There are numerous other exemptions, particularly for goods which are to be used in Malaysia's development.
In addition to the duty, a sales tax of 10 percent is levied on most and domestic imported products. Excise taxes are also levied on goods, at rates between two and 65 percent, depending on the product.
Documentation:
There is a prescribed form for the application of import licenses. Information needed includes the identity of the purchaser and supplier, a description of the imported goods (including their market value), and the tariff heading and number code. Certain goods that do not require specific licenses must have a "Declaration of Goods Imported" form, which is filled out at the point of import. International freight forwarders generally handle the documentation procedure.
COMMERCIAL POLICIES
Free-Trade Zones:
Malaysia has 11 free-trade zones, established as areas where manufacturing companies can produce and/or assemble imported products. Customs controls in these zones are minimal,
and all machinery and raw materials and components used in the manufacturing process may be imported duty free.
Of the 11 zones, four are in the state of Penang, three in Selangor, two in Melaka, and two in Johor. They are administered by the states within which they are located. In order to operate in a zone, a company must export at least 80 percent of its output. Malaysia also has two free ports, Labuan Island, off the coast of the state of Sabah, and Langkawi Island, off the coast of the state of Kedah. Labuan is the location of several industries based on the petroleum industry; Langkawi's development is based primarily on tourism. In 1989, the Malaysian government made Labuan a tax haven and international offshore center, thus making the island a center for offshore banking and insurance, trust fund management, offshore investment holding and licensing companies, and other offshore activities carried out by multinational corporations, excluding dealings in petroleum or shipping. Income from offshore nontrading activities is tax exempt, and taxes on income from trading activities based there is taxed at a rate of three percent of net profits or M$ 20,000 maximum per year.
Exchange Controls:
Given the government's relative stability, guarantees against inconvertibility are not necessary. Repatriation of capital and remittance of profits are freely permitted, and payments to countries outside Malaysia may be made in any foreign currency except those of South Africa and Israel. Payments within Malaysia must be tendered in Malaysian dollars (Ringgits).
No restrictions are imposed on remittances of less than M$ 10,000. For transactions of greater value, a simple exchange control form is required, which is issued by commercial banks and not subject to review by the Controller of Foreign Exchange. Interest and repayments on loans from abroad must be made in accordance with the terms and conditions approved by the Controller when the loan was obtained.
FOREIGN INVESTMENT
The Malaysian Industrial Development Authority (MIDA) serves as a one-stop shop clearinghouse for regulatory information and investment project approval.
Very few industries are protected from foreign investment. However, the major restrictions are as follows:
The government has made investment in the economy a priority, and as such has provided foreign companies with a wide array of incentives designed to make it easier to conduct business and operate in the Malaysian marketplace. Incentives are awarded on a case-by-case basis according to guidelines established by MIDA and the Malaysian government's Foreign Investment Committee (FIC).
Incentives include:
INTELLECTUAL PROPERTY RIGHTS
Malaysia protects intellectual property rights. It is a member of the World Intellectual Property Organization (WIPO) and in 1990 became a member of the Berne Convention for the Protection of Literary and Artistic Works.
Patents:
Patents are registered at the Patent Registration Office. The registration process can take up to three years to complete, due to the complexities of verification. When issued, patents are valid for 15 years, and are subject to annual renewal payments. There are severe penalties for violations of the patent code.
Trademarks:
Trademarks are registered at the Registrar of Trademarks of the Ministry of Domestic Trade and Consumer Affairs. Registration is valid for up to seven years, with renewal permitted when the registration has expired. Trademark registration is open to any person who has a valid trademark registration in a country designated by the Government of Malaysia within six months of registration in the original country. Injunctive relief is only available after the trademark has been published by the government, which sometimes creates difficulties due to the backlog of trademarks ready for official publishing.
Copyrights:
Malaysia is in the process of creating an enforcement arm in the Ministry of Domestic Trade and Consumer Affairs for the protection of copyrights.
TAXATION
Corporate Taxes:
Nonresident individuals and corporations are taxed at a flat rate of 35 percent on all sources of income generated in Malaysia, excluding interest payments, royalties, management service fees, and rental of business equipment or moveable properties.
Personal Income Taxes:
Generally, nonresidents are not subject to income tax from employment in Malaysia if the period of employment is less than 60 days.
Other Taxes:
In addition, there is a development tax of four percent on net income from businesses or property rental sources. However, the government has suggested that this be abolished.
There is a sales tax of five percent on certain goods, though it was lifted in 1990 for certain foodstuffs, sporting goods, and household equipment.
Tax Treaties:
Malaysia is currently negotiating a treaty with the United States to prevent double taxation. A treaty signed by the two nations in 1989 places safeguards against double taxation in air and sea transport operations.
REGULATORY AGENCIES
U.S. Embassy in Malaysia
376 Jalan Tun Razak
P.O. Box 10035
50400 Kuala Lumpur, Malaysia
Telephone: (60 3) 248-9011
Facsimile: (60 3) 242-2207
Embassy of Malaysia in the United States
2401 Massachusetts Avenue, NW
Washington, DC 20008
Telephone: (202) 328-2700
Facsimile: (202) 332-8914
Consulate General of Malaysia
Malaysian Trade Commission
630 Third Avenue, 11th Floor
New York, NY 10017-6757
Telephone: (212) 682-0232
Facsimile: (212) 983-1987
Telex: TRAEMB 429720
Malaysia Industrial Development Authority (MIDA)
630 Third Avenue
New York, NY 10017-0757
Telephone: (212) 687-2491
Facsimile: (212) 490-8450
American Business Council of Malaysia
Unit 15-01, Level 15, Amoda
22 Jalan Imbi
55100 Kuala Lumpur, Malaysia
Telephone: (60 3) 248-2407
Southeastern Asia, bordering the Gulf of Thailand, between Burma and Cambodia.
Area:
Total area: 514,000 sq km, land area: 511,770 sq km,
comparative area: slightly more than twice the size of Wyoming.
Land boundaries:
Total 4,863 km, Burma 1,800 km, Cambodia 803 km, Laos 1,754
km, Malaysia 506 km.
Coastline: 3,219 km
International disputes:
Boundary dispute with Laos; unresolved maritime boundary
with Vietnam; parts of border with Thailand in dispute; maritime boundary with Thailand not clearly defined.
Climate:
Tropical; rainy, warm, cloudy southwest monsoon (mid-May to September); dry, cool northeast monsoon (November to mid-March); southern isthmus always hot and humid.
Terrain:
Central plain; Khorat plateau in the east; mountains elsewhere.
Natural resources:
Tin, rubber, natural gas, tungsten, tantalum, timber, lead, fish, gypsum, lignite, fluorite.
Land use:
Arable land: 34%, permanent crops: 4%, meadows and pastures: 1%, forest and woodland: 30%, other: 31%.
Irrigated land: 42,300 sq km (1989 est.).
Environment:
Current issues air pollution increasing from vehicle emissions; water pollution from organic and factory wastes; deforestation; wildlife populations threatened by illegal
hunting natural hazards land subsidence in Bangkok area resulting from the depletion of the water table international agreements party to - Endangered Species, Marine Life Conservation, Nuclear Test Ban, Ozone Layer Protection, Tropical Timber; signed, but not ratified - Biodiversity, Climate Change, Hazardous Wastes, Law of the Sea.
Note: Controls only land route from Asia to Malaysia and Singapore.
Population growth rate: 1.3% (1994 est.).
Life expectancy at birth:
Total population: 68.35 years, male: 64.99 years
female: 71.87 years (1994 est.).
Nationality:
Noun: Thai (singular and plural), adjective: Thai.
Ethnic divisions:
Thai 75%, Chinese 14%, other 11%.
Religions:
Buddhism 95%, Muslim 3.8%, Christianity 0.5%, Hinduism 0.1%, other: 0.6% (1991).
Languages:
Thai, English the secondary language of the elite, ethnic and regional dialects.
Literacy:
Age 15 and over can read and write (1990 est.), total population: 93%, male: 96%, female: 90%.
Labor force:
30.87 million by occupation agriculture 62%, industry 13%, commerce 11%, services (including government) 14% (1989 est.).
Conventional long form: Kingdom of Thailand.
Conventional short form: Thailand.
Digraph: TH Type: Constitutional monarchy. Capital: Bangkok.
Administrative divisions:
73 provinces (changwat, singular and plural); Ang Thong,
Buriram, Chachoengsao, Chai Nat, Chaiyaphum, Chanthaburi, Chiang Mai, Chiang Rai, Chon Buri, Chumphon, Kalasin, Kamphaeng Phet, Kanchanaburi, Khon Kaen, Krabi, Krung Thep Mahanakhon, Lampang, Lamphun, Loei, Lop Buri, Mae Hong Son, Maha Sarakham, Mukdahan, Nakhon Nayok, Nakhon Pathom, Nakhon Phanom, Nakhon Ratchasima, Nakhon Sawan, Nakhon Si Thammarat, Nan, Narathiwat, Nong
Khai, Nonthaburi, Pathum Thani, Pattani, Phangnga, Phatthalung, Phayao, Phetchabun, Phetchaburi, Phichit, Phitsanulok, Phra Nakhon Si Ayutthaya, Phrae, Phuket, Prachin Buri, Prachuap Khiri Khan, Ranong, Ratchaburi, Rayong, Roi Et, Sakon Nakhon, Samut Prakan, Samut Sakhon, Samut Songkhram, Sara Buri, Satun, Sing Buri, Sisaket, Songkhla, Sukhothai, Suphan Buri, Surat Thani, Surin, Tak,
Trang, Trat, Ubon Ratchathani, Udon Thani, Uthai Thani, Uttaradit, Yala, Yasothon.
Independence: 1238 (traditional founding date; never colonized).
National holiday:
Birthday of His Majesty the King, 5 December (1927).
Constitution:
New constitution approved 7 December 1991; amended 10 June 1992.
Legal system:
Based on civil law system, with influences of common law; has not accepted compulsory ICJ jurisdiction; martial law in effect since 23 February 1991 military coup.
Suffrage: 21 years of age; universal.
Executive branch:
Chief of state King PHUMIPHON Adunyadet (since 9 June 1946); Heir Apparent Crown Prince WACHIRALONGKON (born 28 July 1952)
head of government Prime Minister CHUAN Likphai (since 23 September 1992) cabinet Council of Ministers Privy Council NA.
Legislative branch:
Bicameral National Assembly (Rathasatha), Senate (Vuthisatha) consists of a 270-member appointed body House of Representatives (Saphaphoothan-Rajsadhorn) elections last held 13 September 1992.
Judicial branch: Supreme Court (Sarndika)
Member of: (International Organizations)
APEC, AsDB, ASEAN, CCC, CP, ESCAP, FAO, G-77, GATT, IAEA,
IBRD, ICAO, ICFTU, IDA, IFAD, IFC, ILO, IMF, IMO, INTELSAT, INTERPOL, IOC, IOM, ISO, ITU, LORCS, NAM (observer), PCA, UN, UNCTAD, UNESCO, UNHCR, UNIDO, UNIKOM, UNTAC, UPU, WCL, WFTU, WHO, WIPO, WMO.
Thailand's economy recovered rapidly from the political unrest in May 1992 to post an impressive 7.5% growth rate for the year and 7.8% in 1993. One of the more advanced developing countries in Asia, Thailand depends on exports of manufactures and the development of the service sector to fuel the country's rapid growth. The trade and current account deficits fell in 1992; much of Thailand's recent imports have been for capital equipment suggesting that the export sector is poised for further growth. With foreign investment slowing, Bangkok is working to increase the generation of domestic capital. Prime Minister CHUAN's government - Thailand's fifth government in less than two years - is pledged to continue Bangkok's probusiness policies, and the return of a democratically elected government has improved business confidence. Nevertheless, CHUAN must overcome divisions within his ruling coalition to complete much needed infrastructure development programs if Thailand is to remain an attractive place for business investment. Over the longer-term, Bangkok must produce more college graduates with technical training and upgrade workers' skills to continue its rapid economic development.
National Product:
GDP - purchasing power equivalent - $323 billion (1993 est.).
National Product real growth rate: 7.8% (1993 est.).
National Product per capita: $5,500 (1993 est.).
Inflation rate (consumer prices): 4.1% (1992 est.).
Unemployment rate: 3.1% (1992 est.).
Budget:
Revenues $21.36 billion, expenditures $22.4 billion, including capital expenditures of $6.24 billion (1993 est.).
Exports:
$28.4 billion (f.o.b., 1992), commodities machinery and manufactures 76.9%, agricultural products 14.9%, fisheries products 5.9% (1992). Partners: US 22%, Japan 18%, Singapore 8%, Hong Kong 5%, Germany 4%, Netherlands 4%, UK 4%, Malaysia, France, China (1992).
Imports:
$37.6 billion (c.i.f., 1992) commodities capital goods 41.4%, intermediate goods and raw materials 32.8%, consumer goods 10.4%, oil 8.2%, partners Japan 29.3%, US 11.4%, Singapore 7.6%, Taiwan 5.5%, Germany 5.4%, South Korea 4.6%, Malaysia 4.2%, China 3.3%, Hong Kong 3.3%, UK (1992).
External debt: $33.4 billion (1991).
Industrial production:
Growth rate 9% (1992); accounts for about 26% of GDP.
Electricity:
Capacity 10,000,000 kW, production 43.75 billion kWh consumption per capita 760 kWh (1992).
Industries:
Tourism is the largest source of foreign exchange; textiles and garments, agricultural processing, beverages, tobacco, cement, light manufacturing, such as jewelry; electric appliances and components, integrated circuits, furniture, plastics; world's second-largest tungsten producer and third-largest tin producer.
Agriculture:
Accounts for 12% of GDP and 60% of labor force; leading producer and exporter of rice and cassava (tapioca); other crops - rubber, corn, sugarcane, coconuts, soybeans; except for wheat, self-sufficient in food.
Illicit drugs:
A minor producer of opium and marijuana; major illicit trafficker of heroin, particularly from Burma and Laos, for the international drug market; eradication efforts have reduced the area of cannabis cultivation and shifted some production to neighboring countries; opium poppy cultivation has been affected by eradication efforts; also a major drug money laundering center.
Economic aid:
Recipient US commitments, including Ex-Im (FY70-89), $870 million; Western (non-US) countries, ODA and OOF bilateral commitments (1970-89), $8.6 billion; OPEC bilateral aid (1979-89), $19 million.
Currency: 1 baht (B) = 100 satang.
Exchange rates:
Baht (B) per US$1 - 25.446 (December 1993), 25.400 (1992), 25.517 (1991), 25.585 (1990), 25.702 (1989).
Fiscal year: 1 October-30 September.
Highways:
Total 77,697 km; paved 35,855 km (including 88 km of expressways); unpaved gravel, other stabilization 14,092 km; earth 27,750 km (1988).
Inland waterways:
3,999 km principal waterways; 3,701 km with navigable depths of 0.9 m or more throughout the year; numerous minor waterways navigable by shallow-draft native craft.
Pipelines: Petroleum products 67 km; natural gas 350 km.
Ports: Bangkok, Pattani, Phuket, Sattahip, Si Racha.
Airports:
Total: 105, usable: 96, with permanent-surface runways: 51, with runways over 3,659 m: 1, with runways 2,440-3,659 m: 14,with runways 1,220-2,439 m: 28.
Telecommunications:
Service to general public inadequate; bulk of service to government activities provided by multichannel cable and microwave radio relay network; 739,500 telephones (1987); broadcast stations - over 200 AM, 100 FM, and 11 TV in government-controlled networks; satellite earth stations - 1 Indian Ocean INTELSAT and 1 Pacific Ocean INTELSAT; domestic satellite system being developed.
The primary business organizations in Thailand are the sole proprietorship, partnership, limited company, and the branches of a foreign corporation. Before commencing business, foreign businesses are required to obtain a license from the Alien Business Registration Section, Department of Commercial Registration, Ministry of Commerce, including factory permits, commercial registration, business tax registration and work permits for alien staff.
Partnerships:
There are three types of partnerships in Thailand: unregistered ordinary partnerships, registered ordinary partnerships, and limited partnerships. The primary difference between these three are the varying partner liability requirements. The Thai and Western concepts of partnership are very similar, as are the laws governing them. Limited Companies: The limited company in Thailand is similar to the Western corporation. Liability of shareholders is limited to the amount of their investment and the remaining unpaid amount on the par value of their shares. There are two types of limited liability companies -- private and public. Public companies must have at least 100 shareholders, with no single entity holding more than 10 percent of the capital stock, and 50 percent of the stock must be held by small shareholders. Private liability companies are the most common form of operation in Thailand.
Under the Securities Exchange of Thailand Act of 1975, companies incorporated in Thailand have an option to apply to have their securities listed with the Securities Exchange as either "registered" or "authorized".
Branches:
The operation of a branch by a foreign company is governed by the Alien Business Law. For tax and legal reasons, foreigners may prefer to operate in the form of a limited company or establish a local representative office. The representative office may participate in buying, quality control, and market research activities. It is not permitted to operate in the actual trading of goods.
A contractual unincorporated joint venture or consortium is not recognized as a unique legal entity under the Civil and Commercial Code, with the possible exception being in the form of a partnership.
EXPORTING
Agents and Distributors:
There are four primary types of agent/importers.
* The first category includes well established foreign companies with strong commercial and financial resources and a large turnover.
* The second category includes smaller importers who generally specialize in one line of business in which they have well established contacts and market knowledge.
* The third category represents new companies that are trying to expand into major marketing organizations.
* The fourth category includes the International Trading Companies (ITCs). ITCs are firms heavily involved in the import/export business and are granted certain privileges from the Board of Investment including exemption from certain import duties.
Import Restrictions:
Import restrictions are minimal and only a select few goods require licenses, including some foods, materials and industrial products.
Import Duties:
Most duties are ad valorem and are arranged into three categories that include finished goods, intermediate goods, and raw materials. Higher tariffs range from 30 to 150 percent, with middle rates ranging from 20 to 30 percent, and lower rates ranging from five to 15 percent.
Documentation:
Documentation necessary for exports include a commercial invoice, bill of lading, import entry forms, and letters of credit where applicable. A sanitary certificate may also be required for some products. A "certification of products for export" is required for medical equipment.
COMMERCIAL POLICIES
Free-Trade Zones:
There are no actual free-trade zones or ports in Thailand. However, a number of export processing zones have bonded warehousing facilities. In addition, bonded warehousing facilities exist at many of the Thai sea and airports, although charges are levied for storage after the first 72 hours.
Exchange Controls:
Thailand has significantly liberalized exchange controls. No restrictions apply to capital investment and foreign borrowing. Repatriation of investment funds, dividends, and profits, loan repayments and interest payments, net of all taxes, may be made freely. Trade transactions are permitted without restriction, although export proceeds in excess of $ 2,000 must be deposited with an authorized bank.
FOREIGN INVESTMENT
The Government of Thailand encourages foreign investment. It especially supports investment that will create employment opportunities for Thai nationals and increase the flow of technology into the economy.
The Alien Business Law of 1972 restricts the participation of non-Thai nationals in certain types of business activities in
Thailand. Restrictions on business activities are classified into three categories of business:
Foreigners are prohibited from occupations such as accounting and law under the Alien Occupation Law. Moreover, the acquisition of real estate by aliens is restricted.
In 1966, the United States and Thailand concluded the Treaty of Amity and Economic Relations that permits U.S. corporations to establish a wholly-owned subsidiary or branch in Thailand with few restrictions. Under the Treaty, U.S. investors are exempted from most restrictions on foreign investment imposed by the Alien Business Law. The Treaty does not exempt U.S. businesses or citizens from the provisions of the Alien Occupation law.
Incentives:
The Board of Investment offers a number of tax and non-tax incentives to increase foreign investment in certain industries. These projects include manufacturing and services, chemicals, mechanical and electrical equipment, agricultural products and minerals, ceramics and some metals.
Projects must receive a promotional certificate to qualify for investment incentives. Specific incentives include:
* Exemptions or reductions of import duties on machinery, raw materials, components and re-exported items.
* Imposition of import bans or duties on the import of competitive products.
* Guarantees against nationalization, price controls, export restrictions, competition from new state enterprises, and state monopolization of the sale of similar products.
* Permission for international business executives to enter the country to undertake feasibility studies; for foreign
technicians to enter the country; for foreigners to own land needed to carry out promoted projects; and for the remission of foreign currency abroad.
* Tax holidays of between three and eight years from corporate income tax and exemptions from withholding taxes. In addition, permission may be obtained to carry forward losses and deduct them as expenses for up to five years after the expiration of the tax exemption period.
Thailand has been divided into three economic development zones and incentives for these zones may differ. These three zones are: (i) Bangkok and five adjacent provinces; (ii) the 10 provinces located near Bangkok (in the central region); (iii) and on the eastern seaboard and the up-country provinces.
INTELLECTUAL PROPERTY RIGHTS
Patents:
In 1992, Thailand's National Legislative Assembly enacted amendments to the Patent Act of 1979. These amendments extend product patent protection to pharmaceuticals and their ingredients, food, beverages, and agricultural machinery and increase the term of patent protection to 20 years from filing. The Patent Act of 1979 gives protection to inventions and product designs.
Trademarks:
Protection of trademarks is provided under the Trademarks Act of 1991. Trademarks are valid for 10 years from the date of registration, renewable for 10-year periods beginning three months before expiration. Trademarks are registered within 90 days if there is no opposition. In 1991, amendments were enacted to the trademark law providing for increased penalties for infringement and protection for service, certificate and collective marks.
Copyrights:
The Copyright Act of 1978 provides protection for literary and artistic works. The copyright is valid for the lifetime of the author and for 50 years after death. Thailand is a member of the Berne Convention for the Protection of Literary and Artistic Works.
TAXATION
Corporate Taxes:
Business organizations incorporated in Thailand are taxed on worldwide income while branches of foreign companies pay taxes only on profits earned locally. The corporate income tax rate is 30 percent. There is a branch profits remittance tax of 10 percent across the board on income already subject to income taxes. A 20 percent withholding tax is applied to dividends remitted abroad. This rate is reduced to 15 percent for dividends remitted to non-resident individuals abroad. Interest remitted abroad is subject to a 25 percent withholding tax with a reduction to 10 percent on payments to foreign banks and financial institutions.
Royalties and fees remitted abroad are taxed at the rate of 25 percent. Royalties and fees paid within Thailand are considered part of normal income for tax purposes.
Personal Income Taxes:
Residents and non-residents who derive income from sources based in Thailand are subject to a personal income tax with rates ranging from five to 55 percent. Individuals in Thailand for 180 days or longer in any tax year are liable for income derived from within Thailand and income brought into Thailand.
Other Taxes:
A value-added tax (VAT) of seven percent is currently in effect. Excise taxes are levied on petroleum products, playing cards, matches, alcoholic beverages, tobacco products, and cement. In addition, there is a stamp tax, a local development tax, a rent tax (equal to 12 percent of rent) and a signboard tax.
Tax Treaties:
Thailand and the United States are currently negotiating a treaty governing double taxation.
REGULATORY AGENCIES
USEFUL CONTACTS
U.S. Embassy in Thailand
Diethelm Towers, A-302
93/1 Wireless Road
Bangkok 10330 Thailand
Telephone: (66 2) 255-4365/7
Facsimile: (66 2) 255-2915
To mail from the United States:
U.S. Embassy Bangkok
APO AP 96546
Embassy of Thailand in the United States
2300 Kalorama Rd. NW
Washington, DC 20008
Telephone: (202) 483-7200
The American Chamber of Commerce in Thailand
140 Wireless Road
Bangkok 10330
Telephone: (66 2) 2519266-7
Facsimile: (66 2) 255-2454
Office of the Board of Investment
555 Vibhavadi-Rangsit Road
Bangkok 10900
Telephone: (66 2) 270-1400
Facsimile: (66 2) 271-0777
Note: Above information courtesy of Univ. of Missouri-St. Louis, based on the Dept. of Commerce National Trade Database - NTDB
In 1992, product shipments by all producers of motor vehicles and car bodies totaled $138.8 billion, an increase of almost 8 percent. Sales of new light vehicles in the United States increased slightly after 3 consecutive years of decline, reaching a total of 12.9 million units.
Challenges of Competition
The U.S. market for new passenger cars and light trucks is essentially saturated. There is little prospect that annual growth on a long-term basis will be more than 1 or 2 percent. Despite, or perhaps because of this situation, competition in the United States among foreign and U.S. manufacturers is growing even more intense. In 1993, U.S. purchasers could choose from among 31 major domestic and foreign manufacturers offering 337 separate car and 143 separate light truck models, almost all of them superior in most respects to previous models (see attachment "A" for 1995 models.) Moreover, virtually all of today's new vehicles were developed and brought to market more quickly than in the 1980's, and were manufactured more efficiently and with less negative impact on the environment.
Virtually all competitive, high-volume vehicle and parts manufacturers worldwide have become significant players in the U.S. market, and more are coming. BMW and Mercedes-Benz announced in 1993 that they will operate vehicle assembly plants in the United States in 1995 and 1997, respectively. Kia Motors, a South Korean automaker, began establishing a West Coast sales network in 1993. It has targeted an early 1994 introduction date for its compact sedan, to be followed by a sport utility at mid-year.
The genuine openness of the U.S. market has profoundly affected the operations of U.S.-owned producers, from the smallest parts supplier to the largest vehicle manufacturer. Many companies have declined or disappeared in the face of stiff competition, but others have funnelled substantial resources into new or renovated facilities. The latter have become more competitive and have increased their share, not only of the U.S. market, but worldwide as well. Motor vehicle and equipment manufacturers invested $8.7 billion in the United States in 1992 for new and refurbished manufacturing plant facilities and equipment, a decline from $10.3 billion in 1991. In the first quarter of 1993, investments were running at an annual rate of $10.4 billion, up from an annual rate of $9.4 billion in the same quarter of 1992. Based on realized and known third-quarter capital spending plans, total investments were an estimated $9.8 billion in 1993.
The severity of the competition has taken its toll on domestic profits. It also has propelled the industry on a painful, but beneficial, journey to reduce operating expenditures through improvements in manufacturing technology and productivity and reductions in overhead expenses. In 1982, at the bottom of the last slump in domestic production, local manufacturers assembled 7 million cars and all types of trucks. The Department of Labor's Bureau of Labor Statistics (BLS) reported average annual employment in the industry was 318,000 manufacturing employees, the equivalent of 22 vehicles per worker. In 1992, output totaled 9.7 million units, while BLS-reported employment averaged 323,000, or 30 vehicles per worker.
GM, Ford, Chrysler, and many U.S.-owned parts manufacturers obtain many products for the U.S. market from their foreign subsidiaries and from their competitors. Competitive pressures also have generated a bewildering array of cooperative manufacturing and marketing ventures.
GM's "Geo" car brand is marketed as a single product line in the United States. The brand consists of compact sedans made in California in a 50-50 joint venture between GM and Toyota; subcompact and sport-utility vehicles made in Canada in a 50-50 joint venture between GM and Suzuki; and a compact made in Japan by Isuzu, of which GM owns 38 percent.
Ford owns 50 percent of Mazda's Michigan plant, which builds the Mazda MX-6 and the Ford Probe on the same basic platform. Chrysler provides engines to Mitsubishi's Illinois plant that are used in vehicles that each firm sells under separate nameplates. In 1993, GM and Toyota petitioned the Federal Trade Commission (FTC) and won the right to continue to operate a $1.5 billion joint venture in California -New United Motor Manufacturing, Inc. (NUMMI). The original 1984 FTC consent order required that they terminate operations at the end of 1996. In 1992, the two firms merged their separate manufacturing operations in Australia, where they now produce individual models on a common platform in a shared facility. In 1996, Toyota will begin marketing a GM U.S.-built car in Japan with a Toyota nameplate.
The entwining of the passenger car producers is duplicated by the light and heavy truck manufacturers, many of which are the same players. Chrysler initiated joint-venture production in 1992 with the Austrian firm, Steyer-Daimler-Puch, of a slightly modified version of Chrysler's U.S. market-leading minivan for the European markets.
Since 1991, Ford has produced in the United States a "badge-engineered" sport-utility truck for Mazda. In 1994, it will supply all of Mazda's light pickup trucks. Mazda previously had imported all of its light trucks from its factories in Japan. Ford also assembles in Ohio a small passenger van that was designed principally by Nissan, using sheet metal panels and engines supplied by the latter from its Tennessee plant. Both firms market the minivan, but with different trim options and nameplates. In late 1993, General Motors and Isuzu announced that they are working out details for the U.S. production of an Isuzu-designed commercial truck. Mitsubishi is reported to be searching for a U.S. source for a light truck. Honda has contracted Isuzu to supply it with a sport utility made in Isuzu's Indiana plant.
Recognizing the high level of competition that exists in the United States, and the need to match or exceed it, General Motors, Ford, and Chrysler--the Big Three--have initiated several jointly funded "pre-competitive" product and manufacturing technology research projects under the umbrella of the United States Council for Automotive Research. USCAR was formed in June 1992 to coordinate more effectively existing and future jointly funded R& D programs. The directorship of the council rotates every 2 years among the three companies. USCAR, in compliance with the National Cooperative Research Act of 1984, cannot focus on the design or production of specific vehicles. It may, however, pursue the development of generic, fundamental technologies to bring vehicles to the market sooner and at less cost to customers and the environment. USCAR will generate new techniques to reduce vehicle emissions and to improve fuel economy, as well as to create more environmentally friendly manufacturing and recycling procedures.
The Automotive Composites Consortium, which is under USCAR's purview, seeks to develop new materials for stronger, lighter, and more durable body panels. This consortium already has generated patents for new methods of fabricating polymer-based components. Other USCAR consortia include the Auto Oil/Air Quality Improvement feasibility research program, the CAD/CAM Partnership, the Environmental Science Research Consortium that seeks to improve understanding of the environmental impact of vehicle and manufacturing plant emissions, the High Speed Serial Data Communications Research and Development Partnership, the Low Emissions Technologies Research and Development Partnership, the Low Emission Paint Consortium, the Occupant Safety Research Partnership, the U.S. Advanced Battery Consortium, the U.S. Automotive Materials Partnership, and the Vehicle Recycling Partnership. Industrial research laboratories are participating in several of the consortia.
In September 1993, President Clinton proclaimed a major new undertaking involving the U.S. government and industry. USCAR will join with several agencies of the Federal Government, under the leadership of the Commerce Department's Technology Administration, to inaugurate the New Technology Initiative, a special partnership aimed at strengthening U.S. competitiveness. The initiative will enlist government and industry resources to develop within 10 years a new generation of vehicles having up to three times greater fuel efficiency than now exists. Cooperative research projects, involving private research facilities and the Federal Government's national defense research laboratories, will be launched to develop advanced manufacturing techniques for bringing new product ideas to the market quicker; implement near-term productivity improvements in manufacturing techniques that also will reduce the impact of auto production on the environment; and generate near-term improvements in vehicle fuel consumption, safety, and emissions.
Financial Performance
Domestic corporate earnings of motor vehicle and equipment companies (before taxes, inclusive of inventory adjustments) reached $3.1 billion in 1992, reversing losses of $6.9 billion in 1991. In the first half of 1993, vehicle sales were almost 7 million units, nearly 8 percent higher than the same period of 1992. According to the Commerce Department's Bureau of Economic Analysis, in the first quarter of 1993, total domestic corporate earnings jumped to $4.7 billion, compared with $1.8 billion in the first quarter of 1992.
The Big Three suffered global net income losses in 1992 of $30 billion on worldwide automotive sales and revenues of $236 billion. While Chrysler posted its first net income gain since 1988, Ford reported a loss of $7.4 billion. General Motors' net loss of $23.5 billion was the largest in U.S. corporate history. However, the net income figures of GM and Ford included one-time charges to net income of $20.8 billion and $7.5 billion, respectively, due to Federally required changes in the accounting methodology for post-retirement benefits. Essentially, these are paper losses. Without these charges, the Big Three loss in 1992 was "only" $2.4 billion (compared with a $7.6 billion loss in 1991 on worldwide operations totaling $208 billion).
The Big Three recovered somewhat in 1992. Total net sales and revenues rose for the first time since 1989; gross profits showed their first increase since 1988; and net losses before the nonrecurring accounting charges were less than those of 1991. Profit margins improved over 1991, but returns on sales and equity declined sharply due to one-time accounting charges. Liquidity indicators also improved, with cash and marketable securities continuing to grow and working capital accounts finally increasing. The total debt-to-equity ratio continued upward, however, while the quick and current ratios (defined in Table 1) remained relatively unchanged.
Discounting Chrysler's first-quarter 1993 charge of $4.7 billion for its post-retirement benefits obligation, the three firms generated first-half 1993 gains of $4 billion on worldwide sales of $144 billion, compared with earnings of $245 million on sales of $140 billion during the same period of 1992. Their improved earnings are primarily the result of reduced manufacturing costs, but other factors include expanding market share, enhanced product offerings, less sales incentives, increasing domestic demand partly due to aging of the vehicle fleet, and a strong Japanese yen that reduces the competitiveness of Detroit's primary challengers.
U.S. automotive parts suppliers had increased revenues in 1992 and expected higher sales in 1993. In 1992, the top 50 U.S. original equipment (OE) suppliers had North American sales of $73 billion, an increase of 11 percent. This follows a period of increased losses since 1989, when major U.S. OE suppliers saw a sharp drop in profits due to lack of demand, pricing pressures from Detroit, and foreign competition. Financial pressures on the supplier sector have greatly increased as their customers often ask them to finance R& D, inventory, tooling, and logistics.
In 1992, the parts-producing affiliates of the Big Three - GM's Automotive Components Group (GMACG), Ford's Automotive Components Group (ACG), Chrysler's Acustar, and Chrysler/GM joint venture New Venture Gear - accounted for about 40 percent of North American sales by U.S. OE suppliers. The three companies had sales of $28.6 billion in North America. GMACG was number one in sales, both globally and in North America, with revenues of $23.6 billion and $19.5 billion, respectively. Ford ACG was the number two North American supplier with sales of $7.2 billion and fourth-largest supplier worldwide. Acustar was number 17 in North American sales, and New Venture Gear was 25th. Independent OE suppliers comprise the remaining top 50 OE vendors. U.S. automotive parts manufacturers that produce replacement parts also posted sales increases in 1992. According to the Motor & Equipment Manufacturers Association (MEMA), U.S. retail sales of aftermarket parts totaled $76.4 billion in 1992, and were expected to rise about 4 percent to $80 billion in 1993.
INTERNATIONAL COMPETITIVENESS
Until recently, exports have played only a minor role in the profit-generating efforts of U.S. firms in this industry. However, recent actions to improve their product offerings, productivity, and prices for the domestic market also have resulted in increased international competitiveness. Automotive exports totaled $47.3 billion in 1992, up from $40.7 billion in 1991, even though total sales in most major foreign markets were flat or negative. The United States exported more automotive parts than motor vehicles ($28.5 billion vs. $18.8 billion) in 1992, while importing more vehicles than parts ($57.1 billion vs. $33.5 billion).
As has been the case for many years, most of the auto deficit is the result of trade with Canada and Mexico, where GM, Ford, and Chrysler operate plants producing vehicles for the U.S. market, and with Japan. The United States had an estimated trade deficit in motor vehicles of $43 billion in 1993, 12 percent higher than in 1992. The estimated 1993 trade deficit in automotive parts was $3.7 billion, compared with a deficit of $5.1 billion in 1992. (This discussion is based on a "general imports" accounting, rather than "imports for consumption."
Total U.S. direct investment (the market value at the time the investment was made) in place in foreign motor vehicle and equipment manufacturing organizations was $24.5 billion in 1992, compared with $22.8 billion the year before. The foreign subsidiaries created by these investments generated income of $2.9 billion in 1992, up slightly from $2.8 billion in 1991, but far behind $5.1 billion earned in 1989. This trend reflects the intensifying strength of competition abroad and the weakness in demand in most foreign markets. In 1992, capital outflows by U.S. firms were $3.6 billion, mostly to establish operations in newly emerging markets, or to create facilities to supply their U.S. requirements.
The value of direct investment placed in the United States by automotive sector foreign-owned entities totaled $2.7 billion in 1992. However, there was an outflow of $11 million, primarily because of sales, income, and market share losses by U.S. subsidiaries of European and Japanese vehicle and equipment producers. Foreign investors reported losses of $284 million in 1992 on their U.S. motor vehicle and parts operations, following losses of $372 million in 1991. This pattern continued in 1993.
ENVIRONMENTAL PROFILE
California's ZEV Requirement:
While a market niche is emerging on its own in the United States for environmentally friendly, "green" vehicles, much of the auto industry's current interest in environmental research has been stimulated by the stringent new clean air standards that California introduced in 1990. The regulations require that, beginning with the 1998 model year (generally the fall of 1997), 2 percent of all new vehicles sold there must emit no harmful particulates. By 2001, 5 percent must be zero emission vehicles (ZEVs) and by 2003, 10 percent. Other states are free to adopt California's stringent air pollution regulations, which are more restrictive than those of the U.S. Environmental Protection Agency (EPA).
One of the joint ventures formed by the Big Three in response to California's ZEV requirement is the Low Emissions Technologies Research and Development Partnership. It seeks to reduce emissions by refining the internal combustion process and by improving the performance of catalytic converters and other exhaust-related components. The program also hopes to enable engines to run on alternative fuels, including ethanol and methanol mixtures combined with gasoline, liquid natural gas (LNG), and liquid petroleum gas. This accomplishment will help these firms gain eligibility for sale to Texas government offices. By 1998, 90 percent of all Texas state-owned vehicles must be fueled by LNG. All local Texas governments must comply by 2002.
The only feasible way to meet California's requirements is apparently with electric vehicles. This has led the Big Three and the U.S. Department of Energy (DOE) to form the U.S. Advanced Battery Consortium to develop new battery storage technology. The private sector and DOE each contributed $130 million to fund the consortium's efforts. The industry is beginning to fear, however, that the first vehicles brought to market could be much too expensive for volume sales, costing from $6,000 to $10,000 more than comparable gasoline engine vehicles. Operating costs will be comparable, but the need to replace the battery storage system at the end of 3 to 4 years could add another $5,000 or more to the cost.
Federal regulations now require that each manufacturer's fleet of new passenger cars sold in the United States average 27.5 miles per gallon (mpg). Light truck fleets must average 20.4 mpg. Manufacturers of noncomplying fleets are subject to penalties, while individual models are assessed "gas guzzler" taxes of as much as $7,700 per vehicle. According to EPA data reported by the National Highway Traffic Safety Administration, domestic passenger cars averaged 27.7 mpg in 1993, and imported cars averaged 29.3 mpg. Domestic light trucks produced 20.4 mpg, while imported light trucks averaged 22.8 mpg.
New Materials:
The automakers' quest for environmentally friendly vehicles with improved fuel economy and lower pollutants has led to the development of production materials that are significantly lighter and recyclable. Automotive products now account for a substantial share of the consumption of basic materials: steel (20 percent of total U.S. consumption), lead and cast iron (50 percent), and zinc (33 percent). More efficient and more environmentally friendly use of these materials will generate major savings for the auto industry, and improve the efficiency of the whole economy.
In 1993, the Big Three formed a joint research group to develop new materials for use in lighter, cleaner, and safer vehicles. The U.S. Automotive Materials Partnership will conduct research into such materials as polymer composites, aluminum, plastics, iron, steel, ceramics, and advanced metals, incorporating work already in progress.
COMPOSITE MATERIALS, which are a mix of plastics with glass and carbon fibers or other substrates, are being used increasingly as substitutes for metal. In 1993, the Big Three consortium was granted a patent that covers the manufacturing process for a lightweight composite material that could replace steel in car bodies. The new technology allows composite parts to be formed around a hollow mold without a core, thus reducing their weight 10 percent or more. The automakers are not expected to begin using this patented parts-making process for at least 5 years. New heat-resistant technologies have enabled the automotive industry to use more plastic in engine blocks. Many new engines from the United States and Europe have plastic intake manifolds. In what may be the first major use of an engineering thermoplastic for an operating component inside an engine block, GM has replaced a proven metal guide with a plastic valve roller-lifter guide.
Automakers also are pursuing development of ALUMINUM vehicles. According to the Aluminum Association, a mid-size sedan using 1,000 pounds of aluminum would be 25 percent lighter and 20 percent more fuel efficient than an all-steel car. It could save 770 gallons of gas over 100,000 miles of service and emit 6.5 fewer tons of carbon dioxide. The aluminum content of vehicles has increased since the early 1970's, when an average car contained 78 pounds of aluminum, to 191 pounds today.
Ford leads the way in aluminum uses; on average, each of its cars contains 219 pounds. The demand for aluminum-based transportation equipment is expected to grow 7 percent annually through 1997, according to one industry study.
The transportation sector accounted for 21 percent of aluminum demand in 1992, up from 17 percent in 1982. Engineers maintain that aluminum can be just as safe as steel, with much less weight. Questions remain about repair, formability, assembly, corrosion, and metal fatigue. Cost is another problem; while aluminum sheet costs $1.50 per pound, steel sheet is 30 cents. However, the lower lifetime costs of using aluminum, in terms of less gasoline consumption and pollution emissions and recyclability, make it increasingly competitive.
The majority of the 1.8 billion pounds of aluminum used each year by the North American automotive industry is employed to make engines. Most auto engines introduced in the last few years have an aluminum block. Engines also are being made with recycled aluminum, which is less expensive than aluminum ore. U.S.-based Alcoa, the world's biggest aluminum group, helped Volkswagen-Audi launch an "aluminum-intensive," top-of-the-line V8 model in the fall of 1993. Several automakers, including the Big Three, are working actively to develop aluminum bodies and suspensions.
BMW and Norway's Hydro Aluminum, the world's largest producer of aluminum extrusions and a supplier of space frames for GM's Corvette, are working on a project that may result in the production of complete space frames (skeleton-like assemblies to which body panels, suspension and drivetrains can be attached).
Another Big Three consortium that focuses on environmental issues is the Vehicle Recycling Partnership (VRP). According to USCAR, the U.S. automotive industry uses 23 million tons of materials per year, including steel, cast iron, aluminum, and many types of plastics. However, although 90 percent of all motor vehicles now pass through a recycling facility, only 75 percent of the weight of a typical motor vehicle is reclaimed.
Recycling has increased in recent years, and according to one industry study, more automotive steel scrap was recycled in 1992 than was purchased by the U.S. automotive industry. About 10.5 million tons of automotive steel were recycled in 1992, compared with the 9.3 million tons sold to all U.S.-based automakers. VRP is researching methods to increase recycling to the greatest extent possible, as the time approaches when all vehicles will have to meet the recycling standards of each user country.
PLASTICS, which accounted for about 6 percent of vehicle weight in 1980 and 8 percent (243 pounds) in 1992, represent a growing, major challenge for the industry. A recent industry study estimates that as much as 1 billion pounds of automotive plastic now end up in landfills. At the current rate, this figure could reach 2.5 billion pounds by the end of the decade. About 100 different plastic formulations are present in a typical vehicle. They are difficult to identify and separate during dismantling operations, but if simply melted down together the result is an amorphous mass with no known economic value.
The Society of Automotive Engineers introduced a plastics labeling standard in 1992 that may help overcome the problem. New chemical "polymer renewal" recycling processes also are being developed to economically recycle thermoplastic polyester, nylon, and acetal into first-quality polymers.
Ford claims to be the first North American automaker to salvage plastic parts from some of its previously built models and recycle them into parts for a test fleet of vehicles. In a pilot program with GE Plastics, Ford is making new materials from salvaged plastic bumpers to mold new tail light housings. The automaker also is experimenting with materials such as recycled plastic soda bottles.
Although some analysts believe that it may be just a cyclical change in purchasing patterns--and one that is near its peak, the domestic market in 1993 continued to exhibit what well may be a fundamental shift toward light trucks (sport utilities, minivans, pickups) and away from station wagons and sedans. Light trucks supplied just 29 percent of the domestic light vehicle market in 1986, but by 1992 accounted for 36 percent of all sales. Light trucks supplied more than 38 percent of the U.S. market during the first 7 months of 1993, compared with 35 percent in the same 1992 period. The strength of the light truck segment, in fact, was responsible for most of the growth in the motor vehicle market. Light trucks increased an estimated 14 percent to 5.3 million units, while sales of passenger cars advanced just 6 percent.
Detroit is particularly competitive in the light truck sector, selling 4 million units - 86 percent of that market - in 1992. Japanese firms supplied virtually the rest. Germany and Great Britain are the only other suppliers, selling a few thousand units each year, but they have major marketing efforts under way to increase their sales, if not their market shares.
The eight leading suppliers of light vehicles increased their share of the market from 90 percent in 1986 to 95 percent in 1992, leaving only a few customers for the 20 other companies. The top four firms (GM, Ford, Chrysler, and Toyota) supplied 80 percent of the 1992 market. GM's share has declined by four percentage points since 1986, but it remained by far the predominant individual supplier with 34 percent. Toyota had the largest foreign-owned share - 8 percent.
National Nameplates
If imports and local production are categorized according to the nationality of the sellers (irrespective of the actual manufacturers, or countries of origin of the products sold), the U.S. "national nameplate" share of the domestic market was 72.2 percent in 1992, about the same as in 1986. Japan's share increased from 20.6 percent to 24.4 percent during the period.
Big Three nameplates gained share in 1993, accounting for an estimated 75 percent of the light vehicle market. Their piece of the light truck segment grew to slightly over 87 percent. Detroit's car share increased from less than 65 percent in 1992 to 68 percent. Until early 1993, few analysts had anticipated the rapid shift in the market's favorable assessment of the Big Three's products, nor had they given adequate weight to the competitive advances which they have accomplished.
U.S. buyers, however, clearly have begun to recognize the improved quality, pricing, and fuel economy of Big Three vehicles. According to J.D. Power and Associates' annual consumer survey, buyers' perception of the quality of cars sold by U.S. automakers improved 40 percent between 1986 and 1993, to a level of 132. Their perception of Japanese cars improved 18 percent to a level of 141. U.S. nameplates still trail those of the Japanese producers, but the quality gap has narrowed significantly. Many consumers now apparently consider the differences to be inconsequential.
Motor Vehicle Production
In 1992, total car and light truck production in the United States was 9.5 million units, and capacity utilization was 77 percent. In 1993, production increased 13 percent to an estimated 10.7 million units, utilizing about 82 percent of total capacity.
Autofacts International reports that Big Three plants in the United States produced 7.8 million units in 1992, while their capacity was an estimated 10.3 million units, resulting in a capacity utilization ratio of 76 percent. (Historically, U.S.-owned auto assembly plants in the United States have not been profitable when utilization rates were below 85 percent.) The Big Three operated 49 plants in 1993 to produce an estimated 8.8 million vehicles.
Detroit is spending heavily to improve U.S. vehicle design features, product quality, and manufacturing technology. It also is engaged in programs to reduce manufacturing overhead expenses and direct manufacturing costs, seeking to significantly lower the current break-even point on manufacturing operations. Few Big Three facilities now can make a profit on less than 100,000 units of a particular model. Because the market is fracturing into smaller niche segments, however, companies must find ways to be profitable at lower levels of production.
Autofacts expects that by 1995, Ford will add 270,000 units to its North American light truck capacity, while Chrysler will increase its car capacity by 100,000 units. GM is in the process of reducing its North American production capacity to 5.4 million units by 1995, down from 6.7 million when it began restructuring in December 1991. The firm has announced that corporate-wide employment will be reduced by 90,000 by the end of 1995, leaving the company with about 320,000 U.S. salaried and hourly employees. GM closed a Michigan car assembly plant in late 1993, plans to shut down a Delaware van plant in 1996, and expects to close or sell two more vehicle plants. (A discussion of possible closure of several components plants is in the auto parts section.) At the same time, plants for some vehicle nameplates are being upgraded and modernized. The Saturn Corporation subsidiary has been unable to keep up with demand, and it may have to add a second plant in the near future.
Domestic Market Factors
One significant element that is serving to dampen sales in the U.S. market is the growing elasticity in demand as vehicles become a more discretionary purchase. The near-compulsion to automatically replace a new car every 3 years appears to be a phenomena of the past. Consumers are stretching the replacement cycle and voluntarily holding their cars and light trucks longer, mostly because their vehicles are more reliable and owning them longer represents less of a risk. Also, the cost of ownership, driven in part by rising expectations regarding acceptable levels of performance and comfort, as well as by Federally mandated safety and emissions regulations, has risen sharply, creating affordability problems.
On a corporate worldwide basis, GM, Ford, and Chrysler continued to rank first, second, and seventh, with 1992 production estimated by Automotive News magazine to have totaled 15.1 million units. The Big Three have major factories in Argentina, Australia, Austria, Belgium, Brazil, Canada, Germany, Great Britain, Mexico, and Spain, plus several smaller facilities in developing countries. According to corporate annual reports, the Big Three spent $11.3 billion worldwide on automotive R& D projects in 1992, an increase of 7 percent over the previous year. From 1986 to 1992, the Big Three invested $95.4 billion worldwide in plant and equipment, even though in the same period they suffered net income losses totaling $2.1 billion. New capital investment by Detroit was $13.5 billion in 1992, when they recorded a net income loss on their automotive operations of $30.1 billion.
General Motors produced 7.1 million vehicles worldwide in 1992, 15 percent of the world's total. Ford manufactured 5.8 million units worldwide (12 percent share). Chrysler's total production of 2.2 million units accounted for 5 percent.
The Big Three have notable investment positions in several large and small foreign vehicle manufacturers, although there is no direct investment in the Big Three by any foreign vehicle maker. Among its several holdings,GM owns 37.5 percent of the shares of Isuzu, 5.3 percent of Suzuki, and 50 percent of Saab Automobile (Sweden). GM decided in mid-1993 to sell one of its English holdings, Lotus, to Bugatti of Italy.
Ford owns 25 percent of Mazda, 10 percent of Kia Motors (South Korea), 100 percent of Jaguar, and 75 percent of Aston Martin (both United Kingdom).
Chrysler owns 15.6 percent of Maserati (Italy). Chrysler sold Lamborghini (Italy) and its remaining holdings in Mitsubishi in 1993, and may sell its Maserati share in 1994.
In 1992, the Big Three supplied 24 percent of the 13.8 million unit West European markets, primarily from the several local manufacturing facilities that GM and Ford established or acquired in the 1920's and 1930's. GM's European automotive operations generated an estimated $1.2 billion profit in 1992, and continued to have substantial profits in 1993. During 1992-93, GM reduced its employment 14 percent to 78,000 persons, and increased its productivity 8 to 10 percent each year. Ford Europe lost $1.3 billion in 1992, and was forced subsequently to cut its 1993 work force by 17,000, or 17 percent of its staff. Further losses were expected in 1993.
In 1991, Chrysler opened a joint-venture plant in Austria to produce minivans for the European markets. Production reached 15,300 units in 1992 and an estimated 33,000 units in 1993. Chrysler's partner, Steyer-Daimler-Puch, also will build annually up to 47,000 units of Chrysler's Grand Cherokee sport-utility vehicle, beginning in late 1994.
The Big Three have substantial manufacturing operations in Canada (11 plants) and in Mexico (6 plants). In 1992, they assembled 1.6 million vehicles in the former and 600,000 in the latter. In late 1993, GM announced that it will return to Argentina, after terminating operations there in 1978, investing $80 million in a $100 million joint venture with Cidea, the local assembler of Renault cars. Production will begin in 1994, with annual volume of 25,000 vehicles scheduled by 1996. GM's plant in Brazil was expected to assemble 250,000 vehicles in 1993, up from 198,000 units in 1992. GM is reportedly prepared to open a second plant in 1995, if the market continues to expand at its current pace. Ford holds 49 percent of a joint venture in Brazil and Argentina with Volkswagen. Ford produced a total of 177,000 units in the two plants in 1991.
A sea change now appears to be under way in U.S. export efforts, perhaps fostered by the realization that the U.S. market is fully mature, while many emerging foreign markets have the potential for exponential growth well into the next century. Contributing greatly to Detroit's export prospects is the development of models with heightened international appeal, notably greater product quality, and significantly improved price competitiveness because of more efficient manufacturing techniques and much more favorable exchange rates.
Forbes magazine reports that General Motors was the second-largest exporter in the United States in 1992, with export shipments totaling $14 billion. According to GM, its North American exports were 114,000 units, up 3 percent. Key foreign markets for GM include Canada, Saudi Arabia, Kuwait, Brazil, Argentina, Germany, Japan, and Taiwan.
The firm has announced plans to reach an export volume of 250,000 units annually by 2000, with expanded markets expected in Russia, Eastern Europe, China, North Africa, and South Korea. GM's export commitment is reflected in its decision that modifications for differing safety and emission regulations for some models will be accomplished in the United States, rather than being retrofitted in the country where they are to be marketed.
Right-hand drive (RHD) export versions of GM's Saturn models now are being evaluated for production in 1995, while RHD versions of GM's small pickup will go into production in late 1994. Even though the company is short on capacity for the domestic market, GM has targeted 1994 RHD light truck exports of 25,000 units, plus 25,000 left-hand drives, double 1993's expected total, all of which were left-hand drive.
Ford's 1992 exports increased 11 percent to 50,100 units. It anticipates that 1993 will be its best export year to date. Ford also has announced a goal of annual exports of 250,000 units by 2000. Key overseas markets include Germany, England, Taiwan, Japan, South Korea, Kuwait, Venezuela, Chile, and Puerto Rico.
Ford has engineered RHD into its Probe, Taurus, and Explorer--its most popular models on the U.S. market, and is evaluating the feasibility of producing RHD versions of its minivans and small pickup trucks. The company also plans to make modifications required by foreign safety and emission regulations during initial assembly, rather than at its export terminals.
Chrysler's 1992 worldwide exports grew 19 percent to a total of 86,400 units and were an estimated 104,000 units in 1993, up 20 percent. The company predicts annual increases of 15 to 20 percent for the next 5 years. Chrysler was the first of the Big Three to develop a RHD vehicle, Jeep Cherokee, for foreign markets. Chrysler's new small car, Neon, entered production for the U.S. market in late 1993, and also will be exported to 18 countries, beginning in 1994. Chrysler now exports to more than 80 countries, including Germany, France, Taiwan, Switzerland and Japan.
In 1992, the total value of U.S. motor vehicle "general imports" (which excludes all units assembled in U.S. foreign trade zones by U.S. and foreign-owned firms) was $57 billion, up 3 percent. U.S. exports advanced 14 percent to nearly $19 billion. The deficit dropped 1 percent to $38 billion. In the first 6 months of 1993, imports increased nearly 11 percent (compared with the same previous period) to $31.2 billion. This was primarily the result of Big Three imports from Canada of their more popular U.S.-nameplate models. U.S. exports increased nearly 9 percent to $10.2 billion. As a result, the 6-month trade deficit was $21 billion, an increase of 12 percent.
Total U.S. exports of motor vehicles were an estimated $20 billion in 1993, and will be about $22 billion in 1994 (Table 5). Imports totaled an estimated $63 billion in 1993, and could rise to $66 billion in 1994. The trade deficit is expected to increase from $43 billion to more than $44 billion in 1994.
1993 within the context of the U.S.-Japan "Framework" discussions, and more talks are scheduled.
The U.S. motor vehicle trade deficit with Japan fell 5 percent in 1992 to $21.4 billion on imports of $22.3 billion and exports of nearly $900 million. The dollar value of imports from Japan rose 3.5 percent in the first 6 months of 1993 to $11.3 billion. Big Three and Japanese transplant motor vehicle exports to Japan increased 46 percent in the first half to a total of $600 million. The deficit increased 2 percent compared with the previous period, reaching a total of $10.7 billion. On an annual basis, Japanese imports increased an estimated 4 percent during 1993, reaching $23 billion, while exports to Japan rose an estimated 22 percent to $1.1 billion.
In 1992, registrations of U.S. Big Three vehicles in Japan, led by GM's 9,100 units, totaled 14,100 vehicles, up 3 percent. Registration of transplant vehicles totaled 22,000 units, up 44 percent. Honda's transplant registrations were 19,800 units. Total motor vehicle registrations in Japan fell 8 percent to 7 million units. Registrations of all imports fell 7.7 percent to 185,000 units, equal to just 2.6 percent of the total market. In the first 6 months of 1993, the total market dropped 7 percent to 3.4 million vehicles. However, U.S. Big Three registrations advanced 18 percent to 8,300 units. Transplant registrations totaled 20,800, an increase of 185 percent. Total import registrations were up 13 percent, reaching 96,000 units, equal to a 2.8 percent share.
Sales of Big Three nameplate vehicles should advance by 7 percent to 11.3 million units. This would represent a one percentage point gain in market share to 76 percent, the highest in the past several years. Big Three passenger car sales will grow by 5 percent to 6.2 million units, or 69 percent of the segment. The light-truck segment represents the greatest opportunity for Big Three growth.
Japanese competitors have made repeated product errors, after their initial successes, in this sector, and it is unlikely during 1994 that they will offer products that are fully competitive with current and planned products of the Big Three. Detroit's 1994 light truck sales could reach 5.1 million units, increasing their segment share by one percentage point to 88 percent.
The Japanese-nameplate share of passenger cars probably will remain flat at about 27 percent, with total sales of 2.4 million cars. Light truck sales will increase in volume by nearly 5 percent to 711,000 units. Sales of Japanese-made light vehicles that are imported will continue to drop, falling by 7 percent to 1.5 million units. Hardest hit will be the low-value, high-volume models, but sales of imported Japanese luxury vehicles also will suffer from the exchange rate and from the improved product offerings and pricing policies of both their European and U.S. competitors.
Fewer residents will reach driving age in the next several years than in the past decade. The negative implication of this development could be offset somewhat, however, by the baby boom's entry into what has typically been their peak earning years, permitting them to own more expensive cars and more of them. Another factor affecting the industry's long-term growth is the response of Federal and local governments to increasingly congested urban streets and overburdened, deteriorating interstate highways. If the response is inadequate, or if a preference evolves for giving greater support to mass transit, future vehicle sales could be adversely affected. As part of its initial effort to address the deteriorating road infrastructure, Congress appropriated $660 million for R& D of "intelligent vehicle highway systems" during FY 1992-97. These funds could greatly reduce traffic congestion and accidents in several critical regional transportation corridors. The appropriation is part of a larger funding to revive and improve the surface transportation network under the Intermodal Surface Transportation Efficiency Act of 1991.
The U.S. light vehicle market will continue to become more competitive, with more producers offering new and revised models on ever-shortening time cycles. Market demand will splinter into smaller segments, aided by the success of the major manufacturers in adopting and refining the high degree of flexibility inherent in the lean manufacturing techniques that were pioneered by Japanese firms.
Manufacturers will aggressively exploit their new capabilities by cultivating and filling new market niches with models constructed specifically for them. This strategy will place a heavier burden on product planners, market researchers, design and production engineers, and styling studios to generate new concepts, and to compress their development cycles. Manufacturers also must continue to improve their cost-control procedures so that they can extract profits from relatively small production runs of individual models.
The battle for U.S. market share will exert some downward pressure on prices. However, more stringent safety, environmental, and fuel economy regulations may be introduced; if so, they are likely to increase manufacturer costs and raise prices more rapidly than the average rate of inflation. Producers will thus have additional impetus to maximize manufacturing productivity and to keep costs under control. Consequently, labor relations will become increasingly important to the industry. This is especially true since vehicle assembly operations are becoming more vulnerable to total disruption by local strikes. The low parts inventory procedures being implemented as part of lean manufacturing allow no cushion, even for the temporary disruption of supplies.
The new labor contracts signed by the Big Three with the United Auto Workers in late 1993 provides for base-pay increases of 3 percent in 1994, 2 percent bonus payments in the following 2 years, a continuation of existing health-care benefits, and up to $200 per month extra in pension benefits. The contract also renews the existing income-protection program for laid-off workers, providing up to 95 percent of salaries for 3 years.
Detroit also will continue efforts to increase sales in Japan. Good opportunities exist in certain niche segments, although building a viable sales network will be a major challenge. Moreover, the Industrial Bank of Japan predicts that the local market will remain depressed until Japanese FY 1995, when registrations could grow to 7.2 million units. The bank predicts a peak of 7.9 million vehicles in FY 1997, with sales falling to 7 million in 2000.
With the North American Free Trade Agreement (NAFTA) among the United States, Mexico, and Canada, U.S. producers are expected to benefit from greatly improved access to one of the fastest-growing markets in the Western Hemisphere. Several forecasters expect that, if Mexico experiences the expected economic stimulus from NAFTA, the consumer vehicle market could grow 4 to 7 percent annually in the near term and at higher rates thereafter. The Big Three have a 51 percent share of Mexico's light vehicle market. Because of current import restrictions, however, they must supply the market primarily with local production. Under NAFTA, the elimination of investment and import requirements will allow imports to increase.
The Big Three can maximize their international opportunities if favorable dollar exchange rates continue and there is a sustained commitment to their export strategies. Detroit also must continue to reduce its U.S. operating costs and improve productivity and product quality, perhaps by adopting new "agile manufacturing" techniques that take lean manufacturing to the next plateau.
Critical to Detroit's effort will be the availability of low-cost capital for the acquisition of even more flexible plant, tooling, and assembly machinery than now exist. Operating costs must be reduced by improving productivity through more intense employee training. The containment of health-care expenditures for current and retired employees also will be critical.
Note: Based on Randall Miller and Mark Brectl (Financial Performance section), Office of Automotive Affairs (202) 482-0669, November 1993.
Compounding the Japanese manufacturers' problems are home market manufacturing cost increases and the first 3-year slump in local sales since 1945. In their efforts to restore income, Japanese producers have been forced to adjust their U.S. prices on both imported and U.S.-made vehicles, significantly reducing their competitiveness. According to U.S. industry estimates, the average 1993 price differential between comparable Big Three and Japanese nameplate cars in the U.S. market was $2,500- $2,800 in favor of Detroit. Even more significant for the future is a reported $2,000 per unit manufacturing cost advantage for Japanese vehicles produced in the United States compared with those made in Japan. Automotive News reported in late 1993 that the average price increase on 1994 "comparably equipped" models of Japanese brands was seven times more than that of the Big Three car lines.
Since 1985, the Japanese government has imposed unilaterally a quota on its manufacturers' exports to the United States. This voluntary export restraint applies to all vehicles in which the volume of the passenger compartment exceeds that of the cargo compartment. Most sport-utility vehicles and vans fall into this category, as do all "traditional" passenger cars. However, the policy has had no direct impact on the number of units shipped to the United States. Since 1986, exports to the United States have been below the 2.3 million unit ceiling every year. Japan reduced the quota to 1.65 million vehicles for the fiscal year ending March 31, 1993. Shipments in that period totaled 1.57 million units.
Exports of Japanese nameplate vehicles from their United States plants have risen sharply. Led by Honda's worldwide shipments of 56,000 units from Ohio, Japanese transplant exports almost doubled to 146,000 units in 1992. Shipments went to 26 countries, including most major European markets. A total of 26,400 transplant units were shipped to Japan, and 57,000 to Taiwan.
The Japanese government agreed in 1993 to reduce its manufacturers' home country exports to the European Community (EC) in accordance with the terms of the 1992 EC-Japan understanding that limits Japanese motor vehicle sales in the 12 EC countries through 1999. The agreement, however, does not apply to vehicles produced by Japanese firms in third countries. Following the announcement of the revised quota, several U.S. subsidiaries of Japanese producers indicated that they would expand or begin shipments from the United States to select European markets. Mazda, for example, announced that, beginning in 1994, it will ship 10,000 vehicles annually to Europe from Michigan.
Japanese-affiliated manufacturing facilities in the United States have become increasingly significant in the industry. They were expected to assemble 1.9 million units in 1993, 18 percent of total U.S. production. The Japan Automobile Manufacturers Association (JAMA) reported that the value of the transplant investments was $9.6 billion in 1992, with annual capacity of 1.7 million units. Planned additions are expected to increase transplant capacity to at least 2.4 million units by 1995.
Honda operates two car plants in Ohio; Nissan has a plant in Tennessee; Toyota is in Kentucky; Isuzu and Subaru have a joint venture in Indiana; and Mitsubishi is in Illinois. GM and Toyota operate a joint venture (New United Motor Manufacturing) in a former GM plant in California. Mazda has a half interest with Ford in a Michigan plant. Autofacts estimates that Japanese transplant capacity in 1992 was 2.05 million units (differs from JAMA's data). Production totaled 1,687,000 units, resulting in a capacity utilization ratio of 82 percent. (Foreign Direct Investment in the United States: Establishment Data for Manufacturing provides comparative data on Japanese and U.S.-owned auto plants in the United States. See the Additional References section.)
Toyota, with worldwide output of 4.7 million units, was the third-largest producer in 1992. Nissan ranked fifth at 3 million units; Mitsubishi, 10th largest, produced 1.8 million units, as did Honda, in 11th place. Automotive Industries magazine estimates that worldwide expenditures by Honda, Nissan, and Toyota on automotive R& D projects totaled $6.7 billion in 1991, a 17 percent increase in dollar terms over 1990.
Japanese vehicle producers will concentrate on producing luxury and niche models at home for export to the United States and elsewhere, while lower-value vehicle manufacturing will be shifted to North America and other countries. Honda announced in September 1993 that it would cease shipments to North America of its Civic line of vehicles during 1994, and shift production to Ohio. By March 1996, shipments of some Accords also will be terminated. In late 1993, there were indications that Honda might also manufacture some of its upscale Acura line in a new North American facility. Subaru has announced that it will terminate imports of its 1994 Legacy model, transferring all production for the U.S. market to its Indiana joint venture by mid-1994. Nissan and Toyota also are contemplating production shifts.
U.S.-owned firms have not been the only casualties of the U.S. market wars. Faced with fierce competition from Japanese vehicle producers, Sterling, a unit of the British Rover Group, and the French firm, Peugeot, withdrew completely from the United States in 1991. Yugo, which supplied the "entry level" small car market, ceased operations in 1992. Daihatsu, a small Japanese producer of entry-level cars and sport-utility vehicles, also left. Other withdrawals could occur in the near term.
Germany, at one time the largest foreign supplier to the United States, is now a distant second, having steadily lost share to Japanese imports. Sales of German nameplate passenger cars totaled 221,000 units in 1992, only 2 percent of the 1992 market. However, the average value of German vehicles is much greater than the import average. The 208,000 vehicles imported from Germany in 1992 (but not necessarily sold that year), accounted for less than 5 percent of total U.S. motor vehicle imports, but about 10 percent of the total U.S. customs value.
In the mid-range market today, only Volkswagen remains active among European automakers. Except in the high-end segment, the rest have departed. However, there have been losses in this segment as well. The decline of the Europeans began when the dollar started to depreciate against major European currencies in 1985. Most European firms responded to the shift by routinely increasing their U.S. retail prices to compensate for reduced profits. Consequently, these prices mostly reflected "currency content," rather than "value content." This strategy failed as U.S. customers became more sophisticated, no longer equating high price with high value.
Sales of European luxury brands increased about 9 percent in 1992 to 231,000 units, but their share of this segment of the U.S. market dropped to 21 percent. On the other hand, Japanese luxury sales increased about 6 percent to 267,000 units, a 24 percent share. Sales of U.S. luxury brands fell steeply--10 percent--to 602,000 units, a 55 percent share.
The European automakers greatly underestimated the intrinsic build, fitment quality, and competence of the driving characteristics of the Japanese luxury brands. Their failure resulted in their lack of a strategy to counteract the rapidly acquired, excellent reputation generated by the Japanese luxury cars. According to J.D. Power and Associates' survey, the satisfaction of American buyers with the cars purchased from European automakers improved from an index level of 106 in 1986 to 130 in 1993, but the satisfaction index for all Japanese brands (including "economy" and inexpensive compact cars) grew faster and is now much higher. European brands are in the mid-price range or higher, where consumers expect much better-than-average quality. On an individual nameplate basis, 4 European brands ranked in the top 10 in 1993. Jaguar was highest, in fourth place, behind Lexus (Toyota), Infiniti (Nissan), and Saturn (GM).
In mid-1993, several European makers announced new U.S. business strategies designed to take advantage of the emerging appreciation of the dollar against European currencies and continued depreciation against the yen. They are cutting prices, offering better lease and finance terms, or increasing product content without increasing retail prices. The market may be shifting in their favor. During the first 8 months of 1993, sales of European luxury brands reached 171,000, up 4.5 percent over the same previous period. This generated a 24 percent share, compared with 22 percent in 1992. Sales of Japanese luxury brands began to falter as their prices escalated, dropping almost 3 percent to 174,000 vehicles. Their share was 24.2 percent compared with 24.3 percent previously. Sales of U.S. brands dropped nearly 5 percent to 375,000 units, and their share declined from more than 53 percent to about 52 percent.
German manufacturers BMW and Mercedes-Benz have announced that they will build full-scale manufacturing plants in the United States. BMW's $400 million plant in South Carolina will begin production in 1995, and eventually employ 2,000 people. Volume is planned at 90,000 units per year, possibly of three different sports models, including approximately 70,000 export units. Mercedes' $300 million plant, to be located in Alabama, is designed to assemble 60,000 sport utilities annually, starting in 1997. Exports could account for two-thirds of total production. Direct employment could reach 1,500.
The next several years should witness more cross-border mergers (like the proposed 1994 amalgamation of Volvo and Renault), takeovers, terminations, and the development of even more extensive cooperative production and marketing arrangements between or among firms in the United States, Europe, and Asia. The result will be fewer (perhaps no more than 10), but more equally matched, global contestants. If there are no new barriers, Japanese investment probably will continue to expand in the United States, Europe, and in Asia, as will investment by the Big Three.
European firms may remain focused in their own region, except for the three major German producers, which are all expanding or establishing production facilities in North America.
Unlike its German competitors, the Italian automaker, Fiat Auto S.p.A, is betting that the profit potential of developing markets in Asia, Africa and Latin America will far outstrip the markets of Europe and the United States. Planing to develop its first true world car for production outside Italy, Fiat will now design cars for its targetted markets, instead of adopting its habitual, although presently renounced, practice of modifying their vehicles to fulfill environmental demands.
Fiat's new car, a 1.0 to 1.6-liter, four-cylinder code-named 178, is expected to be priced below $8,000. According to the company's record, the production of this hatchback is scheduled to start in Brazil and Argentina by 1996, where investments total 1 billion dollars for a volume of 350,000 units. Fiat also plans to invest $100,000 in Turkey by 1997. By 1998, the Italian auto maker will invest $100,000 in Mexico, $30,000 in Morocco, $30,000 in India and $30,000 in South Africa.
In the United States, the South Korean auto maker, Kia Motors, has launched the Sportage. Kia expects this 2.0- liter, four-cylinder, four-wheel drive sport-utility vehicle to outsell Suzuki's Sidekick. A base Sportage four-door was priced at $14,495 and the Sidekick at $14,809.
Hyundai is running the largest carmaking complex in the world, with 33,000 workers, at the coastal city of Ulsan in South Korea. It is using state-of-the-art robots for 95% of the welds on its new Elantra assembly line. It is designing its own cars, engines and transmissions. Fearing that their car industry is too small to survive, Hyundai, Kia and Daewoo are spending $10 billion to double their manufacturing capability. By diving into the car business, they expect to undercut Japanese small car prices.
The Japanese lost their price edge to manufacturers elsewhere because the yen appreciated sharply to 95-98 to the dollar in the past year, making all Japanese goods more expensive. European car-makers attacked the Japanese core market for economy small and medium-size cars, apart from dominating the luxury bracket.
By the end of 1993, a total of 137,797 Japanese cars were sold in Thailand, representing 79.1% of the market. But by the end of October this year only 90,298 Japanese cars were sold, compared with 115,202 at the same time last year.
Opel, a GM subsidiary, was the first European maker to worry the Japanese by introducing the Corsa, a small car. Opel recorded a 4.7% market share in the first 10 months of 1994, having sold 6,011 units, up 473.6% from 1,048 units in 1993. The increase mainly came from the Opel Corsa, launched late in 1993, and the sole distributor, Phra Nakorn Automobile Co has expanded its budget-car range to include both the 1.2-litre and 1.4-litre versions.
In Thailand, more car brands are to come on the market, including the Czech Republic's Skoda. Skoda is expected to be marketed by Motor Ways Group, an independent importer of Volvo. It hopes to start selling the Czech national car early in 1995 with an initial sales target of 3,000. The group also plans to set up a Skoda assembly plant. The all-new Skoda Felicia, employing German technology from Volkswagen, will be sold in Bangkok at a competitive price.
Rover International Group is seriously considering Thailand as its new production base outside Britain. It has sent experts and researchers to Thailand to study the country's vehicle industries in this region, as well as their climates.
In the past, many vehicle firms in Asia were automatically prevented from exporting cars as their domestic markets were not big enough to enable them to have economy-of-scale. Therefore, their governments had to provide promotional export packages to help them. In the year 2000, the total vehicle assembly capacity in Asia, excluding Japan, is forecast to reach 11 million units: five million from Korea, three million from China, one million from Thailand, 800,000 from Taiwan, 500,000 from Indonesia and 400,000 from Malaysia.
Significant prospects are emerging quickly in the less-developed Asian markets, which some analysts believe will account for two-thirds of all growth in the world auto market over the next 7 years. The Big Three are moving to augment their local sales offices, as well as to establish and expand existing manufacturing operations in the region. GM is investing nearly $70 million in a $110 million joint venture in Indonesia for the production of right-hand drive light trucks and passenger cars, beginning in 1995. Chrysler is gearing up in Malaysia, with a joint venture assembly operation capable of producing 2,000 Jeep Cherokees per year. Ford already owns 70 percent of a joint venture in Taiwan, and has acknowledged that it is evaluating other sites in Asia for a new assembly plant. General Motors also assembles vehicles in Taiwan. All three companies are thought to be evaluating production sites in Thailand.
The Chinese government expects that auto sales in China, which were 180,000 units in 1992, could reach 1.5 million cars annually by 2003. GM and Chrysler already have joint-production facilities with separate Chinese partners to produce light trucks. Ford began to open a China sales network in 1993 to take part in this expanding market.
South Korea may represent the best near-term export prospect among the developing countries of Asia, with an estimated annual growth rate of 15 percent expected for several years. Sales reached an estimated 1.5 million units in 1993. Although foreign vehicle producers have been denied full market access, liberalizing changes are expected soon.
China's auto policy, formulated by the State Planning Commission in February 1994 and made public in July of that same year, still envisioned a major role for foreign firms. But the policy disdained assembly projects and demanded state-of-the-art technology, full involvement for the Chinese in all stages of product development and a commitment to high local content.
Porsche and Mercedes-Benz won points with Chinese officials for bringing technologically advanced family car prototypes designed specifically for China; Honda offered a reworked 1.3-liter version of an existing car model; Ford offered its 1.3-liter Fiesta and 1.6-liter Escort; General Motors presented the 1.4-liter Corsa, made by its European subsidiary, Opel; and Chrysler displayed the 2.0-liter Neon. All hope the government will choose to work with them to develop a family car for China.
China's hopes for its auto industry may be too ambitious. Some 80 million Chinese still live in poverty. Per capita roadway in China is just one twenty-eighth of that in America. And tractors still make up one third of road traffic. But if the auto industry develops according to plan, the global environment and world oil supply will be profoundly affected.
The German car maker was looking for a market big enough to support itself and which could also serve as a strong export base. The Indian firm was formed in 1945 as a venture with Daimler-Benz AG, which still holds a 13 percent stake.
General Motors Corporation produced truck and buses in India from 1928 to 1954, it pulled out because of what it called "unfavorable market conditions." GM has been working with an Indian manufacturer, Hindustan Motors, in India since the 1950s and licenses its Bedford trucks, British-brand Vauxhall cars, Allison transmission and off-road equipment.
However, GM returned to India after its 40-year absence as it became a 50:50 partner with Hindustan Motors in a venture called General Motors India Ltd., where GM will have management control. The venture will produce the German-designed Opel Astra four-door notchback sedan. Production is scheduled to start in the third quarter of 1995, at a Hindustan Motor plant in Halol, Gujarat.
General Motors said it intends to set up a lean manufacturing operation, patterned after its most efficient plant, in Eisenach, Germany. The India plant is scheduled to operate two shifts, employ 500 workers and produce 20,000 cars annually within several years. To comply with India's requirement, the car will have 70 percent local content after three years. The project will be coordinated by Opel in Germany. Opel will set up a supplier base.
Note: Courtesy of Automotive News January 31 and May 16, 1994
Proton, or Perusahaan Otomobil Nasional, was set up as a joint venture between state-owned Heavy Industry Corporation of Malaysia (HICOM) and Japan's Mitsubishi Corporation, nowadays holding the stakes of 60 and 40 percent, respectively. After a slow start, Proton built its share of the Malaysian car market up to 73 percent and now exports to 17 countries.
Proton is also investing in neighboring countries. It has joined a new venture with Mitsubishi Motors Corporation, Mitsubishi Corporation and the Vietnam Transportation and Communication Export-Import Corporation to import completely knocked down vehicles for assembly and sale in Vietnam. The joint venture company, Joint-Venture Motor Corporation, is expected to begin by assembling minibuses, then Proton cars, and eventually other Mitsubishi vehicles.
Other neighbors, such as Thailand, already supply components for Proton's manufacturing activities in Malaysia. Japan supplies about 20 percent of the parts required, but the strength of the yen has prompted Proton to accelerate its search for alternative local and regional suppliers. Proton will need parts.
The national car project was intended to contribute to the more effective process of industrialization by increasing the level of employment, export, technological progress, value-added and linkages throughout the economy. Under the Industrial Master Plan (IMP), which covers the period of 1986-95, the government has planned to rationalize and restructure the industry, such that by 1995 there will be only three automobile manufacturers remaining in the industry. Each of them is expected to specialize in a specific range of vehicles.
Competition in the vehicle industry has been very testing, forcing Japanese car-makers to rethink their pricing tactics. But their competitiveness has declined from a market share of about 85% at the end of 1992 to only 70.8% in October this year. "If the rising yen forces us to pass on additional costs to the buyer, our total market will drop to 50% eventually," said Bancha Pianvanich, marketing manager of Daihatsu-Phranakorn Motor Co.
Sales of Japanese cars in Thailand peaked in January 1992 when they had just over 92% of the market.
Toyota suffered a heavy loss in the car segment. At the startof 1992, its market share was 47.7% but by October 1994 the figure was a mere 24.7%. Nevertheless, it remained the best-selling brand.
For the first time in recent years the vehicle industry has seen single-digit sales growth, creating fierce competition, especially in the last quarter.
In 1992, the vehicle industry grew by 35.2% compared with 1991 figures. Last year's growth was 25.8%. At the end of 1992, vehicle sales totalled 362,987 units, up from 268,560 units in 1991. In 1993 sales reached 456,461 units. But in the first 10 months of this year 395,108 vehicles were sold, up by only 5.4% from 374,942 sold in the same period last year. Car companies were not expecting any surge in sales in the last two months.
The vehicle industry has grown rapidly in recent years because of car sales which alone saw growth of 81.9% in 1992 and 43.1% in 1993. Motorists were previously prevented from buying imports by artificially high import duty on fully-assembled cars. However, the Anand Panyarachun administration liberalized the industry late in 1991 and substantially cut the import duty.
The Land Transport Department late in 1992 registered metered taxis in Bangkok, creating great demand for cars during 1992 and 1993. However, the market for metered taxis has become saturated with demand for new vehicles taking a dive. Only 300 to 500 cars are now registered as metered taxis in Bangkok each month, compared with almost 2,000 during the peak period.
Local assemblers have sharply cut their output. The number of locally-assembled cars has marginally increased by 2.12% in the first three quarters of this year because of the saturated market for metered taxis, according to a report from the Federation of Thai Industries' Automobile Industry Club. During the first three quarters of 1994, Thai companies have assembled 320,644 units, 6,657 more than in the same period of 1993.
The commercial vehicle segment helped the industry grow in 1994. In 1992, commercial vehicles contributed growth of 19.7% or 241,499 units and 17% or 282,299 units in 1993. One-ton pickups played a major role with sales totalling 182,958 units in 1992 and 224,388 in 1993. In the first 10 months of 1994, commercial vehicles showed sales growth of 16.9% with 267,644 bought in the period, 209,410 of which were light commercials. Buyers had a good year in 1994 with all car companies running promotions. The campaigns included small down payments and long-term hire-purchase. Some companies offered interest-free terms and others paid comprehensive insurance for the customer.
Although all Japanese and German car companies have been pressured by the appreciation of the yen and mark to the US dollar, they cannot pass on all their additional costs and risk losing sales. Toyota Motor Thailand Co, the largest vehicle assembler in Thailand, held its prices for as long as possible, causing difficulty for rivals including Mazda, Honda and Nissan. Toyota also slightly reduced its price for the Corolla 1.3i by cutting out some extras. Many potential car buyers held on to their money in 1994 because they expect competition to be more intense in 1995 with better deals on offer, especially in prices.
The Inchcape Thailand Group will diversify into the vehicle business at the start of the year to strengthen its substantial marketing operations in Thailand. It has already established a subsidiary, Inchcape Motors International (Thailand) Co, with a registered capital of 100 million baht. The establishment of Inchcape Motors is a good sign for buyers, showing there will be another giant to take on existing big manufacturers. Eventually, buyers will benefit from the freer competition.
Inchcape Motors, the world's largest independent importer and distributor of motor vehicles, has operations in 30 countries and 74 franchises throughout Europe, the Middle East, Africa, Southeast Asia, the Far East, Australasia and South America. It sold almost 400,000 new or used vehicles in 1993.
Many vehicle companies are unlikely to meet their sales target this year, despite spending a lot of money and effort to push sales. In 1995 they will have to expend more effort to develop their market. Many companies are planning to introduce more models, especially budget cars.
Nissan's distributor, Siam Motors Co, plans to introduce its all-new Nissan Sunny on the market at the start of the year. The car will be equipped with 1.5 and 1.6 litre engines and will replace the Nissan Sentra. "We will try to make our price competitive," said Phornpinit Phornprapha, senior vice-president of the company. However, he said Siam Motors was talking with Nissan Motors Corporation in Japan about installing 1.3 litre engines in the Nissan Sentra to serve buyers on a tight budget. "Otherwise, if we do not have car for 300,000 baht we may lose our opportunity," he said.
Sukosol and Mazda Co also aim for a 10% share of the car market within three years by spending hundreds of millions of baht to boost their after-sales services and training. They will introduce their new Mazda 323.
Mitsubishi's sole distributor, MMC Sittipol Co, plans to launch a smaller-engine Lancer 1.3i to serve the lower-budget group in addition to the Lancer 1.5i.
Total vehicle sales next year are expected to be higher than in 1994, but the level of competition will challenge all assemblers in Thailand. Toyota Motor Thailand Ltd will start production of its second plant in Gateway City Industrial Estate in Chachoengsao, about 40 kilometres east of Bangkok, in 1995. It has spent about 7 billion baht to set up the plant with an initial production capacity of 50,000 units a year in addition to its existing plant in Samrong, Samut Prakan, which produces 150,000 vehicles a year. The company will be able to double its overall production capacity because the second plant will assemble at least 100,000 vehicles a year.
Several companies are considering setting up new assembly plants in Thailand. Siam Nissan Automobile Co is building an assembly plant just off the Bangna-Trat Highway to bring its capacity to more than 100,000 cars a year.
Hyundai Motor Co, South Korea's largest car maker, is also considering with its sole distributor, United Auto Sales (Thailand) Co, setting up an integrated car assembly plant in Thailand.
Japan's Mazda Motor Corp and Ford Motor Co of the United States are also jointly conducting a feasibility study on joint pickup truck production. They are considering building a new factory in Thailand which would include stamping, body, welding, painting and vehicle assembly lines, with production targetted to begin in 1998. The feasibility study will be completed by early 1995. The vehicles will be sold in Thailand and exported toneighboring markets under Ford and Mazda brand names through their sales networks.
Toyota, Nissan and Hyundai are also considering use of Thailand as their assembly base for eventual exports to other countries in this region.
The Board of Investment is confident the Thai vehicle market will reach the one-million mark by the year 2000. In the past three to four years the demand for vehicles in Thailand has risen rapidly, except in 1991 when the Government started liberalization.
The growing market has encouraged the spare parts industry to expand rapidly as well. By 1991, about 8.5 million vehicles were registered in Thailand, half of them more than 10 years old and needing many parts to stay in working condition. Annual demand for spare parts is said to exceed 12 billion baht.
The Thai vehicle industry would be more healthy if supporting industries were strong enough and the parts industry should therefore be promoted. The parts industry has long been considered an import substitution venture. Now it is ready to handle exports too. Assuming the local market reaches one million vehicles in the year 2000, the parts industry would benefit directly in terms of very competitive production costs. The Government, because of changes stemming from the General Agreement on Tariffs and Trade, would have to relax the regulation requiring Thai assemblers to use 54% local content in their cars.
The Government has implemented some measures to improve the environment. From late 1993 all new cars had to be equipped with catalytic converters to improve the quality of emissions. From mid-1994, the Government required all cars 10 years old or more and motorcycles at least seven years old to be inspected by
privately-run inspection centers to ensure the vehicles were in good working order. The Government hoped this would be one way to help reduce traffic congestion in Bangkok. Car owners who cannot improve their vehicles to required standards will not be allowed to use their vehicles because the registration will not be renewed.
Initially, vehicles in only Bangkok, Nonthaburi, Pathum Thani, Samut Prakan, Samut Sakhon and Ayutthaya have to inspected before annual registration is renewed. The Government plans later to expand the enforcement area to other provinces. The Land Transport Department has issued 153 operating licenses to privately-run inspection centers, 121 of which are now in service. The rest are expected to be in operation soon.
During the first four months of inspection between July and October, 27,404 vehicles were inspected at the centers, 21,716 of them cars and the balance motorcycles. In all, 3,948 cars and 566 motorcycles failed to pass inspection. Hundreds of new cars appear on Bangkok's roads daily, compounding traffic problems and giving the Government every excuse to say why it cannot end the gridlock. About 500 cars are registered every working day.
In the first three-quarters of 1994, 93,670 cars were registered in Bangkok. Of the 64,276 cars registered in the first six months, Toyota had the biggest share with 14,375, followed by Honda (11,837) and Mitsubishi (10,850). In this period, budget cars with engines between 1,300 cc and 1,600 cc were most popular with total registrations of 33,372, followed by cars with engines of above 2,000 cc (15,159), cars of 1,800-2,000 cc (8,542) and those with engines below 1,300 cc (4,404).
In March, the Excise Department and Fiscal Policy Office introduced an off-roader category making the Cherokee cheaper than its rivals, including the Mitsubishi Pajero. The Government also imposed a luxury tax of 10% on cars with engines exceeding 3,000 cc or 220 horsepower. These regulations dented the industry, bringing price rises in some cases. Not all off-roaders can be registered under the category because the specifications exclude, for example, the Land-Rover. All off-roader distributors want to register their vehicles in this category. If not, the vehicles come under the car category subject to an excise tax of 38.5% for those with engines exceeding 2,400 cc and 32.5% for those under 2,400 cc. Off-roaders are taxed at 27%. The modified Daihatsu Mira, for example, is considered a car, causing the distributor to increase its price between 60,000 and 70,000 baht to almost 300,000 baht. The increase makes this vehicle uncompetitive. The luxury tax means an inevitable loss of sales in this bracket.
Note: Courtesy of Bangkok Post 1994
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Briefly stated below are major aspects to be kept in mind during negotiations, organized into the four broad and interrelated categories of: empathy, role of governments, decision making characteristics, and organizing for negotiation.
A) Empathy
The environmental context (political, social, cultural, economic) is different between countries. Negotiators need to understand the nature and reasons for the differences. Some of the major setbacks in negotiations between the IC and the host government or company take place because of insufficient empathy of each other's environmental context. Try to:
1. Place yourselves in the other persons' shoes. It is not sufficient to merely know the position and approach of your opponents to a negotiation; even more important is to understand the reasons which prompt them to adopt the particular stance. This requires that the negotiators view the four Cs and the particular environmental context in a country form the view point of the individuals they are negotiating with. For example, a government official in a developing country might place particular weight on the political influences on him instead of emphasizing the economic dimensions of a project because the official's power and continuity in office is determined by his ability to satisfy individuals with political power. Such a context is significantly different from what the American negotiator is used to, especially in the United States.
2. Understanding the different ways of thinking. Reaching the same conclusions is important, but in negotiations it is even more important to know the thought process by which individuals from different cultures reach the same conclusions. The environmental factors have a direct influence on the ways of thinking, outlook toward, and the manner in which problems are solved. For example, bribes to government position and a means of supplementing very low government salaries. Most IC executives, on the other hand, in keeping with the values of their own country, view such a practice with disdain and disfavor, and as illegal.
3. Pay attention to saving face of the opponent. "Winning" in a negotiation situation should not result in a loss of face for the opponent, especially in countries where personal honor is a sensitive issue. Unlike the United States, many countries typically possess hierarchical structures of society where a superior-subordinate relationship exists between two individuals. Caste, family name, and type of occupation are some of the determinants of status. The "image" of "face" of an individual determines the extent to which he can influence others.
4. Improve your knowledge of host country. Often negotiators do not have sufficient knowledge of the history, culture and political characteristic of a country in which they are negotiating. Yet, host country nationals are proud of their heritage and traditions and feel flattered when a foreigner reflects some knowledge and understanding of their country. For example, in the mid 1960s when Singapore first started to attract foreign investments, host government officials received letters from American companies addressed to "Singapore, care of the Republic of China." Needless to say, they were offended and did not feel that inquiries from such companies were worthy of further exploration.
B) Role of the Government
Unlike the United States, governments in most emerging countries and in Japan play a major role in planning, regulating, and often participating in industrial ventures. Insufficient recognition of the important role of the host governments in economic matters results in serious setbacks in negotiations in emerging countries. Keep in mind:
1. Recognition of the nature and characteristics of the role of government in centrally planned economies. The desire for rapid development, distrust of private enterprise, lack of indigenous entrepreneurial talent - these and other considerations have prompted host governments in many countries to play a major role in planning for the economic development of their countries. The planning is often highly detailed, as in India, and at times it is general administrative guidance, as in Japan. The planning process is based on both economic and political considerations and the international company has to fit in such a context. The IC executives, used to a far more laissez-faire context of the United States, have to understand and interpret the environmental context of a planned economy in undertaking a negotiation.
2. Recognition of the relatively low status assigned to business people. Not only are government officials in planned economies powerful, but they often look down upon business people, who are viewed as being concerned only with questions of profits and not the broader national aspirations of the society. In many countries, broader environmental factors (historical, cultural, etc.) have created such an attitude. For example, in India the business community was viewed as being too closely associated with the British colonizers for purposes of economic benefits. The Hindu religion does not stress material achievements by deals more with the spiritual aspects of life. In Indonesia the loyalty of the Chinese business community is questioned by the "pure" Indonesians, resulting in distrust and suspicion of the Chinese businessman. The IC business people, therefore, have to recognize the environmental factors that have created the existing attitudes toward private enterprise and plan their negotiation accordingly.
3. Recognition of the role of the host government in negotiations. Negotiations in emerging countries are generally tripartite in nature, involving the foreign company, the local company, and the host government. The government approves the terms on which the foreign enterprise is permitted to invest in the country. Therefore, planning for negotiations by the IC must recognize at least a triangular situation. For example, the IC often needs to develop direct access to appropriate host government officials to learn firsthand their views on the investment, instead of depending solely for such information on the local partners who might be wish to promote a particular orientation of the project that suits his interests but not necessarily those of the IC. Again, the broader environmental context needs to be understood in planning for this dimension of negotiations in developing countries.
4. The perception in host countries of the role of the IC's home government in negotiation. Regardless of what the reality of the situation is, the host government believes that the foreign company uses the muscle of its home government in negotiations with the host government. The broader environmental context of many emerging countries largely explains such a perception. It is consistent with theirs own tradition where indigenous businessmen seek the protection of their government for economic benefits. Historically, especially during the colonial period, foreign enterprise from the colonizing country gained benefits in the colony because of protection of the government of the colonizing country. Also, and to a far greater extent than is true for US companies, European and Japanese governments play an active role in assisting companies from their countries in dealing with host government. In Southeast Asia, for example, host governments exposed to such behavior by the Japanese government assume that US companies also engage in similar practices, although in a more covert manner.
C)Decision Making Characteristics
The structure, orientation, human skills, objectives, and goals of and organization influence the approach to decision making. Governments, as organizations, are different in these respects form the IC. Insufficient recognition of the characteristics of decision making leads to setbacks in negotiations with host governments. Keep in mind to:
1. Acknowledge the weights assigned to economic and political criteria in decision making. Host government officials place particular stress on political consideration in evaluating investment proposals in keeping with the general orientation of the type of organization to which they belong. For example, the central government in Indonesia first granted and then rescinded a timber concession to an American company. The military governor of the area where the concession was located had entered into an agreement with the Chinese and Japanese interests. Given the delicate internal political situation in the country, the central government did not with to challenge the authority of the military governor.
2. Understand the difference between approval at one level and implementation of such approval at other levels of the government. Gaining approval of the central government for and investment does not mean that other levels of the government will automatically implement the approval. Internal organizational problems, personality and jurisdictional conflicts and lack of trained personnel, especially at lower levels of government, are some of the reasons for delays between approval and implementation that must be understood by the executives in negotiating with governments. The earlier example of timber concession illustrates this dimension of negotiation. In Japan, different ports of entry were charging different rates of import duty for the same items because the responsible ministry in Tokyo had not adequately communicated the duty schedule to the custom authorities.
3. Understand the role of personal relations and personalities in decision making by the host government. Host government officials possess considerable discretion in interpretation of policies and regulation relating to foreign investments. Often it is the individual who determines the power of and office and not the other way around. Because of the importance of the individual, it is necessary for the foreign negotiator to develop a personal relationship with appropriate government officials.
4. Allocate sufficient time for negotiations. It simply takes longer in certain countries to present a proposal, to gain a reaction, and to offer a response because of distance, mutual suspicion, different ways of thinking, and the internal decision making structure of both the government and the IC. The consensus approach to decision making in Japan and the hesitation of a government official to assume responsibility, especially in projects which are not keeping with precedents, are some of the reason for the delays in host government decision making.
D)Organizing
Negotiation is a complex and time consuming activity involving a range of individuals from the IC and the host government company who negotiate to achieve their respective objectives within a changing environmental context. Insufficient attention to organizing effectively for negotiation results in delays and setbacks especially in negotiations with host governments. Pay attention to:
1. Planning for changing negotiation strength. The negotiation strength of the IC and the host country often changes over the duration of an investment; and such changes in negotiation strength result in renegotiation of the terms of the original investment. Therefore, both the IC and the host government should explicitly recognize and integrate changes in negotiation strength in planning for negotiation.
2. Interference by headquarters. Headquarters personnel sometimes interfere directly in negotiations, causing serious damage to the credibility of the country level managers and the field negotiations. Host government officials prefer to negotiate with executives who in their opinion have the power to decide on behalf of the companies they represent. At times, headquarters interference without sufficient communication to the country level results in promoting an unfavorable government decision. For example, the American Chamber of Commerce in Mexico was making representations to the host government for greater clarity of policies on foreign investment. Senior government officials of Mexico, on a visit to the United States, were entertained by corporate level executives of US companies with operations in Mexico. Corporate executives stressed the need for clarity of government policies on foreign investment. This representation partially contributed to codes on foreign investment. It was an outcome considerably different from what the American Chamber of Commerce and its member companies were seeking to gain from the Mexican government.
3. Planning for internal communication and decisions. Several parts of an organization have an interest in an ongoing negotiation and their views and preferences have to be recognized in negotiating for a particular package of terms of investment. Often in an ongoing negotiation a rapid response to developments is required from the interested parties; a rapid response might not be forthcoming. Of course, at times a response is purposely delayed because of the need for additional review or because of disagreement with what is being proposed by the field negotiators. In any event, in negotiation it is just as important to develop effective channels of communication within one's own group as it is to have effective channels of communication with the opposing groups.
4. The role of the negotiator in accommodating the conflicting interests of his/her group with those of the opposing groups. The IC seeks certain terms of investment in a country that might be greater than what the field negotiator believes can be secured. Conversely, the host government might make demands on the IC that are greater than what the field negotiator believes would be acceptable to the IC. Therefore, the negotiator plays a crucial role as interpreter, intermediary, and counselor both to his/her own group and to the opposing group on what can be achieved in a particular negotiation.
5. Recognition of the loci of decision making authority. Decisions are seldom made by any one branch of government but are shared across agencies and ministries because of the particular characteristics of government organizations. Therefore, the IC must know the diverse centers of influence within the government and be skilled in dealing with them. For example, in a South American country, the IC recognized that the central government would be strongly influenced by the wishes or a powerful state government. It therefore make a special effort to inform the state government of the benefits it would derive from the project in the hope of gaining its influence in dealing with the central government.
6. Recognition of the strength of competitors. The emerging countries have access to a growing range of alternative sources of supply of the resources they seek. Therefore, in planning for negotiation, the IC needs to recognize the unique characteristics (including the terms of negotiation) that are likely to be accepted by the competition emanating from Western Europe, Japan and elsewhere. Note: The tendency to underestimate the competitive strength and negotiation skills of non-American companies is a source of weakness in many of the American companies' planning for negotiations.
7. Attention to training executives in the art of negotiation. Negotiating, especially with host government officials, consumes a growing amount of the time of an American executive at the country level. Effective negotiations can serve to promote and protect the interests if the IC. Yet executives are seldom trained or encouraged to develop negotiating skills.
1. Do Not Bargain Over Positions
Arguing over positions produces unwise agreements.
Arguing over positions is inefficient.
Arguing over positions endangers an ongoing relationship.
When there are many parties, positional bargaining is even worse.
Being nice is no answer.
There is always another alternative.
2. Basic Elements of Negotiation
People:
Always remember to separate people from the problem. Negotiators are people first.
Every negotiator has two kinds of interest: in the substance and in the relationship.
Identify when a relationship tends to become entangled with the problem and when positional bargaining puts the relationship and the substance in conflict.
Separate the relationship from the substance; deal directly with the people problem.
Perception:
Always remember to put yourself in their shoes.
Do not deduce intention from your fears.
Do not blame them for your problem.
Discuss each others perceptions.
Look for opportunities to act inconsistently with their perceptions.
Give them a stake in the outcome by making sure they participate in the process.
Face-saving: make your proposals consistent with their values.
Emotions:
First recognize and understand emotions, theirs and yours.
Make emotions explicit and acknowledge them as legitimate.
Allow the other side to let off steam.
Do not react to emotional outbursts.
Use symbolic gestures.
Communication:
Listen attentively and acknowledge what is being said.
Speak to be understood.
Speak about yourself, not about them.
Speak for a purpose.
Prevention works best:
Build a working relationship.
Face the problem, not the people.
Interests:
For a wise solution reconcile interests, not positions
Interests define the problem.
Behind opposed positions lie shared and compatible interests, as well as conflicting ones.
How do you identify interests?
Ask "Why?"
Ask "Why not?" Think about their choice.
Realize that each side has multiple interests.
The most powerful interests are basic human needs.
Make a list.
Talking about interests:
Make your interests come alive.
Acknowledge their interests as part of the problem.
Put the problem before your answer.
Look forward, not back.
Be concrete but flexible.
Be hard on the problem, soft on the people.
3. Inventing Options for Mutual Gain
Separate inventing from deciding:
Brainstorm with your side.
Consider brainstorming with the other side.
Broaden your options:
Multiply your options by shuttling between specific and the general.
Look through the eyes of different experts.
Invent agreements of different strengths.
Change the scope of a proposed agreement.
Look for mutual gain:
Identify shared interests.
Dovetail differing interests.
Any difference in interests?
Different beliefs?
Different values placed on time?
Different forecasts?
Differences in aversion to risk?
Ask for their preferences.
Make their decision easy:
Making threats is not enough.
4. Insist on Using Objective Criteria
Deciding on the basis of somebody's will is too costly.
Principled negotiation produces wise agreements
amicably and efficiently.
Developing objective criteria:
Fair standards and fair procedures.
Negotiating with objective criteria:
Frame each issue as a joint search for objective criteria:
Ask "What's your theory?"
Agree first on principles.
Reason and be open to reason.
Never yield to pressure.
NOTE: Based on "Getting to Yes" by Roger Fisher and William Ury
Business Week - 1995 issues
The Economist - 1995 issues
The Wall Street Journal
Ward's Auto World
Auto Week - 1995 issues
Automotive News - 1995 issues
BOOKS:
Fisher, Roger and William Ury. Getting to Yes. New York: Penguin, 1991.
OTHER:
HBS Case # 9-388-094 "General Motors' Asian Alliances"
Small Cars: Medium cars under $25,000:
Acura Integra * Buick Century
Chevrolet Cavalier Buick Regal *
Dodge Neon Buick Skylark
Eagle Summit Chevrolet Beretta
Ford Aspire Chevrolet Corsica
Ford Escort Chevrolet Lumina *
Geo Metro Chevrolet Monte Carlo
Geo Prizm * Chrysler Cirrus
Honda Civic * Chrysler Sebring
Hyundai Accent Dodge Avenger
Hyundai Elantra Dodge Stratus
Mazda Protege * Ford Contour
Mercury Tracer Ford Taurus *
Mitsubishi Mirage Ford Thunderbird
Nissan Sentra Honda Accord *
Plymouth Neon Hyundai Sonata
Pontiac Sunfire Infiniti G20 *
Saturn * Mazda 626 *
Subaru Impreza * Mercury Cougar
Small Cars: Medium cars under $25,000:
(cont'd) (cont'd)
Suzuki Swift Mercury Mystique
Toyota Corolla * Mercury Sable
Toyota Tercel Mitsubishi Galant
Volkswagen Golf III Nissan Altima *
Volkswagen Jetta III Nissan Maxima *
Oldsmobile Achieva
Oldsmobile Ciera
Oldsmobile Cutlass Supreme
Pontiac Grand Am
Pontiac Grand Prix *
Saab 900
Subaru Legacy *
Toyota Camry *
Volkswagen Passat
Volvo 940 *
Minivans: Sport-utility vehicles:
Chevrolet Astro/GMC Safari Chevrolet Blazer/GMC Jimmy
Chevrolet Lumina Chevrolet Tahoe/GMC Yukon
Chrysler Town & Country Chevrolet/GMC Suburban
Dodge Caravan * Ford Bronco
Dodge Grand Caravan Ford Explorer *
Ford Aerostar Geo Tracker
Ford Windstar * Honda Passport
Minivans: Sport-utility vehicles:
(cont'd) (cont'd)
Honda Odyssey * Isuzu Rodeo
Mazda MPV Isuzu Trooper
Mercury Villager * Jeep Cherokee
Nissan Quest * Jeep Grand Cherokee
Oldsmobile Silhouette Jeep Wrangler
Plymouth Voyager * Land Rover Discovery
Plymouth Grand Voyager Mitsubishi Montero
Pontiac Trans Sport Nissan Pathfinder
Toyota Previa * Suzuki Sidekick
Toyota 4Runner
Toyota Land Cruiser *
NOTES:
1. Car models followed by an asterisk (*) have shown superior performance and reliability.
2. Nameplates are related as follows:
GM sells: Buick, Cadillac, Chevrolet, Geo, GMC, Oldsmobile, Pontiac and Saturn.
Ford sells: Lincoln and Mercury.
Chrysler sells: Dodge, Plymouth, Eagle and Jeep.
3. Toyota makes Lexus. Honda makes Acura. Nissan makes Infiniti.