Fallout From WTO

Tariff reductions can hurt domestic producers.

It is a supreme irony that foreign companies that showed faith in China's future by large-scale investment may well be penalized by the country's World Trade Organization membership. The WTO membership commits China to reducing tariffs, thereby making imported goods cheaper and more widely available. Domestic producers -- previously cushioned from head-on competition by the high price of imports -- will find themselves competing on an almost-level playing field. In the case of General Motors Corp., effectively a domestic producer, it will find itself up against cheaper autos brought in from Europe or the U.S. Executives from GM have done the math, and claim to be unperturbed. "I am not all that concerned with the importation of vehicles," says Philip Murtaugh, chairman and CEO of GM's China operations. "Our current pricing is already at the level that imported vehicles will be six years from now under WTO. Imported vehicle duty rates in six years will be 25%. If you take a [US$25,000] car and add 10% to ship it here and add 25% duty, 17% value-added tax, and 8% consumption tax, you come up with a figure of around 370,000 yuan. The price of my top of the line vehicle is 369,000 yuan (US$43,000). "I have six years to figure out how to be more competitive than today. From that basis, I don't think we will see a flood of imported vehicles. At the same time, it will result in a drop in the price of imported raw materials and components. I think the agreement is well balanced and gives us the opportunity to increase our competitiveness and lots of time to deal with the threat of imports." It also gives the company a chance to bolster its dealers and service network, making it difficult for any newcomers to compete. China is such an unsophisticated auto market that the notion of a one-stop service center, dealership, and parts store is novel. Now that GM has the product, brand loyalty is one of its main priorities. "We will be tapped in to the customer," says Susan Ting, Shanghai GM brand manager. "I think WTO will increase expectations of the customer and will weed out a lot of the small players. There were 127 manufacturers in China before we came; since we have gotten into the market it has gone down to 112."

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