Understanding Quality Upgrading Dynamics: China’s Automobile Industry

Understanding Quality Upgrading Dynamics: China’s Automobile Industry

The Chinese automobile industry has demonstrated remarkable growth and quality upgrading over the past decade and is staged to become an engine for economic growth in China.

PHOTO: DON MCCURREN/ASSOCIATED PRESS

The Chinese automobile industry has demonstrated remarkable growth and quality upgrading over the past decade and is staged to become an engine for economic growth in China.

One important challenge facing firms in developing countries is the difficulty in moving up the quality ladder to produce higher quality and higher value-added products. There are many examples of success and failure in the upgrading process across countries, however, a systematic analysis examining the economic forces underlying the process has been lacking.

In the project, Understanding Quality Upgrading Dynamics: China’s Automobile Industry, EPoD faculty member Jie Bai and her research team sought to examine the dynamics of quality upgrading in the context of China’s automobile industry. The industry has shown spectacular growth over the past decade, and by 2015, China alone accounted for more than 25% of the global automotive production. Additionally, there have been more than 90 firms, foreign and domestic automakers combined, competing in this market, and producing more than 300 models. Given its massive scale and large potential for spillovers to other sectors of the economy, the auto industry has been identified as a major strategic sector and a vital engine for economic growth. The Chinese government has targeted a large number of resources to spur the growth of domestic auto firms, and with the long-term goal of building a globally competitive industry.

As China emerges as a key player in the world’s automotive market, unprecedented challenges also arise. In particular, how would Chinese auto firms survive in an increasingly competitive market saddled by over-capacity? How do they compete alongside more established global players and gradually move up in the global value-added chain? How do they make efficient research and development (R&D) decisions in a world with new technologies and shorter technological cycles? And most importantly, how could the government structure policies to facilitate the industrial growth and the quality upgrading process? These questions are of enormous interest not only to consumers and firms in the auto industry but also to policymakers and academics in general. Lessons learned from China may also provide important policy guidance to other emerging economies. 

Jie and her team’s research seek to address these questions using rigorous empirical economic analysis tools. They begin by documenting rapid quality improvement by domestic Chinese brands between 2009 and 2015 leveraging a rich set of observable quality attributes and subjective model-level evaluation scores from new buyers (the Initial Quality Study, or IQS). For example, between 2009 and 2015, average fuel efficiency improved by 8%, and the numbers of safety and comfort features increased by 27% and 21%, respectively.

Motivated by these empirical patterns, Jie and her research team build and estimate an industrial equilibrium model that incorporates rich household heterogeneous preferences for quality and firms’ incentives to provide quality. The model yields estimates of consumers’ valuation for various quality attributes and how that changes with income, as well as firms’ costs of introducing new models and improving quality. These preference and cost parameters further allow them to conduct counterfactual analysis to examine the important driving forces underlying the quality improvement, including (1) increasing demand for quality that is associated with rising income; (2) increasing competition from international brands that have been diversifying into the low-end vehicle segments; (3) learning spillovers from joint ventures (JV's) (4) spillovers from the auto parts industry, which is getting more efficient as a result of supplying more to the international market; and finally (5) various government policies, including subsidies for small and fuel-efficient vehicles and preferential policies for locally produced vehicles.

 

Principal Investigators:
Jie Bai, Harvard University
Panle Jia Barwick, Cornell University
Shengmao Cao, Stanford University
Shanjun Li, Cornell University