S14: Market Maoists

• Henry Ford used the assembly line to transform the auto industry into linear, repetitive manufacturing.
• 1909: 10,000 Model T cars.
• 1915: 250,000 cars, and prices fell by over 50%.
• After WWI: annual sales exceeded one million cars.
• Ford’s River Rouge complex became the world’s largest industrial facility in 1928.

• Industrial paradigm: mass production of standardized goods on a moving assembly line using dedicated machinery and semiskilled labor.
• Growth regime: mutually reinforcing cycle of mass production and mass consumption.
• Mode of regulation: monopolistic competition between large firms + compromise with organized labour (workers accept management prerogatives in return for rising wages)

Why this case study?

• Successful non-state owned enterprise
• Family firm, with roots in early rural industrialization
• A Chinese company’s global strategy: Growth in the US, with limited public opposition

Wanxiang

• 1969: Start-up at the depth of the Cultural Revolution
• 1977: Access to market; one of three surviving universal-joint producers
• 1993: Wanxiang America founded

China/Global

• 1978: Reform era begins
• 1985: Plaza Accord
• 2000: Entry to the WTO

• How did Wanxiang grow to become China’s leading cart parts manufacturer?
• Growing out of the planned economy: What role did township and village enterprises play?
• Internationalization of Chinese firms: How American is Wanxiang America?

• Who is Lu Guanqiu? How did he start his business career?
• What was it like to run a business during the Cultural Revolution?
• What was the business model of Wanxiang’s precursor?

Out of plan:

• Lu’s village business was excluded from the central economic plan: it can’t easily get raw materials or sell his farm tools.
• He survived by using scrap steel from nearby villages.

First breakthrough:

• His high-quality tools was adopted by the municipal farm-tool company in Hangzhou.
• The government included his factory in the economic plan, granting him steel quotas and market access.
• By the late 1970s, commitment to quality allowed Wanxiang to survive as one of the only three universal joints makers in China.

Lu Guanqiu focused on producing universal joints (in Chinese, wanxiangjie 萬向節), recognizing market potential from government plans for increased car and truck production.

• What is a TVE (township village enterprise)? How is it different from an SOE (state-owned enterprise)?
• What was the origin of TVEs? How did they evolve?
• What explains their success?

• Gave a household control over a plot of land in return for the delivery of an agreed quantity of grain after harvest
• This allowed households to effectively rent land from collectives and sell surplus on the market.

• Lu Guanqiu pioneered the “contract system” in 1983.
• He guaranteed fixed annual payments to the village government, with yearly increases.
• In return, he received exclusive management rights for three years.
• Factory output significantly increased from RMB 5.5 million (1983) to RMB 19 million (1985).

• Wenzhou’s economy started with tiny, household-based private ownership.
• They specialized in common items like buttons and ribbons, filling market gaps.
• Production was heavily coordinated by markets: Industries formed chains where households specialized in single production stages.
• Overtime, Wenzhou model led to the development of private banks and real estate firms.
  

• TVEs in the Pearl River Delta grew rapidly with foreign investment.
• Hong Kong and Taiwanese businessmen, with local ties, pioneered these cooperative village businesses.
• Village leaders managed land, export contracts, and labor.
• The PRD model was highly open to foreign trade, investment, and workers from elsewhere in China.

Human capital

Wanxiang hired high-school graduates to overcome difficulties in recruiting qualified employees as a TVE.

R&D

Wanxiang invested 5%-7% of its annual revenue in research and development. The “Four Heights” policy was introduced to improve quality through increased investment in technology, better equipment, higher personnel standards, and superior products.

State-business relationship

Despite becoming a private enterprise in 1994, the Chinese Communist Party (CCP) maintained influence through key personnel like Lu and his son, and CCP officials in management.

• Who is Ni Pin, Wanxiang’s US CEO?
• What is Wanxiang America’s business model? How has it evolved?
• Is Wanxiang American or Chinese?

• Rapid growth of auto-industry in China: Surpassed US in sales in 2009
• Rapid consolidation of US parts company: 50% gone as they were unable to compete in new cost-sensitive market
• New tech frontier emerging: EVs

• Over $1 billion in revenue
• 4000+ staff, only 15 Chinese employees
• Big three auto companies as largest consumers
• Manufacturing moved to China: $0.9/hr wage vs. $22.5/hr (US)
• Using acquisitions to see which processes could be enhanced and transferred to China
• Invests in maintaining proprietary technologies in US

• Critical to China moving up the value chain is heavy investment in new technologies.
• China’s export-oriented economy generated a huge surplus for foreign direct investments.
• However, overseas acquisitions of leading firms and their technology is politically risky: Manufacturing increasingly seen as core to national security.

• Possibility of a public backlash and political action in US
• Unrelated expansion on outside core area expertise courts: potential big losses could divert cash flow.
• Discussion electric car is worrisome (Doesn’t build on strength)
• Being outmaneuvered in the technology area by another Chinese company

• Business decline of one or more of the big 3 auto companies: Who are the future customers if these firms fail?
• More aggressive Chinese competitors emerge and they lose their low cost and technology edge
• Lose its source of funding: the case is silent on this topic. (Government relationships are key here)

Key proposals:

• U.S. must launch a government-led industrial revival, akin to a “Manhattan Project for cars.”
• Embrace state-driven investment and long-term planning to regain competitiveness.
• Recognize the national security risks of ceding the auto industry to China.

Can they work?