China's decision at the end of 2011 to close the door on further foreign investment in its mainstream auto industry makes eminent sense and might even have been implemented a good deal earlier.

Every foreign auto manufacturer who wanted to enter the mainland market is already here and it was certainly time to call a halt in order to introduce a more rational approach.

Foreign involvement in car-making is highly symbolic of the way China has grown up and moved forward in terms of industrial structure and government policy towards it.

The pioneering ventures of Beijing-Cherokee Jeep Co. Ltd. (Chrysler of the United States) and the Sino-German Shanghai-Volkswagen Automobile Co. Ltd. in 1984 were a benchmark in China's opening up and reform policy. It was not easy for these two foreign investors with little precedent to guide them or their domestic partners through the economic minefield of the times – as I found while researching a book on doing business in the mainland in the mid-1990s.

However, they persevered and established a bridgehead for others to follow from Europe, Japan and the United States. The latest, and almost certainly the last, foreign investment in the sector took place last June – Daimler's 2bn euro joint venture with Beijing Automobile Industry Corp.

Now, says the Chinese Government, it is time to move on with a program of "industrial integration" to bring order out of the somewhat chaotic domestic industry – reducing the number of manufacturers by mergers and moving towards a "lean and mean" sector that can produce Chinese brands capable of competing on the world market – and encouraging companies to switch their attention away from petrol-driven engines into "new energy vehicles (EVs)".

Foreign investors will be encouraged to get involved, too, by moving part of their R & D facilities to the mainland, if they haven't already done so. Effectively, China is telling foreign automakers to transfer some of their research and development facilities into China, and telling their domestic auto industry to step up a gear in the move into new energy vehicles.

The original policy of attracting foreign investment with generous incentive packages was necessary to upgrade a domestic auto industry unable to come up with advanced vehicles able to meet the nation's transportation needs (originally the emphasis was on trucks and buses).

Production then was in the hands of state-owned enterprises (SOEs), which, like many of their counterparts in other industries, were unable to cope with the changing demands of the times dictated by promotion of a "socialist market economy".

Investment in vehicle manufacturing proved a profitable deal for foreign companies as the central government sought to promote economic growth through stimulating domestic demand.

That policy can be seen now in the near gridlock on streets of big cities like Beijing, Shanghai and Guangzhou and the pall of smog that has made the air hazardous to the health. In recent times, for example, it is estimated that an average of 1,000 new cars has been joining the queues each week in Beijing.

The current number might be over 4 million, forcing the Beijing municipal government, for example, to try and impose some order through restricting the use of cars through a system based on the last digit on the number plate (odd cannot be driven on this day, even on that day).

For the companies, the switch in government policy also reflects a tightening market. Vehicle sales in China rose 2.6 percent during the first 11 months of 2011, with passenger car sales increasing 5.3 percent to 13.1 million units, according to the China Association of Automobile Manufacturers. This compares to a record 32 percent growth in 2010.

The 2011 performance is certain to be the worst in 13 years as the government steadily withdraws the incentives to car ownership. Industry analysts I have talked with in recent months expect an even more drastic slowdown in demand in 2012, raising the prospect of a factories turning out far more vehicles than needed and nobody likes having a big inventory that drains off capital.

Thus, the time is right to move on and look for new technological fields to conquer and there is every indication that China is keen to assume world leadership in the EV field as quickly as it can.

Wan Gang, the Science and Technology Minister, said at the end of December that the country needed to improve its research and development of electric cars, and should urgently establish standards for car batteries. The goal is for a million electric-powered vehicles on the road by 2015.

The time is right for foreign investment to be channeled into energy-saving and environmentally friendly technologies, new-generation information technology, biotechnology, high-end equipment manufacturing, alternative energy, advanced materials, and alternative-fuel cars, says a new guideline jointly issued by the National Development and Reform Commission and theMinistry of Commerce recently.

And surely it's a natural progression in economic and industrial terms.

The author is a columnist with China.org.cn. For more information please visit: http://www.ccgp-fushun.com/opinion/geoffreymurray.htm

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