Factor conditions for production are the inputs and infrastructure necessary for competition, which include: • Human resources: quality and quantity of skilled labor, cost of personnel, and labor skill variety; • Physical resources: “the abundance, quality, accessibility, and cost of the nation’s land, water, mineral, or timber deposits, hydroelectric power sources, fishing grounds, and other physical traits.” (Porter, 1990, p. 74); • Knowledge resources: market, scientific, technical knowledge residing in a nation’s research institutions; • Capital resources: capital availability and cost to finance industries. Capital resources can be affected by the rate of savings and national capital market structure; • Infrastructure: availability and quality of infrastructure, including communication system, transportation system, payment or funds transfer, health care, and so forth. A positive estimate of profit in the automobile industry indirectly promotes the development of national infrastructure development. To speed up the progression, the government has attracted FDI in the basic infrastructure sectors. Although China’s population on average has a low education level, the auto industry attracts many skilled laborers in urban areas due to its geographical concentration in major cities and fast technological advancement introduced by foreign partners. Both labor productivity and wage in the auto section increased significantly between 1994 and 2004, at the rate of 11.4% and 13.5% respectively (China Automotive Yearbook, 2005). China’s labor cost owns comparative advantage as compared with developed nations, but may not be as competitive as other developing nations. Wages (including welfare bonus) is on average $1 to $2 US per hour, which is 1/10 to 1/20 of hourly wages paid in advanced nations.
As technological and managerial skills keep transferring into China, the quality and cost of its labor market will show continuous competitiveness in the world. Another important factor indicator is technological advancement and R&D investment. As shown in Table 10, China’s auto industry had cumulatively invested $50.2 million US in R&D, taking on average 1.5% of annual sales revenue from 1998 to 2003.
A final advanced factor condition is the stability of the nation’s capital market and the availability of funds. To comply with WTO protocol, China reduced its controlling power in capital market and granted more freedom to local governments and multinational financial institutions. Overall, government has been working to promote capital freedom in the auto sector and to cooperate with rationalizing the market.
Demand conditions refer to home demand condition. Porter (1990) discussed home demand through three general attributes: the nature of buyer needs, the size and growth rate of home demand, and the transferability of domestic demand into foreign markets. As Porter described in his location competitiveness study, advantage arises from “having sophisticated and demanding local customers or customers with unusually intense need for specialized varieties also in demand elsewhere”
Although China’s auto firms have few competitive advantages comparing to leading global companies in terms of technological and managerial skills, China is still the largest potential demand market in the world. Kister (1998) stated that, the world three largest auto markets are North America (two people per vehicle), Europe (two people per vehicle), and Asia (34 people per vehicle). China's early auto production primarily focused on heavy trucks (mostly for construction and military uses). Accompanied by the process of urbanization, the need for public transportation has increased dramatically. China in addition, passenger and private cars represent more and more market share because of increased product variety and private vehicle demand. Increasing road and highway constructions, as well as...