By Ben Blanchard
SHANGHAI, Aug 28 (Reuters) - An effort to protect Chinese car makers from foreign competition is unlikely to succeed because it goes against Beijing's WTO commitments pledging a level playing field, analysts and industry sources say.
China is pushing a new policy, a draft of which was seen by Reuters, that would ensure locally developed cars command half the market by 2010 and discourage the use of imported parts.
Foreign players rule in China's booming car market, which is expected to see total sales doubling this year to surpass two million vehicles.
Now Beijing wants local firms, led by giants First Automotive Works and Shanghai Automotive Industry Corp, to develop their own vehicles.
"Chinese car makers are very weak compared with their foreign rivals," said Xu Xiang, an auto analyst at China Southern Securities. "The government wants to give them a helping hand."
Volkswagen AG commands about a third of the market and rivals General Motors Corp , Honda Motor Co and Ford Motor Co have ploughed billions of dollars into China to set up plants.
Most of the 120 or so local plants, on the other hand, crank out small numbers of vehicles.
SEEKING HALF THE MARKET
But the new policy states that by 2010 more than half of all car sales should be from local makers with their own intellectual property rights.
Industry sources are pondering how much of the draft, being pushed by the powerful State Development and Reform Commission, can and will become law.
A lawyer familiar with the document said the policy would mainly be used as a pointer for the local auto industry.
"I'll be very surprised if there were a law passed imposing restrictions on foreign car manufacturers in order to meet these targets, because those would contravene WTO," said the lawyer.
Among other things, the new policies threaten to restrict the assembly of cars with mostly shipped-in components -- now a common practice.
"The state encourages auto makers to increase their ability to produce locally made parts, and discourages the import of 'semi-knocked down' (SKD) and 'completely-knocked down' (CKD) kits for assembling cars," the policy draft reads.
Foreign car makers in China have remained mum on the sensitive issue, preferring to wait for the final document.
But analysts say the draft seemed to conflict with World Trade Organisation promises that pledge equal treatment.
"I don't believe they will force foreign joint ventures to give up their market share," said Peter So, who watches China's auto market for ING from Hong Kong.
TAXING IMPORTED PARTS
The policy also takes aim at imported components, saying that if too many crucial parts come from abroad the car will be taxed as an imported model.
This could threaten GM's plan to bring its premium Cadillacs to China. GM plans to ship semi-finished Cadillacs from the United States to Shanghai, where final assembly would take place.
That get-rich-quick method of production has fed the car investment frenzy in China, analysts said.
"It's much easier and quicker to build cars through knocked-down component imports," said Gu Qing of Haitong Securities.
China has pledged to slash tariffs on imported vehicles to 25 percent by July 2006 from 40-50 percent now and abolish all quotas by 2005.
Taxes on imported parts, about 28 percent on average now would fall to 10 percent by 2006.
Imported vehicles constitute a tiny portion of China's car sales, totalling just 61,400 cars in the first half.
But the total value of auto imports jumped 109 percent to $8.19 billion in the year through July.
Analysts say the government aims to curtail that.
"The Chinese government...needs to get auto makers to transfer technology from overseas," ING's So said, adding that relying on imported parts and knocked-down kits was of little added value. ($1 = 8.276 yuan)