SEPTEMBER 27, 1999 VOL. 154 NO. 12

China Pictorial Dongfeng's sprawling base was meant to shield the car plant in the event of attack.

SHIYAN: A Factory in the Wilderness, 1968
False Alarm
By HUANG YASHENG

If you had to pick a place where not to build an automobile plant, Shiyan might be it. The mountainous terrain of that part of Hubei province is treacherous, with no fewer than 80 deep valleys. Given China's poor infrastructure, parts-suppliers and car-buyers would be hard-pressed to cope with Shiyan's isolation. Wuhan, the nearest transportation hub, is four hours away by train. Yet in 1968 China's officials selected Shiyan as the site of the massive Dongfeng Motor Corp., the country's second-largest automobile firm.

Economic rationality was the last thing on the leaders' minds when they opted for Shiyan. Officials had originally planned to build the factory in Wuhan, an industrial powerhouse. But after the Sino-Soviet fallout, Mao was convinced that Moscow would launch preemptive missile attacks against China's key industries. So he decided to shield the plant in an isolated area. Other giants were similarly tucked away in remote corners, becoming the so-called Third Line defense against the Soviet Union. The attacks never came, of course, and China's economy still suffers the burden of Mao's strategy.

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Change came quickly to Shiyan. In 1968, it was a sleepy town of barely 100 rural households. Overnight it became home to one of China's biggest projects. But Shiyan's remoteness necessitated the transfers of thousands of workers and engineers from Shanghai, Wuhan and Changchun, as well as construction of railway tracks and parts factories nearby. The costs would be colossal, not just in terms of building enterprises in an inaccessible location but also in terms of the losses in output associated with transferring personnel away from the productive coastal areas.

Military considerations influenced not only the choice of Shiyan but also the factory's layout. A sensible approach would have been to locate the vehicle-assembly and component production near one another to economize on transportation costs. Not at Shiyan. After all, if the intention was to shield the plant from air assault, it made more sense to spread out the production sites rather than concentrate them. Dongfeng Motor still reflects that thinking, sprawled over some 2.9 million sq m.

Dongfeng's future is uncertain. Competition in China's automobile industry has accelerated with the appearance of new domestic players and foreign-backed joint ventures. In 1997, Dongfeng's profit-to-asset ratio--a common measure of financial performance--was just 3%, compared with 44% at Shanghai Volkswagen.

As car production becomes increasingly globalized, China will some day surely see a wave of mergers similar to those occurring in the West. Dongfeng will likely be taken over by a more efficient player. A firm so well shielded from military attack cannot ultimately block the unrelenting assault of globalization.

Huang Yasheng is an associate professor at the Harvard Business School. His most recent book is FDI in China: An Asian Perspective

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