Shanghai succeeded in the initial stage of auto sector development because the local government took on many of the roles of a developmental state. Firms needed nurturing, and local officials provided it. Even though competition was limited during this period, no other municipality in China did this as well; the institutional infrastructure of Shanghai was particularly well suited for the development of capital- and scale-intensive manufacturing industries. The problem, however, was that Shanghai was succeeding under a very distinct set of circumstances – tariffs were high and products were stable – and just as the municipality was beginning to reap the gains of having mastered this stage of development, the rules of the game began to change. A dramatic rise in FDI and impending accession to the WTO resulted in increasing domestic competition, and cutting costs and increasing technical sophistication replaced the creation of basic manufacturing capability as the primary objective of the local industry.

How effectively would the various municipal auto sectors adjust as the level of global integration increased? None of them were close to being internationally competitive at the end of the 1990s. In 1996, after a decade of development and immediately prior to the dramatic increase in competitiveness, the Development Research Centre of China's State Council commissioned a report on the overall competitiveness of the Chinese auto industry.