Automotive assemblers and parts suppliers are located in the same regions, and this heavy localization is a common characteristic of the automotive industry worldwide. This paper analyzes how Chinese automotive assemblers and their parts manufacturers choose their locations. We emphasize that economic as well as political factors are important in China. The failure of the industry to concentrate is due to the lack of a suitable industrial policy in the central government. In contrast, this paper shows that Shanghai was successful in its policy of nurturing the automobile and parts industries. Now Japanese automotive assemblers such as Honda and Toyota have been reinforcing their activities in China, but their manufacturing systems are different from those in Japan. This is due to characteristics of the Chinese automotive parts industry. Based on the authors’ field research, we discuss how Toyota and Honda form their distribution networks to fit the constraints of the Chinese automobile parts industry. Finally, further issues of the Chinese automobile industry are presented.