China Goes Car Crazy

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Skyscrapers tower over the city, new construction everywhere you look. Traffic clogs the highways, billboards exhorting motorists to buy everything from cellphones to soft drinks. And there are plenty of new name-brand stores for folks like James Wang to shop at.

So when the 27-year-old real estate developer ordered a new Maybach 62 luxury sedan, it might have seemed like the perfect example of the American way of life. Except for the fact that this isBeijing, not New York.

Yet as the Asian nation races to modernize its economy, creating millions of middle and upper-class consumers in the process, the two countries are turning out to have a lot in common. Like a passion for automobiles.

“I like cars more than clothing,” says Wang, who already owns a Porsche 911 and a Subaru WRX STi, and showed up at the Beijing show to pick up the keys to one of the first two Maybachs in China. “I was just waiting for this car to come to China ,” adds the young entrepreneur, who made his fortune developing golf courses for the capital cities new leisure class.

Wall to wall shoppers

While he may be among the most affluent of China ’s citizens, Wang’s passion is shared, seemingly at every level of the economy. Organizers of the auto show, officially known as Auto China 2004, had to cut

off ticket sales, yet even so, Beijing’s International Exhibition Center was wall-to-wall with potential buyers looking to check out the latest models.

And there were plenty of them, an assortment of new brands entering the fast-growing Chinese market this year, while existing marques are flooding the streets with new product designed to maintain share, even as the market grows at a near-exponential pace.

Last year, the market surged to 4.4 million, double the volume of 2001, and displacing Germany as the auto industry’s third-largest national market. A combination of factors, including the central government’s decision to reign in lenders, has slowed car sales in recent weeks — to a still torrid 20 percent or so. Even so, sales will all but certainly top five million this year, says Phil Murtaugh, CEO of GM China, who forecasts that within two to three years, China will push past the Japanese market.

Few seem to doubt that trend will continue, basing their beliefs on sheer numbers. Where in the U.S. there’s nearly one car for every potentially eligible driver, the figure is barely nine per 1000 in China . So “Even if ten percent of the population would want to buy a car, that would be 130 million people, almost as many as you have in Japan ,” stressed Nissan Executive Vice President Toshiyuki Shiga.

By 2020, industry leaders generally agree, China could reach volumes of 20 million vehicles annually, which would likely make it king of the hill, larger even than the massive American market.

And that, adds GM’s Murtaugh, is kicking off “an unprecedented race among global automakers.”

Frenzy of investment

Since the beginning of this year alone, various foreign auto manufacturers and their Chinese partners have announced plans to invest over $13 billion in China . That includes a whopping $5.7 billion from Volkswagen, and $3 billion from General Motors, which intends to boost capacity from the current

530,000 units a year to an annual output of 1.3 million. With China already GM’s fourth-largest national market, that could jump to number two soon after the three-year project is completed.

This frenzy of investment is understandable, says Michael Dunne, founder of Automotive Resources Asia and an occasional contributor to TheCarConnection.com. With capacity lagging demand, it’s been a seller’s market. GM earns an average $4000 for every Regal sedan it sells in China, eight times more than in the U.S. , and the gap is nearly as large for other products, such as the popular VW Santana.

But Dunne warns “We’re going to see overkill, just like we have in other industries.” China ’s over-optimistic television manufacturers, he points out, currently have four times more capacity than they

need, and have been accused of dumping overseas to absorb that excess.

For now, most car manufacturers echo GM’s Murtaugh, who insists that even with slowing sales and growing production capacity, there will remain more than enough demand within China. GM does export a small number of V-6 engines to its CAMI plant in Canada , but there are “absolutely no plans” to ship fully-assembled vehicles out of the country, Murtaugh declares.

But that position may be softening in a hurry.

Honda has been steadily expanding production at its first venture, in Guangzhou , and can now roll out more than 200,000 vehicles annually. The automaker has worked hard to develop a Chinese supplier network that can meet both the cost and quality demands expected by Western buyers, perhaps the biggest challenge faced by potential exporters, according to Sho Minekawa, CEO of Guanzhou Honda Automobile Co.

Get the supplier network right, he says, and “ China has everything necessary to become a globally-competitive export market.”

Honda’s second plant will produce the subcompact Jazz model for Europe, replacing a version of the car now built in Japan . Initial production capacity will be 50,000 units annually, but that’s likely to grow. Meanwhile, Volkswagen officials suggested last week that they will begin exporting vehicles as part of their own expansion program.

Significant numbers of exports could begin by 2007, predicts a new study by the International Metalworkers Federation, Swiss-based umbrella organization for auto unions around the world. “The biggest risk is that all companies will rush like lemmings into the trap of over-capacity,” warned Juergen Peters, president of Germany ’s IG Metall union and IMWF president, and if that happens, there will be no other option.

Homegrown ambition

The foreign-dominated joint ventures aren’t the only ones looking for markets abroad. The homegrown Chinese maker, Chery, would like to export its little QQ model. But that raises a variety of thorny issues — such as intellectual property rights.

GM has filed a grievance with the Chinese government, attempting to block production of the little car, which the U.S. maker insists is a complete clone of the Chevrolet Spark. The respect of intellectual property rights is a thorny issue in China , and one that the government promised to address in return for its admission into the World Trade Organization.

Newly issued automotive guidelines promise to bar sales by manufacturers who ignore property rights. Yet few observers expect the government to act on the complaint against Chery, which, in the labyrinthine world of Chinese capitalism has significant financial and political ties.

Even if the government did move against the QQ, Chery is ready to spend the dollars it takes to compete more fairly. Well-placed industry sources tell TCC it is hiring Western and Japanese consultants, engineers and designers, as well as suppliers, hoping to bring a vehicle all its own to market. The challenge will be to keep the $1250 price advantage it currently has over the Chevy Spark, which has helped it outsell the GM model by 6-to-1.

“We want to depend on ourselves,” Michael Zhang, a Chery executive, told a TCC contributor.

Right now, the foreign makers and their approved Chinese partners control more than 85 percent of sales. The government has made it clear it wants to shake out the estimated 120 local makers still operating. Even so, companies such as Chery and Geely are ambitious, to say the least. The latter firm is owned by a high-school dropout who has become one of China ’s top entrepreneurs.

Geely’s strategy, according to analyst Dunne, lifts a page from Mao Zedong’s play book. The company believes it can leave the huge urban markets in China’s affluent Pacific coast to the foreign makers, then slowly encircle cities like Shanghai by appealing to the less affluent rural market with low-priced products.

There are still plenty of challenges facing China , its regulators as well as its auto manufacturers.

Pollution is a major problem, especially in big cities like Beijing and Shanghai , where the sky is often a sulfurous brown. There’s the issue of importing enough oil to feed the hungry cars of an increasingly affluent market. And there are plenty of over-arching economic challenges for booming China to deal with.

Few expect the populous Asian nation to experience the same sort of meltdown that crippled much of Southeast Asia during the 1990s. The potential is too rich to make for anything but a temporary setback, according to industry analysts. There are far too many folks, whether they’ve got the millions of a James Wang, or the wages of a bureaucrat, who can’t wait to get a car of their own. The China of today is too steeped in recreating its own version of the American — automotive — dream.