2004 Beijing Motor Show Preview

June 7, 2004

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Rolls-Royce, Aston Martin, Maybach, and Lamborghini. These are not the names one normally associates with a communist society. But forget the Long March. In China, these days, it’s all about the long drive.

If he were still alive, China’s spiritual leader, Mao Zedong, might have a hard time reconciling what goes on display later this week at the Beijing motor show. More formally known as Auto China 2004, it’s the country’s biggest new car show. So big, in fact, that organizers have had to cut off ticket sales. They’re looking to nearly double exhibition space when an all-new conference center opens in 2006.

The People’s Republic is about to pass Germany as the world’s third-largest national new-car market, trailing only Japan and the United States. Though sales have cooled a bit from the triple-digit growth of 2002, manufacturers are still struggling to keep up with demand as they invest billions in new production capacity and roll out scores of new products.

Yet there are also some ominous signs on the horizon. Beijing bureaucrats have just announced new rules that could lead to an industry shakeout, especially among the dozens of smaller Chinese manufacturers. And while sales remain strong, there’s growing concern that government efforts to cool an overheating economy could have a particularly chilling impact on the auto industry.

In all, over 600 cars and light trucks will go on display at Beijing’s International Exhibition Center. Ford Motor Co. will be the largest of the exhibitors, with more than 40 different vehicles representing the Ford brand, as well as the automaker’s Volvo, Mazda, Jaguar, Aston Martin, Lincoln, and Land Rover nameplates.

Nissan Teana

Nissan Teana

Ford is a relative newcomer to the mushrooming market, having launched production barely a year ago, yet it is already expanding its Chinese factory — for the third time.

It’s not alone. Auto China 2004 will be a veritable Who’s Who of global automakers. That includes mainstream manufacturers, such as Nissan — which will introduce the Tian-lai, a Chinese interpretation of Japan’s Teana sedan — and Peugeot, which is expected to show off its small 307.

To Beijing, Jeeves

But this year’s Beijing motor show will also bring an explosion of high-line products appealing to China’s fast-growing entrepreneurial class. Maybach will debut its big, chauffeur-driven M62. Lamborghini will show off its high-performance Murcielago and Gallardo roadsters.

Most of these high-line products are imported, manufacturers like DaimlerChrysler taking advantage of relaxed rules fostered by China’s entry into the World Trade Organization. Imports rose from 70,370 in 2002 to 103,039 last year For the first quarter of 2004, the numbers rose another 34 percent. That’s lagging the pace of the overall market, however, which was averaging gains closer to 45 percent through April.

“The Chinese market,” notes a report in the McKinsey Quarterly, “now has the world’s highest sales-growth rate for vehicles. Indeed, by 2010 China will become the world’s second-largest automotive market, trailing only the United States.”

Until recently, Chinese regulators kept a tight lid on foreign investments, limiting the number of manufacturers who could enter the market, as well as which products they could build. The rules are still more restrictive than in North America, Japan, or Europe, but there’s been a definite easing of restrictions that has allowed, if not outright encouraged, foreign makers to set up shop.

GM China plant

GM China plant

Volkswagen, General Motors, and DaimlerChrysler’s Jeep unit are among the oldest and largest, but today, it’s hard to find a major nameplate that doesn’t have some sort of presence. BMW, for example, recently introduced a version of its 5-Series.

“Everyone is already here,” said Michael Dunne, founder of the automotive consulting firm, Automotive Resources Asia.

In all, there are well over 100 different automakers producing motor vehicles in China. The vast majority are local producers, and the largest of those have teamed up with Western and Japanese companies. Shanghai Automotive Industrial Corp. has formed an unusual alliance with two normally bitter rivals, GM and VW.

As the market has grown, these foreign names have steadily gained share, and now control more than 90 percent of sales, according to a report in the English language China Daily.

New investment rules weed out the weak

The foreign share could continue to grow. Early this month, the government announced rules requiring that any foreign investment in a new plant total a minimum $242 million. That’s not likely to mean much to those foreign manufacturers who’ve already set up shop, but it could prove devastating to those smaller Chinese carmakers who’ve not yet formed overseas ties. It has long been expected, analysts say, that the government would move to rationalize production capacity.

But with concerns mounting that the overall Chinese market is overheating, it is looking more and more likely that the government may take more far-reaching steps. For one thing, the the China Banking Regulatory Commission is looking into automotive lending procedures, citing questions about lax industry credit policies. Bad loans throughout the Chinese economy have many observers worried about a potential crash of the economy.

Shanghai Buick

Shanghai Buick

Consumers also have been growing more cautious, according to a report in the Financial Times, as they wait for further price cuts. Until recently, Chinese-made vehicles carried a significant premium compared to the same vehicles sold in Japan, the U.S. and Europe. That reflected not only high taxes but also in production inefficiencies.

As competition has increased, manufacturers have come under increasing pressure to streamline operations and drive down costs. The sticker price of VW’s Santana basic has dipped 21 percent over the last two years, from 119,500 yuan to 94,000. The 2.0-liter version of Ford’s Mondeo declined 26 percent, to 209,800 yuan during the same period. And analyst Dunne expects the trend to continue.

Pricing pressure raises issues

That is, of course, cutting into the profit margins of foreign manufacturers who, in turn, are pressing their suppliers to reduce costs. Nissan is encouraging more efficient Western suppliers, particularly those from the U.S., to set up shop to support its Chinese assembly line. In turn, it is offering to reward supportive parts makers with lucrative contracts in other parts of the world.

Pricing pressures are running into other issues, including a sharp increase in raw material prices, especially steel. Chinese manufacturers have been gobbling up global supplies of scrap steel pushing up prices worldwide.

There are those observers who wonder whether China could repeat the experience of Brazil, Latin America’s largest market. It experienced similar sales growth throughout the early 1990s, but then the economy collapsed and manufacturers have been saddled with significant excess capacity.

Pessimists have some reason to support their worries. In May, Chinese car sales grew at less than a 20-percent rate compared to the year before. That’s positively tepid by China’s recent standards. But it’s still the sort of number that other markets can only watch and envy.

“China is not another Brazil,” declares GM CEO Rick Wagoner.

Despite any fears about the future, Auto China 2004 is likely to remain an upbeat event. China’s car market continues to have plenty of potential and most analysts believe that any setback is likely to be, at worst, a temporary one.

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