2004 Beijing Motor Show Preview Page 2

June 7, 2004
GM China plant

GM China plant

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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

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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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