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Strategies & Market Trends : China Warehouse- More Than Crockery -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (550)	8/28/2003 12:36:46 AM
From: RealMuLan	Read Replies (1) \| Respond to of 6370

Profits blinding carmakers in China? By JAMES MACKINTOSH RICHARD MCGREGOR FINANCIAL TIMES AMONG the many indicators of China's exploding demand for cars, few match the scramble in Shanghai to buy a licence plate. Only a few thousand of the plates - needed even before a car can be bought - are made available each month at a government auction, part of an attempt to limit increasing traffic congestion. Last month, demand drove the price in Shanghai to a record 38,000 yuan (S$8,000): about half the cost of the cheapest cars in the market and 50 per cent higher than a year ago. The rising price has spawned a thriving business in nearby quota-free cities where traders buy cheaper licences to sell to eager Shanghainese. 'We can get you a licence for 3,000 yuan, including transportation and cost of a temporary residence certificate - it's so much cheaper than Shanghai,' says Ms Yang Chunyan, a saleswoman at Heping Auto Sales, near Shanghai. With these and other measures of booming demand, it is little wonder that the boardrooms of global car manufacturers are buzzing with talk about China, a rare bright spot in a world car market sunk in depression. Passenger car sales rose 82 per cent in the past six months year-on-year, after increasing more than 60 per cent last year. Most manufacturers expect China's demand for cars to grow at 15-20 per cent for the rest of the decade, creating a market that Mr Bernd Pischetsrieder, chief executive of Volkswagen, says is on track to become the second largest in the world, after the United States. Nor is carmakers' enthusiasm driven simply by the growth in demand. They are also making fat profits. Many cars sell for up to twice the price that they command in the US. For most manufacturers, China is now the most profitable market. Peugeot, one of the few to publish figures for Chinese operations, had an operating profit margin last year of 12.2 per cent at its joint venture in Wuhan, central China: three times as high as in its European business. FEARS OF OVERCAPACITY BUT the rush into China is far from a one-way bet. Even before many of the factories planned by Western carmakers have been built, fears of overcapacity and a profit-destroying price war are emerging. Mr Max Warburton, analyst at Goldman Sachs, says global manufacturers are taking 'a colossal, lemming-like leap over the cliff' as they pile an estimated US$10 billion-plus (S$17.5 billion-plus) into car factories in China over the next three years. Just last month, Mr Pischetsrieder laid the foundation stone of Volkswagen's factory in north-east China, committing the company to double output in the country to 1.6 million cars a year, at a cost of Â£6 billion (S$16.5 billion). More than 3,000km south in Guangzhou, near Hong Kong, Japan's Honda is preparing to double the 120,000-unit annual production of its factory and building another, with an initial production of 50,000 a year exclusively for exports. Nearer to Beijing, BMW is installing machinery at its joint venture with China Brilliance to make executive saloons in China for the first time, allowing them to compete with VW's successful Audi luxury operations. Japan's Toyota and Nissan are also stumping up more than US$1 billion each to open plants in China later this year. Toyota aims to have a 10-per-cent share of the passenger car market by 2010, up from a negligible level now. China's car sales are still low, at 1.2 million last year. But the lure for these carmakers is the nascent Chinese middle class. With average annual income of around US$4,000, they now number more than 100 million and are expanding quickly. ... Chinese carmakers still have some way to go before they can be fully competitive with multinationals. Local companies have only 10 per cent of the market today. Their spending on research and development is a fraction of that at Western companies. Production costs remain too high. And the local market is still too attractive to make a focus on exporting worthwhile. But by the time foreign carmakers' over-investment in China brings the current bonanza to an end, they may find they have nurtured a formidable new global competitor. 'I am worried the industry is acting as a midwife to a low-cost exporting industry that the global industry just doesn't need,' says McKinsey's Mr Mercer. Mr Dunne of Automotive Resources Asia believes divorce between the foreign companies and their local partners is highly likely and could be messy. 'Intuitively, the Chinese believe that one day they will buy out their foreign partners. And intuitively, the foreigners think they will buy out their Chinese partners. So crunch time will come, but today is just sensational, as everyone is making money hand over fist,' he said. straitstimes.asia1.com.sg