ANALYSIS-China may have to downshift car export ambitions
Reuters, 03.12.04, 4:17 AM ET
By Chang-Ran Kim, Asia auto correspondent
SHANGHAI, March 12, (Reuters) - Export juggernaut China may have to downgrade plans to become a major auto exporter unless it lowers high import tariffs on engines, transmissions and other car parts that foreign assemblers need to build a car.
Last year, the Communist regime had outlined an ambitious road map to becoming a car-exporting power, with plans to require 40 percent of all locally produced vehicles to be exported, compared with one analyst's estimate of 13 percent in eight years.
But experts say that in its latest auto policy draft, which has been kept under tight wraps, China is expected to shift that rule to a mere "aspiration".
"This will most likely not become law, because it is not permitted under the WTO (World Trade Organisation)," Carl Cheng, partner at law firm Freshfields Bruckhaus Deringer, said at an industry forum in Shanghai this week.
For now, foreign assemblers see few incentives in building a global production base in China, the world's fastest-growing car market.
Despite its cheap labour, making cars in China is said to cost up to 30 percent more than in most other countries because of high tariffs on the many components that have to be imported.
Local content ratios can differ widely depending on the model and car maker, and measurements are often inaccurate.
"But it's safe to say that most cars priced above 200,000 yuan ($24,160) will have more than half of their components imported," said Michael Dunne, president of consultancy Automotive Resources Asia.
Tariff rates are higher for the most expensive parts, such as engines and transmissions. Auto makers say even sheet metal has to be sourced from abroad, because of poor local quality.
CRUISING IN CHINA
For the time being, foreign brands are too busy meeting voracious demand for cars in China, where consumers are willing to pay a fat premium.
General Motor's Buick GL8 wagon costs nearly $10,000 more in China than the comparable Pontiac Montana sold in the United States, even though it has a slightly smaller engine.
"Most foreign assemblers are also grappling with excess capacity elsewhere, so there's no sense in adding more in China," said Jack Perkowski, CEO of Beijing-based Asimco, an auto parts maker. "And with a 50 percent cap (on ownership of a local joint venture), the profit incentive just isn't there."
Graeme Maxton, managing director of consultancy Autopolis, said vehicle exports would eventually come mainly from local Chinese brands, especially as some were already facing problems of overcapacity.
By around 2012, he estimated, about one million passenger cars, or 13 percent of total production, would probably be exported from China, with local brands accounting for four-fifths of that.
Honda Motor Co, a known maverick in the auto industry, is an exception.
Later this year Honda, Japan's second-biggest auto maker, will begin building about 30,000 Jazz/Fit compacts in China for export to Europe. It hopes to increase that number to up to 50,000 units down the road.
It is the only auto maker with concrete plans to export passenger cars in significant volume. China's dominant brand, Volkswagen AG, has said it would ship Chinese-built cars to Australia, but only about 600 over the next five years.
POLE POSITION
Honda received special permission to take a majority 70 percent stake in its Chinese venture on the condition that the cars it built were solely for export, so it can claim bigger profits.
By choosing a model that is also sold in China, Honda will also be able to boost economies of scale by buying more common parts, while winning popularity with Chinese officials in the process.
"They also have capacity constraints in Europe, and euro-yuan currency rates are favourable now, so it makes sense for them," said Autopolis's Maxton.
It remains to be seen, however, whether Europeans will get past the car's "Made in China" stigma.
"How the Europeans will react, this is the big issue," Koji Kadowaki, head of Guangzhou Honda, conceded. "But we figure if it flies in Europe, it will fly anywhere else in the world."
Profitable or not, exporting could become a necessity in a few years, when the current rush of production will lead to a supply glut, some observers say.
"If there's a downturn in demand, assemblers will have to turn to exports," said Automotive Resources Asia's Dunne.
Analysts also noted that while world trade rules would keep China from imposing requirements on exports, the government could always indirectly apply pressure by favouring companies that use it as a production base.
If that happens, Honda could find itself in pole position. ($1=8.277 Yuan) (Additional reporting by Ben Blanchard)
Copyright 2004, Reuters News Service
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