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

To: RealMuLan who wrote (3584)	10/20/2004 6:13:20 PM
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China's star dips but not for long By John McCormick / Autos Insider Comment on this story Send this story to a friend Get Home Delivery SHANGHAI, China - China should be called the land of contrasts. Consider the following: - The country has more US dollar millionaires than America, yet the average factory wage amounts to less than $100 per month. - Under a communist government thrives the world's fast growing economy, with capitalist-style conduct that sometimes makes Americans look modest. - There are scenic attractions of stunning beauty, but grim, sprawling cities with air quality so bad it makes one hanker for Los Angeles at its worst. - China is sucking down the world's oil supplies (not to mention other commodities such as steel and cement) at a pace second only to the US, yet the country has few oil reserves of its own. Energy security is, in fact, the government's number one concern. - The nation's vehicle fleet is expanding fast, but outside of new road systems in certain major cities, the transportation infrastructure is woefully inadequate. - Shanghai, the country's commercial capital, is growing at a furious pace, with the world's tallest building under construction. Yet the city is already 10 power plants short of its needed electrical capacity and is subject to rolling blackouts. - Despite a population of 1.3 billion people, regional labor shortages are starting to become a concern, as workers cannot afford to live in more affluent areas. So how do these and other Chinese market contradictions play into the strategies of the world's top automakers? With car companies struggling to make money in Europe and the US, most are hoping China can come to the rescue. Some automakers, notably General Motors Corp., have made bigger bets in China than others. Investing early and heavily has already paid off handsomely for GM. Other leading automakers have been more cautious and are now scrambling to catch up. Now the question is whether this booming Asian market will continue to be a goldmine or whether economic forces start to erode its attractiveness. This summer the first signs of trouble appeared as sales flattened dramatically from the runaway pace maintained over recent years. Overall sales grew 40 percent in 2002 and 36 percent in 2003, with sales of domestically built passenger car rising by 80 percent and 68 percent respectively in the same two years. The boom continued into 2004 but then after April, tapered off to the extent that two months have been below the rate set in 2003. Exactly why the market softened so abruptly is hard to determine, but Phil Murtaugh, chairman of GM China Group, has a pretty good idea. Essentially it boils down to consumer confidence, he says. Two years ago the Chinese government opened up automotive financing with new regulations. In many cases financing was backed through loan insurance. Unfortunately, due to the inexperience of the banking industry, many bad loans were issued. Consequently insurance companies stopped issuing loan guarantees and the automotive financing rate dropped from 25 percent on average to five percent. On top of the financing slow down, the government's efforts to cool the economy tightened up restrictions on credit, which affected auto dealers' ability to finance inventory. A third factor was a flurry of price cuts in the market place from competing automakers. The end result was that consumers have decided to hold off purchases and see how the pricing wars play out. Murtaugh however maintains the slowdown is a short-term phenomenon. "The real question is what is the definition of short term," he says. "Is it days, weeks, months? Almost everyone I know believes this 'short term' will end sometime in the next six months." One element that should help kick the market back into gear for GM is the very recent establishment of China's first automotive financing company, GMAC-SAIC, a joint venture between GM and its Chinese partner, Shanghai Automotive Industry Corp. GMAC aims to build the financing business to 60-80 percent of sales within the next few years. When all is said and done, Murtaugh expects the Chinese auto industry to grow by 12 percent in 2004 to 5.1 million units and settle down to around 10 percent annually thereafter. That may not be quite as sexy a growth number as we've seen from China in the last couple of years, but compared to the unhealthy situation in Europe and the US, it's very attractive indeed. So the savvy conclusion seems to be that even with the known challenges - price cuts, consumer wariness, increased competition and so on - China will present the auto industry with its best opportunities for some time to come. John McCormick is a columnist for Autos Insider and can be reached at jmccormick@detnews.com detnews.com