China's car market (Good bye Western car industry!)
Shanghaied
Apr 21st 2005 | SHANGHAI
From The Economist print edition
Things are going awry for foreign carmakers in China
STRUGGLING elsewhere, the world's carmakers are increasingly relying on China, with its 1.3 billion potential customers, to bail them out. Comforting forecasts abound. McKinsey, a consultancy, expects China, already the world's fourth-largest car market with sales of 2.3m in 2004, to overtake Germany this year and Japan by 2010. America, with 17m cars sold a year, could be passed soon after.
That will be the official message at the Shanghai motor show, which opened to the public on April 22nd. Yet, in truth, China's car market is ailing. After soaring by more than 55% in 2002 and over 75% in 2003, growth in car sales slowed abruptly last year, to 12%. In the first quarter of 2005, sales actually fell by nearly 8%, though there was a small rise in March.
More trouble for Ford and GM
Apr 21st 2005
China
The motor industry
China's economy
Shanghai Automotive has information about the company. See also Geely, Volkswagen and GM in China.
The main culprit has been the Chinese government's crackdown—to help cool its still booming economy—on the car loans that fuelled much of the spectacular recent sales growth. This is colliding with a big rise in capacity, the result of optimistic earlier growth forecasts. In the past two years, almost every foreign carmaker has declared an ambition to increase mainland production. Despite recently giving warning of margin pressures from price wars, General Motors (GM) insisted that it will stick to its $3 billion plan to double capacity to 1.3m units by 2007. In total, foreign car firms and their local joint-venture partners plan to invest $15 billion to triple output to over 7m cars by 2008. Such growth and consequent over-supply is common in emerging markets—often leading to bust, as it did in Brazil in 1997-98. In China, capacity problems are exacerbated by expanding domestic car firms.
The glut threatens to slash prices already hit by slowing demand and China's commitment to the World Trade Organisation to cut its high tariffs on imported cars. The price of a Volkswagen (VW) Jetta, a popular mid-market model, has already fallen by one-third in the past three years, to 100,000 yuan ($12,000) in late 2004.
This is hitting profitability. In 2003, VW earned over $500m in China, two-thirds of its total global profits. Last year its Chinese profits more than halved; Goldman Sachs forecasts that it will lose over $500m in China this year. Its market share—50% not so long ago—has plunged to barely 10%.
Management change is suddenly rife. On April 17th, VW said that Winfried Vahland, vice-chairman of its Skoda unit, will replace Folker Weissgerber, a former board member responsible for China, and Bernd Leissner, head of China, who is to retire. Weeks earlier, GM announced the departure of its China boss, Phil Murtaugh.
The new bosses face a growing threat from Chinese carmakers. Traditionally, the domestic industry has been weak, fragmented—China has over 120 (mostly small) car firms—and technologically primitive. Some 90% of cars sold in China are foreign brands. But China's government has long aspired to create global car champions. One big firm, Shanghai Automotive (SAIC), which has joint-ventures with both VW and GM and plans a $1 billion overseas listing of its shares this year, is busily buying foreign car technology—most recently from Britain's failed MG-Rover. Firms unconstrained by foreign partnerships are even more aggressive. Chery (part-owned by SAIC) and Geely are both accused of blatantly copying foreign car technology. GM says that Chery's popular small QQ model is a direct rip-off of its Chevrolet Spark. Both GM and Toyota have failed to win court protection in China for their intellectual property.
Chinese firms are cornering the crucial market for the small, cheap cars that now appeal to middle-class buyers no longer able to borrow heavily to pay for a bigger vehicle. Two of the three top-selling models in March were Chinese brands—Chery's QQ and FAW's catchily named TJ7101U. They are under-cutting the foreign firms by using more cheap labour relative to capital. Shanghai GM's car plant is full of robots. At Geely's factory, 40 minutes south of Shanghai, visitors are jolted back to the past, watching workers sweat to bolt car bodies together by hand.
“We must make cars like people from Wenzhou make lighters”, says Li Shufu, Geely's boss, revealing the extent of his ambition: Wenzhou city makes one-quarter of the world's lighters. Though there are technical and quality hurdles to overcome, Chinese car firms plan big capacity growth, and want to sell cars overseas. Chery, which already sells 8,000 cars a year abroad, plans to enter America in 2007 and has its eye on Europe. On April 15th, Brilliance (BMW's partner in China) revealed plans to build its Zhonghua (“Chinese nation”) sedans in Egypt this year. Added to the other bad news for foreign car firms, that prospect may take some air out of the tyres in Shanghai this week. |
