A recent surge in passenger car sales has benefited China's sprawling auto industry, but a rationalisation of the sector remains inevitable.
According to official statistics, both sales and output of domesticallymade passenger cars in 2002 were in excess of 50 per cent year-on-year to 1.1m units. This is compared with fewer than 50,000 units in 1990. The sharp upward trend has been carried through into 2003. In the first quarter total car sales, including sports utility vehicles, climbed 109 per cent year-on-year to 409,161 units.
China is now the fastest growing vehicle market in the world and it has become the fourth largest automaker. There are four main reasons for the accelerated growth over the past two years:
a rapidly increasing percentage of private buyers;
a large number of new models appearing on the market; continued targeting of the Chinese market by major global vehicle manufacturers;
the gaining of market share by new, indigenous manufacturers.
The most striking aspect of the passenger car market in the past six years has been the growth in private ownership. The proportion of automobiles sold to individuals and private enterprises rose from 10 per cent in 1995 to an estimated 50 per cent in 2001. Private sales rose from approximately 32,000 to 375,000 units over this period, a more than 11-fold increase.
The share of the taxi sector fell from 30 per cent in 1995 to 24 per cent in 2001. Sales growth potential has been constrained in many cities that have capped their taxi populations, but the market of 180,000 units annually remains attractive.
By contrast, the proportion of sales to state enterprises and to central and local government has declined by two-thirds and onethird respectively to 10 per cent each (75,000 units in 2001). Automobile sales to joint ventures and wholly foreign-owned enterprises also declined by two-thirds, to just 37,500 in 2001. It seems very likely that these sectors have declined further in 2002 in favour of the increasingly important private sector.
Lack of a middle-class market
The current segmentation of the market in terms of units sold is reflected in a dispersed price segmentation. China lacks a significant middle class population and the demand for passenger cars is concentrated in two segments: compact automobiles priced at less than Yn150,000 which account for 58 per cent of the market (of which 24 per cent sell for less than Yn92,000), and mid- to high-end cars priced at more than Yn250,000, which account for a 24 per cent market share. The remainder is made up of vehicles costing between Yn150,000 and Yn250,000.
The geographic dispersion of passenger vehicles in use at the end of 2000 casts further light on the development of the market. Only 14 municipalities and provinces had a registered number of vehicles on the road (PARC) of more than 2.5m, most of them in the more developed coastal regions. Together they accounted for 72 per cent of the passenger vehicle PARC nationally.
While there are more than 100 vehicle assemblers in China, the market is concentrated in the hands of a few. The big three auto companies, First Auto Works (FAW), Shanghai Auto Industry Corporation and Dong Feng Motors, captured 47 per cent of the total market in 2001. However, a number of Chinese domestic producers – Chery, Geely and Qinchuan Flyer – have grabbed a significant share of the dynamic private car market from the multinational vehicle manufacturers by offering low-priced basic cars.
These inroads into the market have been made possible by powerful backers. Chery is supported financially by the Anhui provincial government. The brothers Li, who own Geely, had made fortunes from the construction industry and motorcycle production, while the Qinchuan Flyer is ultimately an offshoot of Norinco, the commercial arm of the People's Liberation Army.
These newcomers do not intend to remain at the bottom end of the market. Chery has recently invested US$55m in a new paintshop, while Geely has plans for six new models in the design stage. They are now looking for outside expertise to help them move up to the next level.
Most of the major vehicle assemblers with multinational participation are located in the coastal regions, with the exception of Dong Feng Motors and Changan Auto. With nearly all the major global auto manufacturers now in production in China, the two Volkswagen models of the FAW-VW joint venture and the three models of the Shanghai- VW joint venture no longer predominate.
Impact of WTO entry
Under the negotiated terms of China's entry to the World Trade Organisation, import tariffs and localisation requirements will be reduced gradually (see table).
Whatever changes these relaxations in restrictions on foreign company operations bring to the structure and ownership of the industry and the reduction of prices, it is likely that local production will continue to dominate China's automotive market. There is no precedent in the import experience of other Asian markets, ranging from South Korea (1 per cent market share) through to Japan (5 per cent market share) for supposing that multinational auto manufacturers will succeed in penetrating the China market, except for luxury cars, other than through foreigninvested enterprises.
In the medium term, there is some reason to question whether China will be able to sustain the tremendous market growth in passenger cars seen in 2002 and what might be done to stimulate demand. Possible measures could include the relaxation of import quotas, modernisation of vehicle financing, improved vehicle servicing and recall facilities. There are certainly business opportunities in all these areas.
A more intriguing question is how long it will be before China begins to export automobiles. In other industrial sectors, such as white goods, computers and now communications, Chinese manufacturers have progressed from being backward domestic suppliers to global exporters in a very few years. In the automotive sector, King Long Buses has established a joint venture in India to build complete knock down bus kits supplied from China, and Honda has begun to talk openly about producing a derivative of the Fit/Jazz supermini for export from China. Geely hopes to sell 1m cars annually by 2010, almost a third of them overseas. The prospect of China becoming an automotive exporter draws closer.
This is an edited extract from the fourth edition of Doing Business with China , published by Kogan Page and written jointly by Mark Norcliffe, head of international department at the London-based Society of Motor Manufacturers and Traders, and the editor.