Stampeding for share forms is one thing. Fighting over car product brochures is clearly quite another. Particularly in a country where only a small minority can afford to buy cars or acquire licences and where the driving conditions are so hazardous.
Yet in a curious way, the disturbances at Auto China ’92 last June were a sign fiat the auto business was coming of age. Previously fed a meagre diet of parts and components, the trade was treated to the product displays, video walls and press events so familiar to US or European enthusiasts. General Motors’ Director of Marketing Communications, said the event "marked a new era in automobile sales in China. It was a more comprehensive marketing experience."
Beneath the gleaming marketing veneer, the show also demonstrated the rapid industrial since the government turned its attention to car manufacturing in 1987.
The achievements are impressive. Total foreign auto investment so far exceeds US$800m, and joint ventures have imported efficiency and enabled Chinese-made cars to eclipse Japanese imports. Passenger car production, which stood at just 101 in 1959, exceeded 100,000 in 1992. Volkswagen, Peugeot, and Citroen are committed and expanding producers, whilst others wait in the wings. Ford just opened a liaison office in Beijing and Renault is widely rumoured to be touting to secure a joint venture. With all this activity, some predict that in the medium-term China will emerge as a significant car exporter.
All these developments, however, must be put into perspective. China’s 1991 annual production of 700,000 vehicles ? including cars, jeeps, trucks, vans etc ? was dwarfed by the 9.5m passenger cars and goods vehicles made in the US and the 13m in Japan.
Private car ownership, estimated at just 20,000, has obvious growth potential given growing affluence and the prospect of cheaper models around the corner. Even today, according to Garel Rhys, professor of Motor Industry Economics at Cardiff Business School, "there could be about 50m mainland Chinese capable of buying cars."
But two factors are likely to frustrate private buying. An inadequate frame-work is manifest in poor and congested roads as well as a lack of services, such as parking lots and fuel stations. And the government must limit imports so as to protect its increasingly vulnerable balance of payments position. The erosion of foreign exchange reserves caused by importing all the Toyotas and Nissans during the 1980s remains fresh in the memory.
On the production side, many local automakers are simply not up to meeting Western demands. Poor managerial, commercial and engineering skills, especially outside Shanghai and Guangdong, contribute to low productivity and quality. As a result, China’s top eight automobile producers are heavily in debt.
According to Peter Crawford, Chief Executive of the Automotive Components Division of the UK’s BBA Group, "There needs to be another two to three generations of open door policy for the young Chinese to learn the necessary engineering and commercial skills." Others are less pessimistic, particularly if links with Taiwan are strengthened. Even so, BBA, which has a long-standing licensing agreement with the First Auto-mobile Works (FAW) in Changchung, Jilin Province, is expected to sign a joint venture in three years time in a country where it "now can’t afford not to be."
For the time being, Western firms recognise that China has to be a long-term commitment. Immediate returns are not going to be realised simply by being able to combine advanced production and engineering processes with cheap shop floor wages of around US$2 a day. The realistic aim for the joint venture companies is to become internationally competitive by the second half of the decade. By then quality and training standards should be closer to international standards and volume increases yield economies of scale. A car assembly plant needs to produce about 200,000 units a year to operate at optimum efficiency, an engine plant somewhere nearer 600,000.
Another major obstacle is state control of supply and demand. Worker co-operatives, government officials and joint venture participants monopolise demand, whilst production and export quotas require state approval.
This is all very well and indeed comforting at a time of 8m overcapacity in the world car market. The danger comes when policy is reversed, as happened during the period of austerity, which led to an 11 per cent fall in vehicle production in 1989. Key company profits fell by over half. FAW made its first loss for many years. And whilst the government propped up the industry through buying cars and relaxing purchase controls, the market remains exposed to political as well as market forces.
But the problems don’t stop here. Parts are difficult to import due to the shortage of hard currency and high taxes. Related industries, like petroleum, chemicals and textiles lag behind and essentials such as steel, fuel and raw materials are often lacking in the right quantities. Throw in regular power cuts and the shortage of qualified staff and it is a wonder that Western automakers talk in terms of "reasonable progress" so far.
Since the Second World War most motor vehicle produced in China have been trucks, buses and jeeps for the domestic market. Even now, cars represent just 10 per cent of motor vehicle production. As a relatively well-established sector, light truck and jeep production is an attractive way into the market. Beijing Jeep, in which Chrysler holds a 31 per cent stake, leads the way with production of the Cherokee; Daihatsu’s Charade minibuses are made in Tianjin; and Isuzu trucks are due to roll off the production line in 1993.
With the state having put a freeze on the number of carmakers in China, van and truck production remains a way in. Dr. Cheng Chen, General Manager of Taiwanese steering drivetrain and components supplier, Tamp Auto Parts, said "That’s how Taiwan’s auto companies are going to enter the mainland, through small trucks."
Like many developing countries, China’s focus on commercial vehicles makes sense as it represents a capital investment in the economy. And domestic models, simple and sturdily built, are well-equipped to the rugged environment. Maintenance is easy, requiring "only a blacksmith to keep them on the road," according to Professor Rhys.
As for cars, the few that could be seen in the cities five years ago were mostly Japanese. Domestic models were unreliable and outmoded by comparison. Many, like the Shanghai Sedan, are no longer produced.
The big three
The shift in emphasis to car production was introduced in 1987 and is reaffirmed in the current Five Year Plan (1991-1995). There are three big joint venture car operations in China. Dongfeng Citroen Automobile Company, 70 per cent owned by Dongfeng, assembles the Citroen ZX with parts sent from France. A final unit ? comprising pressing, body assembly, painting, wiring and final assembly ? has been built in Wuhan, Hubei province; a mechanical components unit, based in nearby Xiangfan, will start production in 1995. On a smaller scale, Guangzhou Peugeot Automobile assembles Peugeot 505 and 504s.
The second of the big three is a 56:44 joint venture between FAW and Volkswagen in Changchung. Trial production of its Jetta cars has only recently begun, with Golfs to follow.
But the biggest success story is Shanghai Volkswagen, which operates separately to the Changchung operation but intends to cooperate in the areas of supply, training and aftersales. It was established in 1985 and is a 50:50 joint ventures between Volkswagen AG of Germany and three Chinese partners. The company, which makes the Shanghai Santana and Passat Variant, has an annual production capacity of 65,000 cars and 116,000 engines. In 1992 it made 60,000 Santanas, up from 35,000 in 1991. It has ambitious growth plans of 150,000 cars by 1995 and 300,000 by 2000.
According to Dr. Stefan Messmann, deputy managing director of Shanghai Volkswagen, "China has the potential to become VW’s main base for Asia. However, for the time being, our company is concentrating on the rapidly growing domestic market, where, so far, local manufacturers can not meet demand."
One of SVW’s first priorities was to increase the proportion of parts sourced locally: 70 per cent by the end of 1991; 75 per cent in 1992; and 80 per cent planned by the end of this year. Whilst this helps to balance the company’s foreign exchange, Dr. Messmann admits that "their main problem is the parallel development of the supply. Not only must they keep pace with the car manufacturers’ capacity but also improve standards."
Many parts are derived from external suppliers, and SVW has been particularly stringent in assessing their quality and reliability and helping them to meet production targets. A special Suppliers Support Team provides technical and other help and some 200 suppliers’ staff have been sent to Germany and Brazil for training.
Notable by their absence are the Japanese. Aside from small joint venture or licensing deals, the likes of Suzuki and Toyota have stayed away. Political unease is one factor. There is concern in Tokyo over helping to develop such an important industry on its doorstep. Others cite business constraints, notably the massive exposure of the big Japanese auto makers elsewhere in the world. Whatever the reasons, China is certain to be in Japan’s longer-term sights and any political problems will be overcome as they have in other industries.
More immediately South Korea and Taiwan are likely to increase their presence. Taiwanese investors across all industries have been flooding the mainland in search of cheap labour and a market. Korean automakers are likely to demonstrate their renowned nimbleness by capitalising on the establishment of diplomatic relations with Beijing. According to Automotive News, Kia Group has recently agreed to set up a joint venture to assemble cars and auto parts in Yanji City, bordering on Korea.
Forecasting growth is a difficult business, particularly given the state’s ability to control domestic demand. Estimates vary wildly. Professor Rhys, who has recently been analysing the market with Chinese economists estimates that around 400,000 "modern" cars will be produced by the turn of the century. Yet targets of the "big three" along account for such numbers b 1995.
For its part, the China National Auto Industry Corp, which coordinates vehicle production throughout China, expects annual output to rise to 240,000 by 1995. Cai Shiqing, CNAIC’s president, predicts a total vehicle production of 1.7m by 2000. A high percentage of cars will be exported, as the government is likely to stifle domestic demand in a bid to boost foreign exchange and improve the trade balance.
Road conditions will improve, but slowly. In the current Five Year Plan, 90,000km of roads, including 1,000 km of motorway are to be built.
Whilst accepting that China’s automotive industry won’t start to become efficient by international standards until the second half of this century, overseas competition will be increasingly exert pressure. If China should rejoin Gatt, customs duties may ease gradually and the number of imported cars rise. Greater competition should facilitate the necessary streamlining of Chinese auto suppliers. Peter Crawford goes further, arguing that China’s adherence to vertical integration should be dropped altogether; otherwise "they won’t keep up with technology."
But the fear that a more open trading environment will damage the infant industry is over-simplistic. The Gatt structure allows countries different levels of membership according to economic development, and therefore China could continue to exercise certain protective practices.
So, for all the advances in productivity, it seems that good, old-fashioned protectionism will help to see the industry through over the next few years.
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