Many observers expected China's WTO accession in 2001 to negatively affect its domestic automobile industry. But events played out somewhat differently. The automobile market experienced 30% annual growth in 2001 and 2002, and a phenomenal 80% growth in 2003, when a total of 2.04 million cars were sold in China. In a country with a population as large as China's, these figures still amount to a total of about 40 million private cars on the roads in China today, compared to over 200 million in the United States.
Further driving the automotive frenzy has been the introduction of financing by automobile retailers, which means that car ownership is no longer limited to those who can walk into a dealership and exchange a suitcase full of cash for a new Audi.
Although optimists had hoped to see this profitable trend continue to soar, the figures for 2005 showed the Chinese car market coming back down to earth, at least for the short term. Growth in sales has been sluggish compared to previous years, and the industry as a whole saw profitability down 59% in the first quarter of 2005.
Many factors are to blame for this sudden change, but chief among them are a rise in steel prices and a significant increase in competition. Long time heavyweights Volkswagen (VW) and General Motors (GM) have been losing market share to younger, mainly Asian newcomers like Hyundai and Toyota.
Consider First Auto Works, a joint venture with VW, which suffered losses of US$68.9 million in the first few months of 2005 with almost half of its production inventory remaining unsold. Conversely, Beijing-based Hyundai saw sales rocket to 56,100 vehicles in the first quarter of 2005, making it the industry leader for the period, although this was due to a massive upgrade in Beijing's taxi fleet.
Foreign firms dominate
Volkswagen made its way into China in the early 1980s when the Chinese government was actively encouraging foreign firms to enter the market through joint ventures. Pairing with Shanghai Automotive Industry Corporation (SAIC) in Shanghai and First Auto Works (FAW) in Changchun, the German auto maker was the market leader for 20 years. The traditional runner-up, GM, finally saw sales surpass VW's by over 40,000 cars in the first half of 2005 with a total of 308,722 units.
These partnerships between experienced foreign carmakers and technologically lagging and ill-managed state-owned monoliths have been crucial to the development of China's domestic car manufacturers. Such cooperation allowed companies like SAIC and FAW to streamline management, acquire advanced technologies and increase global exposure. In 2004, SAIC renewed its joint venture contract with Volkswagen for an additional 20 years.
Carmakers can churn out around 5.5 million vehicles per year in China, just about equal to 2005 sales up to November. Hence firms are investing in scaling up production, with a likely expansion in capacity to more than 10 million vehicles in the coming years. Even with its China sales slipping, Volkswagen is upping production in anticipation of a resurgence. Its third factory on the mainland, to be located in Chengdu, Sichuan province, will begin operations in May 2007.
China currently has about 100 domestic carmakers, most of which are expected to collapse or be swallowed up during the next few years of intensifying competition. Given the market's increasingly cutthroat nature and China's comparatively low respect for intellectual property rights (IPR), many foreign companies are finding themselves in tough IPR battles. These clashes often involve smaller carmakers which "borrow" everything from design to logos from foreign companies. Such standoffs, which sometimes go to court, have even emerged between JV partners, illustrating that such cooperation is not always the "win-win situation" envisioned by eager foreign firms.
Car imports are generally limited to luxury vehicles, primarily due to price-inflating tariffs. But current tariffs are not as steep as in years past, due to new WTO regulations. Previously as high as 130%, in 2005 they ranged from 38-43%, depending on the origin of the car; in 2006 the tariff is expected to drop to a flat rate of 25%. As a result, car imports are growing steadily, reaching over 100,000 units in the first half of 2005 with a value of over US$3 billion.
China's auto exports have grown rapidly in percentage terms primarily because they were starting from a low base; currently Chinese autos are not up to the standards of American or European consumers. China may become a top automobile exporter someday, particularly as the potential for oversupply becomes ever more likely in the domestic market. Volkswagen plans to export its China-made vehicles to 84 countries by 2009, and other car manufacturers will certainly follow suit. But exports will be mainly confined to developing countries for the foreseeable future.
Aside from the economic benefits of a healthy auto industry, car culture itself is catching on in China. Despite massive investment and campaigns extolling the virtues of public transportation, Chinese people are falling in love with driving. The number of cars in Shanghai reached the 2020 estimate by the beginning of 2005. New highways are saturated with traffic as quickly as they are built. For better or worse, car ownership is fast becoming synonymous with success in China and the automobile is here to stay.