Anticipating a surge of cheaper imports fuelled by WTO tariff reductions, Chinese automobile manufacturers are cutting prices in a race for market share. The potential of the passenger car segment of this market is particularly enticing. An estimated 20 percent of middle-income households – roughly 26m people – have expressed a desire to own cars. The annual demand for passenger cars China is expected to reach 700,000 in 2002, and to grow to 1.2m by 2005.
With its co-operative relationship between Yuejin Motor Group and Fiat Group of Italy, Jiangsu's capital city of Nanjing is gearing up to become a significant player in China's vehicle manufacturing sector.
Yuejin Motor and Fiat have been working together since the formation of their 50/50 Iveco joint venture in 1996, manufacturing a range of turbo trucks and vans that have become well known in most Chinese cities. Nanjing Iveco currently holds a 12 percent share of China's market for passenger vans. In April 1999, the two sides formed a second joint venture, Nanjing Fiat, to manufacture passenger cars. Fiat is now positioned to meet demand in both the commercial vehicle and passenger car sub-sectors; of total vehicle sales of about 1.4m in China last year, half were of trucks and commercial vehicles and half of passenger cars.
Passenger car output begins
Nanjing Fiat launched its first passenger car, the 1.5-litre Palio, in January 2002. Just last month, the company released a 1.3-litre version. The latest Palio, which last year earned the title 'car of the year' in Brazil and India, priced at US$11,600-US$13,500, and was the first passenger car of international standard to be released on the China market since WTO entry. According to Mao Xiaoming, Nanjing Fiat's general manager, the company has delivered 3,000 Palios to customers in the first half of this year.
Flavio Ciappa, Fiat Auto's chief representative in Nanjing, says that production of the Palio is only the beginning. "We are planning to launch three new models by the end of 2003," he comments.
In recent months, car manufacturers have slashed prices by between 8 and 25 percent due to deflationary pressures and over production. This has resulted in some increase in sales, although many consumers are adopting a wait-and-see attitude in expectation of further price cuts towards the end of 2002. Right now, competition is fierce, as manufacturers battle it out on price in an attempt to obtain a foothold in the market.
But Ciappa suggests that price won't necessarily be the most important consideration for Chinese consumers. He defines customer service as crucial for success in this competitive market. The company has established a network of dealers that combine sales, maintenance, spare parts supply and information services. "It will be most important to take customer service into consideration," he says. "We are currently working to expand our network of dealers. Our network includes 25 dealers now, and by the end of this year we will have 50 dealers."
Certainly, the competition will be stiff. Fiat's main competitors include Volkswagen AG and General Motors. Both of these companies have joint ventures that have altered their production lines to manufacture compact sedans – the Buick Sail in the case of Shanghai GM and the Polo of Shanghai Volkswagen.
The impact of WTO entry on the passenger car market has yet to play out. Recent discussions on this topic have focused on lowered import tariffs and the possible effect that low-cost imports, say from neighbouring Russia, could have on the market. But protectionist measures will not be removed overnight, and passenger car imports in 2002 are expected to change little from last year's level of 72,000 cars. Import tariffs, which in 2002 were slashed to between 44 and 51 percent (depending on engine size), should fall to 25 percent by mid-2006.
According to Ciappa, one of the most important results WTO entry will have for Fiat is to encourage companies in the auto parts sector to cooperate with foreign automakers, becoming both more competitive and more integrated with the global distribution network. "WTO entry will reduce the cost of imported car components, but actually the benefits of this will be marginal," he says. "Most important is that [the WTO agreement] will make it possible for Fiat component manufacturers in China to be competitive and export Fiat parts to other Palio manufacturing locations worldwide."
In an era that has seen the rise of Shanghai as a major commercial centre, Fiat's choice of Nanjing as a manufacturing base may seem unlikely. As an old political centre, Nanjing has a reputation for being somewhat murky in its business dealings. But the city has also become a thriving manufacturing centre in recent years. It has a well-educated labour force supported by 30 universities and 500 scientific research institutes, and many companies see it as a more cost-effective alternative to Shanghai. By September 2001 the city registered 6,150 foreign-invested enterprises involving total contracted investment of US$10.3bn.
Foreigners doing business in Nanjing also express optimism about the city's appointment of a new mayor, Luo Zhijun, in January of this year. Steve Barru, an American business consultant who has worked in Nanjing for 13 years, describes Luo as "a breath of fresh air [for the business community]."
"This administration is working on service and responsiveness. It's becoming much easier, more transparent and just much less of a headache to deal with [business issues]," he continues.
Fiat Auto says it is happy with its choice of Nanjing and of Yuejin Motor as a manufacturing partner. "Fiat Auto set up operations in Nanjing because Fiat Group and Iveco had already established a joint venture here. Our partner was here and our co-operation had been very successful. Based on these past successes, we felt Nanjing would be a good location from which to enter this new field [of passenger cars]," Ciappa says.
"Knowledge, belief and culture are quite different [in Nanjing], but we are working towards the same goals at Fiat," he adds. "Our confidence has increased along with the production of the new Palio and this is a very successful venture right now."
Ciappa is bullish on Fiat's prospects: "We expect strong results in 2003 and 2004. We will produce and sell 25,000 cars this year, and 50,000 next year."
It remains to be seen how the struggle in China's domestic car market will be resolved, and in whose favour. But for the moment, Fiat knows that its ventures are valued highly by Nanjing, and that they are playing an important role in drawing other foreign companies to the city. In April of this year, Lear Corporation announced the formation of a joint venture in Nanjing to supply Fiat and Yuejin with seat systems and wire harnesses for their vehicles. Lear Xindi, now Lear's largest venture in China, is expected to generate annual sales of US$40m initially.