The words of Karl Marx must have been ringing in the ears of the world's largest auto executives as they gathered in late September to watch the inaugural Shanghai Formula One race.
In the early 1990s, Brazil was seen as the next big market and the world's carmakers rushed in, only to see the economy tank and sales disappear. They ended up leaving factories to rust and writing off billions.
The Chinese economy is not in meltdown, but one of the primary targets of the cooling measures introduced by the government over the last year has been the auto sector, and the resultant steep drop in sales has awakened carmakers to the possibility of China becoming the next Brazil.
Since the middle of last year everyone knew that far more capacity was being installed than even the most optimistic sales predictions could account for. But none of the big car manufacturers could afford to miss out on their share of the fastest growing car market in the world and nobody expected the boom to end quite so soon.
August marked the fifth straight month of declining sales growth with just 11 more cars sold than in July, according to China's National Passenger Car Association. Sales are now expected to continue to decline until at least Chinese New Year 2005, as consumers hold out for new models and a predicted price war. The steep slowdown that began with a 20% month-on-month fall in sales in May has been a massive shock to an industry that saw sales rise 75% last year and 62% in 2002.
In the same week that the May sales drop was announced, the world's largest auto manufacturer, General Motors, revealed that it was investing a further US$3 billion dollars (on top of the US$2 billion previously committed) over the next three years to more than double capacity to 1.3 million vehicles and add 20 new models. The company also announced it was moving its Asia-Pacific headquarters from Singapore to Shanghai.
Optimistic or delusional
Following GM's audaciously optimistic (or, some might say, stubbornly delusional) announcement, other carmakers chimed in with their pledges for expanded investment to install new capacity and fresh models.
A few months down the line and the lawyers for Volkswagen (which has pledged about US$6.65 billion to double its annual capacity to 1.6 million cars), Toyota, Hyundai and Nissan (between them US$3.4 billion of expansion plans underway) must now be picking through agreements with local partners to see how to get out of throwing money into a market that has stalled virtually overnight. Even Ford, which got burnt worse than any other company in the Brazil hypefest, has promised US$1.5 billion to boost annual production in China to 150,000 units.
By some estimates, Chinese factories will have the capacity by 2007 to build twice as many cars as the country's consumers will be buying.
The hope now is that the Chinese government's plan to turn China into an internationally competitive car exporting base will make it viable for the multinationals to start exporting their Chinese-made Passats, Regals and Fiestas. The problem with that is the government wants China's exports to be Chinese branded cars, and has even published a draft resolution that domestic automakers should own half of the country's auto production, of which 40% should be exported, by 2010.
In fact, while the world's auto giants have been pouring cash into China's market, some domestic producers have already quietly been looking to expand overseas. BYD Auto, which is owned by the world's second-largest manufacturer of rechargeable batteries, is exporting cheap compacts to Syria and Sudan while privately-owned upstart Geely sends its cars to the Middle East and Mexico and hopes to be selling its Uliou sedan in the US by the end of the year.
China's premium VWs
Volkswagen, the foreign automaker with the biggest share of the Chinese market, estimates that it still costs 18% more to produce a car in China than in an industrialized country like Germany. But with new steel mills and parts factories opening rapidly, that gap should disappear by 2006 and after that China's greatest economic advantage – labor costs – will come into play.
But the executives at GM and VW and all the other carmakers can't wait until then. Right now they're wondering how the boom could have ended so soon and hoping that the Formula One will have inspired at least a few more people to buy in September and October.
Actually, many people living in China could have instinctively guessed that the auto boom was coming to an end. You only have to look out the window in Shanghai or especially Beijing to know that last year's growth rates in car production and sales were unsustainable. Gridlocked traffic, unbearable air pollution and skyrocketing oil prices are hardly the best advertisement for a shiny new Buick.