Output has risen during the 1990s but the industry remains fragmented and geographically dispersed. Managers are often more concerned with meeting production targets than demand. Market reforms have changed working practices but the central government still exerts significant control, for example restricting foreign investment in assembly projects and determining the price bands at Since being identified as a pillar industry earlier this decade, China's automotive sector has experienced some well-publicised difficulties. Most stem from the fact that demand for vehicles has lagged behind expectations. Between 1994 and 1996, passenger car sales grew by just 2.6 per cent a year while production grew at an average of 18.5 per cent. This has forced companies to operate at levels well below full capacity, thereby depriving them of the benefits of economies of scale.
According to recent estimates by the Economist Intelligence Unit, motor vehicle sales in China will actually fall by around five per cent in 1998 compared with last year. Official predictions have also been revised downwards. In 1994 the government was forecasting that 2'.5m vehicles of all types would be bought in the year 2000. More recent government estimates have put demand at 1.96m by the end of the century, of which 0.5m will be passenger cars.
Low productivity levels which vehicles can be sold.
A report by Arthur Andersen which concentrates on automotive components suppliers contrasts China with other regions. While highlighting inefficiencies and outdated working practices it concludes that the industry in China is developing along similar lines to other emerging markets. According to the report, there are big shortcomings in productivity and quality but these are compensated to a significant degree by the low labour costs which exist in China.
The study says Japanese plants pro-duce about four times as many units per labour hour compared with those in China. Productivity among European and US manufacturers is about three times as great.
The quality differential is even more alarming. Chinese component plants deliver 13 times the number of defects to their customers compared with American plants, and 18 times the number of Japanese plants.
However, the report argues that these findings are consistent with a country passing through the early stages of industrial development. A 1994 study of Mexican component plants revealed that they were just 20 per cent more productive than their Chinese counterparts. When taking into account labour costs ?the average hourly cost for a production operator being about US$1.00 in China against US$2.36 in Mexico ?China can be regarded in a much more competitive light.
Future productivity gains are likely to be constrained by the difficulty cited by non-Chinese managers in reducing the number of workers at joint ventures. Their Chinese counterparts often insist that existing manning levels should be maintained. Production volumes are still low by international standards because of flat demand in the market, meaning that it is not possible to derive economies of scale. Across the country, companies have invested in modem plant in anticipation of improved demand, thereby adding to the problem of low utilisation.
There is a marked contrast in the operations of different component manufacturers in China. One of the plants studied in an outlying part of the country was using extremely out-of-date equipment. Here, it was reported to take eight labour hours to produce one unit while a plant in a developed country might make eight units an hour.
However, other Chinese plants are investing in boosting capacity, even if the range of products produced remained relatively narrow. For example, German seat plants have, on aver-age, more than 30,000 'live' products while the equivalent figure in China is just 14 products.
Inventory levels in China compare very unfavourably with japan, which is able to turn over stocks quickly because of more efficient inventory management and better integrated supply chains. By contrast, Chinese plants are still characterised by a lack of market focus and they often have to contend with poor transport facilities and power shortages. It can be hard to instil a 'produce to need' philosophy in a country where various suppliers can be located some distance from the company.
An increasing number of Chinese plants appear to be introducing worker participation schemes to solve problems. In one company, engineers can earn a bonus of up to YnlO,000 (US$1,200) if they come up with cost-saving suggestions. However, one Japanese manager claimed that 'top-down' structures still predominate in China, making it difficult to encourage workers to suggest improvements.
The report concludes that Chinese plants still have a long way to go to meet international standards of productivity, quality and production control.
Inside the Chinese Automotive Industry was compiled by Andersen Consulting, Cardiff Business School and Cambridge University, with help from Tsinghua University in Beijing. Researchers visited four car assembly plants and 14 component plants.
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