Chinese Car Industry Paper

Tyler Grove Introduction to Third World Politics. April 26th 2005

The Chinese Car Industry. The market of the future?

The newly emerged Chinese car industry is the new wild car of the automotive industry. Some critics compare the emerging auto industry in china to one of the last untapped markets for automobile sales. But unlike other countries, china has a lot of government control on the auto industry. The Chinese Auto industry will be the market of the next ten years and is worth effort by companies such as General Motors to tap into the market to make up for failing profits worldwide. The Chinese Car industry has two angles. The ability to domestically produce and sell vehicles and the ability to put vehicles on the worldwide marketplace to undercut the completion. This is the oddest part of the industry. Instead of focusing on selling vehicles in their own country they try to jump into the word market. This is while the world automakers are attempting to Jump into China, which they deem to be the strongest market in demand for cars. Domestically Volkswagen is Europe's largest car company and “now sells more cars in China than it does in its home market of Germany.”1 General Motors estimates that 20% (74 million) of the population can afford a car, this is a massive market.2 Chinese economic data seems to vary widely. For example, per capita GDP for Beijing varies from $2,300 to 1 2

http://forbes.com/2003/12/15/cx_dl_1215feat.html ibid

1

$6,300 depending on the source. Central government statistics are usually the more conservative. 3 The current and mid-term forecast for auto markets in developed countries is sluggish to say the least, as these markets have matured. The majority of cars that they sell in China are previous generation vehicles from around the world. The Volkswagen Jetta is the number 1 selling car in china with sales of almost 100,000 for the first ten months of 2003, it is actually a previous generation of the Jetta sold here and it is custom for the Chinese market. It is built domestically in China. Its prices start from $12,050 USD to $15,050. China has made a great leap in road construction with 1.4 million kilometer of roads and 16,000 kilometers of highways. China now has the third largest amount of paved road in the world. However, while a Shenyang-Beijing-Shanghai highway is in place and functioning China still does have a national highway grid, which estimated to be only 50% completed. China, a country of relatively similar geographic size as the U.S., has a road system only at pre-WWII U.S. levels. (Amount of road per capita is still 1/9 of Japan levels and 1/24 the U.S.) And, while road construction has certainly improved roads are still shared with 200 million bicycles, 30 million motorcycles, 15 million agricultural vehicles, 13 million tractors and 10 million horse drawn carts. Central government statistics are usually the more conservative. The potential for the Chinese car market improves considerably from 2010 (or possibly 2008 with the Beijing Olympics) in terms of road infrastructure, capacity utilization efficiency and income levels of consumers.

3

http://www.marubeni.co.jp/research/eindex/0210/body.html

2

In China there are over100 motor vehicle manufacturers making over 100 models, so there has been a lot of redundancy and low quality in the market. The government succeeded in recent years in consolidating 90% of production into roughly 13 makers and 44 brands. Since 1990, motor vehicle sales in China have quintupled, with sales of passenger cars having grown more than ten times.4 In 2004 Sales of Vehicles in China rose 15% after doubling the year before.5 One of the most beneficial aspects for Chinese Car companies is the laws effecting manufacturing companies. Laws require foreign companies can only own up to 50% of a Chinese company. This requires cooperation and Chinese involvement which exponentially helps Chinese industrial development. Worldwide In the last ten years the North American and European markets have seen an onslaught of Low price cars from South Korea and other Asian nations. Such companies as Kia, Hyundai and Daewoo have become household names of Low priced cars. Between 1999 and 2001 they have doubled sales in the United States up to 618,000 vehicles sold.6 One major factor in China is the dramatically low wages” an average of 95 cents an hour in the auto sector, compared with around $26 in the U.S. and $36 in Western Germany, according to the Center for Automotive Research in Ann Arbor, Mich.”7 One large problem that companies are facing is the negative stereotype associated with Korean and Chinese Built cars. While most Japanese makers have a very positive image on build quality, this is not the case for other Asian car companies. Consumers are not 4

http://www.marubeni.co.jp/research/eindex/0210/body.html http://news.bbc.co.uk/1/hi/business/4459225.stm 6 http://www.forbes.com/2003/05/06/cz_jf_0506flint.html 7 http://www.financegates.com/news/business_news/2005-04-04/chiaut04.html 5

3

stupid, they realize that if something is cheap, especially such a big purchase as a car that something was cut in the production of the vehicle. One way Korean car companies have combated a bad image is a 60,000 mile/5 year warranty, which is one of the best in the business. For Hyundai, since 1998, they’ve taken 62 percent of the defects out of their vehicles8 In J.D. Power initial quality survey shows Hyundai tied with Honda Motor Co. for second place behind Toyota. “According to a J.D. Power & Associates survey, a Westlake Village, Californiabased research firm that specializes in the Asian market, the quality of compact cars built in China was four times worse than those built in the United States.”9 But they are constantly working on quality and the latest survey, that came out in 2005 “New-vehicle quality in China shows significant improvements, driven by the continuous introduction of new, high-quality models to the market, quality improvement initiatives of automobile manufacturers, and a declining share of low-priced vehicles, from 2003”10 Recently American dealers are working to bring Chinese cars to America to sell, their belief is they would undercut the competition and provide similar looks, reliability and quality. But this has yet to pan out. The other big issue with Chinese Cars is the fact that many are nearly copies of their Japanese counterparts. One good example of this trend of nearly copying vehicles is the Laibo SR-V which is nearly a blatant copy of the Honda CR-V the grille uses an Audi Symbol, but instead of 4 rings it uses 2. Both Honda and Audi have gone after Shuanghuan Motors, the maker of the SUV in Chinese Court but nothing has occurred. Many analysts think this is because of protection by the Chinese Government. The 8

http://www.detnews.com/2004/insiders/0406/14/b01-149202.htm http://www.chinadaily.com.cn/english/doc/2004-06/29/content_343812.htm 10 http://www.jdpower.com/news/releases/pressrelease.asp?ID=2005036 9

4

Chinese manufactures are working on original designs but these initial cars are going to hinder original thinking at the companies.11 Chinese tastes are vastly different than Americans, only 2% of vehicles are SUV’s compared to the 40% of American purchases. The biggest change in the last decade has been China's entry into the World Trade Organization in 2001. This drastically changed how the industry would due business. The entry forced Chinese industry to sell dated cars. Thus Chinese consumers have increasing amounts of discretionary income that now permit them demand the latest and greatest products. Entry into the WTO affected laws; China had to lift restrictions on imported cars, making its own inferior, older cars no longer salable. This was in stark contrast of the earlier auto industry by prohibiting or outrageously taxing products. The WTO has changed this strategy, and China now invites foreigners to import their cars--provided that they also make cars on Chinese soil. 12 China accounted for 40% of the growth in oil demand over the last four years, says the US Energy Information Administration (EIA). Due to its insatiable thirst, Chinese oil firms are trying to squeeze more out of their wells using smarter technology and looking globally for opportunities to purchase oil. The demand for Oil in China is staggering; in 2005 they will use 7.2 million barrels a day. This is up from the 6.6 million barrels a day used in 2004. Unlike the US where the majority of oil is used for transportation, 43% of oil used by industry while 34% used by cars. In 2003, China raced past Japan to become the world's second biggest consumer of petroleum products after the US.13 Can the world handle 200 million more motor vehicles by 2025 in terms of energy and environmental impacts? Current conditions and factors say no.14 11

http://paultan.org/archives/2004/12/05/china-pirates/ http://forbes.com/2003/12/15/cx_dl_1215feat.html 13 http://news.bbc.co.uk/1/hi/business/4191683.stm 14 http://www.marubeni.co.jp/research/eindex/0210/body.html 12

5

6