Outlook on Auto Industry In China

Outlook on Auto Industry In China Presented by Team 2: Huanhuan He Siyan Zhang Seung-sil Lim

Overlook of Auto Industry in China • Despite the current marked decline in the automotive industry worldwide, sales in China are climbing at an unprecedented rate. • The number of vehicles sold in the first quarter of this year doubled, year on year, to reach more than 400,000, leading some analysts to predict that China will be the world’s third-largest car market by the end of the decade, after the US and Japan. • Announcements of new manufacturing investment in the country seem to take place almost weekly.

Overlook of Auto Industry in China: Some Numbers • Annual car sales in China broke the one million mark for the first time last year, surging 56 percent to 1.126 million. • Automotive imports almost doubled in the first eight months of the year from the same period of 2002 to reach a record $9.3 billion as the industry sped ahead to meet demand • Car output over the first eight months rose 89.7 percent year-on-year to 1.25 million cars -- surpassing the 1.06 million in all of 2002

Why this would happen? • China has pledged to slash tariffs on auto imports to 25 percent by July 2006 from between 40 and 50 percent now and abolish all quotas by January 2005, in line with commitments made upon joining the World Trade Organization in late 2001. • China has given boost to the development of Auto industry as one of the two pillar industries---the other being housing---in a bid to stimulate people’s consumption, spur the market and enlarge domestic demands.

Why this would happen? • Chinese government is planning to remove some of the regulatory and financial hurdles to encourage private car ownership. • During the period of Ninth-Five-Year plan the auto sales volume in China has increased by 6.33% annually, from 1.46 million units in 1995 to 1.83 million units in 1999. The volume of private cars has grown by 28.4% annually, from 2.50 million in 1995 to 5.34 million in 1999.

Why this would happen?

The world's largest producer of automobiles? • "The question facing us is how to compete with a country whose labor costs are currently one-twentieth or one-thirtieth those of Japan," he says, adding that China will become a force to be reckoned with in less than five years. "If we look at home appliances and consumer electronics - including refrigerators, cameras and televisions - China is already the world's largest producer. And its trade surplus with the U.S. now exceeds that of Japan. It is just a matter of time before China becomes the world's largest producer of automobiles." --Kosuke Shiramizu of Toyota.

“Be careful with China” • China’s emergence as a trade power is finally starting to annoy other countries. • China’s export success of recent years has been an important factor behind its high GDP growth rate. Its emergence as a trade power, however, has caused controversy overseas. --Business China • “U.S. factories have shed jobs each month since September 2000, according to the Institute for Supply Management‘s surveys. "according to an article on wardsauto.com

National or Multinational? • In one hand, China has become a larger and larger producer of automobiles, in the other hand, local carmakers are not satisfied of just being “producers”—although it seems they have to be. Germany’s Volkswagen, South Korea’s Hyundai Motor, Italy’s Fiat, United States’ General motor, behind every large Chinese national auto-manufacturer, there is always a famous international collaborator—all were attracted by China’s cheap labor force and large market, however, Chinese national enterprises may also want to “create their own brand”. Above is a picture from an advertisement of Shanghai-General Motor

Repeat construction • "Only aiming at the speed of development and carrying out economic developing strategy simply by administrative means are still popular in some regions… industry park and introducing foreign investment (or fund from other provinces) are always completed by decided quote task, in addition, such task is committed to government staff in different department, the repeat construction at the low level began to increase in some region, and the small backward industries" • The above phenomenon is especially true in the auto industry in China. Attracted by the high profit of this industry, supported by provincial governments, eager to set up a new brand, low level repeat constructions exist widely within the auto industry in China now.

Overcapacity • "Overcapacity will be a major factor within two years, with the passenger car market - already the single most important sector within the Chinese vehicle market - likely to be at the forefront" --Paul Brough, managing partner of KPMG's Financial Advisory Services practice

A Direct Outcome • Overcapacity and repeat construction together lead to a more intensive competition in automotive market. • In order to stimulate consumption, there are several choices for the manufacturers: to improve automobile’s quality; to enhance technology, and to decrease the price. Unfortunately, most auto manufacturers choose the last method—in the first half of the year, average car prices in China fell seven percent.

Incessant decline of price • The incessant decline of price has drawn a lot of attention. • “In the round of price decline, although some factors may bring some benefits such as the furious competition after breaking the monopoly, the productivity enhancement from technological advance and so on. The continuous decline of price will result in the reduction of expected return rate and affect the investment activities of enterprises, thus having a sequential influence on the expectation of employment and employees’ income and and possibly bringing about the slow growth of economy." --China Daily

Incessant decline of price • In addition to the above sequence, a more direct output of the price decline is, when it becomes a common phenomenon, it’s function as a stimulating demand method is weakened. • Will any consumers want to buy an automobile when they expect or even know that the price will decline in the near future? • And, even if this kind of solution of stimulating demand can be of any use, it yet creates some problems above the auto industry itself.

Environmental and transportation problem • As Greider mentioned in his "One World, Ready or not", this kind of solution engenders a dangerous collision between mass consumption and the natural environment. • Environmental problem: • The pollution to the environment related tightly with auto industry. • Transportation problem: • In such large cities as Beijing and Shanghai in China, when the quantity of private car has raised rapidly, the transportation problem has drawn more and more concern.

Traffic in Beijing • One scene in Beijing: Some private car owner complained that although they now own private car, it’s not as convenient as they hoped—because of the frequent traffic-jam.

Debate over the development ofAuto Industry • There are, however, some debates raised by some more optimistic critics. • "Traffic-jam" is a symbol of prosperity? • “Price-war” is beneficial to the consumers? Once Beijing was called kingdom of bicycles, and now, it seems bicycles are replaced more and more by cars—which also led to a worse traffic and environment.

Conclusion • In spite of all these different opinions, on August, Chinese authorities are drafting a new policy toward the restructuring and development of the country's booming automotive industry. Although some critiques believe that China need a more mature “consumption policy” rather than merely “industry policy”, most believe that this government intervention can better solve the existing problems. • This seems to echo Greider’s point of view—market can not solve the problems by itself, and nations must eventually turn to political solutions.

Reference • http://www.wardsauto.com/ • http://www.autonews.com/ • Xinhua Net • People’s Daily • Economist Intelligent Union • Proquest Direct

Outlook on Auto Industry In China