The oppressive heat that descended upon Beijing last month couldn’t supress the sense of energy and enthusiasm that flowed from the city’s International Exhibition Center. Auto China 2004 was a mix of youthful enthusiasm and surprisingly mature marketing, and a sort of coming-out party for the booming Chinese auto industry, writes Paul A. Eisenstein.
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Those who go by the numbers couldn’t help but be impressed as manufacturers rolled out dozens of new models, as well as an assortment of new-to-China brands. Last year, an estimated 50 new products hit the market, and that figure seems all but certain to be broken by the end of 2004. For good reason, of course, considering the incredible growth of the Chinese car market.
Since the beginning of the decade, the motor vehicle market has more than tripled in size, surging past Germany’s national market, and looming in the mirror of Japan’s. Phil Murtaugh, the boyish CEO of General Motors’ Chinese operations, predicted that sales could climb to anywhere between 18 million and 20 million by the year 2020, which would very likely make China the world’s largest car market.
That said, there are more than a few pessimists who, citing the unexpected results of the last two months, have begun wondering whether China’s boom is heading for a bust. The 45 percent growth rate of the first quarter has slipped to a “mere” 20 percent since the government began trying to cool the overheated economy, in particular by putting the squeeze on automotive lending. Even that, counters Murtaugh, is a number most manufacturers “would kill for” in other parts of the world.
Trying to get a handle on the Chinese market isn’t easy. Contradictions abound, especially in a less-than-transparent system where government puppet masters continue to wield significant powers. Consider the situation at Shanghai Automotive Industry Corp., where chairman Hu Maoyuan discovered his company was the top bidder for Korea’s Ssanyung – only because Communist Party bureaucrats decided not to let one of SAIC’s domestic competitors bid for the bankrupt Ssanyung.
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By GlobalDataTo get a sense of what is happening in China, one might begin by looking at two of the products that generated much of the buzz in Beijing in June: the Cadillac CTS luxury sedan, and Chery’s little QQ hatchback.
The CTS is the first in a new line of products designed to revitalize General Motors’ flagship brand. With its edgy, “Art & Science” design theme, CTS has helped put Caddy back on the map again, and encouraged long-moribund dreams of becoming a truly global brand. Cadillac intends to begin importing the sedan – along with the equally edgy XLR roadster and SRX crossover vehicle – from the U.S. later this year. And by early 2005, CTS will start rolling off the assembly line that GM and SAIC operate as part of a joint venture in Shanghai.
Eventually, predicts Cadillac General Manager Mark LaNeve, China could generate as much as 20 percent of his division’s total global volume. Indeed, China’s fast-emerging leisure class has so much money, Caddy is seriously considering production of the sexy Sixteen concept vehicle it debuted in Detroit 18 months ago. Demand for the huge sedan might be greater in China than in the U.S., according to LaNeve.
There’s no question that China’s supposedly communist consumers are hot for the trappings of capitalism. Everywhere you go in this government seat, one sees the billboards promoting big-name perfumes, top-brand designer clothing and, of course, the most expensive automobiles. Cadillac wasn’t the only luxury automaker to appear for the first time at Auto China 2004. Among the other high-line marques making their debut were Aston Martin, Maybach, Jaguar and Lamborghini. Depending on where you draw the line, luxury vehicles account for somewhere between three and five percent of overall Chinese car sales right now, though that segment is outpacing the overall market.
In the rarified niches at the top of the luxury market, volumes are still miniscule, perhaps 300 a year, estimated Aston’s Bill Donnelley. “But we’re taking the long-term view…and (are betting) the potential is tremendous. Aston expects to sell perhaps 25 cars in China when it goes on sale there next year, though eventually, that could surge tenfold, according to Donnelley. China is already rivaling Japan for Mercedes-Benz, which expects to see sales surge past 50,000 in the near-term.
Mercedes was one of the first luxury brands in the market, and it already has about 100,000 S-Class sedans on the road in China. As the result of a new joint venture, it will begin producing E- and C-Class cars in the country next year, but with import tariffs coming down as China joins the WTO, Mercedes also plans to expand its line-up of import models, including the American-made M-Class SUV.
But we’ve wandered off our original subject, Cadillac. To handle production of the CTS without cutting back capacity for the rest of its model mix, the S-GM plant in Shanghai will undergo a significant bump in capacity over the next three years – as will GM’s overall China operations. The U.S. automaker and its Chinese partners will invest about $3 billion between now and 2007 to increase capacity to 1.5 million units.
Notably, that project will be self-funded. No market in the world can match the profitability of China, industry analysts agree. Take GM’s more mainstream Buick Regal sedan. According to figures compiled by Automotive Resources Asia (ARA), each copy generates $4000 in margins, about eight times more than the U.S. Regal. And that figure is echoed throughout the Chinese industry. How long that can continue is another question entirely.
GM’s investment is dwarfed by Volkswagen’s, the German automaker planning to spend closer to $6 billion to expand. And overall, about $13 billion is currently committed to Chinese factory investments. After years of lagging significantly behind surging demand, manufacturers are heading for what ARA’s Michael Dunne describes as “overkill.” Already, growing competition is creating a bit of a price war. The price of the Regal has been cut by roughly 20 percent over the last two years. And Volkswagen has just announced it will cut its own prices 12 percent across the board to respond to rising competition.
Chinese consumers appear to be a curious breed. In the affluent crescent along the country’s Pacific coast, where incomes typically average three to five times more than in the rest of China, buyers seem willing to load their vehicles up with top line features. That doesn’t mean they won’t engage in the favored Chinese pastime of bargaining. And few are better at the art of the deal. Analysts like Dunne believe that many consumers, well aware of declining prices, may be sitting out the market right now waiting to see how low the industry will go.
To get an answer, one only had to visit building one at the International Exhibition Center, where most of the homegrown Chinese auto manufacturers put their wares on display. No one seems quite sure just how many domestic makers there are, in fact. Most estimates run between 100 and 120. Newly-proposed government rules should lead to a shake-out. But while the most successful Chinese automakers have, until now, tied their fate to foreigners, a handful of homegrowns are betting they can do better operating on their own.
They’re lifting a page from Mao Zedong’s handbook, ceding the big cities to the global makers, but targeting the smaller “towns” – which in China means those cities with populations of only 3 million or so – with products priced as low as $3000. And don’t let the Aston Martins and Maybachs fool you. There’s plenty of pent-up demand for vehicles like the $5000 Chery QQ.
But that raises the thorny issue of intellectual property rights. The little car is a virtual clone of the Chevrolet Spark, but priced $1250, or about 20%, less, it’s outselling the GM model by a margin of 6-1.
The new government auto policy promises to punish companies, like Chery, who ignore IPR. And GM has filed a grievance with the government, attempting to block production of the QQ. Yet few observers expect to see Chery admonished, at least anytime soon. In the labyrinthine Chinese system, its ties to the government run deep, and it appears there are those who first want Chery to build up its war chest. By the time the QQ is pulled from the market, it’s likely the automaker would be ready to move on, anyway.
“We want to depend on ourselves,” explained Michael Zhang, a Chery executive. Industry insiders reveal that the company has already begun work on a replacement product, this time using its own cash to hire on Western know-how, much the way South Korean makers got off the ground 20 years ago. Indeed, much like the Koreans, several of the Chinese homegrowns are looking to set up assembly operations abroad to serve other emerging markets, including places like Iran.
Who’ll win the war for Chinese consumers is uncertain, at best. But for now, manufacturers can enjoy the fact that there are plenty of them, with more entering the market each year. “Even if 10 percent of the population would want to buy a car, that would be 130 million people, almost as many as you have in Japan,” said Nissan Executive Vice President Toshiyuki Shiga. That’s the sort of scenario that will continue to lure large investments, no matter how loud the warning bells are beginning to sound.
