China’s booming economy is seeing concerted government action to slow growth and subdue inflationary pressures. Credit restrictions have hit vehicle demand at the same time as ramped up production has come on stream, The net result is a price war that has rapidly eroded profit margins. Vehicle makers need to adjust strategies to changed conditions. Chris Wright reports from the Shanghai Show.
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Despite government-imposed credit restrictions in the second half of last year aimed at cooling the economy, the Chinese car market hit 5.3 million vehicles in 2004.
While car sales slowed towards the end of the year, they have picked up again in the first quarter of 2005 and are expected to hit 5.8 million this year – and ever upwards to near 10 million by 2010, according to Michael Dunne, president of Automotive Resources Asia.
“Credit restrictions have led to price reductions and where once the market demanded full size saloons, it has moved through mid-size and now it is for small cars,” he added.
Add to that the increased competition. From just five manufacturing joint ventures between established Western and Japanese carmakers with Chinese partners 10 years ago there are now 28 arranged marriages in 15 cities.
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By GlobalData“There are now more brands offered and manufactured here than in North America and the competition is tough,” said Dunne. Local Chinese carmakers are also quick on the uptake.
Dunne cited the example of the Jeep Cherokee, made in Beijing, which DaimlerChryser offered at just $13,500 for the 2.5-litre model. It quickly opened up a booming SUV market, but just as quickly attracted Chinese makers to put their own SUVs into production at under $10,000.
Not surprisingly Jeep’s market share dropped. The fierce competition means life in China is going to get a lot tougher for European automakers Volkswagen and PSA Peugeot Citroen.
Although they got a head start by setting up manufacturing in China more than 20 years ago, the ‘halcyon era’ has come to an end, according to Dunne.
From 1985 to 1998 the Chinese auto industry was highly regulated. Opportunities were limited for carmakers looking to set up operations and three of the five early joint ventures were snapped up by VW and PSA.
VW’s domination of the car market, through its early joint venture producing the Santana with Shanghai Automotive Industries Corporation has diminished.
From a market share which once stood at 53 percent it will now drop closer to 20 percent this year according to Dunne.
Dunne said: “People are now looking at the value proposition. There are more brands manufactured in China now than there are in North America and the Chinese preference is for Asian designed or influenced vehicles which are cheap and reliable.
“Automakers such as Ford and GM have been wise to leverage their Asian affiliates in China in terms of design input and this is something PSA and VW cannot call upon.
“Whereas once the market was dominated by larger saloons which the richer Chinese could afford, the volume is now at the lower end and the demand is for cheap and very modern vehicles.
“VW and PSA need to review and update their model ranges very quickly because life in China is going to get an awful lot tougher for them.”
A look around the Shanghai Motor Show provides proof of the choice now available to the ever-increasing numbers of Chinese able to afford a car.
As well as the established automakers, there are plenty of Chinese carmakers offering their own brands and models, some uncomfortably close in looks to their western counterparts.
General Motors used its Asian operations, GM-Daewoo and its Pan Asia Technical Automotive Centre in Shanghai to develop its all-new World Car, launched at the Shanghai Show.
The Chevrolet Aveo will go into production later this year and will be rolled out across 120 countries and will make its European debut at the Frankfurt Motor Show in September.
The new sedan, based on the Daewoo Kalos hatchback platform, will initially be built in Korea and in CKD form at GM’s joint venture with Shanghai Automotive Industries Company (SAIC) in Shangdong, China.
Other possible production sites for the car include Columbia, South America, Ukraine and Thailand.
GM ‘s joint venture with SAIC also introduced its ALA.s concept vehicle at the Shanghai Show.
ALA.s, which stands for Action Life Activity sedan was completely designed and developed in China and the first mini crossover designed for city life in the country.
It combines the flexibility and performance of a multiple-activity vehicle with the comfort of a sedan and its design draws inspiration from traditional Chinese culture.
The ALA.s is the fourth concept car designed by PATAC, also a joint venture with SAIC, following the Qilin in 1999, Phoenix in 2001 and the Kunpeng two years ago.
The two models are part of an aggressive GM push in China which will see 10 introductions this year from its brands including Buick, Chevrolet, Cadillac, Saab and Opel as well as the SAIC-GM Wuling brand which produces small commercial vehicles, minivans and the small Chevrolet Spark passenger car at Liuzhou, Guangxi Province.
With production reaching 492,000 vehicles in 2004, China is now GM’s largest market behind the United States overtaking Canada and the United Kingdom.
Chinese carmakers have plans of their own and are prepared to start exports of their own. Chery Automotive Group, for example, is looking for a European partner to sell its vehicles in the region from 2007.
It is developing new passenger cars and engines with the help of Italy’s Pininfarina and AVL of Austria and plans to unveil these at September’s Frankfurt Motor Show.
It will also use the show to seek out a partner to help it sell up to 250,000 cars a year in Western and Eastern Europe, supplied from its factory in Wuhu, Anhui Province, 90 kms south west of Nanjing, and from new CKD plants in Iran and Malaysia due to come on line this year.
This is in addition to Chery’s plans to launch into the United States where it also plans to sell 250,000 cars a year from 2007 with American partner Malcolm Bricklin, the entrepreneur who tried to introduce the Yugo brand into North America.
Chery’s Marketing vice president Qin Lihong said the company was already China’s largest domestic vehicle exporter, accounting for 95 percent of exports – around 50,000 units – which are sold mainly in South East Asia and the Middle East.
“We plan to increase this by starting exports to Latin America, Eastern Europe and the Middle East when our CKD plants start production and then into the United States and Western Europe, “he added.
Lihong revealed that further CKD plants were possible with Russia a possible location.
The main problem for China’s vehicle makers is engines which are not compliant with North American or European emissions standards. Chery currently buys BMW’s 1.6-litre Mini engine and Lihong said this could be used in future models.
“We are also with AVL to develop a new family of 18 engines from 0.8- to 4-liter which will meet emissions standards,” he added.
To service new markets, capacity at Wuhu is being increased to 600,000 vehicles a year by 2007.
Chris Wright
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2006 Chevrolet Aveo |
