Leading industry voices are warning that despite the huge opportunities that volume growth prospects in China represent, there are very significant challenges ahead.

The possibility of a growth slowdown and fall in prices in China have refocussed industry concerns on export competitiveness according to a recent survey of automotive suppliers there.

The survey, by the Economist Corporate Network in association with IBM Business Consulting, has appeared against a background of growing concern among forecasters and analysts that China may have difficulty in slowing its over-heated economy gently – leading to a greater risk of cyclical market fluctuations.

Dr Alexander Scheidt, head of business consulting services at IBM, says that there are greater risks in China than in other fast growing markets such as Eastern Europe.

He highlights the sharp reduction in trade barriers that have occurred since China joined the World Trade Organisation (WTO) in 2001.

The changes will result in the Chinese car market being opened wide to international competition by 2006.

The fall in tariffs over the period is from the current 34-37% to 25% on vehicles and 10% on parts by 2006.

Local content requirements will also be abolished.

IBM undertook a survey of 299 “top auto industry suppliers” in China, most of them Chinese owned.

Respondents expected fiercer competition in the market as a result of the change but, perhaps optimistically, did not mostly expect less protection for domestic companies or a surge in imports – only 30% of respondents said that they expect imports to grow as a result of the changes triggered by WTO entry.

But it is widely expected that the industry will see higher quality demands (88% of respondents) and lower vehicle prices (81% of respondents).

ZF Friedrichshafen CEO Siegfried Goll, whose company is a major investor in China, said at the Automobil Forum in Stuttgart at the beginning of May that he sees car prices falling by an average of 6-9% a year for the rest of the decade to a level comparable to current European market prices.

Cost competitiveness needs to improve

The Chinese industry will also be challenged to meet the export growth targets that the Chinese government is considering for the industry. The Chinese government’s proposed development path for the automotive industry to 2010 sees rapid growth in Chinese exports to 40% of all component production.

“I think that the percentage is set too high”, said Goll.

Most Chinese owned respondents (93%) to the ECN/IBM survey exported less than 10% of sales, and only 22% of Chinese-foreign owned joint ventures exported more than 25% of their volume.

The key export challenge identified by both domestic and foreign owned suppliers was cost competitiveness.

Fully 58% of respondents said that was their biggest issue, well ahead of any other threat, according to the survey.

Chinese volumes have been growing and are helping the supplier industry to overcome the diseconomies of scale that it has traditionally suffered, but the automotive industry structure remains fragmented and regionalised, says Goll.

ZF has built up investment in Changchun and Shenyang in the north of China as well as in the Shanghai area to meet the demands of its various customers.

A shake-out could help the Chinese industry to hit its export targets if it leads to consolidation and fewer, more competitive OEMs and suppliers with internationally competitive volumes – but it looks likely that the challenges will be more than just managing growth.