China’s entry into the WTO – like any monumental event – has triggered a rush of hearsay and speculation that at times seems to carry as much weight as the facts. Now that the euphoria over China’s membership has settled somewhat, it is time to cast away some widely-held myths.
Myth #1 Imports Will Have a Field Day
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China has agreed to phase out quotas on imports by 2006. And it has also agreed to reduce import duties to 25 percent by that same year. That is true. No where in the fine print, however, does China indicate a readiness to throw the gates open to imported cars.
China in 2001 imported 47,000 cars, a little more than 6 percent of the passenger car market and 2 percent of the total vehicle market. In 2006, I predict that imports will account for less than 10 percent of car sales in China.
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“by 2006, every major auto maker in the world will be producing cars inside China” |
Here are three reasons why:
First, by 2006, every major auto maker in the world will be producing cars inside China. Most of the world’s best cars, like the VW Polo, the Honda Accord and the Toyota Land Cruiser will be built here. China makes no secret of its intent, with or without the help fo foreign companies, to build its own world-class auto industry to rival those of Japan, Korea, Europe and the U.S.
Second, a twenty-five percent duty will make it difficult for imported cars to compete against those made locally. Imports will be most likely be relegated to the domain of luxury cars, like Jaguars, S-Classe Mercedes and Lexus brands, whose buyers are not bothered by high sticker prices and steep taxes. This is the case everywhere else in Asia, where imported cars are expensive niche products that account for less than 5 percent of sales.
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2001 Sales 2001 Car Imports Import Share
of Sales
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Korea 1,450,000 15,000 1%
Japan 5,900,000 320,000 4%
Thailand 297,000 12,000 3%
China 2,300,000 47,000 2%
Malaysia 340,000 16,000 4%
In the first four months of 2002, imported cars totaled just 15,000 units. Based on a projected market of 900,000 units this year, imports are on track to secure just seven percent of the car market and less than 2 percent of the total market.
Third, in sharp contrast to only a few years ago, the quality of cars made in China is quickly approaching world-class standards. GM is even exporting its Buick minivan to the Philippines. Chinese car buyers are coming to believe in the quality of locally-made Buicks, Volkswagens and Hondas. In China, as as elsewhere, perception is reality.
Myth #2: The WTO Will Spur a Boom in Car Financing
The WTO agreement allows foreign credit companies associated with car makers to play a much greater role in the offering credit to car buyers. For the first time, foreign financiers are permitted to extend credit to Chinese car buyers (provided the company operates the transaction in Chinese renminbi).
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” China is still without the legal process for recovering vehicles in the event of a default” |
But the reason financing still figures in less than 1 in 10 car sales in China is due not to a lack of cash, desire or know-how. Talk to anyone in China’s car market dealers, car buyers, the manufacturers and they will all tell you of their strong desire to ramp up purchases through credit.
The catch is the legal system. China is still without the legal process for recovering vehicles in the event of a default. Right now, jurisdiction over vehicle ownership and re-possession belongs to the Security Bureau (the police) not the courts. How soon China transfers that power to the courts in a systematic way is an open question. Until then, financing will continue to be limited to small pockets of China, like Shenzhen, where you have a well-controlled populations of white collar workers, with steady incomes and property to offer as collateral for their new cars. Such demographics are the exception, not the norm, in today’s China.
Myth #3: Chinese Suppliers Will Be Crushed by Imported Parts
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There are two kinds of Chinese suppliers. One type manufactures extremely low cost components for use in dirt cheap commercial vehicles. Foreign parts suppliers shudder in disbelief when they learn that the majority of Chinese trucks and buses start at prices under $10,000. These Chinese parts makers that excel in making parts more cheaply than anyone on the planet are unafraid of competition from imports.
The second kind of Chinese supplier is already teamed up, either through a joint venture or through licensing, with a foreign component maker. Global component leaders like Michelin, Bosch, Denso, Valeo, Lear, Delphi, Dana and Visteon have been operating with partners in China for the better part of a decade. These companies predominantly feed the passenger car industry. Lower duties on imported parts simply mean that these companies can bring in their sub-components from abroad more cheaply than in the past. Savings will be passed onto the car maker and then to the customer. But these Sino-foreign joint ventures are not destined to meet a major challenge caused by the WTO agreement, let alone a threat to their existence.
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The WTO is not a paper tiger on all fronts. As part of the terms of its accession, China has relaxed controls on new model approvals inside China. This has triggered a flood of new models onto the market, including the VW Polo, the Fiat Palio, the Buick Sail, the Citroen Picasso and the Ford Ikon, to name just a few. This wide range of choices inevitably spurs competition and since the beginning of 2002, every auto maker has been forced to cut prices.
Such “inside China” competition will grow sharper in the weeks and months ahead. Capacity already outpaces demand by a factor of 2 to 1. No matter how much the car makers may wish it so, the impending price war is not another myth.
Michael J. Dunne
Automotive Resources Asia Ltd.
Email: mdunne@auto-resources-asia.com
Web: www.auto-resources-asia.com
