China's Car Market Creating Monster Competition

From Automotive Resources Asia Ltd - Sales of cars built in China grew 39 percent in the first six months of 2002 to 492,430 units. The Volkswagen Jetta was the best-selling model for the period, capturing 12% percent market share Head-turning growth in China is drawing a crowd.

China's car market grew at a clip of 31 percent through the first five months of 2002. Sales for the year are on track to reach a record 900,000 units. This makes China the fastest growing car market on earth.

Competitors from Japan, the USA, Korea and Europe today are scratching and elbowing for a share of a market that, only a few years ago, was dominated by Volkswagen. The German automaker, operating two joint ventures in China, consistently took 60 percent market share during the 1990s.

But China's entry into the WTO has flung open the doors to competition. Gone are the days of cozy, managed competition.

Strongest among today's challengers is General Motors, which has grabbed 10 percent market share since entering China in 1998. GM's joint venture in Shanghai (Shanghai GM) produces the Buick Century, the Buick GL8 minivan and the Buick Sail, a Brazil-sourced Opel Corsa modified for the China market. Buick sales are projected to be 90,000 units in 2002, up from 52,000 cars and minivans in 2001.

Ford, for its part, is moving to make up lost ground. At a new joint venture in Southwest city of Chongqing, Ford is building a green field factory to produce the Ikon, a compact car based on the Fiesta platform. Initial designed capacity is 50,000 units, with the option to expand to 150,000 in the future. Ford, which concluded unsuccessful negotiations for two separate joint ventures in the 1990s, expects the new venture, Changan Ford, to produce 30,000 Ikons in 2003.

DaimlerChrysler hopes to reverse the misfortunes Beijing Jeep, the US-Chinese joint venture founded in 1985. Years of acrimony between the Americans and Chinese has soured the atmosphere at the Beijing plant, where production is at its lowest levels since 1987. Sales through May have limped to 1,102 units. Further aggravating the sales slump is a Chinese perception that SUVs are work vehicles to be driven by farmers and construction workers. To appeal to a younger crowd of urban professionals, DaimlerChrysler in 2003 will add production of the Mitsubishi Pajero Sport.

Mercedes Benz car sales, in contrast, have been strong. Imports of Mercedes, 80 percent of which are S-Classe priced at more than $120,000 after taxes, will top 5,000 units in 2002.

Market leader, Volkswagen, is wasting no time or resources to defend its position. Since 2000 VW (and its sister company Audi) have introduced their very latest VW products to the market, including the Passat, Audi A6, Bora, and Polo. VW joint ventures also continue to sell the older model Jettas and Santanas, which appeal to more frugal Chinese.

There are an estimated 2.4 million Volkswagen on the China, thanks to the long presence in China dating back to 1984. Despite the hard-charging competition, VW still accounts four of ten new car sales in China in 2002.

While General Motors may be most visible rival to VW, even greater threats come from the Japanese car makers, who are making quiet but certain inroads into the Chinese market. Honda, which started full production in China only in 2000, will sell 60,000 Accords and Odessey minivans this year out of its joint venture in the southern city of Guangzhou. Customers wait 1 to 3 months for delivery.

In October, Toyota will begin production of the T-1, a car based on the NBC Platform, that will come equipped with navigation equipment (a first in China). Chinese consumers like the attention to detail of Japanese car interiors and the money-saving engines that are so stingy on fuel.

All together Japanese makes capture 28 percent of China's car market today. If Japanese performance in other Asian markets is any indicator, that share will only rise in the years to come.

Competition for the China market does not end with coverage of the global automakers. Shocking the industry, two privately-owned Chinese companies have launched products that in less than 24 months have stolen 10 percent of the market. The Chery, a Chinese model built from an older SEAT production line shipped over from Spain and the Geely, a Daihatsu Charade knock-off, will combine for sales of 90,000 units in 2002. These companies were virtually unknown just three years ago.

Cheaper cars made by Chinese factories, adding to the already mounting competition, have forced every automaker to reduce prices in 2002, some by as much as 25 percent.

Ominously, the Chery product is built by a joint venture between the government of Anhui province and the Shanghai Auto Industry Corporation (SAIC). SAIC is joint venture partners with both VW and GM.

To the chagrin of global car makers, competition in China's car industry will be ever more ruthless in the days to come.

Michael J. Dunne (mdunne@auto-resources-asia.com) President Automotive Resources Asia Ltd.