The automobile industry has become one of the biggest growth engines of China's economy. Last year, the country's total car production exceeded 4.4 million units, an increase of almost 35 percent over 2002. China surpassed France as the fourth largest auto producer in the world market after the United States, Japan and Germany. With total automobile output of more than 5 million units this year, China is expected to overtake Germany to rank third. By 2010, the vast country will become the world's second largest vehicle market, surpassing Japan, and could overtake the USA by 2025. At present, there are about 12 million cars on China's roads. Less than two in a thousand Chinese own cars, compared to a worldwide average of 90 per thousand. However, vehicle demand will continue to grow rapidly. By 2020 the number of cars on China's roads could be a staggering 130 million. The country's rapid economic growth has generated high demand for cars in most major cities and urban communities along the eastern seaboard. Over the past decade, China has seen the emergence of a middle class numbering in the tens of millions with increasing buying power. In a market that used to be dominated by government and big-company purchases, individual buyers have rapidly become the biggest driving force. The average price of the estimated 2.8 million passenger cars that will sell in China this year is about US$ 20,000.

Industry Overview

China's automobile industry developed almost overnight. Ten years ago, virtually every car on the Chinese mainland was a Santana, the model made locally by Volkswagen, the first to China in 1985 and the market leader ever since. As recently as four years ago, there were less than ten China-made cars on the market. By the end of last year, Chinese buyers were able to choose among more than 90 models, many of which are uniquely geared to the local market. At least 40 new models will be launched in China this year, an increase from 36 new models that were introduced in 2003.

There are more than 120 vehicle plants in 27 provinces and municipalities nationwide. All of the world's top nine automakers Volkswagen, General Motors, Ford, Toyota, DaimlerChrysler, Nissan-Renault, PSA Peugeot Citroen, BMW and Honda have established joint ventures with Chinese partners. Most of them arrived less than ten years ago. In 2003, ten key vehicle plants accounted for almost 80 percent of China's automobile production. The First Automotive Works Corp. (FAW), based in Changchun of northeast China's Jilin Province is the country's largest car producer with 858,700 units in 2003. Shanghai Automotive Industry Corporation followed closely with an output of 796,900 units, while third place went to Dongfeng Motor Corporation in central China's Hubei Province, with 470,300 units. The other seven plants assembled between 100,000 and 400,000 units. They are Chang'an Automobile Group, Beijing Automotive Industry Corporation, Harbin Hafei Motor Co., Ltd., Jinbei Automobile Co., Guangzhou Automobile Industry Group Co., Ltd., Changhe Aircraft Industry Co. and SAIC Chery Automobile Co., Ltd. Among the ten major plants, Guangzhou Automobile Industry Group Co., Ltd., Beijing Automotive Industry Corporation and SAIC Chery Automobile Co., Ltd. experienced the biggest growth in both output and sales.

China imported 172,683 cars in 2003, double the volume recorded in 2001. Imports will be boosted this year because the Chinese government has increased its quotas for car imports to honor its commitment to the country's accession to the World Trade Organization. China promised to scrap its vehicle import quota on January 1, 2005 and import tariffs on passenger cars will be reduced to 25 percent by July 2006.

Challenges Ahead

In the past two years, many state-owned and private Chinese companies, especially from the low-margin consumer electronics industry, have rushed into the more profitable auto sector, buying up licenses from weak or bankrupt players. At the same time, most established automobile manufacturers have announced ambitious business expansion plans valued at US$ 13 billion until 2010, on top of the US$ 30 billion already invested. As a result, the manufacturing capacity of China's auto industry is expected to increase extensively in the coming years raising concerns about overheating. By 2007, Chinese auto plants will be able to produce 15 million vehicles annually while consumer demand is expected to be 7 million. Already, increased competition has lead to drastic price-cutting. Car prices have been falling steadily for the past three years. During the first half of 2004, prices declined by another 10 percent on average. The market is approaching its saturation point as the exploding car-making capacity outpaces income growth in China. In addition, the expected elimination of import quotas and the slashing of tariffs will drive down the prices of imported vehicles, which is causing some potential buyers to hold their money and put off buying cars.

The industry also faces serious challenges due to oil shortages, traffic congestion and environmental pollution. Auto vehicle annual oil consumption is expected to grow to 138 million tonnes annually by 2010, accounting for 43 percent of China's total oil demand. The Chinese government is very concerned about an increasing dependency on oil imports. Just ten years ago, China was a net oil exporter. Today, about a third of the country's demand is met by imports, projected to rise to the American level of 55 percent by 2030. As car ownership continues to expand, exhaust emissions will increase, aggravating China's already serious pollution problem. Air quality in Beijing, Shanghai and other major cities is deteriorating rapidly. Vehicle exhaust emissions will account for 79 percent of total air pollution in China by 2005. Congestion that has slowed traffic to a crawl in large cities such as Beijing and Shanghai will worsen.

For the first time in three years, production of all vehicles dropped just over six percent in April, while sales declined more than eight percent. At the same time, the price of automaker materials such as steel increased considerably and imported components are expensive due to the strong euro. As a result, the profit growth of major automakers in China is slowing down sharply. Contrary to most other mainland products, profit margins in the automobile industry in China are still very high. The auto profit margin will stand at 7 to 8 percent this year, down from 9 per cent in 2003. But the margin is still higher than the 3 to 5 percent in developed markets. The profit margin in China's automobile sector is expected to decrease to similar levels to developed auto markets within the next two to three years. Many less competitive players will be phased out amid growing competition. Over the next decade, only 8 to 10 automakers in China will be able to survive with the support of their powerful foreign partners.

New Policies

In June, the National Development and Reform Commission (NDRC) launched a long-awaited new policy designed to give foreign investors more flexibility in China's automobile market, curb over-investment and consolidate the industry. Under the new rules, multinationals can still only own 50 percent of an automobile joint venture. However, foreign investors will be allowed to control stakes of more than 50 percent in automobile joint ventures with Chinese partners if the plants are located in an export processing zone and aim at overseas markets. Foreign investors will also be able to form two separate joint ventures producing the same type of vehicle, one targeting the export market and the other aimed at domestic buyers. Under the new policy, foreign enterprises may invest in more than two joint ventures, if they and their Chinese partner jointly acquire another local automaker. To curb over-investment in the exploding automobile sector, the new rules raise minimum thresholds for building new plants to RMB 2 billion (US$ 241 million). All new projects must include a research and development organization with an investment of at least RMB 500 million (US$ 60.4 million). By not allowing companies in other industries to buy failing vehicle manufacturers, the new policy prevents new and untried industrial players from entering the already crowded sector. It also aims at promoting a national united and open auto market mainly depending on private consumption. Local governments will not be allowed to take discriminatory action on vehicles produced in other regions. The central government will introduce a national unified vehicle registering and checking system, and local authorities will not be able do likewise in their own ways. The new policy also stipulates that vehicles may only be imported into Mainland China through four harbors and three land ports. The four harbors are Dalian in the northeast of the country, Tianjin in the north, Shanghai in the east and and Huangpu in the south. The designated land ports are Shenzhen in Guangdong Province, Manzhouli in Inner Mongolia and Alataw Pass in the Xinjiang Uygur autonomous region in the remote northwest of China.

Beijing International Automotive Exhibition

From June 10-16, 2004, Beijing hosted the biennial Beijing International Automotive Exhibition. The show was first established in 1990 and has since become the leading auto show in China and is on its way to joining a select list of cities, including Detroit, Tokyo, Geneva, Paris and Frankfurt that host the world's most prestigious auto shows. A record of more than 1,600 manufacturers, including all major international brands, exhibited at Auto China 2004. A total of 460,000 people both from China and overseas visited the show, another record for the biennial event. The show, the eighth of its kind, had drawn 50,000 more visitors than the previous event. It was one of the first Chinese shows watched internationally for trends and the market reactions. Major international carmakers displayed models specially designed for the Chinese market and launched brand-new models at the show.

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