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Friday, 7 June, 2002, 07:20 GMT 08:20 UK
China car sector seeks world dominance
Nissan's Ideo concept car
The Chinese people's appetite for cars is massive

China is gearing up for an explosion in car ownership that is set to dwarf all previous developments in the auto industry.

Chinese boy with a bike
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The industry's rapid growth will become clear to the Chinese people when the 2002 Beijing International Automotive Industry Exhibition opens its doors for the public this weekend.

As yet, there are only 16 million cars in China - not many for a country with 1.3 billion people - and only one-tenth of one per cent of the Chinese people will be buying a car this year.

But industry officials enthuse about a 20% rise in sales last year and a 30% sales rise during the first four months of this year.

And looking ahead, sales growth will be given further shots in the arm, partly by a slew of government initiatives, but also by the country's rapid economic growth and, eventually, by loans for private car buyers from both car manufacturers and finance houses.

"There seems to be no end to growth here," Automotive Resources Asia's Michael Dunne told BBC News Online.

Rapid growth

The huge growth potential offered has led the world's car makers to pinpoint China as the battleground where they will slug it out over the next decade.

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"The development potential of China's passenger car market is... very optimistic," said Bernd Leissner, president of Volkswagen Group Asia Pacific which has a 50% share of the Chinese passenger car market.

By 2006, about 60% of all cars sold will be privately owned, Mr Leissner predicted, up from about 30% this year.

By then, the number of passenger cars sold should have almost doubled, Mr Dunne predicted.

"There's no doubt that China will be at the top of the world's growth for autos," said Nissan Motor's chief executive, Carlos Ghosn.

Made in China

Much has been made of how China's recent entry into the World Trade Organisation would help the industry flourish.

Chinese model shows off a Hyundai car seat
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China has agreed to gradually remove import quotas altogether and to slash import duties to 25% by 2006.

But this, argued Mr Dunne, does not mean that China has indicated a readiness to throw the gates open to imported cars.

"The Chinese are masters at building walls," he said.

"I think they'll sign on the dotted line to join the WTO and then race to do what they can to protect their own auto industry."

Consequently, few global car makers value the prospect of supplying the Chinese people with cars made abroad, with the notable exception of a few luxury car makers.

This means that although imports might rise from last year's 6% share of the market, "they will never go above 10%", Mr Dunne said.

Joint ventures

Most leading automotive groups are tackling this problem by doing politically favourable deals with Chinese firms, many of them state controlled, rather than flooding the Chinese market with imports,

Chinese model shows off Citroen's latest
Domestic models: Global firms produce ever more cars in China
Through joint ventures, they can slap their badges onto cars made, or at least assembled, locally, in partnership with Chinese manufacturers.

"Every one of the top ten global automotive suppliers had set up shop in China by the end of 2000," according to Paul Gao of McKinsey consultants.

"That's the way the game will be played for the next five to 10 years at least," said Mr Dunne.

Recently announced projects include DaimlerChrysler's and Hyundai's separate manufacturing agreement with Beijing Automotive Industry.

General Motors has entered into a new production deal with the Shanghai Automotive Industry and the Liuzhou Wuling Automobile Company.

Toyota is believed to be in talks with China FAW Group, and Mazda has entered into a joint venture with FAW Hainan Motor.

"All the manufacturers want to be here," said Ford Motor China's marketing, sales and service executive Dale Jones.

China's mass market

Some joint ventures between foreign and Chinese car makers are primarily "screwdriver operations" where local assembly line workers put together high-end cars, one analyst told BBC News Online, citing the Audi A6, the Volkswagen Passat and the Honda Accord as examples.

Car factory in Shanghai
"Screwdriver operations": Some factories merely assemble foreign parts
But these cars cost several times more than the cheapest cars available in China, some of which are made under licences granted by foreign car makers.

Some of these cars are made by local firms like QuRyi - which makes small sedans using a Seat assembly line imported from Spain and 1.6 litre engines brought in from the UK - and Sichuan Jili - which makes a local version of the Daihatsu Charade.

This is the segment of the market where growth is expected to be the sharpest, analysts predict.

Which explains why Chinese automotive brands, which accounted for just 3% of the total market in 2000, raised their share to 7% by the end of 2001.

But foreign car makers, along with their Chinese partners, are fighting hard to beat off the threat from local independent operators, many of which have embarked on ambitious research and development programs of their own.

"Several [foreign] automakers are just launching small family sized cars," Mr Dunne noted, mentioning Volkswagen, Fiat and Toyota among the leading contenders.

Car financing

Beyond delivering the products, the car industry is also keen to lend the Chinese money to buy cars with.

"For the market to really take off, car financing is key," said Mr Dunne.

Only China's four domestic commercial banks can offer car financing, despite the country's commitment under WTO rules to open up the market.

Besides, China lacks a legal system where vehicles can be recovered if a borrower defaults on a loan.

Consequently, only 20% of the 716,000 cars sold last year were bought on credit.

"If China can button up its legal system and [car] financing can come on stream, look for really explosive growth," Mr Dunne said.

Exporting cars made in China

Beyond the home market, China has made no secret of its ambition to become a major international car making nation like its Asian colleagues Japan and Korea.

"China will have the fastest and highest growth and this development will not only come in quantity but also in quality," said Mr Ghosn.

Consequently, it should eventually be pretty easy for China to export cars.

"Beware the rest of the world, just as you walk into a department store today and find 'Made in China' on all kinds of basic commodities: It won't be long before you see the same thing in the auto sector," Mr Dunne said.

Automotive Resources Asia's Michael
"There seems to be no end to growth in China"


See also:

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