Going Car Crazy

Huge potential is a gleaming lure for investors in what could become an overheated auto industry


There is a popular joke in China today that says, “If you are good for nothing, go and make automobiles,” mocking investors standing in line to enter the automobile manufacturing industry in China. Amid this buzz, however, there are mounting worries that the auto industry could become another victim of haphazard investment and surplus poor quality products.

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On February 24, at the Diaoyutai State Guesthouse in Beijing, the Ningbo Aux Group Co., Ltd. declared its intentions of entering the automobile manufacturing industry, changing its name to the Aux Group and its logo to “AUX.”

Developed from a manufacturer of electric energy meters, the Aux Group entered the air conditioner market in the late 1990s to sell air conditioners cheaper than most of its competitors. It has now decided to enter the auto industry, announcing that in the five years from 2004 to 2008, they plan to inject 8 billion yuan ($966 million) into the business to achieve the goal of annually producing 450,000 automobiles. The Aux Group organized a team to make preparations for the automobile project in June last year and bought an 80 percent stake in the Shenyang-based automaker Shuangma, renaming it Shenyang Aux Automobile Co. Ltd. In November, Shenyang Aux produced its first sport utility vehicle (SUV), Yuandongli and pickup truck, Ruitu. By the end of last year, Shenyang Aux had installed three production lines and now the company is capable of producing 30,000 automobiles annually.

Beside Aux, more competitors with different backgrounds are flocking into the auto market. Chunlan (Group) Corp. and Guangdong Midea Holding Co., Ltd., two major players in household electrical appliances, tobacco giant Yunnan Hongta, cell phone manufacturer Bird and motorcycle manufacturer Chongqing Lifan, all released and brought into effect their intentions to enter the auto-making industry. Recently the Wuliangye Group Co., Ltd., a major distiller, also declared its ambition to enter the lucrative auto industry.

The influx of money into the industry up to the end of last year began a new craze for auto manufacturing, receiving the attention from all walks of life. This is because haphazard investment and production of a surplus of poor quality products has been perplexing some industries and regions for years.

On March 5, Premier Wen Jiabao emphasized in his Government Work Report at the Second Session of the 10th National People’s Congress (NPC) that “the year 2004 is crucial for China’s reform and development,” that one important task for macro-control this year is to “firmly halt haphazard investment and low-level, redundant construction in some industries and regions” and that the government should “adhere to the scientific viewpoint of development.”

Pondering upon these words, people wonder whether the craze for automobile manufacturing will bring about production of a surplus of poor quality products. Does the industry need a push or a brake in this crucial year and where is it heading?

Bigger and Bigger

While players from various other industries intent on trying their hand in automobile manufacturing, most existing automobile manufacturers have declared their business expansion plans.

ASSEMBLING A FORTUNE: The assembly line of Chongqing Chang’an Ford, a U.S.-Chinese joint-venture, is geared up to cope with the extra demand for vehicles

The goal of the First Automotive Works Corp. (FAW), for example, is to produce 2.07 million automobiles in 2008 while Shanghai Automobile Industry Corp. aims to produce more than 1 million in 2007. Dongfeng Automobile Co., Ltd. hopes for a capacity of 220,000 in 2006. Chang’an Group announced its ambition last year—to “build another Chang’an in three years.” Ford announced that it will co-invest $1 billion with Chongqing Chang’an to expand the capacity to 150,000 automobiles.

For the year 2004, Guangzhou Honda will double its capacity to produce 240,000 automobiles while the Republic of Korea (ROK) legion, led by Beijing Hyundai, aims at 1.5 million. Domestic brands such as Cherry and Geely hope for a capacity of 500,000.

According to a rough estimate, the manufacturing capacity of the auto industry in China will increase from over 4 million last year to 10 million in 2005.

In the high-end market, new arrivals are expected as Shanghai General Motors Corp. plans to manufacture Cadillac and Volvo plans to start up its manufacturing base in China. This is all apart from the partnership between Mercedes-Benz and Beijing Jeep and the new presence of BMW cars made in Shenyang, Liaoning Province on the market. With an all-around expansion, automobile players are predicted to start a fresh round of scrambling for the market, from mini autos to deluxe cars.

POPULAR CHOICE: BMW’s 325i, made in Shenyang, Liaoning Province, was first seen on the local market in October 2003

Statistics show automobile production increased 56 percent in 2002 and 83.25 percent in 2003. The number of automakers in China rose from 20 in 2002 to 32 at the end of 2003.

Currently, there are 123 automakers capable of producing whole vehicles. About 27 provinces and municipalities nationwide are manufacturing automobiles, with 17 of them producing cars and 23 of them having installed production lines for cars. The total capacity of automobile manufacturing nationwide is over 5.5 million and that of car manufacturing is 2.5 million.

However, Miao Wei, Chairman of Dongfeng Automobile, pointed out that severe problems of disorder and low quality still characterize the country’s auto industry. Shanghai, leading automobile manufacturing in China, enjoys the highest annual production of 585,000 automobiles. Of manufacturers capable of whole-vehicle production, only eight of them turn out an annual production of more than 100,000 automobiles. Among more than 120 manufacturers nationwide that produce whole vehicles, one-third of them produce less than 1,000 automobiles annually.

Wang Chunzheng, Vice Minister in charge of the State Development and Reform Commission, indicated that now an upsurge of merge and acquisition (M&A) characterizes the international market, due to exceeded capacities of automobile manufacturing. As a result, several large multinationals control the market. The situation in China is different, however, as new players stream into the market to try their luck.

Market and Profit

It is quite a spectacle that players from different industries all covet the automobile market, a majority of them focusing on the mid- and high-end market. According to analysis, three factors contribute to the spectacle.

First, the huge market potential is the biggest lure. The automobile market in China has witnessed rapid growth since 2002. In 2003, the market saw the sales volume of automobiles exceed 4 million as the GDP increased by 9.1 percent and the average GDP per capita topped $1,000, a marvelous achievement that implies car consumption will enter a period of rapid and steady growth. The Development Research Center of the State Council (DRC) predicted the total demand for automobiles would reach 5.29 million in 2004 and 8.6 million in 2010 and 17 million in 2020, when China will replace the United States as the largest consumer of automobiles.

The second factor is the high profit generated in the automobile market. The influx of investment is testimony to this. A comparison between the household appliance industry and the auto industry serves the point well. One usually earns at most several hundred yuan from selling a TV set with about 2 percent profit margin, while the gains from selling a vehicle is measured in thousands, with the profit margin being 25-30 percent. It is the huge profit margin that directs the investment and also explains why many people see the auto industry as the “last cake” for investors.

Last but not least, is the push by local governments. Wang Dechen, a member of the National Committee of the Chinese People’s Political Consultative Conference (CPPCC), believes that the auto industry, the car manufacturing in particular, absorbs high investment, turns high profit and pays high tax, contributing to high production value. For that reason, many local governments give priority to the development of the auto industry as the mainstay of local economy.

The Path Ahead

For this investment upsurge, some analysts believe it is “too hot,” belongs to the category of producing surplus poor quality products and should be “cooled down.” Some scholars even advise the government stifle the immature industry. Another group of analysts argue that it is the function of a market economy as supply always changes with demand. After all, the market will make the selection.

Some people argued at the Second Session of the 10th NPC and CPPCC that the upsurge of automobile investment is against the “scientific viewpoint of development.” They urge the government to take equally effective measures to halt such a phenomenon, as “an important task of macro control this year is to firmly halt haphazard investment and production of a surplus of poor quality products in some industries and regions.”

Li Shufu, a member of CPPCC National Committee, believes the market economy is still to be improved. He said the auto industry is facing a crucial development period, demanding orderly competition. He advised the government to outline a plan for the auto industry development in order to guarantee fair play among competitors and support domestic brands with efficient measures so as to ensure a healthy development of the industry.

There is a view that since private companies use their own money instead of the government’s budget to produce cars, there is no need for the government to regulate the market. However, Wu Jinglian, a renowned economist, said companies should not be allowed to squander bank loans as well, because a failed investment means a bad loan to the bank. Wu warned especially against the overheated investment directed through administrative means. Some local governments abuse their power to put fiscal funds, bank loans or company reserves in some projects of low efficiency, which is against the rules of a market economy and will cause numerous problems.

The government will stop protecting domestic brands in the auto industry from competing with foreign brands before 2005. At that time, automobiles made in China will be on the same footing to compete with imported automobiles. In a market economy, price is always the market’s most sensitive nerve. After China’s accession to the WTO, China’s auto industry should adapt to international practice, beginning first and foremost with price adjustment.

A price war will be inevitable as more and more enterprises strive for a share of the market, making the profit margin shrink. It might be safe to say that private enterprises are taking a risk in entering the market at the moment.

Analysts predict that the auto industry will probably follow the developing course of the household electrical appliance industry: Competitors flock into the same industry, production increases substantially, a severe price war occurs and competition finally dictates who survive.