China's Car Drive

13 June 2005

As the growth in car sales on the mainland stabilises, Chinese car producers will look for markets overseas.

Since 2003, when sales increased by more than 80 per cent to 2 million units, China's domestic market for cars has stabilised. In 2004 sales rose by 15 per cent. They are likely to expand by a further 12 per cent in 2005, and then grow by 15 per cent annually during the next five years.

This would take sales to 5 million by 2010, with China overtaking Japan as Asia's largest car market - and the second-largest in the world.

Caution

But the complexity of economic and social conditions in China, counsels caution in accepting claims that the mainland has already entered the era of mass car consumption.

Rapid income growth and the further expansion of the middle class will generate a steady rise in domestic car demand in the coming years.

However, this is likely to leave excess capacity from the rapidly-expanding factories.

That will lead manufacturers to seek to exploit new markets overseas, posing a fresh challenge to American, European and Japanese car firms.

Car ownership

Ownership in China is overwhelmingly an urban middle-class phenomenon, available only to those in the highest income brackets.

In 2003 13.6 out of every thousand urban households had a car. The highest ownership rates were in Beijing (66 per 1,000) and Guangdong (43.7).

In municipal Shanghai, the figure was only 18 per thousand, though inclusion of neighbouring regions in the Yangtze Delta pushed this figure closer to 30.

Beijing, Tianjin, the Yangtze and Pearl River Delta regions account for more than half of the domestic market share.

Motorcycles

In cities, motorcycle use is more prevalent than cars, and continues to rise -from 188 to 240 per 1,000 urban households between 2000 and 2003.

Car ownership is almost unknown in the countryside, but motorcycle ownership among rural households is rising fast.

Such figures should induce caution about claims that China is becoming a 'car-owning society'.

Per capita car ownership is only marginally higher than in India. It will take many years to reach current levels in Asian countries such as Taiwan, Malaysia and South Korea.

Asia

Japan and South Korea accounted for about three-quarters of all cars produced in the Asia-Pacific region last year.

By comparison, China's output remains quite small.

Nevertheless, the growth has been explosive. In 2004 China produced 2.49 million passenger cars - more than double 2002 and almost four times more than 2000.

This leads to predictions that the mainland could become the world's second-largest car producer by 2010.

Production

The growth is swiftly changing the production pattern, though joint ventures continue to dominate - only 15 per cent of output is by indigenous models.

Passenger car production has gone from 30 per cent of output to 45 per cent since 2000.

Well over half of the cars built and sold in China are sedans, reflecting middle-class demand.

The next biggest category is subcompacts. About a quarter of them are indigenous models.

Market prospects

Compared to the runaway growth of 2003, the market is in temporary slowdown fostered by:

• Restriction of credit which financed more than a third of car purchases two years ago.
• Defaults by borrowers have exacerbated the problems of the banking system, reinforcing the government's policy of tightening credit to cool the economy.
• Rising oil prices which have deterred buyers.
• Competing claims on the income of urban households as they buy houses and apartments, and pay for health care, education and social security insurance.
• A weak road infrastructure, inadequate parking facilities and under-developed repair and maintenance services.
  

Profits

Rising production costs, excess capacity and fierce price competition have seriously affected profit margins.

In 2004 almost of one third of car manufacturers were reported to have experienced losses. A third of automobile dealers went out of business.

Conditions are unlikely to improve in the short run, not least in the wake of China's 30 per cent reduction in its car import tariff during 2005.

Exports

This will push manufacturers to overseas markets.

In 2004 China exported just over 10,000 cars - less than 1 per cent of total production.

Now, the soggy domestic outlook makes an export strategy attractive not only for indigenous producers, but also for foreign firms with a Chinese presence, such as Volkswagen, Chrysler and major Japanese makers.

Barriers

Indigenous manufacturers will face barriers in the West and Japan because of quality, safety and environmental deficiencies. For the time being, their exports are likely to be restricted to the sale of subcompacts to the Middle East, Africa and Latin America.

But Chinese producers have loftier export aspirations. Most ambitious of all are the plans of Chery, which plans to sell 250,000 cars a year to the United States from 2007.

UPDATE
Two weeks after this story was posted Honda sent its first shipments of cars made in China to Europe. Bearing out the looming over-capacity forecast in this report, Volkswagen announced on 9 August that it would cut car prices in China by up to 14 per cent to seek to boost sales.