Tougher road for domestic automakers
By Xin Bei (China Daily)
Updated: 2004-06-14 11:15

Beijing's blistering heat hasn't prevented huge crowds from visiting Auto China 2004, the nation's largest auto show held every two years and wraps up on Wednesday.

Nor has the white-hot price competition in China's car market cooled automakers at home and abroad. Prices have been falling for the past three years and some analysts predict a further 10 per cent decrease this year.

Consumer enthusiasm is well justified. Higher average incomes, combined with the recent substantial price cuts, make cars increasingly affordable. Millions of Chinese consumers are poised to realize their dream of owning a car.

But in terms of supply, the current rush to expand the domestic auto manufacturing capacity regardless of the country's macroeconomic conditions is becoming a cause for concern.

Looming inflationary pressures and the return of an energy bottleneck in the national economy have sharpened policy-makers' vigilance against excessive investment growth since later last year.

Overheating of some industries like iron and steel has already been blindingly visible on the central authorities' radar screen.

Thanks to the enormous significance of the automobile industry as a pillar for the country's long-term economic growth, the administrators have not yet targeted it for a credit squeeze.

But is there irrational exuberance in China's booming auto sector?

The answer differs for various automakers, especially after the country issued a new automobile industrial policy at the beginning of this month.

Over the past two decades the Chinese Government focused its efforts on developing the fledging automobile industry by introducing foreign investment to several State-owned manufacturers. Meanwhile, access to the domestic auto manufacturing market was strictly controlled to limit homegrown competition.

This policy was designed to facilitate growth of the industry. China's "market-for-technology" strategy, however, has practically failed to yield desirable results.

The "infants" never grow up. Exorbitant profits resulting from policy protection has, instead of encouraging those favoured State firms to enhance their research and development capacity, enticed them to oppose domestic competition.

Lack of domestic competition, in turn, leads to the fact that China's local auto manufacturing market remains seriously fragmented.

The new automobile industry policy pinpoints the pressing need to develop self-owned brands and technologies.

And the requirement for market entry has also been lowered - though still high - to encourage domestic competition.

Attracted by the breakneck growth of car sales in the domestic market after the country's entry into the World Trade Organization, some non-State enterprises managed to edge into this booming sector. These newcomers are trying to expand their size as quickly as possible to realize economy of scale.

Given the country's economic conditions, such moves are most exposed to the authorities' credit control. But as long as these new domestic car-makers hold their own in competition, their growth should be no cause of worry. The recent rise of several new homemade brands has actually contributed to the boom in the domestic car market.

For those protected State auto giants, the prospect of the market appears not so rosy.

On one hand, newcomers at home are eroding their share of the domestic market via cost-cutting.

On the other hand, they are losing luster to foreign partners as the latter have more choice now in setting joint ventures with various domestic car-makers.

These State automakers need to carefully rethink their development strategy. Their attempt to maintain market share by further increasing manufacturing capacity must be weighed carefully in view of their real competitive edge in the market.

The new models the multinational giants are showcasing at the international car show represent an investment worth billions of US dollars in the Chinese market. The country's sluggish car sales apparently have not dampened foreign confidence in this fast-growing market.

Surely for them, the dazzling 40-per-cent-odd jump China's auto market registered last year was marvelous. Annual growth of around 10 per cent in such a huge market is already more than what they can expect from any major market in the world.

However, if these foreign automakers' reinvestment plans are purely based on the fact that they had made money from previous moves, their expectation to earn more by reinvesting needs to be questioned.

It is still too early to see if the slowed sales in May are merely a bump on the road or a subtle turning point that will end the car sale bonfire.

But in the short run, Chinese consumers' inclination to put off buying cars until the government reduces the tariff on imported autos to 25 per cent in 2006 as the country promised upon its WTO entry will only become more obvious.

In addition, the Chinese market is quickly approaching its saturation point as the rocketing car-making capacity far outpaces the Chinese people's income growth.