Auto sector puts on a brave face
By Dai Yan (China Daily)
Updated: 2005-04-21 10:20

SHANGHAI: The 11th Shanghai International Auto Show opens tomorrow at the Shanghai New International Expo Centre, with expectations of the same fanfare and glitter that have become the hallmark of this annual event.

Although its mission to fire the imagination and whet the appetite of millions of motor car enthusiasts remains the same, this gala event is cast against a backdrop that is markedly different from previous years.

The enthusiasm of the public for cars may still be high, but the buying fever has cooled off since last year.

For the first time in many years, the rapidly expanding motor car industry in the world's fastest growing market is being thrown off balance. The adjustment to the new market paradigm is posing a real challenge to car makers, who had enjoyed years of uninterrupted growth until fairly recently.

"Consolidation" is the word most often cited by industry analysts to describe the current state of affairs, which signifies an important phase in the development of a maturing market. This unavoidable process, they predict, will weed out some of the weaker independent manufacturers, which will either go out of business or be swallowed up by larger and stronger players, most of which are jointly owned by the large auto companies from the United States, Europe and Japan.

"We have to adjust our system and increase competitiveness in response to the slowdown. I hope those who survive will emerge stronger and fitter to meet the demand of the increasingly discerning public," said Kenneth Hsu, vice-president of Ford's China operation.

"In a market grown at a quick pace, we must have a quick response. But in a low market, more efforts are needed to achieve steady sales," Hsu said.

"The low time will be a test of capability or companies will be kicked out in the reshuffle," he said.

Ford has seen a considerable growth rate despite the overall slowdown.

Though its market share is not that big, the US company, together with the strong new players from South Korea and Japan, is posing a serious challenge to the market dominance long-enjoyed by such leaders as Volkswagen and General Motors.

Beijing Hyundai Motor Co, a joint venture between Beijing Automotive Industry Holding Co and South Korea's largest car maker Hyundai Motor Co, dominated in the first three months of 2005 with sales of 56,100 passenger vehicles, up nearly 160 per cent, according to the China Association of Automobile Manufacturers.

Guangzhou Honda Automobile Co, the Japanese automaker's factory in the southern city of Guangzhou, was the second best-seller, with 45,000 units sold in the first quarter, an increase of 58 per cent from a year earlier.

By contrast, sales at GM's venture with Shanghai Automotive Industry Corp (SAIC) slumped by 35 per cent year-on-year to 44,500 vehicles in the period, ranking third in the country.

Volkswagen's venture with SAIC, the top car seller in China last year, sold 36,139 units in the period, dropping the firm down to No 6.

A total of 574,300 passenger vehicles were sold in the first quarter of this year, down 7.69 per cent from the same period a year ago.

Demand in China will certainly continue heading upwards in the longer term as the economy keeps growing at a brisk pace. But car makers, big and small, should pursue new manufacturing and sales strategies.

Passenger car sales are forecast to rise by about 12 per cent this year, compared to 75 per cent growth in 2003 and 15 per cent last year.

"Car makers are still unsure of the models they will focus on to boost sales, and the Shanghai auto show will be a good barometer," said Zhang Xin, an auto industry analyst from Guotai & Jun'an Securities.

Sedans with 2-litre engines or above are profitable, but risky because of high oil prices and government policies aiming to save energy, Zhang said.

The oil-thirsty country is developing a new regulation on levying an auto consumption tax, which would raise the consumption tax rate for large-displacement cars, Zhang said.

China has become the world's second largest oil consumer after the United States, with the automobile sector accounting for one third of the country's total oil requirements.

But the negligible profits from producing small-displacement cars, especially those under 1.3-litres, are unappealing to car makers except in terms of maintaining market share, Zhang said.

Many companies have made their choices between the 1.3 and 2.0-litre options, and the 1.6-litre engine is also believed to be a very popular model in China, as has already been proved by the strong sales of Hyundai's Elantra.

"We believed the introduction of a 1.6-litre will be a boost to our Chinese sales," said Toshiyuki Shiga, Nissan's chief operating officer.

He said the company will sell its 1.6-litre Tiida in China, which will be exhibited in Shanghai.

The Hyundai venture's 1.6-litre Elantra was the single best-selling model in China in the first quarter of this year, according to the auto association, with 38,500 1.6-litre models sold, representing nearly 7 per cent of the total sales in the period.

Besides the Tiida, more cars like the Elantra will be sold in China including Suzuki's Swift and the Chevrolet Kalos.

But like Ford, many car makers, sparing no efforts to get a foothold in the market, are planning to move their full series to China.

"We believe the maturing Chinese market will become more diversified and we cannot afford to lose consumers at any level," said Ford's Hsu.

Ford is expected to introduce two Ford-branded cars - one domestically-made and the other imported - to China this year, plus other models from Mazda, Volvo and Jaguar.

While car makers will release complete product series in China amid intensified competition, analysts believe their products will appear similar to consumers, so prices will be decisive, though energy-saving and safety are also important factors.

"Car makers must be capable of keeping on lowering the price of cars which have good sales in China to expand market share," said Yale Zhang, a Shanghai-based analyst from US auto consulting firm CSM Worldwide Corp.

Japanese and South Korean car makers do much better than US and particularly European rivals in cost-controlling, which allows them more room to cut prices in China.

Volkswagen AG's Chinese business, which a recent Goldman Sachs report said was in danger of posting a full year 2005 operating loss, is acting to solve the problem.

FAW VW, German car maker Volkswagen's joint venture with First Automotive Works Corp (FAW), has made increasing the proportion of locally-produced parts in its cars to cut costs a top priority.

FAW VW President Qin Huanming said the company aims to raise the proportion of local parts in Volkswagen cars to 85 per cent on average by the end of 2006.

The average locally-made parts rate of the Audi A6, new Audi A6L and Audi A4 sedans built at the venture will rise to 60 per cent "as soon as possible" from nearly 50 per cent at present, he said.

Use of domestically-made parts will help FAW VW cut costs by 60 per cent, according to Qin.

"FAW VW will encourage its suppliers in Europe to set up wholly-owned ventures or joint ventures with partners in China," he said.

Sales of FAW VW reached 30,074 cars in the first quarter, dropping from No 2 last year to ninth.

"All car makers, from Europe, Japan and the United States, should raise local content of their cars made in China, not only to cut costs but also to respond quickly to changes in China's car market," said Yale Zhang.

Average prices in the domestic car market tumbled by an average 13 per cent last year, compared to an 8 per cent drop in 2003.

Zhang Xin from Guotai & Jun'an said car makers have to lower costs to stop huge losses that could eventually put them out of business.

"For gaining market share, many companies have good sales at low prices but actually make few profits," he said.

"But if they dare to lift the prices by hundreds of yuan, they will be absolutely put away by consumers."

According to latest figures from the National Bureau of Statistics, the auto sector reported 3.5 billion yuan (US$422.7 million) in profits from January to February this year, down 61.5 per cent from a year earlier.

Some foreign car makers may choose to leave the market after years of low profit margin, said Zhang Xin.

"But the process of market consolidation will be hard and different in China as local governments will force and support the Chinese factories to open for employment," he added.