A Note on the Chinese Automobile Industry

Executive Summary

China is a country with the largest population and with one of the highest GDP growth rates in the world. These two factors have led to a boom in automobile demand in the Middle Kingdom. China is also making rapid progress to bring its infrastructure to world-class standards. It is expected to complete a massive network of arterial national highways by 2008. The total investment for building the road infrastructure is expected to cross 885.8 billion Yuan. China's accession in the WTO in 2001 has instilled confidence and optimism in global automakers. China committed itself to reducing tariffs gradually by 2006.

It is also required to open certain services markets such as distribution, financing, insurance, etc that will have a significant impact on the automobile sector.

The Chinese government has on its own also imposed stricter laws regarding emissions and fuel economy standards with stiff penalties and broad coverage. The law also called for incentives for clean and renewable energy. The Chinese automobile industry is made up of several big and small players. The smaller players, in most cases, are inefficient and technologically outdated. Most of the larger players entered into joint ventures with foreign OEMs. The sudden surge in demand has prompted most major JVs to expand their operations to the extent that there is a fear of a supply glut in the future. Though the auto industry is growing by leaps and bounds, it is dogged by issues of poor quality and IPR infringement, which are attributed to the poor R&D capabilities of the country. The major players in the Chinese auto industry are called the 'Big Three'. They are FAW, SAIC and Dongfeng who were partners of major global OEMs like GM, Volkswagen (VW), Toyota etc. There are other players like Chang'An, Geely, Chery, and Brilliance who show promise. But all said and done, the Chinese auto industry, especially the passenger car segment is still dominated by foreign models and brands. VW and GM were the most successful, followed by Honda, Suzuki, Toyota, PSA Peugeot Citroën etc. As of 2005, restructuring of the industry so as to enable the emergence of large and efficient Chinese OEMs seems to be top on the to-do list of the Government. Falling margins and continued restrictions on equity seem to have dampened the spirits of foreign players. But considering that growth levels and margins continue to remain higher than western markets, China is still attractive. In the future, competition is expected to intensify.

The Chinese players are expected to launch their brands in large numbers and try to control the market. The government is also keen in making the country an auto export hub by 2010. Though there was a marked shift towards compact cars in 2004-05, the demand for sophisticated automobiles is expected to see healthy growth. Also, cars with new technology like fuel cell, hydrogen and other alternate fuels are expected to be launched by both foreign and local OEMs. China has awed everyone with its spectacular growth. The 2000s certainly belong to China. The country is poised to play a greater role in the world economy in the future. The Chinese auto industry will also witness good growth levels and is expected to surpass USA by 2020 as the world's largest automobile market. If the country is able to sort out the issues that are hindering it from realizing its potential, it can surely hope to have a developed local auto market and possibly also an advanced auto manufacturing and export hub by 2020.

Keywords

China, Chinese, auto, automobile, Chinese automobile, cars, auto policy, market, transport, industry, WTO, Volkswagen, VW, GM, Ford, Beijing, BAIC, Shanghai, SAIC, FAW, Dongfeng, Toyota, DaimlerChrysler, Brilliance, Changh'an, Chery, Geely, Great wall, brands, export, emission, fuel economy, sourcing, quality, suppliers, margins, restructure, Big Three, environment, government, technology, trends, compact

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