A key reason for continued growth is the rapid development of China's lower-tier cities. While China's explosive automotive growth has been most evident in the Tier 1 cities, it is important to note that the trends of urbanization and growth of per-capita GDP will continue into the foreseeable future. As these factors are directly linked to the growth in demand for automobiles, one can expect a continuation of growth next year and thereafter. Urban wealth accumulation is undoubtedly fueling the growth in automotive sales. The fact that 85% of all vehicles are sold to urban residents is a clear sign of the relationship.

As income levels continue to rise, demand may begin to shift towards vehicles and segments offering more appealing content and features, which may create opportunities for manufacturers to improve their product mix. Early-movers in the China market such as Volkswagen and General Motors have enjoyed significant profit margins by occupying mid-size sedan, full-size sedan and MPV segments without a great deal of competition. In such a market environment, strong profits could be made on products such as the VW Santana and the Buick GL8 minivan – older technologies that dominated their segments with good margins. However, today’s China market no longer offers such an easy road to profitability. Virtually every major vehicle manufacturer is now present in the China market. A recent J.D. Power & Associates study has reported that many of the cars sold in 2009 were in low-end segments that are eligible for tax incentives and that many of these cars earn the manufacturers as little as $100 each.

Interview With Robert B. Weiss, Co-Chair of International Automotive Legal Team and Chair of Commercial Law, Bankruptcy and Reorganization Department of Honigman Miller Schwartz and Cohn LLP