China's car market grows more slowly

USA TODAY (Shanghai) - Automakers' vision of China as a promised land where sales skyrocket and labor stays cheap forever is being altered as the government tries to slow economic growth to a more sustainable pace.

As the Shanghai auto show media preview begins Saturday, the rewards of competing in China remain irresistible. Automakers sold 19.3 million vehicles in China in 2012, nearly 5 million more than in the U.S., and optimistic forecasters say Chinese consumers will buy 30 million cars annually by 2020.

But the auto industry and the larger economy in China are confronting economic and environmental limits. For General Motors, the largest foreign automaker in China, and Ford, which is in the midst of a breakneck expansion in the country, the next decade will be different as the government comes to grips with the costs of rapid growth.

The most immediate challenge is the environment.

In January, pollution readings in Beijing peaked at a reading of 755 on the Air Quality Index. Any reading above 400 is considered hazardous for all.

Already the larger cities such as Shanghai, Beijing and Guangzhou have restricted the number of driver's licenses. There are new fuel economy and emissions standards on cars, but most of the automotive smog comes from diesel-burning commercial trucks.

While China's heavy dependence on coal for much of its power generation is the biggest pollution source, gasoline and diesel fuel have much higher concentrations of sulfur than is allowed in the U.S. and Europe.

As regulations are toughened, foreign automakers may gain an advantage because they already must comply with stringent emission standards in the U.S. and Europe.

"The global manufacturers have no problem meeting this stuff," said Bruce Belzowski, of the University of Michigan Transportation Research Institute. "They're on top of it."

Too much capacity?

Many automakers have expanded aggressively. Volkswagen, GM, Ford and others are building new assembly and engine plants. Then there is the tension between joint ventures with the giant global automakers and the dozens of Chinese-based manufacturers that are building their own brands.

There may be too many automakers in China. The government-controlled CCTV network said in January that the government wants the top 10 automakers in China to control 90% of the market by 2015, up from 87% last year.

The government also wants to cultivate three to five China-based automakers capable of exporting vehicles to foreign markets, although they're likely to start with developing countries and not the U.S.

"Chinese brands are not yet able to stand competitive on their own in the global market," said Dong Yang, secretary general of the China Association of Automobile Manufacturers, on CCTV. "So to reach this goal, we need to work really hard."

Aside from wealthy Chinese who crave foreign-made luxury cars, the average Chinese consumer buying his or her first car is looking for basic transportation that he or she can afford.

In order to boost profit margins, automakers are trying to lure middle-class buyers into slightly larger and more technically equipped vehicles.

For example, General Motors recently introduced the Buick Encore compact crossover, while Ford is launching the Ford Kuga (called the Escape in the U.S.) and EcoSport in China.

Chrysler recently struck a deal with Guangzhou Auto Group to launch Jeep production in China by the end of 2014, pending government approvals.

Volkswagen, Mercedes-Benz and BMW all plan to introduce new compact crossovers at the Shanghai auto show.

Namrita Chow, a Shanghai-based analyst for IHS Automotive, said sales of crossovers and SUVs rose 50% in the first two months of the year in China from a year earlier.

If the rate of economic growth slows, consumers may remain content with smaller, simpler cars.

In China's luxury segment, German automakers — Audi, Mercedes-Benz and BMW — dominate. But GM recently introduced the Cadillac XTS in China and hopes to triple annual Cadillac sales to 100,000 units by 2015.

Ford plans to introduce its Lincoln luxury brand in China in the second half of 2014.

Hans-Werner Kaas, director of McKinsey's auto practice, said premium vehicle sales in China will grow at an annual rate of about 12% through 2020, compared with a projected 8% growth rate for the overall auto industry.

Anti-Japan backlash

Sales of Japanese automakers plummeted in China over the last nine months as a dispute between Japan and China over several South China Sea islands triggered anti-Japan retaliation.

In the first quarter, China sales for Toyota, Nissan, Honda and Mazda collectively fell 21%, according to Barclays. Japanese automakers have been piling on incentives, but so far, Chinese customers aren't taking the bait.

The escalating tensions, while unfortunate, present an opportunity for GM and Ford, as well as the dozens of China-based manufacturers such as Geely, Dongfeng, SAIC and Chery.

"The Japanese automakers are really going all out to try to appease consumers here," Chow said. "The presidents of the Japanese automakers in China have been on lots of publicity events. They've stated their allegiance to the Chinese consumers. The problem is that it's much deeper."