China's Emerging Car Industry

Less than 10 years ago, China's annual car production did not match the output of a single large auto company in a developed country, but recent years have seen quite a transformation. Domestic companies like Geely, Chery and Changfeng have learned quickly, expanding production capacity and developing new models.

Yet China is home to almost as many automakers as the United States, Japan and Europe combined. Like so many industries here, the fat needs trimming.

It seems clear which companies will lead the way. Chery Automobile, based in Wuhu, Anhui province, now exports cars to 29 countries. Last year the company produced 305,000 cars and exported 50,000. Chery cars are expected to hit the European market later this year.

Geely Autos is another company looking to export to Europe as soon as this year. The firm was the first from China to appear at the Frankfurt Motor Show (in September 2005) and is now re-engineering its cars to comply with EU auto import regulations. Brilliance Auto, which is collaborating with BMW, also made an impressive display at the Geneva Auto Show earlier this year. Its BS6 model is already being sold in Germany.

Foreign challenge

The domestic players also have competition from abroad as foreign automakers are starting to export cars from China through their joint ventures. Volkswagen plans to export its China-made vehicles to 84 countries by 2009 and Honda is already exporting to Europe from China.

The government has made it an official goal to compete as a global auto player, even enshrining it in the 11th Five-Year Plan. A quality-control licensing system is in its initial stages, though details are scarce as of yet.

Eight auto export manufacturing bases have been established to help automakers expand globally. They include Shanghai, where both GM and VW have joint ventures; the northeastern city of Changchun, headquarters for major automaker FAW; Chongqing (Chang'an Auto); Wuhan (Dong Feng Group); Xiamen (Golden Dragon); Wuhu, (Chery); Taizhou (Geely); and Tianjin, where Toyota has a joint venture with FAW.

It isn't just exports that have a promising future. Last year China overtook Japan as the world's number two market for automobiles, with total vehicle sales rising 25% in 2005 to 7.2 million. The number of cars in Shanghai reached the previous 2020 estimate by the beginning of 2005. Beijing had over 22,000 new car registrations in the first 18 days of 2007, total hit almost 2.9 million. All of these vehicles are clogging the roads and polluting the air, and yet only a tiny fraction of the population is on the road.

Same old game

Copyright infringement has become as endemic in the auto industry as it is throughout China's export economy. There have been multiple suits brought by American and European automakers against Chinese companies - often their own joint-venture partners.

In addition, the hand of the state is ever-present. The US is considering a suit against China at the WTO for, among other things, subsidizing its auto parts industry.

Regardless of whether the US claims are justified, China has become a major global auto parts supplier and this trade will continue to grow. Of the world's top 100 auto parts suppliers, 70% have a presence in China. There are about 1,200 foreign-funded or jointly-invested parts manufacturers in China holding 50% the market. Among them are brands such as Delphi, Bosch, Visteon and Wanxiang, China's largest maker of auto parts. There are about 5,000 domestic spare parts manufacturers.

Factor in the positive prospects of other auto-related industries - repair, road transportation, insurance, finance and rental - and it becomes clear why the expectations, and the stakes, for this industry have soared so high.