China's Auto Market Draws Influx of Foreign Investment

Burgeoning home market and sagging sales in N.A. spell boom in China

Several of the world`s leading automakers announced that they would expand production lines in China, even as they are shrinking their domestic operations. The moves reflect starkly different market trends: booming auto sales in China and sagging demand at home.

China`s automobile market has remained strong despite fluctuations in the global economy, drawing a rising influx of foreign investment. In the first nine months of 2006, 3.59 million passenger cars were sold in China, up 26.4% from the year-earlier period. It has replaced Japan as the world`s second-largest auto market and is expected to challenge the U.S. as the world`s number one auto market within 15 years. One after another, international automakers see the writing on the wall: expand in China or perish.

Ford Motor, for example, announced last October that it would build a new plant in eastern China with local partner Changan Automotive Group and Japanese affiliate Mazda Motor. The plan signaled Ford`s bright outlook on the Chinese market, where its vehicle sales in the first three quarters of 2006 more than doubled to 114,685 units from 55,807 units of the same period of the previous year. The gain came in sharp contrast to Ford`s slumping sales in the North American market. The new joint venture in Nanjing, Jiangsu Province is scheduled to start operations in 2007, with a targeted annual production of up to 160,000 vehicles in the initial stage.

The influx of investment from foreign automakers pushes China to produce high-end sedans.

The new investment project, together with a plan to increase auto parts procurement from Chinese suppliers, is part of Ford`s new global strategy for stemming losses in its home market with gains in China.

Ford is not the only foreign automaker upbeat about China. When DaimlerChrysler opened a new factory in Beijing last September, it announced plans to expand production of Dodge and Jeep models in China, while shuttering its factory of the two car models in North America.

Largest Hub

Peugeot Citroen kicked off construction of a massive factory in the inland Chinese city of Wuhan, succumbing to the pull of the huge Asian car market. The new plant, part of its 50-50 joint venture with state-owned Dongfeng Motor Co., will be the French automaker`s largest manufacturing site in the world. Peugeot`s expansions in China come amid a steady stream of statistics suggesting the bright potential of the market there.

In 2006, Japan`s Toyota Motor unveiled a new model of its Corolla in Beijing, the first time the world`s second-largest automaker has introduced a new car outside Japan or the U.S. With a newly built production line in south China`s Guangzhou city to meet fast-growing market demand in China, the Japanese auto giant aims to sell 400,000 cars in China in 2007 and win a 10% market share by 2010.

Foreign carmakers have flocked into China to reap gains from a market with an increasingly affluent middle class. BMW sold 28,000 cars within the first 10 months of 2006, up 53% from the same period of the previous year. Shanghai GM, General Motors` joint venture in China`s largest city, is also a substantial gainer from the growing market. Its sales shot up 33.4% in the first nine months of 2006, compared with the same period of 2005, to reach 296,658 units. All the foreign brands appeal to higher middle class consumers.

“Foreign automakers will help to raise the quality and manufacturing standards of Chinese-made auto parts,” says Lo Tsun, director of an auto parts trade association in China.

Catering to the Super Rich

The attractions of China`s auto market do not come from its affluent middle class only, but also from the country`s more than 300,000 millionaires. The world`s top luxury carmakers set their sights on this group when they flocked to the Chinese capital of Beijing last November for the 9th Beijing International Automotive Industry Exhibition (Auto China 2006). During the show, China`s Geely Holding Group and Britain`s Manganese Bronze Holdings, inked an agreement to assemble the famed TX4 London black cab in Shanghai. "It signaled a new page in Sino-foreign joint venture cooperation for producing the luxurious British black cab," said Geely.

According to the terms of the deal, Zhejiang Province-based automaker Geely will hold a 51% stake in the Sino-British venture, British Manganese will have a 48% share and Huapu, a small subsidiary of Geely, will have a 1% share. Manganese Bronze, which makes the cabs through its London Taxis International subsidiary, will transfer technology as well as intellectual property rights to Geely as part of the joint venture agreement in China.

The joint venture represents the first overseas production site of the British black cabs, providing the advantages of cheaper components from China and easier access to the rapidly expanding Chinese car market. The first black cabs are expected to roll off the Shanghai production line in mid-2008. Taxi companies, hotels and private limousine companies are among the targeted markets for the vehicle in China.

Government Policy

China`s booming auto industry is partly fueled by the government`s policy to elevate China`s position in the global auto market. Prior to Auto China 2006, the Ministry of Commerce disclosed five principles of the government`s industrial policy for the automobile industry in the following decade:

1. To encourage national automakers to develop their own brands and technologies.
2. To develop internationally competitive Chinese automakers and auto parts producers.
3. To encourage exports of auto parts and automobiles.
4. To accelerate industrial restructuring by strengthening the competitiveness of state-run enterprises and setting up mechanisms to weed out weaker companies.
5. To encourage the R&D for fuel-efficient and environment-friendly models.

The five principles are commonly regarded the guidelines for China to move toward the goal of replacing the U.S. as the world`s largest automobile market by 2015.

Shortly after the guidelines were announced, Japan`s Mitsubishi gained approval from the Chinese government to acquire a stake in Southeast Auto Motor, becoming the first foreign company to hold a major stake in a Chinese auto company. Southeast Auto Motor will hereafter make both own-brand and Mitsubishi brand automobiles to strengthen its competitiveness against foreign brands in China. The company hopes to take advantage of the Mitsubishi name to advance its own brand.

The heightened emphasis on branding was apparent at China 2006, where 1,500 exhibitors from 20 countries mostly introduced own-brand new car models or auto parts.

Cherry Automotive, for example, launched 10 new own-brand models at the show and exhibited several self-developed key auto parts to be used in its cars.

Chinese brands increased their share of the domestic market to 26.4% during the first 10 months of 2006, surpassing their counterparts of any other country in terms of a market share there. Industry observers commented that the significant improvement of quality and market image are major factors in the rising sales of Chinese branded automobiles. Based on their success in 2006, Cherry and Changan, two of the leading Chinese auto brands, aim to increase their sales by 33% and 40%, respectively, in 2007.

Auto Parts

The burgeoning auto market in China has fueled a similar surge in auto parts sales there. According to a national association of auto parts and accessory distributors, the annual sales of auto parts and accessories in China reached 500 billion yuan in 2005 and may nearly triple to reach 14 trillion yuan in 2010, boosted mainly by domestic demand.

"In China, the auto parts makers can be roughly divided into two types. One is focused on the export market and the other mainly to serve the domestic market," said Lo Tsun, a director at the association. Businesses of both types are growing. Those focusing on domestic demand have grown especially fast in recent years thanks to the influx of investment from foreign automakers, which has increased demand for auto parts supplied by local manufacturers. At the same time, Lo believed, the high quality standards of foreign automakers will help Chinese auto parts suppliers to improve their quality and manufacturing technology.