Low Labor Cost: not Advantage for China's Auto Industry

Robert Ward (Right)
Director, Global Forecasting and Chief Analyst Automotive, Economist Intelligence Unit

Graeme Maxton (Left)
Asian automotive correspondent for The Economist and a director of The Insight Bureau

Another five years to sell Chinese cars in US and Europe

Gasgoo.com: We can see the accelerating inflation, rising raw material prices, increased uncertainties about the global economy and capital markets today. Will these adverse circumstances have some positive impact on China's auto industry?

Robert Ward: You mention all the negative for the global economy and obviously China has a lot of communication problems, and inflation is very high in China as well, so I think Chinese government definitely needs to watch the inflation as prosperity going forward next couple of years, and have to adjust policy to cope with that. The tightened financial control is not good for car sales if interest rates go up.

Graeme Maxton: I think the positive aspect is that if the U.S. economy slows sharply and the European economy slows sharply, the demand for those commodities would drop away. We should say that's a pressure. That's what Beijing has to watch very closely. 

Gasgoo.com: Will the negative factors push the Chinese automakers going to the international markets, like what happed in Japan in last century? The adverse circumstances bring the Japanese automakers out.

Robert Ward: you mean in terms of export

Gasgoo.com: Yes.

Graeme Maxton: The Chinese companies are not ready to export to developed market this year, they are ready to export to just like Russia, southeast Asia, Africa, south American, ASEAN countries, except America, where the consumer expectations are not so high, the emission requirements are not so high, the safety requirements are not so high. I think they should wait perhaps another five years before they start to export to Europe and the U.S., because if they sell to the developed markets too quickly, and the consumers don't like their products, their reputation would be damaged for ten years, and they will lose the chance.
 
Gasgoo.com: Will the automobile export have a sustainable growth in the near future?

Graeme Maxton: of course you'll see growth in places like Southeast Asia and South America, but you can see push-back in Russia, because Russia is going to begin to say “we don't want too many Chinese cars”. The growth will flatten off for a while even there's push for export. With the declining demand, the growth is not as much as before.

Gasgoo.com: What's your opinion on the recent WTO ruling on China's import tariff on auto parts?

Graeme Maxton: China obviously lost the case, and has responded positively in terms of perhaps letting more imports of components into China. It's very difficult equation, because to have economies of scale of components requires very big volumes. The manufacturers here often don't have the global volumes. It doesn't make sense to manufacture locally. So I think what happened is at a stage where over the next few years China would have to allow more imports. By that the absolute market grows here, and with a bigger scale, then it makes more sense to manufacture locally.

Gasgoo.com: Do you think the Chinese auto parts suppliers will have a hard time, when the import tariff is lowered to the lowest level?

Graeme Maxton: I don't think so. Actually most of the Chinese auto parts manufacturers are extremely competitive.

Gasgoo.com: Competitive?

Graeme Maxton: In prices. They don't have much spending on research and development; they tend to be manufacturing more labor content which is of very low cost, so I don't think it would be a big issue, because no one is willing to take the much thinner margin, but I think they are likely to have to face more import competition in a short time.

India and China in different directions

Gasgoo.com: What's your viewpoint on the advantages and the disadvantages of the Chinese and Indian auto market?

Robert Ward: They are obviously quite different in many ways. China is in a different development stage from India. In India, the downward pressure of price, not just brought on the cars, but for pretty many end products they have to face. The Indian markets has a much smaller pool of people able to buy cars as well, and Chinese see more advantages in the sense of development as well, it's quite difficult to compare China with India in the sense, because both have enormous potential. 

Gasgoo.com: Do you think small car market has a bright future in China and India?

Graeme Maxton: Low cost cars in China and India has substantial opportunity right now because they have. many of these products. But the trouble is that in India they don't have enough roads.

Gasgoo.com: You mean the infrastructure?

Graeme Maxton: Yes. The infrastructure of roads is very poor. But the other thing is the absolute size the China car market is eight times the size of India, so China has a much bigger chance of achieving an international economy of scale. So the markets are going to different directions right now. The Indian market is going to work on very low cost locally-made cars, which will be exported to less development market. The China auto industry is moving towards a much more international model, where in four or five years, may be able to export to Europe and U.S., and become a much more important global manufacturer. 
Gasgoo.com: More mature?

Graeme Maxton: Yes.

Gasgoo.com: In the long term, what kind of factors will impact China's auto industry? And how effective the factors will be?

Graeme Maxton: The biggest issue is on oil and congestion. So many cars are sold annually. It's not possible for the number of cars per person in China to equal the number of cars per person in Europe or in the U.S. There are just simply too many people. And it's obviously not all in the world. There will come to the crunch that China must find different ways of fueling vehicles, or find a different way of moving people, allowing people to communicate that doesn't involve cars. That is much longer time, but it gives China a huge incentive to develop hybrids or fuel cells or new technologies, and the incentive is bigger here than any other market in the world. 

Robert Ward: If you look at a broader prospect, the oil prices are going forward, there is no way that the oil price is going to come down in future.
 
Low Labor Cost not China's advantage

Gasgoo.com: Apart from the rising oil prices, what about the low labor cost？

Graeme Maxton & Robert Ward: The car manufacturing is not about labor cost, the most efficient car plants in the world today are in Japan, where labor cost are much higher than in China. It's a misunderstanding for many people that the auto industry moves because of labor cost, the auto industry is nothing to do with the labor cost, it's all capital intensive. I don't think labor is going to have a big effect here, except perhaps in a very negative way, it is becoming very difficult to find good quality staff at senior levels, find good financing people, find good marketing people, and find good engineers… The demand for these people is going up much faster than the suppliers, so that would be a constraining issue.
 
Gasgoo.com: You don't think low labor cost is an advantage?

Graeme Maxton: No, the labor content in a car is about 2000 dollars or 20,000 dollars a car, it's very low. The most efficient plants in the world are in Japan.

Robert Ward: And still some companies are actually studying production in Japan.

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