Rising prices nibble thin profits

SHANGHAI -- Automakers in China are complaining about rising raw material prices.

The price of steel, nonferrous metals, plastics, precious metals and many other items are going up. For instance, the price of sheet steel has increased 15 percent on average this year, which will push the production cost of a car up by 2 to 5 percent, according to industry observers. 

A purchasing director of a domestic car maker even asked if Automotive News China would appeal to car buyers to allow his company to raise prices.

But there should be a positive aspect to the pain of rising raw-material prices. The increases should prod domestic automakers to improve their operations so they can produce more expensive, higher-profit cars.

Hardest hit by the present round of raw material price rises are domestic automakers, most of which are still living on the thin margins of their low-priced products. Yin Minshan, president of Chongqing Lifan Industry Corp., says a Lifan 520 sedan sold for about 60,000 yuan ($8,450) can only generate about 1,000 yuan ($140) in profit.

The only solution for domestic automakers is to move up the value chain by making bigger and better quality cars.

Some domestic automakers are acting fast to adjust their product strategies. Chery Automobile has formed a joint venture with Israeli investment company Quantum LLC to make "premier" cars.

Another major domestic automaker, Geely Automobile Holding Group, says it has embarked on "a strategic transition," which means it is striving to produce better, more expensive vehicles.

It is still too early to evaluate the progress Chery and Geely are making toward the higher end of the market. But they are moving in the right direction.