China Auto Industry Report

China being the world’s most populous country has displayed extraordinary economic achievements in the last 20 years and thus, has attracted a lot of attention from the rest of the world due to its ever increasing potential. China grew over the decade around 10 percent a year. It has industrialized at roughly three times the pace that the West did. What took hundred years in Europe has taken one generation in China. It is true that China is a dictatorship, but so were many Western countries when they industrialized, and they had much mass violence, something which China has managed to avoid.

China’s has gone from a centrally planned system that was primarily closed off to international trade to a more market-oriented economy that has a rapidly growing private sector and is a major player in the global economy. China started slowly by phasing out of the dominance of agriculture, and expanded to include fiscal decentralization, increased autonomy for state enterprises, the development of stock markets, the rapid growth of the non-state sector, and the opening to foreign trade and investment. Today, China is the second largest economy in the world and as a result is vital for the impact it has on the global scale.

China’s labor force is estimated to be around 812 million people with GDP per capita estimated to be $6,600 in 2009. In recent years, China has re-invigorated its support for leading state-owned enterprises in sectors it considers important and is pushing them to be able to compete on a global scale. The restructuring of the economy and capitalizing on gains in efficiency has seen China emerge on the world market as a truly dominant force and with a current account balance of close to $300 billion, it is no surprise. China formally joined the WTO in December 2001.

China agreed to lower tariffs and to abolish trade barriers etc in the market. Chinese and foreign businessmen, for example, gained the right to import and export on their own, and to sell their products without going through a government middleman. The agreement also opens up new opportunities for U. S. providers of services like banking, insurance, and telecommunications. China is now one of the most important markets for U. S. exports: in 2007, U. S. exports to China totaled $65. 2 billion, more than triple the $19 billion when China joined the WTO in 2001.

U. S. agricultural exports have increased dramatically. Over the same period (2001-2007), U. S. imports from China rose from $102 billion to $321. 5 billion highlighting the benefits of China’s commitment to the cause of free trade. Export growth continues to be a major driver of China’s rapid economic growth. To increase exports, China has pursued policies such as fostering the rapid development of foreign-invested factories, which assemble imported components into consumer goods for export, and liberalizing trading rights.

In its eleventh Five-Year Program, adopted in 2005, China placed greater emphasis on developing a consumer demand-driven economy to sustain economic growth and address global imbalances. Foreign-invested enterprises produce about half of China’s exports, and China continues to attract large investment inflows. Foreign exchange and gold reserves were $1. 493 trillion at the end of 2007, and have now surpassed those of Japan, making China’s foreign exchange reserves the largest in the world. Since the country’s open market reforms, the growth of new businesses has outpaced the government’s ability to regulate them.

This has created a situation where businesses, faced with mounting competition and poor oversight, will be willing to take drastic measures to increase profit margins, thus sacrificing on quality assurance and consumer safety. This problem came to the forefront with the United States placing a number of restrictions on problematic Chinese exports. The Chinese Government recognizes the severity of the problem, recently admitting that up to 20% of the country’s products are of substandard quality, and is currently undertaking efforts in coordination with the United States and others to better regulate their goods.

China’s economy has held up remarkably well during the global recession. The GDP grew 8. 7 percent in 2009, led by a massive investment-led stimulus that showed up partly in an increase in the official fiscal deficit and, especially, in an increase of net new bank lending of almost 30 percent of GDP in 2009. Real estate investment gained prominence more recently. Exports declined an estimated 10. 6 percent in 2009 as a whole, even as China gained global market share. With imports holding up much better than exports, net external trade had a major declining affect on growth in 2009, subtracting 3.

9 percentage point from GDP growth, and the external current account surplus declined from 9. 4 percent of GDP in 2008 to 5. 8 percent of GDP in 2009. Building on this, GDP growth is likely to remain strong this year with the economy projected to grow 9. 5%. Auto Industry: By 2006 China had become the world’s third largest automotive vehicle manufacturer (after US and Japan) and the second largest consumer (currently the largest). In 1975 only 139,800 automobiles were produced annually, but by 1985 production had reached 443,377, then jumped to nearly 1. 1 million by 1992 and increased fairly evenly each year up until 2001, when it reached 2.

3 million. In 2002 production rose to nearly 3. 25 million and then jumped to 4. 44 million in 2003, 5. 07 million in 2004, 5. 71 million in 2005, 7. 28 million in 2006 and close to 10. 3 million in 2010. This continuously increasing trend hints that it doesn’t seem to be slowing down. China has long been expected to overtake the US since its population of 1. 3 billion people is more than four times that of the United States. But the increase in sales happened much faster than anyone expected because of China’s tax cuts, its stimulus program and a depressed American market.

After a sharp slowdown in auto sales late last year, the Chinese government cut taxes on small cars and spent $730 million on subsidies to encourage sales of SUVs, pickups and minivans. A big stimulus program also boosted truck sales by pumping money into construction. As the Chinese government does not approve wholly owned subsidiaries for foreign carmakers to operate in the country foreign firms have to set up joint ventures or licensing deals with domestic players. By the mid-1990s, most major global auto firms had managed to enter the country through these means.

Among the European companies, Volkswagen (VW), one of the first entrants has dominated the passenger car market. In addition, Fiat had an important presence in the bus market. Japanese and Korean automakers are relatively late entrants. In 2003, Toyota finally committed $1. 3 billion to a 50 % joint venture. Guangzhou Honda, Honda’s joint venture, almost quadrupled its capacity in China by 2004. Meanwhile, Korean auto players are also keen to participate in the China race with Hyundai and Kia having commenced joint venture production recently.

American auto companies have also made significant inroads into China. General Motors (GM) has an important joint venture in Shanghai, whose cumulative investment by 2006 was estimated to be $5 billion. Although Ford does not have a high-profile, large scale venture as GM, Ford nevertheless established crucial strategic linkages with several of China’s second-tier automakers. Daimler Chrysler’s Beijing Jeep venture, established since the early 1980s, has continued to maintain its presence.

Despite China’s low per capita income overall, there is a large, wealthy entrepreneurial class with significant purchasing power thanks to two decades of economic development. The average price of passenger cars sold in China in 2004 is about $20,000, whereas the average car price in countries such as Brazil, India, and Indonesia is $6-8,000. China, for example, is BMW’s biggest market for the most expensive, imported 7-Series sedan, outstripping even the United States – even though Chinese buyers pay double what Americans pay and often in cash.

However, vehicle imports will not exceed 8% of the market in the foreseeable future. China’s automobile industry, which has almost exclusively focused on the domestic market, still has much room for future development and will maintain an annual growth rate of 20% for the next few years. China’s booming auto market has provided opportunities for its auto parts sector to flourish. By the end of 2007, there had been 7,579 makers of auto parts and fittings, 72. 3% of the entire auto industry in terms of the number of manufacturers.

As for ownership, most of them are private companies though, it is clear that the foreign owned joint ventures are the ones that make a higher profit as a result of better development and higher profit margins. In the competitive environment, foreign-owned auto parts makers have entered into China one after another since China’s accession to the World Trade Organization after which China opened its auto parts sector completely. By the end of June 2008, automakers owned or partially owned by foreigners had accounted for more than 60% of the market in China.

For example, foreigners accounted for as high as 90% of auto electronics and parts of engines. Multinational companies like Bosch, Denso, Delphi and Hyundai are the major players in China’s auto parts market. Foreign auto parts makers have brought formidable challenges to China’s homegrown ones. So now Beijing is developing policies to encourage home auto parts makers to be more competitive through mergers and acquisitions or by going public. As a result, a boom in acquisitions and merger is very likely. .Recommendation:

In light of the information given above, I would recommend that my client go ahead with FDI in China’s auto-parts market and before anything do significant research and understand the culture. It is evidently clear that as a result of China’s economic success and explosive population the demand for automobiles is going to continue to rise in this manner. Though it will be hard to break through the competitive barrier of the companies that have been established there for years, the potential to exploit the market demand situations is clearly prevalent.

The government of China clearly wants more foreign joint ventures as it aims to improve the quality of its products and learn new technical abilities from the major players on the world market. By establishing a joint venture in China and taking advantage of the labor benefits, my client will be able to successfully supply auto parts to the current crop of settled car makers in China as well as the indigenous Chinese brands that the government is supporting.

Apart from exploiting this continuous local demand for cars and parts, my client will also have the option of tapping into other markets where parts are more expensive as producing in China will definitely give him an advantage: for example, my client could possibly set up a contract of exporting parts from China to German or American car manufacturers. The Chinese government as a result of severe environmental issues is urgently looking into the development of alternate hybrid cars that run on electricity or alternative fuels.

To exploit this I would advise my client to also research into the manufacture of parts for such hybrid cars and new technologies as to tap into the future of this industry, thus giving him a head-start on the already settled competition. Lastly, when talking about the demand and supply situation, China’s auto parts sector is able to satisfy 60% of the country’s market demand in terms of variety of products. Here the supplies of labor-intensive and material-intensive products, such as windscreens, tires, fuel tanks, air-cleaners and bearings, are far beyond the market demand, so some of those products are for export.

On the other hand the supplies of technology-intensive parts, including engines, automatic transmissions, electronic fuel injection systems, airbags, and ABS, are far behind market demand at home, and so the gap is filled mainly with imports. Thus I would recommend that my client focus on such technologies intensive parts as to ensure that he has at least some level of guaranteed demand when entering the market, something the government may support as it tries to reduce such imports.