It is pondered over, cursed or marvelled at - China's economic and industrial success. World markets are flooded with 'Made in China' labels on toys, clothes and home goods. Whatever they produce for export, Chinese manufacturers seem to be able to do it cheaper and in huge volume. Of interest to the corporate world these days is selling to the Chinese themselves. With a burgeoning middle class and a 'richer-by-the-minute' upper class, not yet blasé about buying and with lots of material gain to catch up on, China is the bastion where consumerism could work wonders for corporate bottom lines.
Foreign firms in industries of all types have made forays into China to get a bite of the growing pie, and the automobile industry is no exception. Projected automobile sales look promising and by 2003 China had already overtaken Germany as the third largest car market behind America and Japan. By 2005, demand is set to reach 2.8 million units. However, disaster could be looming as capacity is estimated at 4.2 million units. Now where are those 1.4 million spare cars going to be parked? And how did it come to this?
In this comprehensive industry note, INSEAD Research Fellow Sarah Harper, Lily Luo, Alain Sepulchre and Steven White, INSEAD Professor of Asian Business and Comparative Management, track the life and times of China's auto industry, with particular focus on the last 5 years.
The Ford Motor company was the first to enter China in 1901, and in 1923 Mercedes Benz came to Shanghai to build trucks and buses. Then came the more complicated Communist era when Russia became China's natural business partner and, in 1950, were asked to help China plan its first independent auto factory. 2003 marked the 50th birthday of that endeavour. In 1953, First Auto Works Corporation (FAW) was born, followed in 1958 by the Shanghai Automotive Industry Corporation (SAIC) and finally, in 1967, Dongfeng Motors Corporation, completing the country's 'Big Three' state-owned, national auto champions.
From the 1970s through the '90s, the Chinese auto industry had a roller-coaster ride, with steep peaks and troughs. International car manufacturers - Chrysler and Volkswagen - entered the Chinese market in the '80s through joint ventures with the Big Three, and since then, foreign models have dominated. But personal cars were still a rarity and most production was geared to trucks, tractors and taxis. Peugeot and Citroen came in during the early 1990s (then left, then came back), to be followed in the mid '90s by a wave of multinationals, including General Motors, Honda, Nissan and Ford…
China's admission to the World Trade Organisation (WTO) in 2001 was a major milestone in the industry's development as the government had pledged to remove some of its protective barriers; for example, from an 80-100 percent import tariff in the '90's, down to just 25% by 2006. Before WTO, only 30,000 imported vehicles from foreign carmakers were allowed into China. This quota has since been increased by 15 percent a year, and will be totally phased out in 2006.
China undertook a radical industry rationalisation and, by 2003, 90 percent of production was concentrated in 13 major manufacturers. In 2004 policymakers drove further consolidation by restricting investment opportunities and merging existing manufacturers into large, and hopefully more competitive, groups.
The note details the present and looming issues facing both Chinese and foreign manufacturers (with interesting comments from industry analysts and players) as they try to successfully ride the consumer wave and get the most out of each other.
The future will tell whether the Chinese are able to realize their ambitions and whether foreign partners will have the wherewithal to stay for the ride, but China is already branching out into the world with its cars. In 2003 they signed a landmark agreement for a manufacturing plant in Iran to assemble the first Chinese-made car overseas.
Have you ever thought about buying a Chinese car?