Japan is relieved. An accounting error made by the Chinese Association of Automotive Manufacturers (CAAM) was discovered in mid-January. It turns out that the real domestic car sales volume in China in 2005 was only 5.72 million units rather than 5.92 million units.
Why does the (relatively) small matter of 200,000 cars matter so much? Because the Japanese output figure was 5.85 million units and – for a short tense period – there were fears it had lost its long-cherished second place in terms of the world's biggest sales volume behind the US.
Even so, the relief looks to be premature. Japan may have been holding on to second place since 1965, but seems certain to relinquish it to China over the next 12 months. Chinese domestic sales are projected to reach 6.4 million units this year, exceeding the Japanese estimate by almost half a million.
China's car production surged ahead of the UK, France and Italy in 2002, and 12 months later it had exceeded that of Germany. Assuming China overtakes Japan in 2006 and Toyota overtakes GM (which has reigned as the top auto company in the world for 70 years), the synchronism will symbolise the structural change of the world automobile industry.
More importantly perhaps, the balance of Chinese car imports and exports has also shifted. Imported car volume in 2005 was about 160,000, versus exported units of 173,000 – the first time that exports have exceeded imports.
Export, however, is centred on trucks and commercial vehicles; currently, passenger cars account for less than 20% of exports. These tend to be exported to developing countries in the Middle East, North Africa, South East Asia, South America and Russia. Imported cars are mainly luxury passenger cars and sports-utility vehicles (SUVs) from Japan, Germany and the US, which account for 90% of imports.
According to statistics from China's Ministry of Commerce, in October 2005 exported cars were predominantly low-priced with an average price of $8,336 (€6,982); in contrast, that of imported cars was $29,180 – more than three times the cost.
The table (view attached PDF) illustrates the competitive nature of the Chinese car market and each company's core models. While GM, VW, Hyundai, Honda, Nissan and Toyota may top the list, year-on-year sales and market share show that domestic manufacturers, such as Geely, Chery, Chang'an, Harbin Aircraft and Great Wall, have grown rapidly. Moreover, the home-grown carmakers are listed as major export players.
Of the foreign car makers, only Honda has much of an export record and that's because 3,500 JAZZ cars were transported from its Guangzhou plant for exclusive export to Germany.
Geely has been making waves in Europe and the US since last autumn. The company showed its branded small cars at the International Motor Show in Frankfurt and the North American International Auto Show in Detroit for the first time. In addition, Li Shufu, chairman of Geely, announced an export plan to the US from 2008, and exhibited the CK, a small sedan (Chinese name: Free Battleship) that will be launched at Detroit.
Shufu also announced that he aims to jump-start sales of this model, which will be priced below $10,000, by offering mega-deals in the US. Free Battleship was launched into the Chinese market in April 2005 and retails at about $7,500-$8,700. The model will be one of the cheapest cars on the market.
Shufu, now 43, was born in Zhejiang Province, often referred to as the 'cradle of capitalism' in China. He launched his first refrigerator company in 1986, entering into the business of interior materials in 1989, motorcycles in 1994 and passenger cars in 1997. He came to attention with the start-up of the first private car maker in China. Currently, Geely has four car assembly plants in Zhejiang Province and Shanghai, with a production capacity of 250,000 units per year.
The company ethos is to "create good cars that the average Chinese person can afford". It seems to be working – the market price of a flagship model Haoqing (1,300cc) is about $3,600 and is one of the cheapest cars in China (see table, in PDF format).
It is not only Geely with designs on the US market. In January 2005, Chery announced plans for selling five-passenger models from 2007 through the US imported-car dealer, Visionary Vehicles in New York. Malcolm Bricklin, CEO of Visionary Vehicles, often referred to as a 'maverick' in the industry, has experience of this kind of challenge. He handled import and sales for the low-priced Yugoslavia-made Yugo from the latter half of the 1980s to the early 1990s, and also imported Subaru cars from Japan in 1968.
Chery was established in 1997, under the umbrella of the Anhui Province government, and began by purchasing Ford's used-engine lines in the UK and Volkswagen's Spanish subsidiary SEAT's used-car assembly lines. Yin Tongyao, chairman and president, worked with Volkswagen AG in its joint venture with First Automotive Works Corp in Changchun. Tongyao recruited Dr Xu Min – an experienced development engineer at GM and Ford – as chief of R&D.
Currently, Chery has a production capacity of 350,000 units per year. The doubling of sales in 2005 has promoted the company to seventh-biggest passenger-car maker in the Chinese market – some achievement considering it's a market where the world automotive giants compete against each other (see table, in PDF format).
Chery exports both cars and complete knocked-down kits (CKDs – car components exported as a kit in order to avoid high import taxes and/or to receive tax preferences for providing local employment). For example, Chery announced plans in 2005 to produce a new SUV, the Tiggo and the A21 model locally with the knocked-down method in both Russia and Ukraine.
However, its journey hasn't always been smooth. In December 2004, GM Daewoo filed an intellectual property lawsuit against Chery in Shanghai, claiming its best-selling QQ model was an imitation of GM Daewoo's Matiz (Chinese name: Chevrolet Spark). Moreover, GM also claimed in May 2005 that the trademark 'Chery' resembles the GM Chevrolet's nickname Chevy. But in November 2005, GM and Chery announced that they had agreed a settlement.
This was not the first such incident. In 2003, Toyota filed a lawsuit against Geely over the validity of its logo, but a court in Beijing rejected Toyota's case.
But why are Chinese car makers trying to advance overseas when the domestic market has been skyrocketing and foreign automotive giants are making huge investments in it? The answer lies in the domestic competition structure within China. At present, there are more than 120 passenger-car models produced locally in China and about 30 car manufacturers.
In terms of pricing, the segment spanning Yn100,000 (US$12,000) and below is the world of local car-makers. The range from Yn100,000-Yn200,000 is the domain of Japanese and Korean car manufacturers, with some European manufacturers making inroads. The Yn200,000-Yn300,000 segment becomes the province of Japanese cars, and the Yn400,000 and over segment is the world of premium cars, where Germany enjoy the lion's share of the market.
The bottom end of the market is a battleground. Manufacturers and more than 50 models compete fiercely with each other, resulting in worsening profitability. In addition, an excess production capacity of two million units only exacerbates such a situation. The congestion of the domestic market and the diminishing profitability has forced local car manufacturers to explore the overseas market in order to survive.
Most exported Chinese cars come from this end of the market. The secret of the average price of $8,300 per exported car is embedded in this domestic structure – the over-competition and excess production capacity are seeking an outlet in the overseas market. In the past, Japanese companies, for example, ventured overseas only after strengthening the foundations of their domestic market, but Chinese companies seem to like expanding overseas while still establishing their domestic base.
Car manufacturers have drawn on the successful experiences of consumer-electronics manufacturers, and the entry into the World Trade Organisation in 2001 also prepared the conditions that helped develop global markets for Chinese companies.
Political factors also play a part. In recent years, the Chinese government has encouraged companies to advance overseas as another step in foreign capital inducement – a policy called "Go Global" that's been running since the 1980s. According to statistics from China's Ministry of Commerce, at the end of 2003, direct overseas investment amounted to $33.2 billion and had increased to $50 billion by the end of 2005.
The Development Policy for the Automobile Industry, issued by the Chinese government in 2004, also set a goal for upgrading the industry and improving the full-scale international competitiveness.
However, Chinese public opinion has called for the automobile industry's 'Latin Americanisation', which means seeking the perfect open market for the introduction of foreign technology, a so-called "barter-exchange strategy of market and technology", as Brazil and Mexico do.
There is also support for Japanese and Korean industrial policies, which focus on fostering a wholly domestic capital industry. The current situation, however, does not allow for adhering to a way that shuts out foreign capital, because the process of globalisation has already started.
As a result, China has been searching for a third way where foreign capital is introduced on a restricted basis (companies learn technologies through joint ventures, for example), and wholly domestic capital companies are fostered while establishing their own brands. Such a catching-up strategy has worked well in the consumer-electronics and IT industries, but it will take time before we know whether the automobile industry can follow in their tracks.
But we need to keep watching China – it keeps defying our expectations.
Chunli Lee is professor of economics at Aichi University, Japan