Tyler Grove

Introduction to Third World Politics.

April 26th 2005

The Chinese Car Industry. The market of the future?

The newly emerged Chinese car industry is the new wild car of the automotive industry.

Some critics compare the emerging auto industry in china to one of the last untapped

markets for automobile sales. But unlike other countries, china has a lot of government

control on the auto industry. The Chinese Auto industry will be the market of the next ten

years and is worth effort by companies such as General Motors to tap into the market to

make up for failing profits worldwide.

The Chinese Car industry has two angles. The ability to domestically produce and

sell vehicles and the ability to put vehicles on the worldwide marketplace to undercut the

completion. This is the oddest part of the industry. Instead of focusing on selling vehicles

in their own country they try to jump into the word market. This is while the world

automakers are attempting to Jump into China, which they deem to be the strongest

market in demand for cars.

Domestically

Volkswagen is Europe's largest car company and “now sells more cars in China

than it does in its home market of Germany.”1 General Motors estimates that 20% (74

million) of the population can afford a car, this is a massive market.2 Chinese economic

data seems to vary widely. For example, per capita GDP for Beijing varies from $2,300 to
1
http://forbes.com/2003/12/15/cx_dl_1215feat.html
2
ibid

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$6,300 depending on the source. Central government statistics are usually the more

conservative. 3

The current and mid-term forecast for auto markets in developed countries is

sluggish to say the least, as these markets have matured. The majority of cars that they

sell in China are previous generation vehicles from around the world. The Volkswagen

Jetta is the number 1 selling car in china with sales of almost 100,000 for the first ten

months of 2003, it is actually a previous generation of the Jetta sold here and it is custom

for the Chinese market. It is built domestically in China. Its prices start from $12,050

USD to $15,050.

China has made a great leap in road construction with 1.4 million kilometer of

roads and 16,000 kilometers of highways. China now has the third largest amount of

paved road in the world. However, while a Shenyang-Beijing-Shanghai highway is in

place and functioning China still does have a national highway grid, which estimated to

be only 50% completed. China, a country of relatively similar geographic size as the

U.S., has a road system only at pre-WWII U.S. levels. (Amount of road per capita is still

1/9 of Japan levels and 1/24 the U.S.) And, while road construction has certainly

improved roads are still shared with 200 million bicycles, 30 million motorcycles, 15

million agricultural vehicles, 13 million tractors and 10 million horse drawn carts. Central

government statistics are usually the more conservative. The potential for the Chinese

car market improves considerably from 2010 (or possibly 2008 with the Beijing

Olympics) in terms of road infrastructure, capacity utilization efficiency and income

levels of consumers.

3
http://www.marubeni.co.jp/research/eindex/0210/body.html

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 In China there are over100 motor vehicle manufacturers making over 100 models,

so there has been a lot of redundancy and low quality in the market. The government

succeeded in recent years in consolidating 90% of production into roughly 13 makers and

44 brands. Since 1990, motor vehicle sales in China have quintupled, with sales of

passenger cars having grown more than ten times.4 In 2004 Sales of Vehicles in China

rose 15% after doubling the year before.5

One of the most beneficial aspects for Chinese Car companies is the laws

effecting manufacturing companies. Laws require foreign companies can only own up to

50% of a Chinese company. This requires cooperation and Chinese involvement which

exponentially helps Chinese industrial development.

Worldwide

In the last ten years the North American and European markets have seen an

onslaught of Low price cars from South Korea and other Asian nations. Such companies

as Kia, Hyundai and Daewoo have become household names of Low priced cars.

Between 1999 and 2001 they have doubled sales in the United States up to 618,000

vehicles sold.6

One major factor in China is the dramatically low wages” an average of 95 cents

an hour in the auto sector, compared with around $26 in the U.S. and $36 in Western

Germany, according to the Center for Automotive Research in Ann Arbor, Mich.”7

One large problem that companies are facing is the negative stereotype associated with

Korean and Chinese Built cars. While most Japanese makers have a very positive image

on build quality, this is not the case for other Asian car companies. Consumers are not
4
http://www.marubeni.co.jp/research/eindex/0210/body.html
5
http://news.bbc.co.uk/1/hi/business/4459225.stm
6
http://www.forbes.com/2003/05/06/cz_jf_0506flint.html
7
http://www.financegates.com/news/business_news/2005-04-04/chiaut04.html

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stupid, they realize that if something is cheap, especially such a big purchase as a car that

something was cut in the production of the vehicle.

One way Korean car companies have combated a bad image is a 60,000 mile/5

year warranty, which is one of the best in the business. For Hyundai, since 1998, they’ve

taken 62 percent of the defects out of their vehicles8 In J.D. Power initial quality survey

shows Hyundai tied with Honda Motor Co. for second place behind Toyota.

“According to a J.D. Power & Associates survey, a Westlake Village, California-

based research firm that specializes in the Asian market, the quality of compact cars built

in China was four times worse than those built in the United States.”9 But they are

constantly working on quality and the latest survey, that came out in 2005 “New-vehicle

quality in China shows significant improvements, driven by the continuous introduction

of new, high-quality models to the market, quality improvement initiatives of automobile

manufacturers, and a declining share of low-priced vehicles, from 2003”10

Recently American dealers are working to bring Chinese cars to America to sell,

their belief is they would undercut the competition and provide similar looks, reliability

and quality. But this has yet to pan out.

The other big issue with Chinese Cars is the fact that many are nearly copies of

their Japanese counterparts. One good example of this trend of nearly copying vehicles is

the Laibo SR-V which is nearly a blatant copy of the Honda CR-V the grille uses an Audi

Symbol, but instead of 4 rings it uses 2. Both Honda and Audi have gone after

Shuanghuan Motors, the maker of the SUV in Chinese Court but nothing has occurred.

Many analysts think this is because of protection by the Chinese Government. The

8
http://www.detnews.com/2004/insiders/0406/14/b01-149202.htm
9
http://www.chinadaily.com.cn/english/doc/2004-06/29/content_343812.htm
10
http://www.jdpower.com/news/releases/pressrelease.asp?ID=2005036

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Chinese manufactures are working on original designs but these initial cars are going to

hinder original thinking at the companies.11 Chinese tastes are vastly different than

Americans, only 2% of vehicles are SUV’s compared to the 40% of American purchases.

The biggest change in the last decade has been China's entry into the World Trade

Organization in 2001. This drastically changed how the industry would due business. The

entry forced Chinese industry to sell dated cars. Thus Chinese consumers have increasing

amounts of discretionary income that now permit them demand the latest and greatest

products. Entry into the WTO affected laws; China had to lift restrictions on imported

cars, making its own inferior, older cars no longer salable. This was in stark contrast of

the earlier auto industry by prohibiting or outrageously taxing products. The WTO has

changed this strategy, and China now invites foreigners to import their cars--provided

that they also make cars on Chinese soil. 12

China accounted for 40% of the growth in oil demand over the last four years,

says the US Energy Information Administration (EIA). Due to its insatiable thirst,

Chinese oil firms are trying to squeeze more out of their wells using smarter technology

and looking globally for opportunities to purchase oil. The demand for Oil in China is

staggering; in 2005 they will use 7.2 million barrels a day. This is up from the 6.6 million

barrels a day used in 2004. Unlike the US where the majority of oil is used for

transportation, 43% of oil used by industry while 34% used by cars. In 2003, China raced

past Japan to become the world's second biggest consumer of petroleum products after

the US.13 Can the world handle 200 million more motor vehicles by 2025 in terms of

energy and environmental impacts? Current conditions and factors say no.14
11
http://paultan.org/archives/2004/12/05/china-pirates/
12
http://forbes.com/2003/12/15/cx_dl_1215feat.html
13
http://news.bbc.co.uk/1/hi/business/4191683.stm
14
http://www.marubeni.co.jp/research/eindex/0210/body.html

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