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The one thing certain about China is that nothing ever is. For centuries, the country remained insular, literally walled off from invading hordes, going so far as to sequester its emperor in the Forbidden City. ADVERTISEMENT In contrast, today's leadership is embracing rapid and dramatic change, and the invading hordes now are auto makers and suppliers adding new product and manufacturing operations. Just last month, in a bid to catch up with rivals, Ford Motor Co. unveiled an ambitious agreement to invest more than $1 billion in China over the next few years and boost capacity from 20,000 to 150,000 vehicles per year. The same day Ford made its media splash, General Motors Corp. announced plans to begin sales of Cadillac vehicles in China in 2004, possibly followed by assembly of its luxury division's products. They're all chasing what soon could become the world's second-largest car market after the U.S. and a growing class of wealthy entrepreneurs that has a powerful appetite for luxury cars. Super-premium Bentley Motors Inc. opened its first dealership in China this year. “It has taken off very well,” says a spokesperson. “It's been very successful, especially for the long-wheelbase limousines.” But therein lies the danger. Although sales and profits in the country are rising exponentially, politics in the region can quickly turn volatile, laws are up for debate, a modern banking system still is in its infancy and international policy has been slow to take hold. Nevertheless, the world's leading auto makers and parts suppliers have reached a consensus that China is the most important place to be. The companies can be divided into two categories: those that have established operations in China — such as DaimlerChrysler AG, Volkswagen AG and GM — and those on their way. Few feel they can afford to dismiss China's vast potential. Vehicle sales are skyrocketing, with no end in sight as the private-car market blossoms. In fact, GM sold 133,000 Buicks during the first three quarters of this year, up 63% from a year earlier, and its China Group posted the widest profit margins of all the automotive businesses within GM during the last quarter. GM China's top executives said last month the company will introduce a minimum of at least one new model a year into China. The nation quickly is transitioning into a market economy, making it easier for foreign entities to conduct business. And thanks to a location central to many major markets, plus a bounty of cheap labor, China's potential as an export base seems boundless. The country's accession to the World Trade Organization in December 2001 immediately escalated activity. Another contributor, prompting major infrastructure development and pressuring the government to continue its support of the economy, is Beijing's successful bid to host the 2008 Summer Olympics. A small side benefit: DaimlerChrysler's long-standing joint venture, the Beijing Jeep Corp., will get a sought-after greenfield plant. The current communist-era facility will be enveloped by the Olympic park. A recent DC deal expanding the Beijing Jeep partnership is one of many up-and-coming ventures with Chinese partners. Among them, DC's alliance partner South Korea's Hyundai Motor Co. Ltd. has made a quick, strong entry into the market, capitalizing on the proximity to its homeland. GM, in the process of growing its successful partnership with Shanghai Automotive Industry Corp., plans to leverage the strengths of South Korean-affiliate GM Daewoo Auto and Technology Co. Nobody is left out of the recent flurry of JV activity, including BMW AG and Volvo Cars. Perhaps the most daring deal is Nissan Motor Co. Ltd.'s $1 billion investment in No.2 auto maker Dongfeng Motor Corp. Global Insight Inc.'s Ashvin Chotai, director-Asian automotive industry research, is not convinced of the payoff. “Nissan has a lot of ambitions, but it hasn't been translated into real production strategy yet,” he says. “So it's not clear how they will reach (the sales target of) 500,000 vehicles annually.” He sees Chinese automotive-juggernaut Volkswagen, with its multiple JV partners, maintaining market leadership through 2008, dropping off after 2013. That's when Toyota Motor Corp., Hyundai, and GM, all of which boast strong product plans, are expected to ascend to the industry's top three spots — in that order. China will lead Asia's sales growth both this year and next, with 1.3 million more vehicles sold in 2004 than 2002, which is closely mirrored by growth in auto production, forecasts Global Insight. Sales and production in the next 10 years will swell by more than 4.3 million and 4.5 million units, respectively. By 2013, China will account for 11% of global sales and 24% of non-Japan Asian sales.
And whereas only five years ago the majority of foreign auto ventures were losing money in China, the landscape has changed dramatically for the better. “Let me simply say China has been quite profitable for us,” says GM Chairman Rick Wagoner. “And that's good because, frankly, we need to generate a lot of cash to grow there. Thank goodness we do have the chance to generate some cash in China.” However, profitability is not a given. Lack of price controls is putting downward pressure on China's auto pricing, while proliferation of product is making for intense competition. Add to that a steady pace of new models and a more sophisticated consumer base that demands the latest technology. Heightened competition is just one market risk. The reluctance to enter China in the past has been replaced with over enthusiasm without proper preparation, says C. Peter Theut, director-international trade practice, at Detroit law firm Butzel Long. Seven years ago, Theut's work was split equally between Europe, Mexico and Japan. Today, 75% of his time is devoted to China-related issues. “Do I think the best game in town is China? Absolutely — if you do due diligence,” Theut says. “It's better you go in a little bit later with proper due diligence than go in early and find yourself chasing your tail.” While Theut says no risk in China is large enough to deter a company from establishing a base there, such opportunity also presents a minefield of unpredictable challenges. The greatest cause of consternation among multinational auto makers is the government's proposed overhaul of its automotive policy. Early drafts call for future vehicles to sport 50% locally developed intellectual property — a stipulation many car makers would find difficult to comply with considering so many vehicles built in China are based on established global platforms. The draft also aims to dramatically increase the level of capital investment necessary for a company to enter China. Chotai says the draft shows just how serious the government is about developing its local players. At the same time, the near-term need for foreign players to assist in the development of domestic car makers is great enough the government wouldn't dare pass a policy that would upset them, he says. Theut agrees. “The auto industry has every right to be concerned, but the likelihood of that pronouncement ever becoming law (in its current form) is practically nil,” he says. A larger risk is the volatility associated with China's currency, the renminbi, long pegged at 8.27 to the dollar. There is increasing international pressure to float it on the open market. Some economists estimate the currency is undervalued by as much as 30%, warning that an open-market correction could — worst-case scenario — prompt an Asia-wide economic crisis. “It's something very unsettling,” Theut says. Still, says Theut, who sees such a move happening in the next two years, ending the currency manipulation could be a positive. “It will be better for the world economy, and I think China will do it in a way that won't adversely impact its own economy,” he says. The ramp-up for compliance to WTO regulations — something Theut predicts will take a decade — perhaps has the most immediate impact on auto makers. “Taking a communist society and changing it into a market-based society, in a country of 1.5 billion people — if you can do it, congratulations,” he says. Chotai takes a bleaker view, especially in regard to foreign-ownership restrictions, which China promised to lift in its bid for WTO membership. “We don't see China changing (the restrictions),” he says — even though recent Honda Motor Co. Ltd. and Nissan deals have tweaked the basic 50/50 ownership arrangement with state-run auto makers, giving the foreign companies controlling interest. And despite the government's insistence on a consolidated auto industry, reducing the 100-plus auto makers to four or five large conglomerates, Chotai sees this as a long-term goal. “In the past, the government has failed miserably to consolidate the industry,” he says. “We see more fragmentation in the near term than consolidation.” With growing fragmentation comes a capacity glut, which industry observers say already is looming as a major problem. Forecasts call for 90% overcapacity — 2.3 million units — by 2005. China's political positioning — from accusations of human rights violations to the country's role as moderator in an escalating and potentially dangerous U.S.-North Korea showdown — also is fraught with potential for economic volatility. Other complicating factors for global auto makers in China include a banking system in which an estimated 40% of loans would be categorized as subpar by U.S. standards; a finance system that only recently authorized vehicle loans — and under strict conditions; and a mixed bag of complicated tax, environmental and labor issues. Those familiar with China say global auto makers and suppliers would be wise to keep a keen eye trained on the road ahead, as change now comes quickly in a land where the dragon no longer sleeps. Who Makes What Where — Existing, Planned Major Assembly Operations in China
© 2009 Penton Media, Inc. All rights reserved.
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