GloboCars: THE NEXT CENTURY : The Last Frontier for Sales : Auto makers the world over eye China lustfully. Yet inefficiency and trade barriers have helped keep its potential largely unrealized.
When General Motors executives in Detroit committed $30 million to invest in the Jinbei truck factory in Shenyang, capital of China’s northeastern Liaoning province, they expected to make a profit in 1993, the first full year of operation.
Things went fine until last summer, when China’s economy czar, Vice Premier Zhu Rongji, alarmed by the country’s overheated condition, ordered a clampdown on credit for state enterprises. The effect on the Chinese automobile industry, which depends almost entirely on state businesses for its orders, was the equivalent of changing the combination on the company safe.
Instead of its selling the 25,000 Chinese-designed, GM-improved “Gold Cup” pickup trucks it anticipated, GM-Jinbei’s orders fell to 15,000. In addition, said GM regional manager Ron Gilchrist, the company managed to sell only 800 of the S-10 model pickups it had brought over in assembly kits to use to train the Shenyang work force and test the market. The two-door S-10, priced at a hefty $20,000 in a country where the annual per capita income is only $367, turned out to be the wrong product for China. Truck buyers here prefer more passenger space to accommodate large work crews.
As a result, GM’s first major plunge into the Chinese market ended up in trouble and deeply in the red. If business does not improve this year, said Gilchrist, the company may be forced to cut some of Jinbei’s 4,000 employees. Layoffs are risky business in China, where workers are accustomed to guaranteed employment under the “iron rice bowl” social welfare net built up under 40 years of Communism.
In the comfortable, distant boardrooms of the world’s great auto makers--in Detroit, Tokyo and Munich, Germany--the huge China market looms tantalizingly on the horizon like a shiny red apple, ready to be plucked.
China is the world’s last great automotive frontier. Nowhere else are there so many people and so few cars. Even India, with nowhere near China’s economic might, has three times as many private cars.
Inevitably, when foreign auto moguls discuss China, the talk turns to the country’s fantastic numbers: 1.2 billion people, 20% of the world’s population; a rapidly growing middle class; fortunes being made on every street corner from steamy Hainan Island in the south to the frigid reaches of Manchuria in the north.
If only one Chinese person out of 120 bought an automobile, that would be 10 million cars--a number rivaling the markets of North America and Western Europe.
Chrysler Corp. President Robert Lutz, whose own company has had a rocky experience with its Cherokee Jeep factory in Beijing, recently rated China the No. 1 future growth market in the world, followed by the former East Bloc countries.
Yet here on the ground, in the sobering reality of a China that has not quite weaned itself from its state-dominated economy, things are not nearly so bright and promising--a least in the short term.
At last count, there were more than 125 different motor vehicle manufacturers in China, more than in any other country.
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They range in size from the big Volkswagen Santana plant in Shanghai that produces almost half of the country’s passenger cars to tiny assembly lines on remote military bases where vehicles are assembled from components of other car makes, Chinese and foreign.
“Some of these plants are like cottage industries with just a roof to keep out the rain,” said Toshiaki Yasuda, general manager of Nissan’s modest China operations. Of all the world’s auto makers, the Japanese have been the most cautious about diving into the China market.
“The smaller companies simply buy the components and put on their own logo,” Yasuda continued. “Sometimes the only original thing on the vehicle is the logo. I’ve seen some Chinese micro-buses on the streets that look very similar to our own products.”
One recent afternoon, the sales lot of the Beijing Agricultural Exhibition Hall featured a sampling of China’s output, dozens of barely distinguishable cars and trucks bearing colorful Chinese names like Bright Sun, East Wind, Liberation, Yellow River, Jade of the Sea, Three Peaks and Golden Dragon.
The Chinese industry is also the world’s least efficient. Nowhere else does it take more people and more tea breaks to produce a single car. Japan, the world’s most productive auto maker, averages 17 vehicles per employee per year; U.S. labor productivity is 13 vehicles per employee per year.
A recent study by Lo Dic, a University of Leeds economist, reported that China produces only about 0.24 vehicle per employee per year. Put another way, the average annual output of four auto workers in Japan is 68 cars; in China, the average annual output of four workers is one car.
Such amazing inefficiency exists because China is also one of the most protected automobile industries in the world. Because of hard-currency restrictions, the only entities permitted to buy imported cars are foreign companies and Chinese-foreign joint-venture companies based in China. During recent years, the Chinese government has limited even these imports to 100,000 cars per year.
Taking into account the estimated 100,000 foreign cars that are smuggled into China each year, imports account for about 13% of the relatively small Chinese market. In addition, China levies duties of 150% and more on imported cars. That allows Chinese auto makers, big and small, to offer their products at highly inflated prices.
For example, one of the most popular and cheapest passenger cars on the market, the compact Xia Li (Charade) manufactured by Tianjin Minibus Works under license from the Japanese company Daihatsu, retails for more than $11,000. The Chinese-made Audi 100 sedans, favorite transport for China’s high-ranking Communist elite, sell for a staggering $35,000 a pop.
Despite a few flashy exceptions in the major cities, the phenomenon of the family car has yet to arrive here. Last year, for example, only 230,000 sedans were produced in China. Of these, only 3% to 5% were purchased by private individuals.
That means the vehicle industry is still largely dependent for its survival on orders from government units. These buyers range from the mighty People’s Liberation Army to tiny regional and municipal corporations. Late last year, in fact, the central Ministry of Education reported that schoolteachers in many areas were not paid because local authorities had used money dedicated for salaries to buy cars instead.
Under such a state-dependent system, sales can be turned off by the government like water from the tap.
“The automobile industry can’t look at China the way Coke or Pepsi does,” said Tony Cevrone, a Chrysler spokesman in Detroit. “The main customers continue to be fleet customers. We have been in China virtually 10 years now, and we still feel we are in the infancy of the market.”
Like General Motors with its new Shenyang joint venture, Chrysler also suffered during the credit crunch last summer. In 1992, the Beijing plant produced and sold a record 20,000 Jeep Cherokees, producing a handsome profit. The company was on the same track in 1993 when the central government, concerned about inflation, restricted credit available to state work units. As a result, orders at Chrysler’s Beijing Jeep plant fell to about 12,000, a 40% drop in one year.
“The main problem with the Chinese automobile market,” said a Western diplomat, “is that it is tremendously overpopulated with companies. The companies are all too small, and their costs too high. The market, such as it is, exists at the expense of Chinese taxpayers.”
Despite the many handicaps and frustrations associated with working in China, few foreign auto makers have resisted entering the market.
Except for Chrysler, which inherited its China business when it bought American Motors in 1987, French and German companies have been the main pioneers.
What keeps the companies interested is not the current market but rather the dream that China will someday explode as a market for family-owned automobiles. Fueling this dream is the fact that at least 10 cities in China already have annual per capita incomes of more than $1,000, three times the national average.
So far, the most successful foreign venture in China is Shanghai Volkswagen.
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One of the peculiarities of the Chinese auto business is that there are virtually no showrooms or sales lots where customers can fondle the upholstery or test-drive the new vehicles. To buy a car in China, the customer is obliged to go to the factory to make the order. With little or no marketing, however, Shanghai Volkswagen last year produced and sold more than 100,000 four-door Santana sedans from its factory offices.
The Santana is a basic six-passenger model not sold in Europe for years. Nonetheless, Volkswagen was able to sell the cars for more than $20,000 apiece, reaping a pretax profit of $115 million for the German company and its Chinese partners.
The key to Volkswagen’s success, said Peter Loew, the company’s deputy manager, was getting into the market earlier, locating in economically booming Shanghai and pairing up with a powerful joint-venture partner, the city of Shanghai itself.
Motor-vehicle production
1991: 708,820
Source: American Automobile Manufacturers Assn.
