Keller

Vehicle demand is going to grow by at least 20 percent a year for the foreseeable future making China the world’s third largest market by 2010.

In 1997, General Motors outbid its rivals to win Chinese government approval for a joint venture to build a large car in Shanghai. Although the market for private automobiles was nonexistent at the time, GM management was correct in believing that economic expansion would eventually create a middle class having the ability to afford a car.

After investing more than $1.5 billion in its Shanghai joint venture to assemble a version of the Buick Regal, the operation is now at full capacity and profitable as Chinese vehicle demand soared to approximately one million units in 2002. GM’s forecast that Chinese vehicle demand would take off was correct, but GM was wrong in thinking that the government would limit participation to a few foreign auto companies.

Vehicle demand is going to grow by at least 20 percent a year for the foreseeable future, making China the world’s third largest market by 2010. Behind the soaring demand is the investment in roadway infrastructure in anticipation of the Olympics, as well as recognition by the government that industrial development required better roads. Although traffic in major cities is already clogged, the government is beginning to restrict bicycles from some roads in recognition of the expanding car population. Membership in the World Trade Organization resulted in lower tariffs on imports and consequently lower prices on many locally made models. Finally, economic gains in China have produced a large and growing middle class that can afford a new car. Consumer finance has had a limited role in the recent surge in sales but the expected approval of captive auto finance operations in the country will open the market to an even greater number of buyers.

Chrysler, Volkswagen and General Motors were the main players in the early stages of foreign investment. Peugeot’s joint venture in Wuhan failed, Renault had a minimal presence and the Japanese had token participation in small projects. But all that changed as demand began to climb after a change in government policy to permit private car ownership. Marginal Chinese assemblers scrambled for joint ventures with European, Korean and Japanese auto companies to try to insure their survival against the more attractive models and technology of the earlier joint ventures.

As exciting as the Chinese marketplace appears with its robust growth and current profits, foreign auto companies are still faced with the fact that they are, in fact, educating a workforce and helping to create an industrial base for China. There is simply no other product that matches a motor vehicle in creating jobs and creating an industrial infrastructure. Ten years ago, China cars were hobbled by shoddy quality, poor technology and little research and development in motor vehicles. But that is quickly changing as China emerges as a major industrial powerhouse.

Joint ventures limit foreign ownership to 50 percent or less so non-Chinese partners will not be able to forge an independent strategy within China. They will not be able to prevent the export of independently developed Chinese vehicles throughout the world, which, as Toyota has recognized, are a threat to local production everywhere else. Toyota, probably the best run auto company in the world, resisted going to China until 2000 and recently began a total cost review to determine how to match Chinese wages at one-twentieth the level of Japan.

The interesting question a few years from now may not be how large the Chinese market is, but rather how great a challenge China’s capacity is to high cost assemblers everywhere else in the world.

Maryann Keller is a veteran auto industry analyst and author of the books “Rude Awakening: The Rise, Fall and Struggle to Recover at General Motors” and “Collision: GM, Toyota and Volkswagen and the Race to Own the 21st Century.”