China enters the fast lane: China will export auto parts. Can Japan keep its lead?

Japan, Inc., August, 2004 by Gordon Feller

HOW will Japan be affected as China plans to shift its focus in the auto industry to the export of auto parts? Chinese government attempts to rationalize the over-productive auto sector have largely failed. Beijing is now hoping to shift the focus of the sector towards the export market, particularly for auto parts. Foreign participation in the industry is a key factor in this policy shift.

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RAPID ECONOMIC GROWTH has led to the emergence of a wealthy urban middle class, whose demand for private passenger cars has attracted major investment in the auto sector. China last year became the world's fourth-largest vehicle producer, with total output of sedans, trucks, vans and buses reaching 4.44 million.

This year, China is set to surpass Germany as the world's third-largest maker of automobiles. However, the sector is plagued by overcapacity and inefficiency, especially among smaller manufacturers.

In the first quarter this year, China produced 1.3 million automobiles (a rise of 25.6 percent from the same period in 2003), but long-term predictions for this highly volatile market vary widely. This is largely owing to variables such as overstretched infrastructure and the uncertain nature and direction of economic development and financial stability over the next five years

Already, rising inventory levels and overcapacity have led to falling prices. Meanwhile, there have been fears that government warnings of overheating in certain industrial sectors would increase confusion in the auto sector.

However, these issues have not deterred leading global automobile manufacturers. Foreign firms have lent direction and structure to the domestic market, while at the same time contributing significantly to the technological capabilities of Chinese manufacturers.

Most major foreign auto manufacturers have already established a strong presence in China, and the majority plan to expand production and market share sharply in the next few years. Several internationally prominent makers stand out.

Currently the leading foreign player in terms of sales and service networks, Volkswagen expects annual sales of 1.2 million vehicles by 2010 (though its market share may fall from 30 percent to below 20 percent by that time). It plans to boost capacity, but not to offer new models. And GM, keen to surpass Volkswagen as market leader in China by 2025, plans to increase its market share from 10 percent at present to 20 perent by 2010. GM is currently based in Shanghai, Yantai and Chongqing, where it is developing a full line of vehicles.

Toyota/Daihatsu has targeted 10 percent market share by 2010, making it the least ambitious of the major automakers in China. It has joint ventures in Guangzhou, and with Changchun-based First Auto Works (FAW). Daihatsu seeks annual sales of 100,000 mini vehicles by 2010.

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The largest joint venture in the industry is that of Nissan and Dongfeng Automotive. Nissan is targeting passenger and commercial sales of 900,000 by 2010.

In addition to its plans to boost capacity and introduce new models, Honda aims to expand its full-service dealership network to rival that of Volkswagen. Its Guangzhou export-only plant is planned to start operation in 2005, with exports of 100,000 predicted by 2010. Most other foreign majors also plan significant expansion in China in the near future, including Ford/Mazda (planning a Shanghai plant by 2007 with capacity of 200,000, and aiming for a 10 percent market share by 2010), PSA Peugeot Citroen (targeting 1 million vehicles in annual sales by 2010), Renault, Suzuki, Fiat, BMW and Proton (whose venture with local partner Goldstar will be the Malaysian company's first overseas production base).

However, with the domestic market likely to continue a somewhat disorderly 'shakeout' in the next few years, policymakers in Beijing are encouraging a shift towards a more exported-oriented auto industry, with the aim of promoting diversification and specialization. Given current technological strengths and weaknesses, the emphasis is likely to be on the export of auto parts, rather than complete vehicles.

In the next decade, Chinese manufacturers are unlikely to overcome competition from South Korean and Japanese manufacturers, who are well established in overseas export markets. Chinese manufacturers currently lack a dealer network, brand recognition and quality standards common to South Korean and Japanese cars in overseas markets, especially in the low-cost price bracket. However, cars assembled overseas from parts largely produced in China would be both competitively priced and less politically sensitive in trade relations with the United States and other export markets.

In April, Deputy Commerce Minister Wei Jianguo outlined a short-term target to increase automobile and component exports to within a range of $15 billion to $20 billion in 2005. By 2010, China hopes to export cars and components worth $70 to $100 billion per year. Such a target would require steady annual growth rates of 30 percent to 35 percent, which are potentially sustainable from the current low base, but less likely after three to five years.