Feb. 14, 2005) — While China will be responsible for much of the growth in the automotive industry for the foreseeable future, the market is starting to show some signs of maturing.
That was the message from Mike McKenzie, a senior emerging-market analyst with PricewaterhouseCoopers LLP. McKenzie spoke at a Jan. 27 seminar on China sponsored by GlobalAutoIndustry.com.
China is in the second of three stages of growth, McKenzie said at the seminar in Troy. The pioneering stage lasted from 1984-2001. During that time, Beijing Jeep Corp. Ltd. and Shanghai Volkswagen Co. Ltd. marked the first foreign joint ventures in China. The nation also published the first “China Automobile Industry Policy” in 1994, confirming the auto industry as a pillar of the Chinese economy.
The second phase — a period of torrid growth — started in 2002 and is likely to last through the 2008 Summer Olympics, to be held in Beijing. During that time, every major global automaker either will enter the market or expand its footing, McKenzie said. Auto firms will introduce capability to assemble annually 5 million high-tech units — not just the older models the Chinese market had to settle for in the past.
In fact, the Chinese government hasn't been able to hold growth down to desired levels. The analyst said the nation had targeted gross domestic product growth of 8.5 percent for 2004, but the increase came in at 9.5 percent.
The final phase — a type of rationalization — probably will come after the 2008 Olympics and last until 2012. During that time, large-scale exports from China will become a reality, there will be significant emergence of Chinese domestic brands and global competitiveness will be gained through consolidation and investment, McKenzie said.
From 2003-12, China will represent 30 percent of all automotive growth worldwide, he said. But with that growth the country also must deal with some activity that is not so desirable. For example, China has been faced with a widespread power shortage and spiking raw material costs.
In addition, car prices already are starting to come down, falling 14.4 percent during the past three years, McKenzie said. Some of that is because of lowering tariffs, but competition also has affected pricing. “Everyone is adding capacity and everyone wants a 10 percent market share,” he said.
The analyst expects downward pricing pressure to continue. With a Cadillac that costs $35,000 in the United States running $60,000 in China, “there is still room.”
Supplier reward, risk
The price drops will erode profit margins as well. He noted that General Motors Corp.'s average profit per vehicle now is $1,132 in China, compared with a mere $145 in North America.
Auto component suppliers looking to enter the Chinese market also need to be aware that a country of 1.3 billion people doesn't translate into a market that big, he said. More than 800 million Chinese still live in rural areas and earn less than $1,000 a year.
Of the 482 million-person urban population, a mere 60 million people earn more than $5,000 a year — the minimum threshold to buy a new car. “So the market is not as big as you'd think,” McKenzie said.
Near term, however, he said suppliers still have growth potential.
“As margins thin and pricing competition intensifies, an efficient and developed low-cost assembly and supply base will be essential for financial success,” he said.
The market may not grow as fast as some have thought and probably won't hit 10 million units a year by 2008 as some have predicted, but still will be a major factor on the world stage. “You won't see a shock like Brazil, where everyone added product for demand that was not necessarily there,” he said, noting that growth also will come from the 10 million people who move to urban areas from rural each year.
The market, though, is not without risk. McKenzie said potential negative factors include local wage increases, a hypercompetitive market, misaligned supply and demand, increased domestic competition and the global ambitions of many Chinese suppliers.
“These companies don't just want to succeed in China,” he said. “They could end up right here in Detroit.”
Meyer is managing editor of Rubber & Plastics News, a sister publication of Plastics News.