The Chinese Business Forum @ MIT Sloan

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China's first automobile manufacturing firm, FAW (First Automobile Works), was built 50 years ago. From then on for over 30 years, there was no big progress in the Chinese automotive industry on both production and technology sides. Production capacity was low, and technology was outdated. From the middle 1980's, with the establishments of joint ventures, the Chinese automobile industry began to develop faster than before. So far, all of the world's major automakers, such as General Motors, Toyota, Ford, Volkswagen, DaimlerChrysler, Nissan-Renault, PSA Peugeot Citroen, Honda and BMW, have established joint ventures in China. In particular, the joint ventures control about 90 percent of China's passenger car market.

China has recently being known as the world's largest untapped market for the auto industry. Since it started its drive towards becoming an auto-producing country, China has been following the same path to success that South Korean automakers took in the 1980s and Japan in the 1070's. With China in the World Trade Organization (WTO), the elimination of trade and non-trade barriers provides a great opportunity for foreign companies to penetrate the huge market. Presently of the world's top 500 automobile assemblers and manufacturers, 51 have set up joint ventures in China.  

China is an emerging market; a country making an effort to change and improve its economy with the goal of raising its performance to that of the world's more advanced nations. Nowadays, the automobile industry is one of the leading industries that the Chinese government is aiming to develop in the future. According to a blueprint for national automobile development in China's 11th Five-Year Plan period (2006-2010), China will make the automobile industry a pillar of the national economy in the coming six years.  

The country expects to become one of the world's top three automakers by 2010. it is now the world's number 4^th automakers after the United States, Japan and Germany. By 2010, the industrial added-value of the automobile sector will make up five percent of China's gross domestic product, while the sector's export value is scheduled to surpass US$50 billion. It has also been predicted by some analysts that China's vehicle output will increase at a double digit rate over the next 5 to 10 years. 

In 2004, the total present value of industrial output of China's automobile industry reached $132.7 billion, an increase of 17.8 per cent from 2003. Actual sales grew by 16.9 per cent to USD130.7 billion but due to higher competition actual profit decreased by 6.0 per cent to USD8.7 billion. Among the 5,857 automobile enterprises, loss making enterprises, there were a total of 1,020 or 17.4 per cent which reported losses, up 0.46 per cent from last year.

The total industrial value-added of the fifteen leading companies in the automobile industry was at USD16.5 billion, a growth of 7.3 per cent and the value of their industrial output increased by 15.1 per cent to USD 66.4 billion. These companies' actual sales were up by 14.2 per cent to USD65.8 billion, with a profit of USD4.6 billion, a decrease of 5.1 per cent from last year.

There are about 120 vehicle manufacturers in China. However, half of these companies have an annual output of less than 10,000 units. Almost all the major automakers had established their plants in China, and consequently foreign brands have thus continued to dominate the China's car market. About 90 per cent of all the cars built and sold in China are foreign branded and they are mostly General Motors, Volkswagen, Honda, Hyundai, Ford, Peugeot, Citroen and Toyota. These major carmakers forged alliances with major Chinese automakers like First Automotive Works Corp (FAW), Shanghai Automotive industry Corporation (SAIC), Dongfeng Motor Corp in the form of joint ventures to assemble foreign branded cars. Volkswagen cars have been maintaining its largest market share which was 25.2 per cent in 2004 as compared to General Motor's 10 per cent. Due to the stiffer competition, the market share by Volkswagen in China has been declining from 50 per cent in 2001 to 40 per cent in 2002, 30.8 per cent in 2003 and the current 25.2 per cent. Volkswagen has two JVs with SAIC and FAW, China's top two vehicle producers and these JVs have been China's top Sino-foreign JVs in terms of annual sales having sold more than 685,000 cars in 2004. Chinese car brands have yet to grab a bigger market share and so far sales had not been comparable to the foreign branded cars. The few Chinese brands include the Red Flag by FAW, Geely and Chery. Presently foreign automakers are only allowed to hold a maximum equity of 50 per cent in a JV.

Facing stiff competition at home, some Chinese automakers had set sight to diversify their markets abroad. Chery Automobile of East China's AnhuiProvince had taken the lead in 2001 to export completely built cars. Chery had in November 2004 signed an agreement with Alado, a Malaysian company to assemble and sell Chery cars in Malaysia. Other Chinese automakers are following suit. Geely of Zhejiang Province is reportedly planning to export 20,000 cars in 2005. Briallance plans to build a plant in a Middle-east country to assemble its Zhonghua-branded cars. China in 2004 exported a total of USD8.16 billion worth of automobiles and parts, an increase of 73 per cent over the previous year. With increased quality and its low cost advantage, China's Ministry of Commerce expects China's exports of automobiles and parts to total USD120 billion annually within 10 years. However, most of the Chinese automakers are controlled by state-owned enterprises.

China has in total 250 second hand cars exchange markets which are spread out in 31 provinces of China. In 2004, the second hand cars markets made a remarkable performance last year, with the total transaction growing rapidly by 16.9 per cent to USD 5 billion. Total trade of used cars was up by 20.2 per cent to 1.3 million units, with sedan cars having increased by 17.2 per cent to 459,200 units, and trucks growing by 19.3 per cent to 285,000 units and passenger cars up 32.4 per cent to 344,700 units.

* Pictures courtesy of Chery.cn