Chinese Auto Market: Steep Grade Ahead

HenryTo

Latest article from Forbes regarding today's dynamics of the Chinese domestic auto industry:
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Steep Grade Ahead
Robyn Meredith, 06.01.05, 12:18 PM ET

6/1/05 4:04:00 PM ET

A big Chinese company displayed its wares: Cadillacs parked next to Volkswagens, a SsangYong alongside a Buick and a Chevrolet--all made by SAIC, or Shanghai Automotive Industry Corporation.

It was the same story at its Chinese competitor in the next booth at the recent Shanghai Auto Show: a Toyota (nyse: TM - news - people ), Audi, Mazda--all made by China's First Auto Works with its foreign joint venture partners.

A worker at the show, struggling with English, tried to explain, "They are our cooperators."

Indeed. Not quite competitors, not quite partners, as the world's automakers rush into the Chinese market.

Just a few years ago, Chinese auto companies didn't know how to make a modern car. Now, thanks to the shared know-how of the world's best-known automakers, China's auto industry has moved into a new phase. The car market--like maturing Chinese markets for other goods--has come to this: lower profit margins for everyone and exports within sight for Chinese car companies.

For Chinese and foreign automakers alike, margins are thinning because China's growing middle class is snapping up lower-profit small cars, and because nearly every big foreign automaker has scrambled to sell in the world's fastest-growing new automobile market. "The China market is one of the few remaining markets," says J.M. Noh, president of Beijing Hyundai Motor, and that market is one of his company's top priorities.

No company wants to risk being left out, but the result is that car factories in China can now make more cars than they can sell in China. "It is going to be rough for everybody," says Michael Dunne, president of Automotive Resources Asia. Just as sales in China have slowed, auto factory capacity reached 3.5 million cars last year while sales hit just 2.5 million, leading most automakers to slash prices.

Some will feel the pain more than others.

China, land of bicycles, has for a few years been the unexpected savior of some of the world's largest most-troubled automakers. As the Chinese market soared in recent years, it overtook Germany as the world's second-largest auto market, boosting the financial results of early entrants such as General Motors (nyse: GM - news - people ) and Volkswagen.

Now, just when GM and VW find their global operations struggling the most, their China-market profit train has all but disappeared.

GM still earns more money selling cars in Communist China than it does in the U.S.--a market more than three times larger. GM had a 5% market share in 2000 and hit 10% last year in China. German giant VW saw its market share in China sink from a near-monopoly of over 80% in the 1990s to 27% last year as GM and most other automakers piled in.

But in April, just as GM reported dismal first-quarter earnings, it became clear that the newfound China market would no longer bail out the company. GM reported its China earnings were $33 million, down from $162 million the same time last year.

Still. GM executives and independent analysts predict the China auto market will grow 10% this year after a government-induced slowdown last year. "I see lots of growth potential in China," GM Vice Chairman Bob Lutz said in Shanghai.

Margins are slimmer because of a change in what's selling. When China opened its auto market in the 1990s, most foreign automakers sold only luxury vehicles and enjoyed profit margins of at least $3,000 to $5,000 per car--above their margins at home, says ARA's Dunne. The buyers were newly minted Chinese tycoons, government officials and foreign business executives trying to crack the China market.

Soon it wasn't just the rich. As the Chinese economy took off, the middle class started growing and spending money on cars. Automakers began offering midsized and small cars--sedans such as the Buick Excelle, Hyundai Elantra and Chevrolet Sail have lower margins than the luxury models but sell in greater numbers. Now the fastest-growing segment is minicars such as the Chevy Spark or Chery QQ, priced between $3,500 and $6,800.

GM counts 150 million Chinese with incomes of at least $3,000 a year--a car-affordability threshold. Sales are zooming, but minicars carry "margins that are closer to wood shavings than anything you can put in your pocket," Dunne says.

Leading Chinese car companies such as Shanghai Automotive Industry are dreaming of exports. Entrepreneur Malcolm Bricklin, who brought America the Yugo, plans to sell Chinese-made Chery cars and SUVs in the U.S. in 2007.

rffrydr · Posted: Tue Jun 16, 2009 9:37 am Post subject:

Oops...how much is assumed in EEM investing? like knowing how to drive:

http://www.webnewswire.com/node/458317
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diesel · Posted: Wed Jun 03, 2009 5:17 am Post subject:

You may think its funny but all the people who were gleeful about GM going bankrupt better figure out, if the US has no one earning good pay for factory work, it will end up like Victorian England whereby much of the population had to flee in order to survive. Are Americans willing to emigrate?
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All cats are gray in the dark.

rffrydr · Posted: Tue Jun 02, 2009 12:39 pm Post subject:

Buys Hummer:

http://www.nytimes.com/2009/06/03/business/03auto.html?ref=automobiles

Now we're getting funny. Laughing

_________________
Today is the Tomorrow you worried about Yesterday!

rffrydr · Posted: Tue May 12, 2009 9:55 am Post subject:

The Ghost of Buick comes back... to haunt us?

http://feedproxy.google.com/~r/weblogsinc/autoblog/~3/XL6INjiIP7o/
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Today is the Tomorrow you worried about Yesterday!

rffrydr · Posted: Thu May 07, 2009 10:32 am Post subject:

Toes-in on the europe/us market, Geely to buy SAAB:

http://www.detnews.com/article/20090507/AUTO01/905070435/1148/rss25
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Today is the Tomorrow you worried about Yesterday!

rffrydr · Posted: Fri Apr 24, 2009 5:56 pm Post subject:

Talk is of the next generation of automobile being chinese; this is not that:

http://feeds.autoblog.com/~r/weblogsinc/autoblog/~3/Xn2BUFyiqmk/
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Today is the Tomorrow you worried about Yesterday!

rffrydr · Posted: Wed Apr 22, 2009 8:35 am Post subject:

http://www.autoblog.com/photos/porsche-panamera-at-shanghai-world-financial-center/1508517/
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Today is the Tomorrow you worried about Yesterday!

rffrydr · Posted: Sun Apr 19, 2009 5:39 am Post subject:

Fear this:

http://feeds.autoblog.com/~r/weblogsinc/autoblog/~3/WbbrXg50h7A/
_________________
Today is the Tomorrow you worried about Yesterday!

rffrydr · Posted: Fri Apr 17, 2009 7:52 am Post subject:

China feeling it:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a.UGBK7Y4ZZM

rffrydr · Posted: Sun Apr 12, 2009 8:02 am Post subject:

Record sales stick:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aAtIdhrLCKfY

diesel · Posted: Tue Feb 03, 2009 11:50 pm Post subject:

http://www.ft.com/cms/s/0/e99e8514-f234-11dd-9678-0000779fd2ac.html

US car sales fall below China’s for first time
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All cats are gray in the dark.

rffrydr · Posted: Fri Oct 31, 2008 7:01 am Post subject:

And steep the road remains:

http://money.cnn.com/2008/10/30/autos/china_cars.fortune/index.htm

Aside from the "protectionism" EPA and DOT affords, and despite the (supposed) price advantages, there is a fundamental flaw in this vision of expansion. Look at the cars: these are NOT chinese cars! These ARE chinese cars.

May the license plates run all "8's." They're gonna need it.
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Today is the Tomorrow you worried about Yesterday!