World's Car Makers Race to Keep up As China Zooms
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December 13, 2002 12:03 a.m. EST PAGE ONE World's Car Makers Race ROARING DRAGON • China Industrial Output Rises As To Keep Up as China Zooms Export Production Booms3 12/10/02 • Big Western Stores in China Lure By KARBY LEGGETT and TODD ZAUN Price-Conscious Buyers4 Staff Reporters of THE WALL STREET JOURNAL 11/26/02 • China's Retail Store Sector Is SHANGHAI -- Foreign auto companies are scrambling to get into the Changing at Rapid Pace5 11/07/02 world's fastest-growing major market: China. • China's Hot Property Sector Shows Signs of Overheating6 After several years of strong growth, China is now the world's fourth- 11/05/02 largest auto market, behind the U.S., Japan and Germany. It could leap into second place in three years, even if growth continues at just half its current pace. Private citizens have overtaken the government as China's COMPANIES biggest buyers of automobiles this year. Banks have helped pave the way Dow Jones, Reuters by offering car loans for the first time, and thousands of miles of new Toyota Motor Corp. ADS (TM) roads have given drivers more places to go. PRICE 51.14 CHANGE -0.70 U.S. dollars 1:07 p.m. Auto executives, facing flat or falling sales in their home markets, Nissan Motor Co. Ltd. ADS predict China will be their biggest source of growth over the next (NSANY) decade. Newcomers Toyota Motor Corp., Nissan Motor Co. and PRICE 15.82 Hyundai Motor Co. plan to spend a combined $3 billion in China over CHANGE 0.05 U.S. dollars 1:25 p.m. the next few years to build or expand factories. Volkswagen AG, General Motors Corp. and Honda Motor Co., all of which entered General Motors Corp. (GM) China years ago, are spending heavily to build the country's first dealer PRICE 36.87 CHANGE -0.57 networks and to punch out new models. U.S. dollars 1:22 p.m. So far, the Chinese market has been profitable for most foreign auto Honda Motor Co. Ltd. ADS (HMC) PRICE 18.33 companies, thanks to low production costs and relatively high sticker CHANGE -0.37 prices. Market leader Volkswagen will generate 15% of its total pretax U.S. dollars 1:21 p.m. profit from China this year, according to an estimate by UBS Warburg. Through the end of October, the number of cars, trucks and buses sold in * At Market Close China soared by 36% to 2.7 million, compared with the year-earlier period. Passenger-car sales alone were up 55% and are on track to top one million vehicles this year for the first time. Now auto makers have begun chopping prices, triggering China's first industrywide price war. They are accelerating the rollout of new models, with some retailing for as low as $5,000. The surge of file://F:\WSJ_com%20-%20World's%20Car%20Makers%20Race%20To%20Keep%20Up%20as%20China... 12/16/2002 investment in new plants risks flooding the industry with excess capacity. By 2010, analysts estimate, companies will be able to build 20% more cars in China than they can sell there. "There are just too many competitors," warns Graeme Maxton, managing director of auto-industry consultancy Autopolis Asia. For some new entrants in China, "it's all going to end in tears." Auto executives have long predicted that China's car market was poised to explode. But sales for much of the 1990s were disappointing. Now, as prosperity spreads through this nation of 1.3 billion people, the rapid rise in auto sales highlights China's growing muscle in the global economy. "I'm a big fan of American cars," says David Chao, a 50-year-old owner of a freight-forwarding company in Shanghai. Mr. Chao says the demands of his business and the availability of low-cost financing prompted him recently to buy his first car, a GM minivan known as the GL8. "I can sit in the backseat with clients and talk about business," he says. The sleek, affordable cars available in China today bear little resemblance to the earlier workhorse vehicles built for government bureaucrats, who just a decade ago were the only ones who could afford cars. Beijing requires foreign auto makers to form a joint venture with a local partner if they want to make cars in China. But with the country's entry into the World Trade Organization a year ago, other rules have been relaxed, giving car makers freedom for the first time to set prices and to roll out new models. Manufacturing centers have sprung up, especially on the outskirts of Shanghai, which is emerging as China's equivalent to Detroit. Tracts of former farmland have been replaced with modern car plants, research centers and test tracks. Volkswagen was one of the first Western auto makers to set up shop in China, in the early 1980s. At the time, the industry consisted of a handful of lumbering state enterprises pumping out endless rows of clunky trucks and buses, and just a few thousand passenger cars each year. Private auto ownership was rare. The German auto maker cut a deal with state-owned Shanghai Automotive Industry Corp. It ripped apart Shanghai Auto's old Volkswagen Polo factory -- including the wood benches where the cars were assembled -- and installed equipment it brought in from a European plant. In 1985, VW began producing one of Communist China's first foreign-designed auto, the Santana. Government Mainstay file://F:\WSJ_com%20-%20World's%20Car%20Makers%20Race%20To%20Keep%20Up%20as%20China... 12/16/2002 The boxy four-door was a hit. Though few individuals could afford the sedan, which cost around $14,000 based on the exchange rate at the time, Chinese bureaucrats pounced on it. The Santana became the mainstay for government-run taxi fleets. In Shanghai, it became the car of choice for policemen, state security agents and other city officials. By the late 1980s, VW controlled about 55% of China's passenger car market. Eventually, bureaucrats tired of the Santana and began importing Mercedes and BMWs. Beijing wanted to spark more competition among domestic manufacturers so it decided to have Shanghai Auto make high-end sedans. The government put out bids for a new foreign maker to be its partner. General Motors won the bidding in 1997 with what seemed a steep price. It would set up a $50 million design center, giving Chinese engineers access to key technology, and invest a total of $1.52 billion. What would the car look like? "We opened our portfolio [to the Chinese] and said: 'Here it is, you decide,' " says Phil Murtaugh, an American who runs GM's business in China. Shanghai Auto and GM began building the Buick Regal, almost identical to the model sold in the U.S. GM knew the masses couldn't afford the $40,000 Buick. So it put controls for the stereo and air-conditioner in the back seat and expanded legroom there to appeal to chauffeur-driven bureaucrats. Sales lagged anyway. But China was changing fast. Buick sales perked up in 2000 as rich drivers began buying the Regal. Riding a wave of growing consumerism, GM rolled out a new version for businessmen who drive themselves, adjusting the suspension and drivers' seat to give the car a sportier feel. Rivals were on GM's tail. Honda invested $300 million to take over a money-losing operation in the southern city of Guangzhou. The first Chinese-made Accord hit the market in March 1999. Like the Regal, the $36,000 Accord was similar to the upscale version sold in Western markets, loaded with extras such as leather seats and a sunroof. Heat on GM Honda turned up the heat on GM, by building a modern dealer network. Koji Kadowaki, a Japanese marketing veteran who oversaw the Honda operation, figured that new middle-class buyers would want help with maintenance and vehicle registration. So Mr. Kadowaki stitched together a national chain of full-service dealerships. With GM and VW following a similar strategy, he taught his dealers to one-up them with Asian Honda Accord flair, such as offering customers plates of steaming fried rice as they mulled a purchase or waited for an oil change. In the meantime, Volkswagen was beginning to see its market share erode. The company fought back by pouring $120 million into a new technology center and launched in early 2000 the Audi A- 6 luxury sedan. "The Chinese consumer was becoming more demanding," says Michael Wilkes, VW's communications manager in China. file://F:\WSJ_com%20-%20World's%20Car%20Makers%20Race%20To%20Keep%20Up%20as%20China... 12/16/2002 Under the terms of its WTO entry, China agreed to sharply cut tariffs and raise quotas on car imports. It also relaxed rules affecting marketing by domestic car makers. At first, these moves achieved the opposite of what the government had hoped for: Many consumers stopped buying cars because they expected prices to fall after China's WTO membership was formalized in late 2001. Then GM jolted the market with the launch of China's first modern economy car in the summer of 2001: the four-door Sail, priced just under $12,000, that helped spark the Chinese sales boom. The Sail drew prospective buyers such as Li Wujin, a 52-year- old former navy officer. Once, Mr. Li only dreamed of owning a GM's Sail car. His small salary and the cost of raising his son left little room for luxuries. Now his son is set to graduate from college, and although Mr.