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Vulnerability Behind Auto Boom

China's auto industry is unquestionably witnessing a golden age as a result of unquenchable car demand from the increasingly wealthy population.

Last year, new vehicle sales in China reached 4.5 million units including more than 2 million passenger cars making the nation the world's third-largest auto market after the United States and Japan.

The nation, some experts believe, will surpass Japan to become the world's No 2 within the next two years.

However, behind the boom lies vulnerability within the auto industry a lack of strong homegrown development capabilities and brands.

In its current state, the domestic passenger car market is dominated by foreign brands as almost all of the world's auto giants have built car plants in China.

Almost 90 percent of passenger cars made and sold in China are brands from foreign automakers, such as Volkswagen, General Motors (GM), Honda, Citroen, Toyota, Ford and BMW.

A small number of homegrown brands, such as Chery, Geely, Red Flag and Zhonghua, are still struggling for territory among the international league in China.

And almost all of them were created by newcomers in the industry without the central government's blessing.

China's top three state-run automakers First Automotive Works Corp (FAW), Dongfeng Motor Corp and Shanghai Automotive Industry Corp (SAIC) are bustling to assemble foreign brands to cash in on the fast-growing car market.

"The phenomenon is a big embarrassment for China's auto industry," said Jia Xinguang, chief analyst with China National Automotive Industry Consulting and Development Corp.

"This is the aftermath of the government's market-for-technology policy on foreign automakers over the past two decades," Jia told China Daily.

The first Sino-foreign vehicle joint venture was formed in 1983 by Chrysler and Beijing Automotive Industry Corp.

The government expected foreign automakers to transfer a large number of advanced technologies to their Chinese partners by allowing them to produce vehicles in China.

However, things have gone contrary to the government's wishes.

Foreign automakers have grabbed the lion's share of the lucrative domestic car market through local production, while Chinese firms have failed to assimilate enough technologies to greatly enhance their development capabilities.

"Chinese automakers should have strong self-development capabilities and brands to prepare for any future uncertainties," Jia said.

"You can imagine what would happen if foreign automakers were permitted to control majority stakes in joint ventures with Chinese partners or even set up wholly owned plants in China in the future."

Although the government now requires foreign automakers to have a maximum stake of 50 percent in joint ventures to protect Chinese players, product portfolios and key technologies are still tightly controlled by foreigners.

"We would not be able to withstand fluctuations in the world's auto industry and the economy as a whole if we just assemble foreign products without strong self-development capabilities and brands," said Yin Jiaxu, president of Chang'an Motor Corp, China's biggest mini-vehicle maker.

However, developing homegrown brands and technologies is a very arduous task as the companies lag far behind foreign giants.

"We should be patient and it will take us 20 years to foster our own strong development capabilities and brands," said Zhu Yanfeng, general manager of FAW.

Dongfeng President Miao Wei agrees: "Only through efforts during several generations can we establish strong development capabilities and brands because it demands an annual output of 2 million cars from a single company and US$1 billion in fixed asset investment."

FAW, the nation's No 1 automaker based in Northeast China's Jilin Province, produced 900,000 vehicles last year.

Large state-owned companies, such as FAW, Dongfeng and SAIC, now seem inactive in product development since they can obtain many products from foreign partners, Jia said.

All of the top three run profitable joint ventures with two or more foreign partners.

Sales of FAW's own car brand, Red Flag, which was created four decades ago, stood at only 20,000 units last year, compared with more than 140,000 Jetta sedans produced by its joint venture with Volkswagen.

FAW is building a new manufacturing base for Red Flag and upgrading the model with a total investment of 1.8 billion yuan (US$210 million).

SAIC, which has joint ventures with Volkswagen and GM, plans to produce 1 million cars a year by 2007, only 50,000 units will be models developed by the company.

"China's car industry cannot be at the mercy of foreign giants any more and we should cast away the illusion that they will really help boost our development capabilities," said Li Shufu, chairman of Geely, the sole privately owned passenger car producer in China.

Geely last year sold 80,000 units of its self-developed cars.

Some Sino-foreign car joint ventures, such as Shanghai GM and Shanghai Volkswagen, vow to increase their development capabilities.

"But these joint ventures are just improving foreign brand models according to local market needs. They will not invest heavily to develop Chinese brands as foreign automakers will never give up their own marks in China," said Yale Zhang, a Shanghai-based analyst with CSM Worldwide, a US auto consulting firm.

Shanghai GM's Buick Excelle - redesigned based on a Daewoo model - and Shanghai Volkswagen's Santana 3000, an upgraded sedan from the German company's Santana 2000, are two hot sellers on the Chinese market.

"One of the most important reasons for our weak development capabilities and brands is that Chinese automakers, especially those state-owned, rely increasingly heavily on foreign partners," said Guo Konghui, an academician from the Chinese Academy of Engineering.

To encourage brand development, Guo suggests the government should treat small and privately owned automakers on an equal footing with state-run big names and Sino-foreign joint ventures.

The government should grant locally developed cars preferential taxation, he said.

"The State should also join hands with domestic automakers to develop key automotive technologies and form our own rules and standards," he said.

China's auto industry aims to make breakthroughs in safety, energy-saving and new product development technologies within the next 10 to 15 years to lay a sound foundation to be internationally competitive, according to Zhang Xiaoyu, vice-chairman of the China Federation of the Machine-Building Industry.

"Regulators should also take measures to encourage consumers to buy homegrown car brands to boost Chinese automakers' development capabilities," said Zuo Yan'an, president of Jianghuai Automobile Group based in East China's Anhui Province.

(China Daily May 11, 2004)

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