Sales in China's intensely competitive auto industry exceeded the U.S. for the first time last month. But even as the industry gains a higher global profile, it is about to get leaner — and potentially less splintered.
Chinese consumers bought 790,000 vehicles in January, according to General Motors Corp. In the U.S., total car and light-truck sales were just under 657,000 that month, according to Autodata Corp.
Like the U.S. in the early 1900s, China has dozens of small but spirited car makers that grew out of the country's burgeoning sales growth last decade. They were welcomed as local engines of economic growth. Now, many are struggling amid a worsening slump. Their difficulties mean short-term pain for China's economy but consolidation could result in a more streamlined industry that is better positioned to take on bigger, foreign rivals.
A year ago, Shuanghuan Automobile Co. was a small but fast-growing car maker with plans to expand overseas. Now, after falling nearly 40% short of its unit-sales target for 2008, the company is cutting workers and worried that it might not survive. “If we could survive, that would be the best thing we could achieve this year,” Cheng Bin, vice president of Shuanghuan, said, sipping hot tea at the company's headquarters here, with its heat turned off to save costs.
The weeding out of companies like Shuanghuan could in the short term benefit big foreign auto makers such as Toyota Motor Corp. and Volkswagen AG by reducing competition in the world's second-largest car market after the U.S. Upstart auto makers have put enormous downward pressure on retail prices for cars in China, hurting foreign players' profitability.
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But a consolidation also could benefit China's bigger auto makers, such as Chery Automobile Co. and BYD Co., whose advancement has been hampered by cutthroat competition in the notoriously fragmented market. China's central government has long said it wants to see consolidation in the auto industry, to create a handful of home-grown national champions. Consolidation is “good for the industry,” said Citi Investment Research analyst Gerwin Ho in Hong Kong.
During the market's boom years, which ran for nearly a decade starting in the late 1990s, car makers mushroomed in China. City and provincial governments, seeing the chance to woo prestigious industries that employed large numbers, chipped in funds or policy support.
Today, more than 80 producers of all sizes vie for small slices of the market, many of them selling what foreign auto executives regard as knockoffs of their cars.
Those small companies thrived because of the high rate of growth in passenger-car sales, sometimes above 20% a year in the past decade. But sales began sliding in August. Unit sales fell 12% in December from a year earlier. For all of 2008, unit growth was just 7%, and this year will likely fall further: Some analysts are predicting no growth or even a modest contraction.
Many smaller upstarts in China are low-cost producers, but their inexpensive cars lack the quality, performance and safety of those designed by established global auto makers. A subcompact car by Great Wall Motor Co., called the Florid, for instance, sells for as little as 53,900 yuan, or about $7,880. A comparably equipped Toyota Yaris costs more than 50% more, at 84,700 yuan, although Toyota dealers recently offered discounts to boost the car's sales.
Many smaller Chinese makers achieve low prices by skipping research and development. Their planners come up with product ideas but farm out most engineering jobs. They assemble cars as if they are Lego sets, with purchased engines, transmissions and parts.
Analysts warn that the speed and scope of any consolidation may be limited because local governments that own some of these smaller companies might try to bail them out.
Still, signs of pain already are emerging. Great Wall Motor, in the city of Baoding near Beijing, increased car and light-truck sales 5% last year to 125,000 vehicles but fell far short of its goal of 200,000, despite aggressive price cuts. It has trimmed 10% of its 23,000 employees. Jiangling Auto Group Co. in the southeastern city of Nanchang, saw its sales plunge 36% last year to 10,500 vehicles.
Shuanghuan, based in Shijiazhuang, about 185 miles southwest of Beijing, has laid off 8% of its work force of 2,000. Mr. Cheng, its No. 2 executive, said the company is trying to shore up its business by cultivating demand for its cars in overseas markets that are less affected by the global economic crisis, such as Ghana and other West African countries.
China's central government, while wanting consolidation, is concerned about the damage that shrinking car sales could do to an already weakened economy. This month, it halved the sales-tax rate on smaller cars to 5% for the rest of 2009, and cut retail prices for gasoline and diesel.