China's Car-making Industry Brims of Mostly Cheery News in 2009

While China continues to wow the world with emerging-economy records as achieving downturn-defying growths throughout 2009 and into the New Year, the nation's auto industry sped across one more astounding milestone on Oct. 20, 2009: FAW-Volkswagen, an automaker in Changchun City of northern China, stamped out the 10,000,000th car, adding China to the ranks of auto-making countries who can turn out over 10M cars a year, solidly in third-place behind giants as the U.S. and Japan.

Industry analysts say that China, had it not been the global meltdown, would have achieved the top-3 ranking earlier, and, driven by surging auto production, has great potential to leave behind Toyota, GM and VW to lead the world in volume produced.

China has performed relatively better in auto production and sales, despite being buffeted by the global downturn, partly due to official incentives: China's annual auto sales surged 46.15% to reach a record 13.79 million vehicles in 2009, safely becoming the world's largest auto market, where on average 1.13 million vehicles were sold monthly.

Statistics compiled by the China Association of Auto Manufacturers (CAAM) show that China's auto sales exceeded 13.5 million vehicles in 2009 for an annual growth of 40%. By contrast, car sales in the U.S. shrank to 10.43 million, down 2.8 million vehicles from the 13.2 million in 2008.

The CAAM statistics show that China's auto production maintained an average annual growth of 21.8% during the eight years from 2001 to 2008, far surpassing the average 2.7% globally, with car-ownership in China jumping from 5% to 13.6% during the same span. Such figure seems impressive independently but may not reflect pervasive rising affluence, which would more accurately be seen in number of cars owned per-capita.

Industrial Locomotive

The auto industry in China is a critical locomotive of economic growth for being able to create downstream benefits.

A growing auto industry stimulates growth of a spate of support sectors, including all the primary, secondary and tertiary sectors, examples of which include metals extractors and suppliers; makers of machinery, electronics and upholstery; and car dealers and insurance brokers, hence being enormous contributor to the national coffers. In 2008, China collected sales taxes from auto and motorcycle makers some 230 billion RMB. And the auto industry created 2.65 million jobs, excluding the 30- million-plus jobs in the support sectors, all of which made up 11% of 2008's labor force in China. Such enormous economic power is especially meaningful during global downturns.

Production Expansion

Rising car sales have motivated automakers to raise capacity. China's carmakers in 2009 announced new investment projects, sharply contrasting the downsizing, suspension, or even closure of auto plants in other countries.

Dongfeng, for example, just announced another 5 billion RMB investment project to build a plant with annual capacity of 240,000 cars to come online in 2012. Guangzhou Auto Honda, currently with annual capacity of 360,000 cars, plans a similar-sized project.

Chang-an Automobile announced production expansion four times in 2009, and will set up new plants, expand existing lines simultaneously. Instead of building new plants, Shanghai GM will expand capacity at existing lines, targeting an annual output of over one million vehicles. Shanghai Volkswagen is following a different approach as it plans to raise output efficiency: to increase hourly productivity in all its plants from 20 vehicles in 2009 to 30 in 2010.

As Buicks have been better sellers in China than in the U.S., Ford Motor started to build its third plant in China in 2009, aiming to expand annual productivity to 600,000 vehicles in China to offset losses racked up at home.

Volkswagen AG, the largest foreign automaker in China to invest in the nation with ambition to maintain leadership in the Chinese market, announced last September that it would invest another 4 billion euros to expand annual productivity at its Nanjng and Chengdu plants to 300,000 and 350,000 vehicles by 2012, respectively, with the investment projects having been approved by Beijing.

China is the most important overseas market for Volkswagen. Production expansion is a must to meet the demand of the fast-growing market, says a senior VW executive.

China is the largest overseas market for Volkswagen, which sold 1.02 million vehicles in this market in 2008 and another 650,000 during the first half of 2009. The German automaker aspires to double-digit sales growths in China's record-setting market.

　　

Official Incentives Continue

Automakers in China need to only worry about keeping up to simmering demand in a market where car-owning fever is only catching on, especially after Beijing announced last December the continuation of its auto sales incentive program for one more year.

China announced in earlier December the “Cars for Rural China” program would be extended to Jan. 31, 2013, and the sales tax discount for buying 1,600cc-or-smaller cars will be extended to the end of 2010, with each car buyer to be subsidized between 5,000 and 18,000 RMB depending on model.

China may achieve an annual GDP growth of 8.5% in 2010, with the steadily rising level of affluence to continue to drive car sales.

Top Performers

In terms of 2009 sales, the Shanghai Automotive Industry Corporation (SAIC Group) led in China, followed by FAW and Dongfeng groups.

The SAIC Group sold 2.72 million vehicles in 2009, up more than 50% from the previous year, with the carmaker able to eventually become a world top-10 for 2009 in light of tumbling sales by most of the major counterparts. All the world's top-10 carmakers, except Volkswagen, ended 2009 with sizable sales declines. The SAIC Group may surpass Suzuki and Fiat in terms of 2009 sales.

The FAW Group sold an estimated 1.96 million vehicles in 2009, followed by Dongfeng's 1.89 million, with both achieving annual sales growth of around 50%.

　　

Exports Down

Not all hummed like a well-oiled machine in 2009. Booming domestic car sales in China seemed a bust relative to the nations' auto export: Official statistics show that China's auto export plummeted 60% during the first seven months in 2009, even lagging India in global market share.

Despite boasting the world's biggest car sales market, China's auto export is only 3% of the international market, and merely 2% of China's total auto output. To promote auto export, Beijing has been drafting strategies, and will initially help automakers set up overseas dealer networks as long-term solution to promote sales.

Weak Image

Not to totally blame the global downturn for its export setback, China's carmakers also suffer from weak market image, especially in safety. A test by the Germany-based Allgemeiner Deutscher Automobil-Club (ADAC) last March show world-leading sales do not equal driver safety, for China-made cars ranked poor to worst, the same safety standards typically shown by Datsuns and Hondas in their early days in North America. Such rickety safety performance is simply unacceptable in many European and North American markets.

As expected, initially China's automakers mostly target markets known to be lax in safety standards to export cars, including Southeast Asia, Latin America, and East Europe. South America, offering an import quota for China-made cars, has bought cars from FWA, Changcheng, and Chery, which have even set up local assembly lines to facilitate sales and after-market services.