For the vast majority of Chinese consumers, there is only one consideration when buying a car: price. This is an area in which local Chinese carmakers excel and foreign firms find it nearly impossible to compete. Luckily for European carmakers, the wealthier remainder of that vast pool of consumers is also numerically huge and rivals its European equivalent in terms of market opportunities. Indeed, no other market has been growing and has such promising potential as China's automobile market. Not only are there many millions of Chinese whose buying power would be termed "middle class" or above, but this wealthy segment is also growing rapidly.
It is precisely in this mid- to high-end market segment where the future for European carmakers lies, and certainly not at the lower end, which in China is extremely competitive. Prices have been driven down to less than €3,000 (US$4,400) for the most basic versions of tiny compact cars, such as the popular Chery QQ. Numerous other Chinese brands are also available at that incredibly low price point, as can be expected since there are 19 Chinese brands with less than 1 percent market share. The profits these companies make per vehicle are extremely marginal, rumoured in some cases to be less than €20 per car. Compare that with the several thousand euros of profit that carmakers can gain from luxury cars, and it is soon clear that the lower end is not a market segment where European companies can earn decent profits.
In addition to it being exceedingly difficult to compete with domestic automakers on price, there is also a 25 percent tax on imported vehicles, which also applies to vehicles with less than 40 percent local content. European-brand cars made in China through joint ventures are frequently not subject to this tariff since they often contain a high percentage of local components, but these cars often lack the quality of their imported siblings. European carmakers are often reluctant to put their latest technology into their JV products, both because of IPR concerns and because the market segment these JV products target cannot afford it.
Room at the top
However, being confined to what is essentially the upper segment of the Chinese market gives European manufacturers a number of advantages. First, foreign brands are deeply entrenched in a superior position in the minds of Chinese consumers. It will take many years before local manufacturers can compete in terms of quality. Few who can afford an imported car would choose a Chinese brand over an import at this stage of China's car manufacturing development. In addition to clear quality advantages, the prestige of owning a foreign car, especially among China's face-conscious nouveau riche, also works to the advantage of European carmakers. For both quality and prestige, the aspirations of Chinese consumers lie firmly in the direction of foreign imports.
Second, potential luxury vehicle owners are not greatly affected by gasoline prices. If gasoline prices rose significantly, or the Chinese government reduced its subsidies for gas and added taxes, then the lower segment of the market might well decide to get back on their bicycles or take the bus. But if someone can afford a €50,000 BMW or Porsche plus 25 percent import tax, then it is unlikely that high gas prices will deter their purchase. In fact, many would probably be delighted if gas prices rose high enough to put their less wealthy comrades off the road, as this would ease the horrendous traffic congestion now prevalent in many Chinese cities.
Similarly, increases in the costs of raw materials, such as steel, copper and plastic, would also have less of an impact on high-end vehicles, which are priced primarily on technology and quality rather than the cost of raw materials.
Some Chinese cities have begun to limit cars in order to reduce congestion and pollution. The Shanghai city government limits the number of licence plates it issues by setting a quota of 6,000-8,500 each month. Since 2000, the city has held an auction on the third Saturday of each month where people bid on new plates. The average price is now over RMB50,000 (€4,800, US$7,000), which means that in some cases the cost of the licence plate is nearly double the cost of the vehicle. Measures like this, also under consideration by other Chinese cities, raise the cost of car ownership and limit new car purchases to those willing and able to spend a great deal of money, again benefiting EU companies that sell high-end cars.
However, there are some challenges for European carmakers in China. One big problem is the limited availability of high-quality fuels. Dirty fuel can clog the advanced anti-emissions equipment found on many high-efficiency and low-pollution European cars, thus negating many of the benefits of such equipment. China sets emissions standards based on vehicle weight, with relatively stringent standards for heavier vehicles and relatively lax standards for lighter ones. Since European cars, especially luxury ones, are relatively heavy, they will need advanced technology and higher grades of fuel in order to comply with the regulations.
The other big problem, namely extremely low-cost local competition, will be more important in the long term. Chinese companies are growing increasingly capable, in the realms of both technology and marketing. Quality, design, and emission controls are all improving steadily. In fact, with China's vast trade surplus and easy credit, Chinese carmakers are having few problems affording the latest automotive technologies from Europe and the United States. Chinese companies have already bought foreign companies, most notably Britain's MG Rover and South Korea's Ssangyong.
There has recently been, and will continue to be, much market consolidation, resulting in increasingly powerful Chinese carmakers. After a complicated series of manoeuvres and with strong encouragement from the central government, in December 2007 the Shanghai Automotive Industry Corporation (SAIC) and the Nanjing Automobile Corporation (NAC) announced the finalisation of their merger, putting the MG brand, Rover's designs (now branded Roewe, as Ford was unwilling to relinquish its rights to the Rover brand) and Ssangyong all under the same company. The resulting company will likely become a serious international player in the auto industry, but it will take them at least several years to fully integrate and implement a long-term strategy.
See you Lada
In addition to acquiring assets abroad, Chinese automakers are also investing heavily in their own research and development, and in developing their own brands abroad. They have already begun exporting and have been quite successful in Russia, where the new Chinese brands are known as "Lada killers" because they are proving to be of better quality than Russia's own venerable Lada brand at a comparable or better price. Chinese automakers have been similarly successful in Africa and Southeast Asia.
On balance, European companies clearly have a bright future in China for the short to medium term. It will be at least five to ten years before Chinese companies can become serious competitors outside the lower levels of car manufacturing. In the long run, European companies will have to keep making improvements in efficiency and maintain their technological edge. This will no doubt get harder to do as strong Chinese automakers emerge from the intense competition in China's domestic market.
