Beijing Gives Foreign Auto Makers The Green Light

The car market opens wider

For more than 15 years, the handful of foreign auto makers allowed into China have dutifully assembled the cars and trucks prescribed by Beijing--even if those vehicles didn't make the most economic sense. They figured that the red ink and bureaucratic headaches would pay off if and when Beijing gave them permission to sell what they really wanted: their most popular models of vans, luxury sedans, and subcompacts.

That time may have arrived. On June 17, Germany's Volkswagen reported it had won permission to build a small car that would retail for just $12,000, in addition to the bigger Santanas that it has long assembled in Shanghai. Other carmakers also hope to make vehicles with broader appeal. General Motors Corp., which this year began producing luxury Buicks costing $40,000 at its new $1.6 billion joint-venture facility in Shanghai, says it has just won approval to convert half of that capacity to make minivans priced under $48,000. GM also is still seeking permission to make Opel sedans. Audi and Honda are launching high-end models, while Toyota may soon be assembling its popular Corolla and Ford is angling to launch compacts. "We know a lot of competition is coming," says Deputy Managing Director Manfred Heinze of Shanghai Volkswagen. "Everybody is working on something."

INEFFICIENT SECTOR. Behind the scramble is an apparent shift in industrial policy as Beijing searches for new ways to boost its economy. For years, China has tightly restricted access to its potentially huge market, especially for passenger cars. The government limited the number of players, set production volumes and prices, and dictated what types of vehicles could be made and where. Beijing wanted to reserve the mass market for indigenous manufacturers. So foreign auto makers have been steered into making vehicles that were too expensive for most Chinese. They also tended to use outdated technology.

The result of Beijing's micromanagement is a globally uncompetitive industry. Apart from VW's 230,000-unit-a-year Santana plant, foreign ventures produce at most only a few thousand vehicles per month. The market is splintered among hundreds of companies that on average use just 60% of capacity. Few have the scale or quality to survive against imports if Beijing carries out vows to slash trade barriers when it joins the World Trade Organization.

But Beijing is now looking for plenty of lift from the industry. And despite Prime Minister Zhu Rongji's political problems, leaders see reform as the way to achieve it. Better, cheaper cars could help stimulate consumer spending, they hope. Even though the government claims the economy will expand by 8% this year, car sales are flat after double-digit growth a few years ago. Also, Beijing wants to boost foreign investment, which is down 17% so far this year. Opening the auto sector may ease all of these dilemmas. "China has been very tough in granting licenses for foreign car manufacturers," says Michael Dunne, president of Beijing-based Automotive Resources Asia Ltd. "Now, the whole landscape seems to be shifting."

Volkswagen's announcement signals a breakthrough. Its new sedans, designed just for China, would have engines as small as 1 liter. The Santana, priced at $15,000 to $23,000, has a 1.8 liter engine. VW will develop the car with its current Santana partner, Shanghai Automotive Industry Corp., and hopes to be in production in three years. VW also plans to make Passat sedans, priced at $29,000, in Shanghai.

PICKY BUYERS. GM's change of plans is another sign of official flexibility. GM claims stronger-than-expected Buick sales since the car's April launch. But it will be hard-pressed to sell 100,000 Buicks a year as planned, given the stiff price. GM has wanted to produce minivans and smaller cars but lost recent bids for joint-ventures to DaimlerChrysler and Honda. Getting approval to also make vans in Shanghai is a big win--and GM isn't stopping there. "We still think we're in the running to bring out a small car," says GM China Group President Lawrence B. Zahner.

The liberalization also means consumers will have more choice. They clearly are getting more demanding. One reason why annual sales of Chrysler's old-model Jeep Cherokees have dropped by 60% since 1995, to only 10,000 units, is because buyers want better fuel efficiency. That's partly why Honda Motor Co. thinks its popular 2.3 liter Accord, which will sell for $36,000, will be a hit (table). Toyota Motor Corp. this fall hopes to win the right to produce either its Corolla or Yaris with Tianjin Automotive Xiali Co. The state-owned carmaker now assembles some Toyotas under license.

The downside of this greater latitude is that competition will be fiercer than ever. Market conditions are expected to get tougher as state-enterprise reforms lead to massive layoffs. "We shouldn't be too optimistic about prospects for high growth in sales to individuals," says a China Auto Industry Assn. official. For now, few in the industry seem ready to heed this warning. After years of lusting after China's potential market from the outside, foreign auto makers aim to dash through the door while it's still open.