China's Carmakers: Flattened by Falling Tariffs

WTO membership means stiffer competition from imports

With China's economy strong and the peak car-buying season at hand, auto dealer Li Ruheng should be prospering. But as he watches customer after customer browse the Buick Sails, Honda Accords, and Audi A6s in his lot at the Beijing Asian Games Village Automobile Exchange, Li is growing anxious. "Many people come by and ask about prices," he laments. "But they never buy."

Chinese consumers are on to something: Soon after China enters the World Trade Organization in early December, tariffs on imported cars are to drop from a range of 70% to 80% of the list price to 50% to 60%. A thirtysomething Beijing graphic designer who recently inspected a four-door Sail in Li's lot balked at the $13,855 price tag. He figures similar imported models will soon sell for $12,000 and that domestic makers will lower their prices, too. "I'm going to wait a few months until after China enters the WTO to see how prices change," he says.

SLOW REBOUND. The wait should be worth it. Next year alone, sedan imports are expected to leap 50%, to 120,000. As a result, car prices should tumble by one-third in a few years, predicts Jia Xinguang, a researcher at the China National Automotive Industry Consulting & Development Corp. in Beijing. By 2006, duties are to sink to 25%--still high by world standards but low enough to put autos within reach of China's swelling upper middle class.

What's good for buyers is bad news right now for China's auto industry. As consumers balk, sedan sales in October fell by 20%, to 60,000 units--a nine-month low, says Automotive Resources Asia Ltd. in Beijing. A quick rebound seems unlikely. Due to a tariff cut, the price of a locally made four-door Citroen Fukang has dropped 5%, to around $15,000, since January. Yet comparable cars still cost about $6,000 less in Europe. "Chinese consumers want to pay the same price for the same quality cars that people pay in other countries," says researcher Jia.

Carmakers already producing in China are preparing for intense competition. As the state phases out rules dictating which models each manufacturer can assemble, General Motors (GM ), Volkswagen (VLKAY ), Ford (F ), Honda (HMC ), and Toyota (TM ) all plan to launch new cars aimed at quality- and cost-conscious buyers. Ford Motor Co. next year intends to market a compact with a 1.6-liter engine for under $12,000: It will be based on Ford's Ikon model, now made in India. GM, whose only offering after it opened its Shanghai plant in 1998 was a $45,000 luxury car, rolled out its Buick Sail in late 2000. On Nov. 20, GM said it will make Sail hatchbacks. "Domestic manufacturers will have to become a lot more focused on customer desires," says GM China CEO Philip Murtaugh. Volkswagen plans to introduce its subcompact hatchback Polo, at $15,000 to $17,000, and Toyota Motor Corp. will produce a similarly priced passenger car.

Eventually, lower prices and wider choice should create a thriving auto industry. Jia predicts that car sales will rise by 15%, to 900,000 units, next year and will hit 2 million by 2005. First, though, prices will have to plunge--and dealers like Li will feel the pain.

By Dexter Roberts in Beijing, with Alysha Webb in Shanghai

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