China: Motor Nation

Finally, the nation's middle classes can afford the family car

For years, Liu Tiantai coveted a car from a foreign auto maker. But the 40-year-old office equipment manager didn't like the limited choice and high sticker price of most joint-venture vehicles. Recently, however, new, affordable models have been appearing almost monthly, and Liu finally took the plunge, buying a Buick Sail SRV for $13,590. He uses the hatchback to drive to work, to ferry his wife and his 7-year-old son around Beijing, and to carry supplies among his company's many offices. "This is the car I've been longing to get," he says. "It's practical, inexpensive, and very useful for my business."

Liu is at the forefront of a consumer revolution. For years, most cars in China were sold to state institutions and companies, or ended up in taxi fleets. Now that's changing. "The rise of the private car buyer is historic," says Jia Xinguang, an analyst at China National Automotive Industry Development & Consulting Corp. in Beijing. "It will change the whole industry."

It's not just China's car industry that will feel the effects, but the entire global auto business. According to Automotive Resources Asia, a Beijing consultancy, car sales will grow 15% annually over the next few years and could more than double, to 2.5 million, by 2010. Mei Wei Cheng, chairman and chief executive of Ford Motor (China) Ltd., is even more optimistic. He expects Chinese to buy 5 million cars a year by 2010. "Chinese want quality cars with good safety features at an affordable price," he says.

In the coming years, more and more Chinese urbanites such as Liu will buy their first car, especially as prices drop. Until recently, cars were out of the reach of ordinary Chinese, including even members of the new middle class. But as tariffs on imported cars tumble in the wake of Beijing's accession to the World Trade Organization and a slew of new models come on the market, domestic auto makers are being forced to cut their prices. Adding fuel to the fire, late last year Geely Motor Co., a small private Chinese auto maker, slashed the price of its Haoqing model by 11%, to $4,700, sparking a price war that has driven down sticker prices 15% since January. Private citizens, armed with hefty savings and aided by a variety of installment plans, are flocking to dealerships.

Policy mandarins know the long-cosseted domestic auto industry must face competition if it is to reform. About 100 state-owned car companies still operate in China. Most lose money, and Beijing is keen to force them to consolidate. At the same time, the government is giving foreign companies more leeway to choose local partners, introduce new models, and move into distribution and after-sales service. "WTO is giving us more freedom," says Zhang Suixin, chief representative of Volkswagen China.

That, in turn, is prompting foreign auto makers to up their mainland investments. On June 4, the eve of the Beijing International Auto Show, General Motors Corp. (GM ) announced it would pay $30 million for a 34% stake in SAIC-Wuling Automotive Co., a minivan and minitruck producer in southwestern China. GM sees the investment as a way to get traction in a fast-growing niche. Earlier this year, Volkswagen (VLKAY ) announced it would move its Asia-Pacific headquarters from Wolfsburg, Germany, to Beijing. VW will also spend $2.7 billion over the next five years developing a new compact, building a transmission plant in Shanghai, and upgrading dealerships. For its part, Nissan Motor Co. (NSANY ) is widely expected to announce a tie-up with Dongfeng Motors, China's third-largest auto maker.

For most of these carmakers, the key for the next few years will be subcompacts and compacts that sell for $16,000 or less. GM led the charge with the launch last year of its 1.6-liter Buick Sail, with dual front air bags and anti-lock brakes. It is already going bumper-to-bumper with Volkswagen's $16,000 Polo and in the coming months will face competition from Toyota's $12,000 NBC5 and a 1.6-liter Ford compact.

With all the choice, car buyers can afford to be picky. In fact, Chinese consumers--who are often first-time buyers--often have unreasonably high expectations. That's because they devour the latest global auto trends from the plethora of car magazines, supplements, and TV shows flooding the market. As a result, buyers expect the newest models with the latest features--all at a low price. And Chinese demand premium after-sales service. In December, a zookeeper in Wuhan took a sledgehammer to a problem-plagued Mercedes that may simply have been suffering the effects of low-octane fuel. Says Philip Murtaugh, chairman and CEO of GM China Inc: "Their expectation of performance and reliability is perfection."

So carmakers are improving service. Even before the Buick Sail went on the market, GM was teaching its salespeople how to move metal and ensuring that sufficient parts were on hand. Ironically, it hasn't been so easy for Volkswagen, the pioneer. Because it was one of the first foreign auto makers in China, VW was forced to farm out its distribution and after-sales service to local partners that proved unprofessional and unmotivated. Over the past two years, VW has begun overhauling its dealer and parts network, bringing in trainers from Germany, installing a database of people who have visited VW promotional events but not bought a car, and allowing test drives--a rarity in China.

This being China, there remain roadblocks. The taxes and fees that municipalities levy on locally made cars can add as much as 50% to the purchase price. Duties on imported cars are still 44% to 51%. Finally, foreign auto makers say Beijing hasn't allowed them to make car loans, despite its WTO commitment to do so. Only 10% of autos are financed, says GM's Murtaugh.

Even with these hiccups, foreign auto makers are betting that China will continue to open up--including doing away with local taxes and allowing financing. That's because Beijing knows that more reform--and foreign investment--is the only way to build a strong domestic industry. Finally, it seems, China's auto market is reaching highway speed. No wonder foreign car companies are stepping on the gas.

By Dexter Roberts in Beijing, with Alysha Webb in Shanghai

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