Falling for China's "Golden Illusion"?

Ford, along with most other big carmakers, sees a vast mass market about to bloom. That promise, however, has more often been a pitfall

By Dexter Roberts

It seemed like apt reading in preparation for Ford's gala launch of its first-ever China-produced sedan. On the two-and-a-half-hour plane ride from Beijing to Chongqing, a southwestern city on the Yangtze River, I brought along 400 Million Customers, a classic business book on China by Carl Crow, an American advertising executive based in Shanghai, written in 1937.

Though written well over six decades ago (China's population has more than tripled since then), the book still sounded downright topical as our plane made its descent. "So long as people of one country make goods to sell to others, so long as ships cross the ocean and international trade exists, the golden illusion of the sales which may be made to China's industrious millions will always be an intriguing one," cautioned Crow.

"Golden illusion," I thought. Wise words to ponder for today's mainland investor, including big auto makers. Ford's (F ) 50-50 venture in a new $98 million factory in Chongqing puts it belatedly in a crowded Chinese field that already includes General Motors (GM ), Volkswagen (VLKAY ), Honda (HMC ), Peugeot Citroen (PEUGY ), and Toyota (TM ). Together, these auto giants have spent billions of dollars building plants on the mainland and, along with Nissan (NSANY ), are readying to spend billions more. While the market is booming now, some analysts see the possibility of overcapacity down the road.


  Crow offered some other observations on the Chinese consumer that struck me as worth pondering, too. "While a few are wealthy, the average purchasing power has been low, and a very small proportion has ever become more than theoretical customers who are interesting for statistical purposes, but valueless from the standpoint of actual sales."

Yes, China is growing rapidly, and incomes are rising. But the average income of urban Chinese is only about $1,000 a year. Rural incomes are less than half that. Most of China's 1.3 billion population still fall under Crow's category of "theoretical customers" -- a significant fact for multinationals hoping to lure Chinese buyers to big-ticket items like autos, I thought.

I put Crow's book down as I arrived, pensive but still open to the possible wisdom of Ford's sedan venture with local partner Changan Automobile. Its four-door compact Fiesta -- based on Ford's European car of the same name -- has an automatic transmission and an engine ranging from 1.3 liters to 1.6 liters. With models priced from $10,700 to $15,400, it's significantly cheaper than GM's Shanghai-produced Sail.


  Ford is keeping costs low by tapping the cheaper land and labor of its inland location. Most rivals have built factories in coastal cities like Shanghai and Guangzhou, where expenses are considerably higher. But they're all lured by the growth of China's passenger-car market, which topped 50% in 2002 and is expected to approach that rate this year, with some 1.3 million cars to be produced. No other country in the world can match car-market growth rates like that.

Jet-lagged Brit David Thursfield, who heads Ford's international operations, had exactly those stats in mind as he arrived in Chongqing: "It could be the No. 2 or No. 3 [car market] in the world in the not too distant future," he said at an early morning press breakfast at the Chongqing Marriott. "In the next two or three years, it could be in excess of 5 million units. We can't afford to miss out on that."

Ford is already building added capacity at the Chongqing plant and plans to soon announce new investment. A minimum of one new model a year will be launched for the next few years, probably starting with the Mondeo.


  After breakfast, a police-car escort with flashing lights cleared the snarled (and smog-choked) streets of downtown Chongqing to rush us to the new factory northwest of the city. It was a pretty impressive motorcade. "The local government is very enthusiastic" about Ford's investment, noted James R. Sasser, ex-U.S. Ambassador to China and now a Ford adviser, as he peered out the van window.

As we navigated through traffic, however, I was reminded of how overtaxed China's highway infrastructure already is. Where are all these new autos going to go? "The density of the population could be a limiting factor," admitted Ford's Thursfield. "This is a city of 30 million -- you can't get 30 million cars into a city this size," he added, even as he noted that China has added an impressive 22,000 kilometers (just under 13,700 miles) of roads and highways in the last few years.

The Fiesta's launch ceremony, held in the factory's canteen, featured young Chinese dancing flamenco on a stage, while young men outside juggled apples and tennis balls. Red, green, and blue laser lights flashed the Ford and Fiesta logos across the walls. Eventually, a gold Fiesta cruised onto the stage filled with local Changan Ford executives, as fireworks blazed and heavy gray smoke hung in the air.


  Li Peng -- best known for his role in ordering the bloody Tiananmen Square crackdown -- was the senior Chinese leader in attendance. He kept well away from all of us foreign journalists (perhaps no surprise there), our closest contact being when we saw his still-fresh signature on a second gold Fiesta on the factory floor. The hood was signed as well by visiting local officials and Ford execs. In an odd but final touch, Chinese journalists were warned to closely follow the Party-controlled Xinhua newswire report when mentioning Li's visit.

Later in the gleaming new factory, which is set to produce 20,000 sedans this year and 50,000 in 2004, I heard some words certain to warm the heart of any Ford executive. "Of course, I'm planning to buy a Fiesta," said Yin Yuhong, a 25-year-old worker, with her hair tied back behind a smiling face. With her husband also working in Ford's new factory, "within a few years, we should have enough money," she noted, refusing to reveal her salary. (With average assembly-line wages no more than $170 a month, it may take a bit longer, I thought.)

On the plane back to Beijing, I read the last pages of 400 Million Customers. "The problems are the same as those we might attempt to solve at home, with added complications and difficulties," wrote Crow for investors in China almost 70 years ago. "None of us ever prosper to the extent we think our work justifies, but we have compensations. The work is always interesting, and, in spite of our years of disillusionment, all of us secretly cherish the thought that a reasonable number of the 400 million [Chinese] may buy our goods next year."


  With people like factory worker Yin aspiring to her own car and hoping to eventually join a middle class already numbering tens of millions in China, Ford very well may find customers for its Fiesta for years to come. But as my plane circled in the smoggy skies over Beijing before landing, I paused once more: With this kind of pollution already choking mainland cities, how will the country handle millions more car owners?

For better or worse, as China's multitudes opt for four wheels, the wisdom of Crow's words from 1937 will be tested as never before.

Roberts covers China for BusinessWeek from Beijing. Follow China Journal every week, only on BusinessWeek Online

Edited by Douglas Harbrecht

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