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Riding China's car boom

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Riding China's car boom

New Chinese markets are opening; Detroit's automakers are rushing in

Christine Tierney / The Detroit News

Beijing

Once a dusty city of cyclists, pedestrians and the occasional dark sedan ferrying party chiefs, China's capital has been transformed in the past 20 years. It's now a modern Asian city boasting new roads, a daunting proliferation of cars and limousines -- and miles-long traffic jams.

Beijing's growth has been so rapid that local authorities now ration driving privileges. On any given weekday, drivers with plates ending with certain numbers are not allowed to take out their Audi, Buick or Geely car.

But the heavy traffic and congestion here and in China's other huge coastal cities isn't likely to put the brakes on the surge in Chinese auto sales.

A new wave of growth has begun in China's secondary cities and poorer inland regions, which are now feeling the benefits of China's economic boom.

Auto executives split the Chinese auto market, the world's biggest, into four sub-markets or tiers: the Tier 1 coastal mega-cities, the fast-growing Tier 2 regions, a third tier in rural central China, and a fourth tier of poor, mostly western, border regions.

During the first boom that began in 2002, after China joined the World Trade Organization, global automakers focused on fulfilling pent-up demand in Shanghai, Beijing, Guangzhou and other newly-affluent cities along the Pacific.

China's domestic automakers were left to carve out a business in the poorer countryside. Their vehicles weren't modern, but, starting at less than $10,000, they were more affordable.

Now, as global automakers pursue opportunities in burgeoning inland markets, the competition will rise to a new level.

For the first time, foreign and Chinese car companies will chase the same customers. "This is the beginning of head-to-head competition," said Michael Dunne, president of investment firm Dunne & Co. in Hong Kong.

Nationwide, cars with global brands -- most of them produced in ventures with Chinese manufacturers -- still outsell domestic brands. But the gap is narrowing, as the inland regions develop.

"Our data and research tells us that Tier 2 and Tier 3 cities are where the growth is going to come in this decade," Joe Hinrichs, group vice president for Ford Motor Co.'s Asia Pacific operations, said. "It's a good opportunity for Ford."

Compared with General Motors Co., which has a powerful local partner in Shanghai, Ford was considered less fortunate in 2001 when it teamed up with Chongqing Changan Automobile, based in the huge but less developed central city of Chongqing. Its per capita income of $2,585 is one-fourth of Shanghai's.

China's Pacific cities will remain the most lucrative markets. But for many mainstream automakers, the coastal cities already represent a shrinking slice of the whole.

In 2009, for the first time, Chinese carmaker BYD Automobile Co. generated more sales in second-tier cities and rural areas, General Manager Henry Li said at the CBU 2010 Global Automotive Symposium in Beijing. He predicted the inland growth spurt will last a few years. "We think we'll have a reasonably high growth rate because of this."

Executives and analysts are confident the interior regions will develop because that's a primary objective of China's government.

In the past two decades, China's economic boom has lifted 300 million people out of poverty, according to United Nations data. But the growth has widened the gap between rich and poor in this officially communist country of 1.4 billion.

The government introduced measures last year to increase the disposable income of people inland, making it possible for them to buy a vehicle, said Xu Changming, senior economist at the State Information Center.

They include 10 percent subsidies for farmers buying vehicles, tax breaks on cars and minibuses with engines smaller than 1.6 liters, and the removal of some road tolls, he said.

Xu estimates the development of inland regions will lead to overall auto sales growth averaging about 20 percent a year, slower than the 30 percent sales gains of the first boom.

In addition to helping China's poorer regions, these policies support the domestic automakers.

"In the Tier 3 and Tier 4 regions, the local brands are stronger," said Yang Hongbiao, an after-sales manager at Shanghai GM, GM's venture with Shanghai Automotive Industry Corp. With a region extending from Beijing, at the top of Tier 1, to Inner Mongolia on China's northern border, Yang sees the full range of China's market.

In Inner Mongolia, "the bigger cities would be considered Tier 3," Yang said, "and the countryside would be Tier 4."

Global automakers are adding dealers in these regions. Ford plans to add 70, for a total of 340, while GM plans to expand at roughly the rate of the market's growth.

Zheng Minda, a Ford dealer in Chendu, in the province of Sichuan, competes mainly against Chevrolet, Honda and other global brands. They dominate the market for vehicles priced 100,000 renminbi, or $14,600, or higher, while Chinese brands do battle in the lower segments. There's not much overlap now, but Zheng expects that to change in a few years.

A new frontier

Among Detroit's automakers, GM is positioned to benefit from growth inland because of its three-way venture in 2002 with Shanghai Automotive and Liuzhou Wuling Motors Co., a low-cost minivehicle manufacturer.

Minivehicles, also called loaves because of their shape, are very small vans and trucks that double as commercial vehicles and family cars. Starting under $5,000, they cost much less than entry-level, foreign-badged autos. Last year, Wuling-badged minivehicles accounted for more than half of GM's 2009 sales in China of 1.83 million vehicles.

Global automakers are watching Hyundai Motor Co. in China. The South Korean automaker has ventured deep into the hinterland, where it offers aging models and those being replaced at cut-rate prices.

Toyota has employed a similar approach with its popular Corolla.

It's risky to sell new and obsolete versions of the same model in one country.

"Hyundai's strategy could only work in China because of the disparity of wealth," Dunne said.

According to investment firm Deutsche Bank, the car-ownership rate in the Tier 1 cities is in double-digits and rising fast. But in the Tier 2 regions, with more than 400 million inhabitants, it's a sparse 4 percent --and even lower in China's Far West.

"China is in a major car ownership growth spurt," said Deutsche Bank's Gaetan Toulemonde.

From The Detroit News: http://detnews.com/article/20100520/AUTO01/5200335/1148/Riding-China-s-car-boom#ixzz0oTPY8Noh

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