The Chinese Automotive Industry

THE CHINESE AUTOMOTIVE INDUSTRY

Overview and Forecast

2003 heralded the coming-to-life of the Chinese automobile industry. Passenger car sales and

production both eclipsed 75 percent growth rates, while automakers posted banner profits.6 Not

unexpectedly, this market explosion prompted a bevy of new entrants, whose subsequent

competition for market share reduced prices and drained the once limitless demand. Nevertheless,

even with the fall from rosy profit margins and breakneck sales growth, China still represents the

fastest growing automobile market in the world with far-reaching potential in sales and

complementary services (see Exhibit 1). A record 1.7 million new vehicles were sold in China in

the first three months of 2006.7 With the strong start, vehicle sales should surpass that of Japan,

placing China as the world’s second largest automobile market, behind only the United States.

The driving force behind the growth in automobile sales has been the burgeoning of the Chinese

economy and in particular, consumer purchasing power. China’s entry into the World Trade

Organization in 2001 energized the economy by removing barriers to foreign trade and investment.

The robust health of the national economy, as seen in the booming gross domestic product, has

trickled down to the individual consumer. For example, the average annual disposable income of

Beijing urban residents has grown 71 percent over the last half decade, reaching 18,000 RMB (~

2250 USD) in 2005 (see Exhibit 2).

In consideration of the saving power of Chinese families, a substantial fraction of the urban

population can now afford the introductory micro car or subcompact offering priced at less than

100,000 RMB (~ 12,500 USD). Indeed, private purchases in the passenger car sector and the

micro car sub-sector have led the growth in overall car sales. As the purchase price of personal

cars diminishes as an obstacle, the crucial factor will be the availability of key complements that

enhance the experience of car ownership, namely roads, fuel prices, and auto service.

Complements Lag Market Growth

December, 2005 marked the debut of the drive-through restaurant in China.8 McDonald’s

Corporation opened the first-of-its-kind restaurant in Guangdong province, where private car

ownership leads the nation. This iconic establishment highlights the growing demands for

complementary facilities and services to personal commuting. Not unexpectedly, the explosive

growth of car sales since 2002 has far outstripped the development of key complements, such as

roadways, auto safety, and service. This weakness in complements threatens to catch up with the

bullish market and represents a critical factor in long term industry growth.

The roads of metropolitan giants Beijing, Shanghai, and Guangzhou boast not only world-class

automobiles such as Porsches and Ferraris but also world-class traffic jams. The millions of new

cars that hit the road each year have pushed existing infrastructure to capacity in many areas. For

6 “Slow-Down in Vehicle Output Pace Expected.” China Daily. 15 January, 2004.

7 “China’s Vehicles Sales Exceed 1.7 Million in First Three Months.” Xinhua News Agency. 12 April, 2006.

8 “Press Release: First McDonald's Drive-Thru Opens in China.” McDonald’s Corporation. 10 December, 2005.

GENERAL MOTORS: A Look into Chinese Expansion 5

example, despite the city’s six beltways, Beijing’s average drive to work spans forty minutes to an

hour,