China’s auto industry takes off

DaimlerChrysler and Ford are not yet following the rush to the low-margin segment, but nonetheless have ambitions to expand in subcompact and upmarket production.  Late-comer Ford has more than doubled its sales with 129,790 units sold in 2006, sixty percent of which was accounted by its hugely popular Focus model line.

“The demand has been so strong for all our models that we have emptied our vehicle storage compounds,” said David G. Thomas, general manager of Changan Ford Mazda Automobile.

What has intrigued analysts, however, is the recent deal announced by Chrysler Group chief executive Tom LaSorda, which 75 American dealers have signed up for, to bring Chinese-made cars to the U.S. market for the first time.

Taking advantage of cheap Chinese labor and manufacturing costs, Chrysler has contracted China’s Chery Automobile Co. to build subcompact cars in China for Chrysler’s Dodge brand.

“Chery won’t create any American manufacturing sites. This time, Chrysler will serve as mere distributor. ... This looks remarkably like the Wal-Mart-ization of the U.S. auto industry,” said Tom Adkins in his column for the conservative Web site CommonConservative.com.

Chinese export potential
For some analysts, however, the Chrysler-Chery deal may well be a signal that the manufacturing of vehicles, especially for the entry-level market, is starting to shift to China, in much the same way that production of garments, shoes and TV sets did. 

Chinese manufacturers, which now control some 27 percent of the domestic market, have become masters at controlling costs and holding prices down, with a typical Chinese auto worker earning $1.95 an hour against a German counterpart’s $49.50 an hour.

Government-owned Chery itself, which started with $25 million in second-hand Ford production equipment, turned out only 2,000 vehicles six year ago. Last year, it sold 305,236, a surge of 118 percent over the previous year, with plans to double that again by 2008.

Privately owned Geely Group, founded by legendary engineer Li Shufu, a poor farmer’s son, has caused some sensation lately with a deal to build London’s iconic black taxicabs.

Li obtained his license only six year ago and began with crudely built copycat hatchbacks powered by Toyota-designed engines. With initial output of 5,000 in 2001, Geely today turns out 180,000 a year, with various models of sedans and sports cars, including own-engineered six-cylinder engines.

China is now a net exporter of vehicles and parts, with 340,000 units —a third of them sedans — sold last year mostly to the Middle East, Russia, Latin America, Africa and Southeast Asia. Exports have doubled every year since 2004, with Chery and Geely taking the lead.

China’s top economic planning commission recently said ongoing massive investments could boost vehicle production capacity to 20 million units by 2010, against projected sales of $9 million to $10 million. 

While the government unveiled steps last month to rein in overcapacity, it is also providing incentives to open up export markets. China’s official goal is to export $120 billion or 10 percent of the world’s total in 10 years, a grand ambition given that its automotive export earnings were only $10.9 billion last year.

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