China was set to become the worldâ€™s second largest new car growth market by the end of 2006, with the country likely to claim the number one spot, surpassing the United States, by 2015. This demand is being fuelled by a number of factors including the rising incomes of Chinese citizens; increased competition improving efficiency and lowering prices for vehicles and vehicle parts; and an increase in the range and availability of new cars.
At the end of 2005 the automotive industry in China was thought to be worth in the region of US$149bn, not including subsidiaries and feeder industries which will also benefit from the growth in the sector. Much of this growth has come from the East China provinces of Shanghai Shi, Zhejiang, Jiangsu, and, to a lesser extent, Anhui, which count for over 44 percent of the total revenue of the Chinese automotive industry.In spite of the growth of the market, firms are finding it harder to make the lucrative profit margins that were once possible in China. This can be attributed, at least in part, to Chinaâ€™s WTO commitments, which have fostered competition amongst rival firms and thus lowered prices of vehicles and parts. Whilst a few years ago profit margins of over 20 percent were not uncommon, by the end of levels were closer to 5 percent of revenue, a figure which is expected to fall even as low as 2 percent in the next few years or so.
Imports, exports and sales
A tiny fraction of the cars produced in China are for export with some 96.6 percent sold on the domestic market. Likewise, only 2.5 percent of cars sold in China are imported. This trade discrepancy is the direct result of the presence in the region of the dominating Shanghai General Motors and Shanghai Volkswagen.
As it stands, there are sizeable tariffs on vehicles which go some way to explaining the above statistics although there are significantly lower tariffs on parts and accessories, 10 percent compared to 25 percent. Note that recent laws have tightened policy so only replacement parts are covered under the tariff. Moreover, used cars are prohibited from being imported into China, along with used or refurbished parts.
In addition, Chinaâ€™s WTO membership had meant that after-sales service of car purchases will have to more in line with standards found in the West. Sales systems are being modernised; competitiveness is being extended in automotive and automotive related sectors in China; and counterfeit goods are being eradicated. It is hoped that this will have the effect of improving the overall quality of the car buying process in China.
Cutting carbon emissions
China plans to tackle its large scale pollution and reduce greenhouse gas emissions by trying to be at the cutting edge of alternative fuel technology and other environmentally friendly plans. Plans have been laid out to improve the average fuel efficiency of all vehicles by the end of this year. The aim is to make the growth of the car market sustainable by replacing high polluting vehicles with lower emission versions and those running on alternative fuels. Reinforcing this will be a strategy to prioritise investment in research and development of new, cleaner fuel technology and mandatory emissions targets, akin to those already seen in Beijing and Shanghai, which are required to meet Euro III targets.
The automotive infrastructure network in China is undergoing a continuous, large scale upheaval which will be required to meet the governmentâ€™s ambitious long term goals. It is hoped that the length of highways in the country will be on a par with the United States before 2030, meaning the construction of around 85,000km of express roads. This will connect all cities with a population of 200,000 or greater, and places as far apart as Harbin and Urumqi.
As of 2006 over half the planned network was complete, with Central and Western China still to be updated, which provides more of an engineering challenge than the East. The majority of future investment will be targeted at these areas, where car ownership and development lags considerably behind the East, in a bid to spread the countryâ€™s economic boom. Total investment in the networks will run into hundreds of billions of US dollars but the resultant development is expected to contribute far more to the Chinese economy.