Cracking China's car market

Cracking China's car market
By Steve Schifferes
Globalisation reporter, BBC News, Liuzhou, Guangxi Province, China

The sleepy, provincial town of Liuzhou is more than 1,200 miles (1,931km) from Shanghai, and 10,000 miles from Detroit. Yet for General Motors, which Toyota claims to have overtaken as the world's largest car company, it is Liuzhou rather than Detroit where the company's future may be decided.

GM has come to Liuzhou to produce a tiny minivan, the Wuling Sunshine, which is a best-seller in China, selling more than 460,000 vehicles a year. The van costs $3,700 (£1,872), has a 0.8 litre engine, have a top speed of 60 mph, and weighs less than 1000kg - yet cheap labour costs mean that GM makes a substantial profit on each vehicle it sells.

Rather than use automation, the Wuling Sunshine is made on an old-fashioned assembly line, which would not look out of date in 1940s Detroit. But with labour costs of just $4 per hour - half the rate in Shanghai - GM Asia Pacific boss Nick Reilly says that the company is only spending $100 per vehicle on labour - and the factory is working around the clock on a three-shift system.

Now GM is investing $350m in building a modern engine plant on the site of the Wuling factory to build 1.1 litre engines, which will open in August, and has expanded production by acquiring another factory in Qingdao. It is the opposite of GM's North American strategy, which has concentrated on selling big, expensive SUVs and trucks - a strategy now threatened by higher petrol prices and changing consumer tastes.

For GM boss Rick Wagoner, China represents a "new model" of production, where the company can make money again as a volume producer of cheap cars, unhindered by union contracts and huge fixed costs.

Rush to China
GM is not alone in identifying China as its key market for the future. There will soon be more cars in China than the US. China's car market grew 25% last year and it has overtaken Japan to be the second-largest car market in the world with sales of 8 million vehicles, including light trucks and minivans.

But with just six car owners per 100 people, compared with 90% car ownership in the US and 80% in the UK, the potential for growth is enormous. According to the research company AC Nielsen, China also has more people who aspire to own a car, but currently do not, than any other country. Also, analysts Roland Berger Associates estimate that the worldwide demand for small cars will rise by 30% in the next decade.

But with the average income in China less than $3,000 a year, reaching the mass market in China is a very different exercise to selling cars in the US or Europe.

Rural marketing
According to James Hu, the sales director of GM-Wuling, the typical Sunshine minivan buyer is male, a small businessman, a high school graduate, and earns between $200 and $500 per month. Over 80% are first-time buyers and most plan to use their minivans for both home and business - sometimes replacing the three-wheeled bicycles in which they used to transport their goods.

Most pay in cash, with sometimes the whole family coming into the dealership with the money in hand. Wuling markets the vehicle through rural China and is expanding its dealer network, which is strong in the poorer, Western regions. In some smaller cities, it shows films in town squares to attract customers.

Fierce competition
Wuling also markets GM's low-priced entry-level car, the Chevrolet Spark, which was designed in Korea. But the Spark, which sells 40,000 vehicles a year, is facing fierce competition from Chinese rivals, especially the Chery-made QQ, which GM at one time accused of stealing its design.

The Chery QQ is 10,000 yuan (£658) cheaper than the Spark and according to vice president Jin Yibo it can compete successfully with the Spark because it has lower development costs. Its sells four times as many small cars as GM. Chery - also based away from coastal China, in Anhui province - is aggressively rolling out new models, including a new A1 compact that was one of the stars at the Shanghai Motor Show.

Overall, rising competition is causing the price of new cars in China to fall by between 7% and 8% per year - cutting into the profit margins of companies like GM.

Rich toys
But China is still a diverse market. Buick is marketed as a luxury brand in China. While GM is selling minivans in rural areas, it is also building and marketing Buicks and Cadillacs in Shanghai, where the Buick van has become a status symbol for companies.

Although the number of private car owners is increasing rapidly, an important part of the Chinese car market is still corporate, especially in the rich coastal cities. With chauffeur-driven cars customary for executives, GM found that the most important modification it had to make for the Chinese market was to increase the size and comfort of the back seat, where the company bosses tend to sit.

GM has even designed a new concept-car version of the Buick at its China-PATAC design centre. But the luxury market is also getting crowded, as multinationals such as Toyota launch their own luxury brands in China. And GM's joint venture approach - its Buicks are built with state-owned Shanghai Automotive Industy Corporation - means it has given its potential rivals access to its technology.

Opportunity
It is not just car companies that are flooding into China. Consumer companies and retailers from around the world are rushing to capitalise on the world's third-largest economy, which has been growing at a rate of 10% per year for two decades.

For most multinationals, Chinese consumers, not Chinese workers, are now their main focus. But understanding how to make a profit in this crowded and diverse market is the real challenge. This is part of series on how globalisation is changing China. Future articles will look at the financial services industry, China's drive overseas, and how Shanghai is tackling pollution.