Auto Industry to Boom for Decades More

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Last updated at: (Beijing Time) Monday, January 20, 2003

Auto Industry to Boom for Decades More

China's auto industry could maintain the strong momentum it saw last year over the coming 20 or even 30 years. The industry produced 38 percent more vehicles last year than in 2001, while sales figures grew by 37.1 percent, stunning many industry watchers.

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China's auto industry could maintain the strong momentum it saw last year over the coming 20 or even 30 years, an article in the China Economic Times predicted.

The industry produced 38 per cent more vehicles last year than in 2001, while sales figures grew by 37.1 per cent, stunning many industry watchers.

However, the newspaper quoted a senior expert as saying that such blistering growth is not a complete surprise.

Liu Shijin, an auto industry researcher with the State Council's Development Research Centre, told the newspaper that the industry's dazzling growth last year was due to three factors.

First, the auto industry is driven by domestic consumption rather than external demand, benefiting from the continuing dynamic national economy while being immune to the slack demand of the world economy. Furthermore, the national economy also demands that the auto industry become a pillar sector in order to maintain its brisk and healthy advance.

Second, many restrictions on market entry and auto consumption are curbed or abolished, which has resulted in a much-improved market environment.

Third, consumers finetuned their expectations, and started buying as never before.

Liu went on to predict that such high growth momentum could be maintained this year because the factors fuelling last year's expansion will still work this year, although it would probably be a lower annual rate of 20 per cent.

Domestic demand is expected to undergo no major fluctuations, so it will continue to propel the car-buying spree in the long run.

Additionally, the improved consumption climate and accelerated pace of urbanization will also prop up vehicle demand, Liu said. China's overall auto policy is to relax further market entry standards to encourage competition, which is also a commitment China made when it joined the World Trade Organization.

The fast growth of the vehicle industry last year is only the primary stage in its high-speed expansion period, the expert told the newspaper. He predicted that the period might last 20 or even 30 years.

However, China's auto industry is still plagued by a host of problems, Liu lamented.

In particular, backward technology, low research and development capacity and low productivity, which result mainly from the country's decades-long isolated vehicle policy under its planned economy, are widely considered to be the most serious defects fettering the auto industry's development.

The joint ventures established since the country began its opening-up and reform policy more than two decades ago are little more than the overseas auto giants' assembly lines in China. The research facilities of these enterprises mainly focus on peripheral work rather than the core technology.

Research institutions affiliated to State-owned auto firms, long accustomed to the planned economy, are not competitive enough.

But some new market players are now gearing up to establish their own research systems. This is the model that the Chinese auto industry should follow, Liu stressed.

The obstacle of low productivity is the direct outcome of lack of competition in the market, said Liu. Therefore, the industry must be opened up to cultivate competition.

The dynamic auto industry of last year showed that opening the market does not necessarily strangle domestic auto firms but could strengthen the infant Chinese industry's competitiveness.

The better-than-expected performance of the auto industry in 2002 and its rosy prospects for the future will make many investors set their sights on this bonanza, the article said. The Chinese vehicle market is still evolving and every investor, whether a well-established giant or fledgling newcomer, has the chance to grab a slice of this ever bigger cake, said Liu.

However, investors should prepare well and conduct feasibility studies before they rush to invest in the auto industry, Liu cautioned.

The expert further elaborated on the development trends of the Chinese vehicle industry. Liu predicted that the auto industry will undergo similar evolution to that once experienced by the household electrical appliances sector.

Batches of new auto firms are swarm into the market, tempted by these market prospects, and this will be followed by frantic competition. Then will come the price cuts and only a few competitive firms will be able to survive a price war.

Many local governments are now eyeing the booming auto industry. The expert, however, cautioned that the government should remain calm and play its due role as an administrator in guiding the healthy development of the auto industry.

He gave three recommendations to the relevant government organizations.

First, governments at all levels should act as administrators not as investors. They should avoid investing in the auto industry directly, which has proved in the past to be ineffective and a waste of resources.

Second, governments should encourage car buying by implementing policies to encourage consumption and building infrastructures.

Finally, the development of the auto industry should be regarded as an important part of urbanization.

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