It costs more than you'd think to make a car in China. Geoff Dyer and James Mackintosh report in the May 31 Financial Times: "Next for the west are cars ‘Made in China’ " (subscription required)
Nor is it yet much cheaper to produce cars in China. Although assembly line workers at Daimler- Chrysler's Chinese factories earn $1.95 an hour, compared with $49.50 at its German plants and $36.50 in the US, labour is only a small part of the overall cost. Many components have to be imported, the factories are sub-scale and logistics can be inefficient in China. "Even today, many of the components used in passenger cars are priced above world market levels," says Jack Perkowski, the American founder and chief executive of Asimco, a Chinese parts maker. As factories grow and local parts prices drop, the cost of Chinese vehicles will also fall, but this will take time.
...But as costs in China fall as a result of rising volumes and economies of scale, the other companies will begin to think much harder about using China...
...to make cars for export
The Chinese want an auto industry. They initially hoped to build one through joint ventures with foreign countries, but this hasn't gone as well as they'd hoped. "...their partners let them go only so far. They learnt about manufacturing but they were shut out of the design and research needed to create their own brands." They apparently are still lagging at technology and brand development, and marketing.
The domestic market is potentially enormous:
The Chinese economy is growing at around 9 per cent a year and is not expected to slow sharply for a number of years. Every year, hundreds of thousands of people in China begin earning enough money to make them potential car buyers - and barely 1 per cent of the population have one. The expected growth rate of demand, with estimates of 10-15 per cent a year, is well above any other significant market in the world.
But it is competitive:
The Chinese companies are trying to introduce their models into a domestic market that will soon be populated by every big multinational carmaker and that the former head of Volkswagen in China recently called "the most competitive market in the world".
The makeup of the customers is changing:
According to Clint Laurent, chief executive of Asian Demographics in Hong Kong, many of the initial customers were government and company bosses or “petrol-heads”, people prepared to spend a large sum for a fancy vehicle. The new generation of customers wants practical, smaller cars and is more cost-conscious.
There are plenty of cars to be sold, but profits may not be fat:
Kate Zhu, an analyst at Morgan Stanley in Hong Kong, summarises the outlook as: “Worsening overcapacity, rising costs, tight industry financing, sluggish demand and ongoing price wars.” The long-term prospects remain more buoyant than almost anywhere else but the fat profits of the last few years are past.