China - An Automotive Smoking Gun?

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Researched by Industrialinfo.com (Industrial Information Resources, Incorporated, Houston, Texas). If you haven't looked over your shoulder lately, a reality check might be in order. In the last ten years, China has been quietly growing its automotive industry via joint ventures with foreign automakers, North American, European, and Japanese, but the endgame is enough to cause a major infarction throughout the global automotive industry, the non-Chinese contingent of which seems to be functioning, for the most part, with its eyes tightly shut.

China's modus operandi for foreign businesses doing business in China is that the foreign company should form a joint venture with an established Chinese company. There is, as the reader might have guessed, an ulterior motive in this design. Virtually all the major OEMs worldwide, as well as many automotive tier suppliers, have now established themselves in China.

Toyota Motor Company (NYSE:TM) (Toyota, Aichi, Japan), in a joint venture with First Automotive Works (FAW), is building a plant in Changdun, which will be operational in 2005. Toyota's subsidiary, Hino Motors, will begin making trucks in Shanghai (with FAW) in 2004, and 50,000 diesel engines a year (with Shanghai Electric) in 2005. Toyota also has a joint venture with Chunlan to produce trucks.

Nissan Motor Company (Nasdaq (SC):NSANY) (Tokyo), in a joint venture with Dongfeng, is building a $2 billion plant, which will open on July 1 of this year and will have the capacity to manufacture 220,000 cars and 330,000 commercial vehicles annually.

General Motors (NYSE:GM) (Detroit, Michigan) has at least four joint ventures with Chinese companies, namely, Shanghai General Motors Company, Jinbei GM Company, SAIC-GM Wuling Automotive Company, and Pan Asia Technical Automotive Center, and plans to launch six new Chinese-made models this year.

Ford Motor Company (NYSE:F) (Dearborn, Michigan) has a plant in Chongqing Municipality. Ford's Swedish subsidiary, Volvo Car Corporation (Nasdaq:VOLVY) (Gothenburg, Sweden) has expressed a desire to produce at least one model of its own at this facility.

DaimlerChrysler (NYSE:DCX) (Stuttgart, Germany) is looking to set up production in either Beijing or Guangzhou with a Chinese partner, of 20,000 to 30,000 Class-C and Class-E Mercedes Benz vehicles a year for the luxury market. DaimlerChrysler's Chrysler Division has a joint venture in Beijing with Beijing Jeep Corporation, which produces Jeeps.

Volkswagen (Wolfsburg, Germany) participates in two joint ventures in China, one in Shanghai with Shanghai Automotive Industries Corporation (SAIC), (formed 1985), with a capacity of 450,000 vehicles a year and 2002 production at 302,000 vehicles; and one with First Automotive Works in Changchun (formed 1991) with a 300,000 vehicle a year capacity, which produced 208,000 last year.

Volkswagen is considering a third plant, possibly in rural central china, where wages are lower than in the larger cities, where wages are already higher than in Central and Eastern Europe.

Fiat's (NYSE:FIA) (Turin, Italy) joint venture, Nanjing First (formed 1999), with Yuejin Automotive Group, plans to be producing 200,000 vehicles a year by 2004.

Citroen, or PSA/Peugeot-Citroen's (OTC:PEUGY) (Paris, France) joint venture with Dongfeng (formed 1992) in Wuhan produces 200,000 vehicles a year.

Honda Motor Company's (NYSE:HMC) (Tokyo, Japan) Guangzhou Honda Automobile Company plans to produce fuel-cell vehicles, among others.

Among the tier suppliers that have located in China, to name just a few, are such industry giants as Johnson Controls (NYSE:JCI) (Milwaukee, Wisconsin); Magna (NYSE:MGA) (Aurora, Ontario); Visteon (NYSE:VC) (Dearborn, Michigan); Delphi (NYSE:DPH) (Troy, Michigan), which recently cited China as its largest performing market in 2002; Fauricia (a Citroen subsidiary); Ficosa International (Barcelona, Spain); and Robert Bosch (Gerlingen-Schillerh}he, Germany), which is presently establishing a $193 million joint venture with Wuxi Weifu Group to make 10,000 Volvo trucks a year. There are many more, far too many to enumerate here.

Here's the catch: China has decreed, according to a report in Automotive News (June 9, 2003), that by 2010, 50 percent of all sales in China must come from domestic companies, which by that time own 100 percent of the vehicles' technology. What does this mean? It means quite simply that China's automotive companies will by that time have acquired all the technology of their foreign affiliates. Can you hear them laughing?

The most logical projection of this decree is that China will use this technology to flood worldwide markets with cheaper Chinese imports. Unsettling thought. Meanwhile, in the interim, Chinese manufacturing efforts would be benignly directed toward lowering the present 1-vehicle-per-120-people ratio in China, while they're appropriating the technology from their hog-tied joint venture partners. Who says we don't like pie on our faces? North American, Japanese, and European OEMs would do well to break out of their backward-looking, short-term profit-making modes and consider what this Chinese strategy will do to their bottom lines in the next decade. Our respective governments would do well to slap an embargo on any Chinese vehicle imports, unless they want to watch their own automakers go down the tubes.

Let's look at the statistics. In April 2003, China's year on year output was up 83 percent, and 110 percent in the first four months of 2003, as compared to 2002. China produced 156,900 vehicles in March, and 166,900 vehicles in April of this year. By the end of this year, China just might displace France as the world's fourth largest vehicle maker, and then, by 2005, displace Germany as #3, with a goal of selling 10 million vehicles (up from 4 million projected for this year).

China sold 1.36 million vehicles in the first four months of this year. How many vehicles did General Motors and Ford combined sell in North America in this timeframe? Not 10 million, for certain.

Whoever said things move slowly in the automotive industry? Anyone who still thinks so had better not go to sleep tonight. They may not know the new rules in the morning.