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Economy Cars Multiplying on China's Roads

Compact vehicles grow more attractive as ordinary buyers begin to dominate the market.

June 09, 2005|Elaine Kurtenbach | Associated Press

SHANGHAI — On the jam-packed elevated highways of China's commercial capital, the big sedans that once dominated the local car market are sharing lanes with a growing number of compact upstarts.

Boxy Volkswagen Santana sedans and sleek black Buick Regals made by joint ventures between foreign automakers and Chinese companies still far outnumber the economy models on local roads, but that's fast changing.

Demand is shifting away from big sedans long favored by government buyers and the upwardly mobile to economy models popular with families getting their first cars.

New entrants -- both homegrown and Chinese-foreign joint ventures -- are giving serious competition to established joint ventures such as those of General Motors Corp. and Volkswagen.

Profits are sliding, thanks to price wars and rising costs. Volkswagen, whose flagship product in China is not the Beetle but the mid-sized, four-door Santana, saw its operating profit in China more than halved in 2004 to $280 million.

Cutbacks on government vehicle buying and lending for auto purchases are prompting Chinese car buyers who might otherwise have splurged on a pricier status symbol to opt for more affordable models.

Now that it's ordinary buyers, not bureaucrats, who dominate the market, smaller cars are attractive, given incomes that average just over $1,000 a year. And with gas prices averaging $1.60 a gallon and tightening government fuel efficiency standards, compact cars are a more logical choice for small families.

According to the China Assn. of Automobile Manufacturers, the three top-selling models in China during the first four months of the year were all economy models: the Elantra, from South Korean carmaker Hyundai Motor Co.; Tianjin FAW Xiali Automobile Co.'s TJ7101U -- an angular compact -- and Chery Automobile Co.'s perky little QQ mini-car. Japanese automaker Honda, which introduced the Fit compact car in September, saw 20% growth in sales in the first four months of the year.

The upstarts build suitable small cars at reasonable prices, said Yale Zhang, an auto market specialist for consulting firm CSM Asia Corp. in Shanghai. A QQ sells for $4,800 to $5,400, while the cheapest Santanas sell for between $10,000 and $12,000. He added that makers were boosted by the recent introduction of new models to meet increased demand for economy models.

According to January to April figures compiled by CSM, Beijing Hyundai's sales soared 132% from a year earlier; Tianjin FAW Xiali, which makes the TJ7101U, saw sales shoot up 44% and Guangzhou Honda's sales climbed 51%.

By contrast, sales at GM's joint venture with Shanghai Automotive Industry Corp. -- which makes Buicks, Chevys and Cadillacs -- was down 23%, and Shanghai VW, Volkswagen's 20-year-old venture with Shanghai Automotive Industry Corp. saw sales plunge 61%.

"This should continue for some time," Zhang said. "Private demand for small, family cars is pretty stable."

GM acknowledged the changing market when it announced in February a new series of small and mid-size Chevrolets aimed at the market of under-40 young professionals buying their first cars.

GM went even further Thursday when it announced that its joint venture, SAIC-GM-Wuling Automobile Co., would purchase a former automobile plant in Qingdao to increase production of mini-vehicles.

With mini-car sales forecast to surpass 1 million units this year, the expansion was vital for meeting demand, said Kevin Wale, president and managing director of the GM China Group.

Industrywide, sales of passenger vehicles in China rose 15.7% in April over last year's numbers, as car buyers returned to the market after hanging back earlier in the year in hopes of further price cuts, according to the China Automobile Manufacturers Assn.

Overall growth has been slowing: Chinese automakers sold only 3.2% more units in January through April over last year's period -- a far cry from the 15% growth in 2004 and 75% in 2003.

But the slowdown hasn't dented manufacturers' ambitions. The potential in a market of 1.3 billion people eager to swap their rusty bikes for driving comfort is just too alluring.

Cheaper cars mean slimmer margins for everyone -- according to the China Assn. of Automobile Manufacturers, the average profit margin for the industry dropped to about 5% in 2004 from 8.6% in 2003 -- but most makers of economy models have continued to prosper.

Nissan-affiliate Dongfeng Automobile Co., which recently introduced the Tiida compact in China, said its first-quarter net income rose 63% from a year earlier to $18 million and car sales rose 31%.

"The reality is that our company has to stay on top of the game and not become complacent," warned Steven Wilhite, senior vice president at Nissan Motor Co., while attending the Shanghai auto show in April. "Otherwise there is somebody who is going to be up your back very, very quickly."

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