Time for a Tune-up

The prediction is finally coming true: after years of dashing the expectations of the world's big car makers, the China market is booming. Passenger-car sales jumped 18% last year and are up 37% in the first five months of this year. In a depressed and highly competitive global car market, that's welcome news for the world's leading car makers, all of which have invested heavily to build a manufacturing presence in China since they first started arriving in the 1980s.

But the long-awaited upswing in market fortunes isn't panning out exactly as planned. New Chinese companies are emerging in key growth areas and are carving out market share in the economy-car segment. Instead of dominating "the world's largest potential market", foreign car executives face intense competition on three fronts in China. As demand rises, they are battling for market share with their international peers, their large state-owned partners and a rash of small but aggressive new car makers, some of which are keen to partner with foreign players while others are determined to make it on their own.

"The number of entrants is so great that it's difficult to see where the profits could accrue," says Joe Stud well, author of China Dream, an analysis of foreign investment in China.

Still, the market is growing. Passenger-vehicle sales topped 720 000 units in 2001 and are expected to reach 900 000 this year, according to Automotive Resources Asia, a consultancy. Much of that healthy growth was spurred by deep price cuts introduced in the wake of tariff reductions related to China's entry into the World Trade Organization and increased consumer pressure for lower prices.

Adding to the excitement among industry analysts is the fact that sales of passenger cars account for only a quarter of total vehicle sales in China, way short of the proportion sold in Western markets. This is at a time when all indications suggest that upwardly mobile and newly prosperous Chinese have the same powerful urge to own a car as consumers in the United States, Japan and Western Europe.

Car makers are betting the market will grow in volume and maturity and are salivating at the prospect of China's economic boom continuing apace until 70% of all sales are passenger cars, as in developed Western markets.

Short-term estimates of market growth are alluring. Analysts expect passenger- car sales to reach 2 million units by the end of the decade. In a new variation of an old dream, industry executives now gush about the prospect that some day one in two of China's 1.3 billion people could own a car, just like Americans or Germans. For now, only one in 100 Chinese has a car.

For foreign car executives China has always been a strategic investment. It is the market potential, not the market reality that is used to justify the big bets. "Making a Commitment Today for a Better Tomorrow" was the theme of the General Motors exhibition at this month's Beijing motor show. After all, the China market is still significantly smaller than, say, Spain, where 1 .4 million cars were sold last year.

But that hasn't dampened foreign executives' spirits. "China today is our No. 1 geographic priority in terms of market development," Nissan Chief Executive Officer Carlos Ghosn said in a keynote address at the Beijing motor show on June 5. Nissan is part of a wave of Japanese car investment in China that began with the launch of Honda production in Guangzhou in 1999 and has been gathering pace. Nissan is currently negotiating with Dongfeng Motor Co., one of China's big-three car makers, to begin production of passenger cars in Hubei province. Honda and Toyota are aggressively expanding their existing capacity.

Major foreign car makers have pumped well over $5 billion into joint ventures and are eagerly transferring technology, design know-how and marketing skills to their Chinese partners, says Singapore-based industry analyst Graeme Maxton. The money has been flowing in since the first half of the 1 980s when Volkswagen, Chrysler and Peugeot set up manufacturing joint ventures in China. Since then the rest of the world's heavyweights have paraded into the market, with General Motors making the largest single investment of $750 million for its share of a 50-50 joint venture in Shanghai.

In all, 10 foreign car makers have entered joint ventures and are now competing for market share. And they continue to lay investment plans. "GM is intent on continually introducing new products and quality services that meet the growing needs of the China market," said Philip Murtaugh, chairman and CEO of the GM China Group, in a recent statement. The chairman and chief executive of Ford Motor (China) expects Chinese to buy 5 million cars annually by 2010.

But even the most optimistic predictions of market growth hardly warrant the attention car makers are lavishing on China, says Maxton. Even if sales reach 2 million units a year by 2010—the best guess of most companies including General Motors—China would still only account for 2% of today's global new-car market. "That makes it the fastest growing market in the world but the extent of the opportunity is really pretty small in global terms. It is going to be a very tough market," he says. In the U.S. more than 17 million new cars are sold each year. Given the large number of domestic and foreign makers competing in China the potential rewards are quite small.

Foreign car makers built their China investments on two strategic pillars: joint-venture partnerships with large car makers and products aimed at fleet sales to state companies and government affiliates.

Now those pillars are starting to crumble. Private buyers are playing an increasingly important role in the market. Estimates suggest that between 25% and 30% of all cars sold in China now go to private buyers, up from almost none a decade ago.

What is clear is that many private buyers are opting for lower-end cars. That is a real challenge for big foreign makers that remain wedded to their state-owned partners and the production of mainly high-end vehicles. The central government has control over the kind of assembly platforms car makers use. It is only recently that foreign players have been able to take a stake in the low end of the market.

Entering that new market means taking on a growing band of small, Chinese car makers that are posting strong sales with less-expensive vehicles. These new companies cannot match the global players in terms of experience, capital or technical resources and many may be forced to seek alliances with foreign multinationals eventually. They can produce cars cheaply. One of the most popular of the new brands, the Chery, looks remarkably like the best selling brand in the country, the VW Jetta. "They definitely mean more competition in the market," says Kenneth Hsu, a spokesman for Ford Motor (China).

The Chery, which is produced in Anhui province, is the top seller among the new brands so far this year. Chery sold 18 500 cars in the first five months of the year, up 220% over the same period last year. Geely, a Zhejiang-based company that was founded in 1998, is also rising fast. It sold 30 000 cars last year. Ding Shaohua, a company spokesman, says Geely aims to sell 50 000 cars this year, an ambition that's fed by the company's ability to attract qualified engineers and line workers from the big established players. He says the company needs to work on improving its network of service and sales outlets but reckons that companies like his "could hold 30% of the domestic market five years from now," up from just under 10% currently.

Maxton and other analysts say foreign car makers, blinded by steep sales- projection graphs, have failed to make a proper strategic analysis of the market. But General Motors believes that China will be the third-biggest car market in the world by 2025 and is betting on a corporate bloodbath in the meantime that will result in domination by two Or three companies. Then, says Daphne Zhang, director of communications for GM China, "we want to be one of the top players."

Recent manufacturing history in Japan and South Korea demonstrates that car industries are vital for developing economies with ambition.

In advanced economies, car production, sales, financing, maintenance and ancillary transport services can account for up to 10% of total economic activity. A healthy car industry also assures plenty of orders for other pillars of a strong developed economy including steel, plastics, glass and rubber industries. That is why a world- class car industry is a key plank of China's economic plans. In June 2000 the State Economic and Trade Commission unveiled a plan to fundamentally restructure 13 industries including the car industry. The government now wants to push most of China's 120-odd car companies towards mergers with the three big domestic car companies.

China, along with India, is one of the few developing nations with a realistic prospect of developing a car industry to rival the established international players because of the economies of scale arising from such a big domestic market. "In another generation, it is certainly conceivable that one of the big manufacturers could be Chinese," says Maxton. When pointing out success stories in China's car industry, most analysts tend to concentrate on the strides Volkswagen has made to grab about 50% of the passenger- vehicle market since it began local manufacturing in 1985 while carefully guarding its technology. "It's the one clear winner in this business," says Stud well.

However, its joint-venture partner, Shanghai Automotive Industry Group, has since added a big joint venture with General Motors to its portfolio. That puts it in an extremely powerful position to play the two giants off against each other. New models and the latest technology are now flowing into the joint ventures.

In recognition of the problems looming for foreign companies, Paul Gao, a Shanghai-based associate principal at McKinsey & Co., advises foreign car makers to contract out component making and assembly of vehicles to local firms.

That way, foreigners could concentrate on developing products and brands. Gao notes that Volkswagen, Honda and GM report that their car making has been profitable to date.

Reading aids and expressions：

1. pan out　　　

to happen or develop in a particular way　进展 e.g.

We'll have to see how things pan out.

2. a rash of　　　　

a large number of unpleasant events, changes etc within a short time　许多 e.g.

There's been a rash of car thefts in the city center.

3. Adding to the excitement among industry analysts is the fact that sales of passenger cars account for only a quarter of total vehicle sales in China, way short of the proportion sold in Western markets.

这是个倒装句，"the fact that sales of passenger cars account for only a quarter of total vehicle sales in China, way short of the proportion sold in Western markets" 是主语，因为比较长，就和谓语部分颠倒了位置，这句就变成了倒装句。

"that sales of passenger cars account for only a quarter of total vehicle sales in China" 是个由"that" 引导的同位语从句，说明名词 "fact" 的内容

"way short of the proportion sold in Western markets" 是个形容词短语，补充说明名词短语 "only a quarter of total vehicle sales in China"，相当于一个非限制性的定语从句 which is way short of the proportion sold in Western markets; 副词 "way" 修饰形容词短语 "short of"，表示程度。

4. Car markers are betting the market will grow in volume and maturity and are salivating at the prospect of China's economic boom continuing apace until 70% of all sales are passenger cars, as in developed Western markets.

主语 "Car markers" 后有两个并列的谓语 "are betting" 和 "are salivating"

"(that) the market will grow in volume and maturity" 做谓语动词 "are betting" 后的宾语从句

"China's economic boom continuing apace" 是个带逻辑主语的动名词短语，"China's economic boom" 是动名词短语 "continuing apace" 的逻辑主语

"until 70% of all sales are passenger cars, as in developed Western markets" 是时间状语从句，修饰谓语动词 "are salivating"

5. China, along with India, is one of the few developing nations with a realistic prospect of developing a car industry to rival the established international players because of the economies of scale arising from such a big domestic market.

虽然这个句子很长，但它却是个简单句。

"along with India" 是个介词短语，做状语，修饰后面的系表结构 "is one of the few developing nations"。

"with a realistic prospect of developing a car industry to rival the established international players because of the economies of scale arising from such a big domestic market." 是个介词短语，做定语，修饰前面的名词短语 "the few developing nations"。

"developing a car industry to rival the established international players because of the economies of scale arising from such a big domestic market." 是个动名词短语，做介词 "of" 的宾语。

"to rival the established international players because of the economies of scale arising from such a big domestic market." 是动词不定式短语，做动名词短语 "developing a car industry" 的目的状语。

because of the economies of scale arising from such a big domestic market." 是介词短语，修饰动词不定式短语 "to rival the established international players"，其中，现在分词短语 "arising from such a big domestic market" 做定语，修饰名词词组 "the economies of scale"。

6. economies of scale：

factors that cause the average cost of production to decrease as output increases. Economies of scale are the driving force behind all mass production. For example, when printing a book, there is a large initial fixed cost in setting up the printing press. However, once the press is running the cost of printing each book remains nearly constant. Therefore, if it costs $1000 to set up the press and $1 to print each book, the unit cost per book will be $2 if 1000 books are printed, $1.50 if 2000 books are printed, and $1.10 if 10,000 books are printed.

There are always limits to economies of scale. Large companies can become cumbersome and difficult to manage, which makes them vulnerable to competition from smaller, more innovative, and more flexible companies. In addition, even if a company has achieved the optimum level of economies of scale, it still faces the challenge of finding a market for its increased output.

7. When pointing out success stories in China's car industry, most analysts tend to concentrate on the strides Volkswagen has made to grab about 50% of the passenger-vehicle market since it began local manufacturing in 1985 while carefully guarding its technology.

"most analysts tend to concentrate on the strides" 是主句。

"When pointing out success stories in China's car industry" 是个省略了主语和助动词的时间状语从句，因为其主语和主句的主语相同而被省略，其动词因为是主动语态而采用现在分词的形式。

"Volkswagen has made to grab about 50% of the passenger-vehicle market since it began local manufacturing in 1985 while carefully guarding its technology" 是限制性定语从句，修饰其前面的名词 "strides"。

在这个定语从句中，"since it began local manufacturing in 1985 while carefully guarding its technology" 是个时间状语从句，修饰谓语动词 "has made"; 其中还有一个省略了主语和因动词是主动语态而采用现在分词形式的时间状语从句 "while carefully guarding its technology", 它修饰前面时间状语从句中的谓语动词 "began"。

动词不定式 "to grab about 50% of the passenger-vehicle market" 做状语，说明定语从句中谓语动词 "has made" 的目的。

8. That puts it in an extremely powerful position to play the two giants off against each other.

代词 "it" 在这儿是指前面提到过的 "Shanghai Automotive Industry Group"。

Questions：

1. What competitors do the world's leading car makers face in China?
2. Why did passenger vehicles enjoy a big increase in the past few years?
3. Why has China always been a strategic investment for foreign car makers?
4. What are the two strategic pillars on which foreign car manufacturers make their investment in China?
5. Why are car industries considered vital for developing countries with ambitions, as well as for developed countries?
6. Why do countries like China and India have a realistic prospect of developing a car industry?
7. Why should foreigners contract out component making and vehicle assembling to local Chinese firms, according to Paul Gao?