People’s Republic of China (PRC)
October 25, 2004 – Lou Ann Hammond discusses the People’s Republic of China (PRC) car culture with syndicated ABC radio network host John Batchelor.
PRC Car Culture
What is it like to buy and own a car in China? Are muscle and tuner cars hot and are they available? Follow us as we careen about corners filled with bicycles that have no lights, people that have no reflective gear, and the largest per car capita death in the world. Were looking under the hood of Shanghai, China.
Just weeks after the first Formula One race was completed at the new Shanghai International Circuit we were at the Chinese Grand Prix for the International Michelin Challenge Bibendum. The layout of the circuit is the Chinese figure for Shanghai. While the circuit is only 20 miles northwest of Shanghai, it takes over an hour to get there from Shanghai because of traffic congestion. These people drive like they are on the track, each vying for Michael Schumacher’s title. The trick, I am told by my interpreter, is not to look at the other driver. It’s kind of like the first person who blinks in a staring contest. They have to give way.
According to Autoweek magazine, the facility costs more than $400 million dollars. All 150,000 tickets were sold, one ticket equalling about three months’ earnings. All this, and foreigners are not allowed to drive on the streets of China. I asked someone if Chinese people were big Formula One fans and they said, no, but they would become fans because it was fashionable. Expect to see muscle cars and tuner cars the following suit. According to Phil Murtaugh, CEO of General Motors, China has more U.S. dollar millionaires than the U.S. does.
Last Thursday, October 14th, Edouard Michelin, CEO Michelin, hosted a symposium while at the Challenge Bibendum in Shanghai China. Entitled, What’s next: a vision of key decision-makers. One of the Chinese guys got up and said that by the time he got through speaking three people would be dead from a car accident. He spoke for ten minutes. That equals 160,000 deaths a year. According to the World Health Organization (WHO), that figure is low.
A report from Who estimates that 600 people are killed and around 45,000 people are injured on Chinas roads every day.
According to Automotive Resources Asia, the average annual income is just $1,000 a year. How can a Chinese person afford a car? Because the average person in China isn’t going to buy a car. Only 30 million people, out of the 1.3 billion in China, own a car. It will be urban professionals, entrepreneurs, and the Chinese yuppies that are buying cars. They are the city folks, earning anywhere from $20,000-$200,000 a year.
Rina Rong, marketing manager for Yongda Auto, the Roger Penske Auto Group of China, says that fifty percent of their car buyers financed their vehicle last year. This year, because of a policy change in April, the threshold for financing was raised, so the projection of the Chinese able to finance their vehicle this year will be only fifteen percent.
Tom Libby, senior analyst Power Information Network, says that 60% of cars in America are financed. If America increased its restrictions on financing there would be a group of people who could not get financing and would not be able to purchase a car. The same is happening in China. Libby sites Chinas credit restrictions with a decrease in sales.
The International Herald Tribune announced that Volkswagen China will be offering to finance. Volkswagen can offer up to 80 percent of the purchase price and a balloon loan that defers as much as 20 percent of the total cost to the final installment. Three-year loans will be 3.88 percent,
rising to 6.99 percent to a four-year term. Consumers can also opt for the conventional loans that require a down payment and monthly installments to pay off the rest of the purchase price.
Maximilian Auffhammer, assistant professor U.C. Berkeley, says the market is restricted to the big players for now. “Part of China joining the World Trade Organisation was the agreement to open financing to outside competition. The financial requirements, however, are high. The numbers are sketchy, but in order for a foreign finance group to offer financing in China, they must maintain a registered capital of $35 million, have minimum assets of $480 million, and show an annual income of at least $235 million.
Auffhammer is concerned about non-performing loans (NPL) as well. “Chinese have had a cultural bias against taking on debt, therefore they have no credit rating. There is a worry about banks going belly-up by NPLs.”
Automotive Resources Asia says that China purchased 2.1 million new cars in 2003 and is on track to purchase 2.5 million for 2004. The average price for a new car is around $20,000. The top sellers Volkswagen Passat, Buick Regal, and Honda Accord.
Yongda Auto in Shanghai sells about 1,500 Regals a month. Rong listed the price for a Regal from 203,800 China Yuan Renminbi (CNY) ($24,608.47) to 336,000 (CNY) ($40,571.38). Interestingly, the lesser cars all have an 8 in the money figure, meaning one is seeking prosperity. The more expensive cars don’t have an 8 in their figure, because it is assumed that if you can afford that car, you have already reached prosperity. Needless to say, the group that feels they have already “made it”, the elite group, buy the luxury cars that don’t have an 8 in them.
Automotive Resources Asia breaks down the first-year costs for a car; For starters, individuals must purchase the rights to buy a car, which costs between $3,000-$5,000. A 2.5 liter Regal goes today for about $32,000. Then there are the annual fees: insurance ($1,000), parking ($600), road maintenance fee ($200), and gasoline ($2 a gallon or about $600 per year for the average driver). All up the costs get close to $40,000 for the first year of driving pleasure.
Automotive Resources Asia breaks down the second group of buyers – the “8” buyers, as the Yuppies, or as we say, the DINKs (double income, no (or one) kid). China has a one-child policy, so you don’t see one family with a gaggle of kids. This also means cars will be smaller. The 8 buyers buy vehicles such as the Honda Fit, Hyundai Elantra, Volkswagen Polo, and the Buick Excelle.
Yongda Auto sells an average of 1,800 Excelles a month, ranging in price from 129,800 CNY ($15,673) to 179,800 CNY ($21,710).
According to Rong, there are thirteen Buick dealerships in Shanghai, Yongda Auto being the number one in sales and customer satisfaction. Rong explains that customer satisfaction is very important in China. J.D. Power is gaining power, not because of the consumers, but because of the OEMs. Manufacturers are using J.D. Powers numbers to promote themselves.
According to Steve Carlisle, Vice President Planning, General Motors, “Buick was not our first choice. Buick has a historical appeal as a luxury vehicle in China. My kids go to school in Pudong and the streets are lined with the GL. We will be offering the Cadillac CTS and are already taking orders to be filled within the year.”
Buick may not have been General Motors’ first choice, but it is selling gang-busters in China.
GMs marketshare is about 13 percent of the Chinese market, GMs fourth-largest market. Volkswagen is huge in China as well, with 29 percent of the marketshare, in fact, they are selling more cars in China than they are in Germany. Audi A6 has been the government car for years, chauffeuring communist dictators in black Audis for a decade. The roads are also packed with Volkswagen Santanas for the middle income, doing the universal chauffeuring of their one child.
Both General Motors and Volkswagen are in joint ventures with Shanghai Automotive Industry Corp (SAIC). Joint Venture was the only avenue of entry into the Chinese market before 2001 when China joined the World Trade Organization. Expect to see more cars made in China with joint ventures from all OEMs, diluting the marketshare of Volkswagen and General Motors. This “made in China” will allow those companies to escape the 25 percent duty that is already in place in the rest of Asia for imported cars. The ultra-luxury cars will still be imported, as those niche cars are priced to include luxury taxes.
SAIC doesn’t have its own vehicle, just joint ventures. GM has announced it’s a first hybrid project to be undertaken with its Chinese partner SAIC. The hybrid bus will utilize a hybrid powertrain developed by GMs Allison Transmission Division that uses dual electric motors; one to start the bus from a stop (since hybrids don’t idle it’s always a stop) and, two, regenerative braking to capture energy in its advanced battery system. It will be packaged, not produced, in a bus manufactured by Sunwin, SAIC’s bus joint venture in Shanghai.
The other concern, according to Automotive Resources Asia is grey cars. A drive-by estimate is one in six or seven vehicles are grey market imports. Top sellers include the Nissan Cefiro and Sunny, Toyota Camry, the Daewoo Nubira, and the Mitsubishi Pajero. According to the Japan Automotive Manufacturers Association (JAMA), Japanese carmakers exported some 39,000 sedans to China in 2000. Not only is that twice Chinas official total, but it also does not even count imports from Korea, Europe, and the United States.
SAIC and Geely Automobile Holdings Ltd., Great Wall Automobile Holdings Co. Ltd., and Gonow, a manufacturer of motor-scooters, are all looking to export Chinese made cars from China. Negotiations are in the works, but according to J.D. Powers, the quality of compact cars built in China was four times worse than those built in the United States.
It may take some time and retooling to get over the stigma about buying a car made in china, even though about half the items sold in Wal-Mart are made in China. The Chinese companies are losing sales to U.S. companies and will need to make up for it somewhere. Just as Japan and Korea have broken into the American markets with small, inexpensive cars and worked their way up, expect China to do the same.
The big question is, how does this play long-term in a communist dictatorship world? China is partnering with companies that are used to having some say in negotiations. All OEMs, in fact, have full lobbying arms in Washington D.C. that “work with the government”. The Peoples Republic of China needs all the partners it can get to stay on an economic growth pattern. At this point, General Motors hasn’t repatriated any of its profits back to the United States, investing it instead in new Chinese ventures. Is there some trepidation from foreign companies to be working in a communist dictatorship when they are used to working in a Capitalist society?