By Brian Schwarz
SHANGHAI – In its quest to make this city China’s auto-manufacturing capital, the municipal government is increasing investment in the Shanghai International Automobile City, according to local media reports.
Analysts say Shanghai has a competitive edge over rival Chinese cities in automobile manufacturing. However, they also caution that Shanghai’s ambition to become China’s Detroit could be hampered by worsening overproduction at home and growing trade tensions with potential importers of Chinese-made cars.
The Shanghai Daily reported that the municipal government has set the goal of turning Auto City, in the Anting area of the city’s western district of Jiading, into a multi-functional regional hub with an additional investment of 38 billion yuan (US$4.75 billion) or more in the run-up to 2010 and bolstering its research and development capacity.
The additional investment in the manufacturing park could encourage car makers such as Shanghai Automotive Industrial Corp (SAIC) and Shanghai Volkswagen to increase production to 500,000 vehicles per year. Zhou Bin, manager of the planning department of Shanghai International Autocity Development Co Ltd, expects Auto City to generate 300 billion yuan worth of automobile trade revenue annually.
With the introduction of a new Formula One racetrack, Auto City has made significant progress. During the past five years, 184 industrial projects have commenced, with investment from 100 auto-part makers. A few weeks ago, for example, SAIC, China’s second-biggest auto maker, began construction on a new automobile research institute, which is intended to help the firm develop self-branded models and new-fuel vehicles. Tongji University, which helped develop China’s first fuel-cell sedan, has also moved its automobile research department to Anting.
And it’s not just domestic producers using the auto park to their advantage. Auto City also hosts foreign parts suppliers such as Delphi and Visteon, both of which work in close cooperation with DaimlerChrysler AG and General Motors Corp in China.
Shanghai’s competitive edge
With overcapacity looming in the domestic market and trade tensions simmering with Western trading partners, some may question Shanghai’s ambitions. While it enjoys a superior location, the metropolis has comparatively high labor costs and high real-estate prices.
And other Chinese cities are racing ahead in search of greater auto investment. How do Shanghai’s capabilities compare with those of other cities such as neighboring Nanjing and the southern manufacturing center of Guangzhou?
Jeff Lin, a principal at Booz Allen in Greater China, says Shanghai has many hidden factors that make it an attractive location. With its international outlook and competitive energy, there is an emphasis on quality among Shanghai residents. Compared with inland Chinese cities, it enjoys superior infrastructure, such as the new Yangshan deep-water port, and a location to serve export markets in the region.
Shanghai is also home to many key suppliers, such Baoshan Iron and Steel, and is close to the fast-growing Yangtze Delta region. Baosteel is considered one of the most competitive steel producers in the world and has expanded its cooperation with FAW-Volkswagen.
Lin says Shanghai also holds an advantage in developing new engineering and management talent. With many industries suffering from a lack of experienced auto professionals, Shanghai universities, on average, have a better pool of young talent than Nanjing and Guangzhou.
“We have attracted car manufacturers and auto-part makers to build plants here and have laid a solid foundation for the development of Shanghai’s auto industry,” Auto City’s Zhou Bin told the Shanghai Daily.
Overcapacity looms
China’s central government has identified the auto industry as a “pillar” of the nation’s economy and offers incentives and protections to domestic producers. And to encourage the growth of local brands, Beijing announced plans in late June to offer low-interest loans to domestic car makers and aims to lift the share of Chinese nameplates to 60% by 2008, from 20% today.
“Years of large investments in the market have made China a top global auto-manufacturing hub behind the United States, Europe and Japan. The manufacturing strength will be enhanced further,” said Wang Liangfeng, an analyst with Shanghai-based Autobeat Consulting firm.
By the end of this year, China is expected to become the world’s third-largest car maker, following the US and Japan, according to a report released by Polk Marketing Systems. Government policy will also play a role in the nation’s efforts to become a world-class auto exporter.
Sales of Chinese-made cars are climbing both at home and abroad. Despite higher consumption taxes on big-engine cars, rising gasoline prices and stricter bank lending policies, passenger-car sales soared 50% during the first six months of 2006 over the same period a year ago, with second-tier cities such as Chengdu and Chongqing in the southwest leading the way. At the same time, China’s exports of automobiles doubled in 2005 to $1.58 billion, according to government figures.
However, while China’s auto industry has made significant progress in recent years, serious production overcapacity and falling prices are bound to take their toll. The government warned this year that the country was on course to produce twice as many cars as it needs.
China’s annual auto-production capacity, now at 8 million units, has already exceeded anticipated sales of 5.5 million units this year. And the government estimates that motor-vehicle production will hit 20 million units in 2010, more than double the expected sales of 9 million units.
Booz Allen’s Lin predicts that this overproduction will lead to a shakeup in the industry, with many inefficient players either consolidating or going out of business.
Overproduction may not translate into a greater reliance on export markets, which could increase trade tensions, but it certainly will put downward pressure on global prices.
Growing trade tensions
In 2004, China’s vehicle exports exceeded imports for the first time, as 172,800 units went overseas. But in mid-September this year, China’s Chery Automobile was forced to delay its ambitious plan to export cars to the US. In cooperation with maverick entrepreneur Malcolm Bricklin, the firm now hopes to send cars to the very competitive US market beginning in 2009, two years behind its original target date.
According to a recent report in BusinessWeek, Detroit-based Chrysler has been in discussions with Chery about the possibility of jointly manufacturing a small car. Chery produces 400,000 vehicles a year and plans to increase production by 1 million vehicles per year.
With the top Chinese auto makers making plans to export more to the West, trade officials are starting to raise concerns. Although import duties have dropped significantly since China joined the World Trade Organization in 2001, foreign auto makers are limited to a 50% stake in Chinese producers for the domestic market, while there is no limit on ownership of export operations. Government support for local auto makers is raising the eyebrows of WTO officials and creating friction among trading partners.
Last month, trade officials from the US, the European Union and Canada formally petitioned the international trade body to prohibit Chinese duties on imported car parts, which they say are hampering foreign car makers in China. The complaint alleges that the government requires foreign car makers to buy at least 40% of their parts from local suppliers or pay almost double the import duty applied to assembled vehicles. Under Chinese rules, imported auto parts making up more than 60% of the value of a car are subject to a 28% tariff, which is the same duty imposed on complete new cars.
And while many other labor-intensive industries have done well by exploiting the country’s low labor costs to export at a rock-bottom prices, the auto industry does not lend itself to a so-called “China price”, at least not in the near future, according to Susan Helper, an economics professor at Case Western Reserve University’s Weatherhead School of Management in the US state of Ohio.
In a recent Warton University e-newsletter, Helper notes two differences between autos and many other labor-intensive industries, such as textiles, that China has come to dominate. Unlike clothing or electronics, shipping costs are significant when it comes to autos, which include more “dead airspace”. Hindering the Chinese auto industry’s efforts to become a low-cost producer are commodity prices and the costs of developing automotive technology and research capability.
All these pose big challenges to the Shanghai government’s ambition to turn the largest commercial metropolis of China into a new Detroit. The city in the US state of Michigan has ridden the auto industry’s boom-and-bust cycle for generations. Now, if local government planners get their way, Shanghai is poised to join the ride.
Brian Schwarz is an American freelance writer and corporate trainer based in Shanghai.