China: Car Capital of the World?

It will soon be the world's busiest market, and domestic carmakers are growing rapidly in size and quality

By Ian Rowley

Models display sedans at the Chery Automobile Co., Ltd. in Wuhu of Anhui Province, China. CHINA PHOTOS/GETTY IMAGES

The attendance at the Shanghai auto show in April said it all: No major automaker dared to miss it. While Nissan (NSANY) skipped Detroit's North American International Auto Show last winter, and several companies are expected to stay home from this fall's Tokyo Motor Show, the glitz and glamour at Shanghai were as flashy as ever. Porsche even decided to launch its new luxury sedan, the Panamera, at a posh event at the 101-story Shanghai Park Hyatt hotel—rather than in Frankfurt or Detroit. "For the last 100 years, the auto market was about the U.S. and Europe, but now everything is changed,"says Atsuyoshi Hyogo, chief operating officer for Honda Motor (HMC) in China, which showed a new concept car in Shanghai under the Li Nian brand, a new marque for the Chinese market.

As car markets sputter around the world, global automakers are looking to China as the big hope for growth in 2009. The Middle Kingdom is on track to rival the U.S. as the world's largest auto market this year. In the first quarter of 2009, sales in China rose 4.3%, to 2.7 million vehicles, and the pace could pick up to as much as 10% for the year, says Intelligence Automotive Asia, a London consultant. That compares with an expected decline of 23% in the U.S. and 15% in Europe. With March and April showing particularly strong growth, China might overtake the U.S. by yearend. In the global auto market, China "is the only bright spot," says Daimler (DAI) CEO Dieter Zetsche.

Yet for the world's automakers, all the optimism about China may be short-lived. As the market takes off, local players are coming on strong and taking market share from foreign rivals. That marks an important shift. Foreign automakers have been China's market leaders ever since the government invited them to form joint ventures with local partners two decades ago. But in the first quarter of 2009, Chinese brands boosted their market share to 30%, up from 26% during the same period in 2008, while foreign automakers' share fell to 70% from 74%.

electric vehicles next?

That trend is expected to continue. Chinese automakers are producing better cars than ever before, yet still enjoy substantial cost advantages over their foreign peers. They are investing in luxury models and clean vehicles, and are better placed than foreign rivals to benefit from the tax cuts and government incentives that have fueled a spurt in car sales. And as they launch more upscale cars, Chinese automakers are also improving their production facilities and keeping a closer watch on quality control. "As their products [advance], they will also upgrade the plants that produce their vehicles," says Mei Songlin, general manager of research at J.D. Power Asia Pacific's (MHP) China operation.

As a result, Chinese players are speeding quickly toward a 40% or higher share of the local market. "It's been coming, but suddenly the Chinese automakers have the critical mass and the momentum," says Ashvin Chotai, managing director of Intelligence Automotive Asia. He estimates that Chinese automakers will control 38% of the domestic car market by 2015. Others are even more bullish. Scott Laprise, an analyst at brokerage CLSA in Shanghai, figures that if Beijing gets serious about electric vehicles, local automakers could account for half of all new car sales within three years. "Within a year the government could turn around and start telling people to buy electric cars," he says.

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