Like many other manufacturing industries in China, the Chinese automobile sector has become over productive after years of rapid expansion, prompting the government to begin raising the threshold for further market access.

In the face of tougher government regulations and intensified competition in the domestic market with the influx of foreign rivals, China automakers are stepping up efforts to boost exports of their products, particularly to the United States, the world's largest market.

But industry analyst doubt that China can become a significant car exporter in the next decade, because of lack of research and development, maintenance, and after-sale services.

China Hunan Changfeng Motor Co is showing models at the ongoing North American International Auto Show in Detroit, the biggest such show in the US, one year after Geely Automobile Holdings became the first auto maker from China to display a brand there.

The moves serve as a signal that China carmakers are eager to access the world's biggest auto market and say it is just a question of when and how. However, auto makers from China and industry analysts have differing opinions on when China will be able to export cars to the US in quantity.

In this regard, China car makers are very optimistic.

Changfeng, 16% owned by Mitsubishi Motors Corp, Japan's sixth-largest vehicle maker by production, and 50.4% owned by the Chinese government , has expressed its hope of beginning to sell cars in the US within two years. Geely also said at last year's Detroit auto show that it intended to sell one of its brands in the US in 2008.

But industry analysts at home and abroad have poured cold water on this ambition, saying it might take a decade for Chinese auto makers to make their dream of exporting cars in quantity to the US come true. And getting a surplus in trading with China.

Intensifying competition in China market is one of the major reasons for home-grown car makers to emphasize exports.

According to statistics released by the China Association of Automobile Manufacturers (CAAM) last week, China's overall sales of motor vehicles of all kinds totaled 7.2 million units last year, up 25.1% from 2005. Passenger car sales grew to 3.8 million units.



This enables the Middle Kingdom to overtake Japan to become the world's second-largest automobile market after the US last year as new car purchases surged 37%.



Japan's overall sales of all vehicles in 2006 totaled 5.7 million units, a slight decline from a year before. US vehicle sales totaled 16.5 million units last year, also down a bit from the previous year, according to research firm Autodata Inc.

But the best-selling vehicles in China are foreign brands made by joint ventures.

Last year, Shanghai GM won the sales crown, with sales of passenger cars reaching 413,367 units, an increase of 23% year on year. Shanghai Volkswagen and FAW Volkswagen followed with sales of 352,000 and 350,000 units respectively. Beijing Hyundai sold 290,000 passenger cars, while the sales of Guangzhou Honda, Japanese car maker Honda Motor's joint venture with Guangzhou Automobile Corp, climbed by 13% to 260,000 units, according to CAAM.

Chery Automobile Co, the Anhui-based maker of the small engine QQ brand, led the home grown makers with sales of 305,236 units. On the whole, China carmakers took a market share of 30% last year, which was significantly up from its 25% share in 2005. This suggests that quality and reliability remain major concerns for Chinese car buyers, in which domestic makers still lag behind their foreign rivals.

After China entry to the World Trade Organization in December 2001, foreign car makers began to rush into China to get a slice of the world's fastest-growing industry. To tap into the booming market, nearly all Chinese regions have also boost investment in auto manufacturing. As a result, the industry has become over productive in recent years, forcing car makers to cut prices to keep their market share.

According to China Daily, there are more than 100 automakers across the China , with dozens of them producing fewer than 10,000 units a year. Figures from the National Development and Reform Commission (NDRC), the China top economic-planning body, China auto-production capacity has already reached 8 million units, which would grow to 10 million in 2008 and 20 million by 2010 if all producers complete their expansion plans, which would far exceed domestic demand.

To prevent overproduction in China , the NDRC last month said in a notice that carmakers applying to build new plants must have sold four-fifths or more of their approved production capacity in the previous year. A firm wanting to construct a second plant must have sold at least 100,000 cars or 50,000 sport-utility vehicles or multi-purpose vehicles (such as minivans), the notice said. It also stipulated minimum sales requirements for trucks and buses.

Analysts say the new measures mainly target small players, which will have little impact on major automakers of China .

Amid increasingly fierce market competition and toughened regulations at home and with the influx of foreign giants, small carmakers of China are beginning to focus on exports in the hope of "conquering" the overseas markets with the so-called " China price". But the products they are exporting are of low quality and virtually without after-sale services.



"Low cost does not necessarily mean low quality, but it could mean a challenge to good products,'' Hong Kong-based industry writer and commentator Tang Sai-kit said. "But exports of low-quality products made in China hurt the reputation of all Chinese exports . And the most negative impact is that this will make [it even harder for] car makers of China ... to penetrate the overseas markets, taking them years and years and years to achieve their goal once the reputation of China exported cars is tainted.''

Complaints about domestically manufactured cars have become among the top 10 consumer complaints in the country since 2003, according to the China Consumers' Association. The group said it received more than 6,600 complaints about cars in 2006, of which more than 80% were about quality problems, maintenance and after-sale services.



Recognizing that quality problems could hurt the domestic auto industry as a whole and the reputation of Chinese exports - the same kind of problems that initially tainted the reputation of Japanese and Korean exports in the US - China has introduced policies to consolidate the auto market.

Banks in China have been tightening credit requirements for car loans, while Beijing has been encouraging mergers and acquisition (M&A) in the auto industry and raising the market threshold for market access to curb the expansion of production capacity, so trading with China will increase.

Aware of problems with car exports, the government has also begun to tighten requirements on domestic carmakers and trading companies for qualification for car exports by introducing a licensing system. The China export license, which will come into effect on March 1, is aimed at weeding out companies that are too small to be serious exporters and rebuilding the image of the "made in China" label, according to the Ministry of Commerce (MOC).

Auto exports in China are expected to reach a record high of 340,000 units in 2006, almost double the 172,000 units in 2005. Passenger car exports are expected almost to triple to more than 90,000 units in 2006, according to the MOC. Developing countries in Africa and Southeast Asia topped the target markets.

There were 1,175 car exporters last year in China . But 669 of them each sold fewer than 10 vehicles overseas and another 204 sold just one unit each. "The establishment of the new rules is expected to eliminate about 700 car exporters," Zhang Ji, deputy director of the MOC's Department of Mechanics, Electronics and High-tech Industry, was quoted as saying by the Xinhua News Agency.

Analysts say China needs to overcome a long list of problems, including poor quality, high costs, weak design and a lack of distribution networks, before car makers of China can seriously compete with their Japanese and South Korean counterparts.

Wharton management's John Paul MacDuffie was quoted as saying by the English-language newspaper Shanghai Daily that Chinese companies will have to improve their products before exporting to the US. "If anything, American consumer standards for quality have only gotten higher," he said.

Hong Kong-based car analyst Tang said it is unlikely that a significant number of Chinese brands will be seen on North American roads in the near future. "In addition to investing more to develop their own engines, car makers in China will find it difficult to produce cars suitable for places where the environment might be totally different from China .''



Tang said it's also unrealistic to count on Sino-foreign joint ventures in China to export vehicles to the US, because of their long-established manufacturing bases in other emerging countries close to the US and world trade restrictions on car exports. "The Sino-foreign joint ventures seem too busy to take their eyes off the Chinese market, which should be their focus for now" and this can be a way for China trading to improve.

General Motors Corp chairman Rick Wagoner said his focus in China is on GM's sales there, the Detroit Free Press reported. "I certainly don't rule out over time importing and exporting more out of China, but at this point our focus is taking advantage of [ China ] domestic market opportunity, and I see that as the game for the foreseeable future."

Other car makers have different views. Daimler Chrysler's Chrysler Group recently said it was joining forces with Chery to manufacture small cars in China that will then be sold abroad, driven by the economics of China auto industry.

This article was researched and produced by Posicionarte for China Trading Company , 2007
Author Bio:

Eric Castro Mattas, is chief editor of Posicionarte researching and producing articles for China Trading Company. If you need products from China please visit www.chinatrading-company.com