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Engines revving as China goes car crazy

Automakers see ‘gold rush,’ others fear impact on environment

BEIJING - Wang Qishun was all smiles as he watched a stream of gleaming cars pull into his drive-in cinema one recent moonlit evening. "The idea is from America, and, like America, China will also enter the auto age," he said, explaining his decision to set up a drive-in movie theater on a wooded northeastern edge of Beijing in 1998.

"The young generation of China is seeking modernity, and watching movies from inside the car, with all its comforts and privacy, is a sign of modernity," he said. "Now, I have a very stable business," Wang added.

Backed by government strategy and consumer demand, the stage is set for China's auto revolution, a historic shift of image for a country known as the kingdom of bicycles.

The explosive growth of China's auto industry in recent years has not only tantalized the world's auto giants — which have already poured in more than $30 billion in investments, with billions more to come — it has also stirred debate about how the world's environment and energy supply could cope with the motorization of a nation of 1.3 billion.

"The car used to be a viewed as a tool of production; but now, owning a car is a way of life, a necessity of life," said Huang Zhihui, a Beijing television producer.

This week, Beijing holds the biggest auto show ever staged in China. "It used to be that many companies would not come even if we invited them to our previous auto shows," said Qie Xiaogang, a veteran analyst at Beijing's largest auto market. "But for this show, many wanted to join even if we could not extend the invitation due to limited space."

China's allure
China’s car sales surged 40 percent and raced past the one million mark for the first time in 2002, and then nearly doubled to almost 2 million last year, with a projected 2.6 million output this year, a phenomenal rate of growth that has pushed it to overtake Germany as the world's third biggest auto market, after the United States and Japan.

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Leading the charge into the China market is the world's number one producer, General Motors, which just announced a new $3 billion investment over three years, with the aim of doubling its yearly output from over half a million to 1.3 million units by 2007.

GM's move will pit it against Europe's leading producer Volkswagen, which also aims to increase its China output to 1.6 million units in the same time frame. Volkswagen, which enjoys a leading 33 percent market share in China, now sells more cars in China than it does in its home market of Germany.

Playing a cautious catch-up strategy, the U.S. number two producer Ford recently announced over $1 billion new investment in China with the aim of tripling output. DaimlerChrysler has also signed a $1.23 billion deal with a Beijing partner and rivals Toyota, Nissan, Honda and Hyundai have announced new investments of $10 billion as well.

The threat of overcapacity, and the specter of a future price war, has led China's Xinhua news agency to warn that output will exceed market demand by 20-25 percent in the next two to three years.

Bullish market
"Actually, the explosion of demand in the last two years was a very special temporary phenomenon," said Qie Xiaogang, the auto analyst. "China is still a low-income country and effective demand is limited, with annual growth rate of 10 to 15 percent, not 40 or 80 percent, more normal and sustainable," he added.

However, GM remains bullish in its belief that China will replace Germany as its second biggest market this year.

GM reported a quadrupling of its first-quarter net profits to $162 million, from last year's $44 million, and China appears to be on track to contribute 20-25 percent of GM's total global projected profit of $4 billion.

GM earned more from its Asia-Pacific operations, mostly from China, than from its traditional home base of North America in the third quarter of last year.

Ho / REUTERS
On the eve of the Auto China 2004 auto show, Chinese visitors take pictures of a Cadillac CTS in front of the Great Wall north of Beijing. General Motors announced plans to invest $3 billion in China over the next three years and introduce Cadillac vehicles and dealerships to China in 2004.

"It is feeling like the great gold rush," remarked GM's chief executive Rick Wagoner to a Swiss-American Chamber of Commerce assembly in Geneva earlier this year.

Wagoner predicted China would surpass Japan as the second biggest auto market in the world in five years' time at most, with a "reasonable chance" of overtaking the U.S. in his lifetime.

GM's current estimate is that some 74 million Chinese families, or 20 percent of the population, can afford to buy cars.

China's huge potential is also seen in the fact that only 20 people per 1,000 own cars, compared with 120 per 1,000 globally. While the United States. has 200 cars per 100 households, there is only one per four homes in major cities here like Beijing or Chengdu.

For GM, with its expertise in car finance, there are huge opportunities for growth as only some five to ten percent of car sales are backed by auto loans. China's auto loans could surpass 40 percent by decade's end, while 60-80 percent is the norm in developed countries, analysts said.

Potential pitfalls
One big question mark is the impact of China's current efforts to cool down its overheating economy, which grew more than nine percent last year and a further 9.7 percent in the first quarter this year, rates many economist consider unsustainable.

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