China gearing up to become major auto exporter

By Keith Bradsher
The New York Times

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For now, most of the cars and light trucks made here are sold here. But China — already the world's dominant manufacturer of products from toys to fax machines to furniture — is laying plans to become a big exporter of cars.

Automakers are producing cars here to the same designs that they use in the United States, with Honda making Accords in Guangzhou that are identical to those it manufactures in Ohio.

Still, China's auto industry, mainly local companies in joint ventures with multinationals, is not internationally competitive because of quality problems and glaringly inefficient parts factories.

China's auto exports to the United States consist mostly of replacement parts shipped to repair garages, because automakers have been reluctant to make their assembly plants reliant on Chinese suppliers.

But with broad support from the government and foreign investors, manufacturers in China are quickly improving operations — and staffing them with workers earning as little as 50 cents an hour. Within a few years, they are likely to be building high-quality cars and parts for as little as, or less than, anyone else in the world.

Analysts say China could surpass Germany as the world's No. 3 carmaking country in four years.

Risk being left behind

Executives at each major automaker say the combination of low costs and strong demand gives them no choice but to invest heavily here or risk being left behind. "Our competitors have reached the same conclusion," said Frederick Henderson, the president of GM's Asian and Pacific operations.

The growth of auto manufacturing in China — the number of cars and light trucks produced has jumped to 3.8 million from 1.8 million over the last three years, compared with 12 million now in the United States, 10 million in Japan and 4.8 million in Germany — has enormous implications not only for this country but for economies around the world.

In China, where about 4 million families own cars and about 1 million more buy cars each year, this means that millions of citizens can travel more widely, eroding somewhat the political and social controls the Communist Party has long imposed. Rising auto production, with sales to state-owned enterprises as well as families, has fostered the rapid expansion of a long list of other industries that rely mainly on sales to automakers, including steel producers. It is helping to create a consumer-credit industry.

But putting China on wheels has also created terrible traffic jams, a rising death rate in a country with an atrocious traffic-safety record, and severe air pollution in a country that already has seven of the world's 10 most polluted cities.

Automakers here should be ready to export cars to other Asian markets in several years and later to industrialized markets like the United States and the European Union.

Bernd Leissner, the president of Volkswagen Asia-Pacific, the foreign automaker with the biggest share of the Chinese market, estimates that it still costs 18 percent more to produce a car in China than in an industrialized country like Germany. But with new steel mills and parts factories opening at a brisk pace, that gap will disappear by 2006, he said. "Our target is to become export ready as soon as possible," he said.

Production problems

Visits to auto-assembly plants and factories across China show why it will be a few more years before this country poses a serious threat to Detroit or Stuttgart, Germany, even though a few parts are already exported and General Motors plans to start shipping Chinese-made engines to a Canadian assembly plant this year.

At Honda's plant in Guangzhou, in southeastern China, 90 percent of the steel for the new Accord sedans and Odyssey minivans must be imported from Japan, despite steep shipping costs. Chinese mills cannot make corrosion-resistant steel that meets Honda's standards.

In Harbin, in northernmost China, Hafei, a Chinese manufacturer, has built a factory with the latest Swedish and Japanese robots. But deliveries of steel are so irregular, because of shortages and the decrepit railroad system, that the factory must absorb the considerable cost of keeping steel for two months on hand — enough for 50,000 cars.

Recent quality improvements have come with extra costs, too. Volkswagen has been able to reach international quality standards for cars made in China, Leissner said, but only because suppliers sometimes must discard large numbers of substandard parts, which drives up costs. Volkswagen also uses many imported parts.

But new equipment and new production processes in assembly plants are starting to address these problems. A factory complex built here by a General Motors joint venture with the Shanghai Automotive Industry Corp. looks much like GM factories in the United States.

Unsteady base?

For all its strengths, the Chinese auto industry, like the Chinese economy as a whole and perhaps like China's political system and even society, is a mountain created on a very narrow and possibly wobbly base. Aggressive lending by government-owned banks has been stimulating the economy for years — even though many debts are never repaid, to the point that Chinese banks now have portfolios of bad loans rivaling those of Japanese banks, but in an economy that is one-seventh the size.

The automaking boom in China worries businesses and workers in many nations. International companies that build factories in China as they expand do not need to hire as many workers in their home markets and may lay off some.

Cooper Tire & Rubber, for example, said recently it would ship tire-making equipment from its factory in Albany, Ga., to a company in Hangzhou and buy as many as 300,000 truck tires a year from the Chinese company. At the same time, Cooper said it would expand production in Georgia of higher-performance tires, but would not expand its labor force to do so.

China's success is also a threat to other countries, mostly close American allies, where auto parts are made, including Mexico, South Korea and the Philippines.

Union leaders in industrialized countries are making low-wage competition from China a political issue. Competing on wages "is a race to the bottom," said Ron Gettelfinger, president of the United Auto Workers. "And no one wins a race to the bottom."

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