GM, VW and Toyota race into China

"By leaping all at once in the same direction, they're creating a fragmented market where they'll have a hard time making money. Plus, the Chinese are masters at playing one company off against another."

Graeme Maxton, managing director at Autopolis

At the Beijing auto show this past June, the most popular entertainers were a pair of Norwegian women who played electric violins.

Foreigners supplied the buzz offstage too, as all nine of the world's biggest automakers held press conferences to announce new investments in China.

Companies such as General Motors Corp, Toyota Motor Corp and Volkswagen AG are eager to spend big money in China -- even though they expect to reap small profits there at least through the end of the decade.

As the foreign automakers rush into China, they remain forced by government regulations to play second fiddle to their local partners. They come anyway, because they see a fast-growing market with huge potential -- as well as a labor force that can produce quality cars at low wages.

"China is becoming the world's factory," said Paul Gao, a McKinsey & Co consultant in Shanghai.

"Its laborers are delivering high quality, high productivity and very low costs in industries like textiles and electronics, and the same thing will happen with automobiles," Gao said.

About 2.35 million cars, buses and trucks were sold in China in 2001, up 12.7 percent from the prior year. By contrast, Japan's sales were 5.94 million, down 0.5 percent, and US sales were 17.2 million, down 1.3 percent.

"To remain the world's largest automaker, you've got to be pretty big in China," said Philip Murtaugh, GM's chairman in China.

Automotive analysts expect these trends to continue.

Annual income of US$4,500 per capita in cities like Shanghai is already more than the salaries that fueled South Korea's auto-buying boom in the 1980s, says Jerry Lou, a Morgan Stanley Asia Ltd analyst in Shanghai.

China will pass the US to become the world's largest vehicle market in 25 years, Murtaugh said.

"GM has to be where its competitors are," said Lynn Yturri, comanager of the Scottsdale, Arizona-based One Group Equity Income Fund, which owns 70,000 GM convertible securities.

"They can't give away a market that might be good."

Corporate lemmings

Not so fast, says Graeme Maxton, managing director at Autopolis, an auto industry research firm in Singapore.

"The foreigners are acting like corporate lemmings instead of looking at the economics," he said. "By leaping all at once in the same direction, they're creating a fragmented market where they'll have a hard time making money. Plus, the Chinese are masters at playing one company off against another."

China still plays a small role in global automaking. GM and its joint venture partners will sell about 250,000 vehicles in China in 2002, said DRI-WEFA auto analyst Neil King.

That's just 3.2 percent of GM's overall sales.

King estimates that Volkswagen will sell about 410,000 vehicles, or about 8.6 percent of its global total, in China this year. Toyota and Ford Motor Co are just getting started.

The automakers, like other foreign investors before them, will have to play by Beijing's rules. While China lowered tariffs on imported cars when it joined the WTO last year, it still restricts foreign companies' operations inside the country to joint ventures of which they can own no more than 50 percent.

"If GM can stay in China 20 years and make some money -- knowing they'll probably get squeezed out in the end -- that's as much as they can hope for," Maxton said.

GM's main partner in China is Shanghai Automotive Industry Corp, the country's biggest carmaker. SAIC is owned by Shanghai's municipal government and has Jiang Mianheng, the eldest son of China's President Jiang Zemin, on its board of directors.

The company operates 55 joint ventures with GM, Volkswagen, Volvo AB and other automakers as well as parts companies.

Chinese officials have picked SAIC as one of three megacompanies into which dozens of smaller automakers must merge. The other two are Changchun-based First Automotive Works Corp and Hubei-based Dongfeng Motors Corp.

At SAIC headquarters, President Hu Maoyuan stands in front of a life-size diorama that shows workers putting cars together in 1964 by using hoists, chains, and their bare hands and says proudly that he started his career on the assembly line.

He says China should maintain control of its auto industry."We need the resources of our foreign partners, but we don't wholly rely on them," Hu said.