Hundreds of Australian manufacturing workers in the auto sector are facing the sack in the coming months. With all the major car companies and many component manufacturers looking to take parts of thier businesses to China, it is worth while taking a closer look at the Chinese motor industry.
By Laurence Coates, RÃ¤ttvisepartiet Socialisterna (CWI Sweden).
There has been an explosion of new investment in China by the global motor industry. The major car companies plan to invest a further $15 billion in China with the aim of tripling output by the year 2008. But sales this year have flat lined and profits across the Chinese motor industry are sharply down. Does this signal the end of the ?China Dream? for the world?s motor giants?
Between 1990 and 2004, the number of motor vehicles on Chinese roads rose from 1.6 million to 25 million. In Beijing alone, 20,000 new cars hit the roads every month. Projections that China will overtake Japan (5.9m cars sold yearly) by 2010, or even earlier, to become the world?s second largest car market have led to a flood of new investment by the big car companies, facing falling profits and tougher competition in the older (i.e. saturated) markets of Europe and North America. Especially for crisis-hit US giants, Ford (pushed into global third place by Toyota of Japan) and General Motors (whose share of the North American market has slumped from 47% to 25% in 30 years), China is seen as the key to corporate survival. While planning to axe its workforce in the US by 25,000 over the next three years, GM will invest $3bn in China to double its capacity there to 1.3 units by 2007. Increasingly, however, China is showing signs of a motor glut ? too many vehicles chasing too few potential buyers.
To the moon and back?
In a celebrated article in 1994, Asia Inc. magazine pointed out that if China should attain a German level of car ownership (one vehicle per two inhabitants) the resulting 571 million vehicles could fill a seven-lane motorway from the earth to the moon! If this ever happens the earth itself will self-destruct given that exhaust fumes are a major cause of global warming. Even before such doomsday scenarios play out, China?s motor boom is having a huge effect on the world at large. One-third of China?s oil imports are for use in cars. Increased Chinese oil demand is now a key ?swing factor? in global oil markets, leading to higher oil prices which recently hit a record $60-a-barrel.
The explosive growth of car ownership in China has taken place despite a chronic lack of supporting facilities such as parking lots, traffic control systems and car repair shops. ?China is not prepared for the coming of an automobile society yet,? bemoaned Jia Xinguang of the China Automobile Consulting Corporation. The Economist (4 June 2005) reports that ?Although a learner has to undergo 70 hours of training over two months, it is hard to fail the test. Ill-paid examiners are readily bribable, with the instructors acting as middlemen and taking their own cut. Many cars on city streets display notices saying ?New driver, please look after me.??
300 killed every day
This explains why 300 people are killed in road accidents every day in China, the worst record in the world. For years, the state-controlled press have been hailing the emergence of ?car culture?, the growth of which is seen as central to the country?s overall economic strategy. For every new job created in the motor industry, China?s economists reason, dozens of jobs are created in allied sectors such as (road) construction, car dealerships, driving schools and petrol filling stations.
The country has experienced a frenzied road-building programme. By the end of 2004, there were 34,000 kilometres of motorways, more than double the 2000 figure. A further doubling of the motorway system is planned by the year 2020. Only the United States has a larger motorway network. While this mastodon construction programme has been an important factor powering economic growth, and the sensational expansion of industries like steel and cement, there are already tell-tale signs of ?oversupply? even as far as roadbuilding is concerned. As The Economist points out, ?Most [motorways] are financed by loans from the state banks, and their operators stand little chance of repaying the debt on time. On some stretches toll revenue barely covers the cost of hiring toll collectors, let alone interest payments.?
To stimulate car ownership and favour local car producers, many provincial and city governments have imposed draconian laws. Most large cities have banned or severely restricted the use of motorbikes, thereby skipping over the ?normal? development pattern from the rest of East Asia, where more readily affordable motorbikes congest the roads. Some cities have banned ?clean fuel? cars, mostly foreign imports, in favour of high-polluting locally manufactured alternatives in which the provincial or city government has a financial stake.
Slowdown in car sales
Car sales leapt dramatically in 2002 (56% annual growth) and 2003 (75% annual growth) following China?s December 2001 accession to the World Trade Organisation (WTO). But this rate of expansion slowed dramatically in 2004 (15% annual growth) partly as a result of central government measures to rein in runaway investment in a range of industries including motor vehicles. Is this merely a cyclical slowdown or have the world?s motor giants radically misjudged the future size of the Chinese market?
Either way, car companies are experiencing serious difficulties in 2005. China Daily (14 June 2005) reports that total vehicle sales only grew by 4.6 per cent year-on-year in the first five months of 2005. Even more ominously, from the standpoint of the capitalists, profits across the Chinese car sector are down 57 per cent from a year earlier. Both foreign and domestic carmakers are reeling. Volkswagen?s joint venture with state-owned Shanghai Automotive Industry Corp (SAIC) reported an 80 per cent plunge in profits over the five-month period. This is partly the result of overproduction which is forcing car makers to imitate the sales techniques more common in ?mature? car markets like the US, by introducing heavy ?discounting?. Average car prices in Beijing, Shanghai, Guangzhou, Shenzen and Wuhan have fallen by 12 per cent so far this year, according to China Daily. At the same time the rising cost of inputs like steel and rubber has further squeezed profits.
Rather than a temporary cooling brought about by the central government?s administrative measures to deal with economic ?overheating?, the current slowdown may reflect a more fundamental ?correction? to a previously unsustainable rate of expansion. A closer look at the record years 2002-2003 reveals a number of ?abnormal? factors that are unlikely to be repeated. Firstly, foreign car companies operating in China cut prices by around one-fifth in anticipation of a surge in car imports following China?s WTO accession ? a surge that never transpired. Secondly, in 2002 the key economic regions of Beijing, Shanghai and Guangzhou reached a per capita GDP level ? $6,000 per year ? at which car ownership becomes possible. But the rest of China still trails a long way behind, with national per capita GDP at just $1,000 in 2005. An additional boost to car sales after WTO entry came when the central government authorised state banks to offer consumer car loans for the first time. This policy has since been reversed partly in response to massive loan ?delinquency? (non-repayment) but also as part of Beijing?s administrative crackdown on the ?overheating? economy. Tighter credit rules imposed at the end of 2003 have drastically reduced the number of cars bought on credit, which is reflected in the overall figures.
As the general economic outlook is one of slower growth and possibly a sharp downturn towards the end of the decade, the projections for the Chinese car market, upon which the global giants have based their future strategies, may turn out to be grossly inflated. With the planned massive expansion of China?s car making capacity in the next few years, the likely consequence will be a furious new bout of price-cutting, profit-slashing warfare in the global car market, with corporate collapses, mergers and further factory closures on the cards. Ownership of the motor industry is already among the most concentrated of any branch of world economy. From 25 big car producers in the 1980s, only six remain. General Motors, Toyota, Ford, Volkswagen, DaimlerChrysler and PSA/Peugeot CitrÃ¶en account for 70 per cent or global sales.
World, watch out!
This year, for the first time on any significant scale, Chinese and foreign-owned carmakers are planning to export Chinese made cars abroad. Honda, DaimlerChrysler and China?s privately owned Geely Automobile, are all looking to increase exports this year. The government?s 50 per cent cap on foreign investment in car factories only applies to plants supplying the domestic market. Honda recently opened a plant in Xinsha producing its ?Jazz? model solely for export to Europe. On this basis the company secured 65 per cent ownership of the factory.
The stage is set in other words for yet another ?supply shock? for world capitalism from China?s overproducing factories. The global economy is already groaning as a result of the ?textile tsunami? unleashed by the January 2005 lifting of quotas, with Chinese and Indian garment producers cornering the lion?s share of the global market and squeezing out smaller competitors. Industry commentators predict a similar trend in steel in 2006 as China?s abundant new steel capacity (it has added the equivalent of the entire US steel industry in the last four years) and a slowing economy translates into an export drive. This will likely be followed by a similar process in the motor industry. Based on current investment plans, China will have the capacity to produce 15 million vehicles in 2007, against forecast sales of just 7 million. This will place huge strains on the system of global trade, pointing to growing calls for protection and a sharpening of tensions between the main capitalist states and regional economic blocs. Side by side with this process, the bosses? attacks on car workers? in all countries are almost certain to intensify. This underlines the need for an international plan of action by motor industry trade unions ? including practical steps to help organise the Chinese workforce ? in defence of jobs, wages and conditions.