Video: Chinese car buyers dream big

By Roland Jones Business news editor
msnbc.com
updated 5/6/2008 7:27:22 PM ET 2008-05-06T23:27:22

With sales data for April showing double-digit declines for General Motors, Ford and Chrysler, the outlook certainly looks bleak right now for the Big Three U.S. automakers.

But there’s a shining light in the East. While American car buyers rush away from trucks and sport utility vehicles, spooked by a combination of high gasoline prices, rising inflation and a sluggish economy, Chinese car buyers are flocking to purchase American brands.

Last week, for example, GM said that even though it suffered a $3.3 billion loss in the first quarter because of weak U.S. sales, its revenue from operations outside North America in emerging markets like China, Russia, Brazil and India rose 20 percent. Earlier in the week Ford surprised Wall Street with a $100 million quarterly gain fueled in part by higher profits in China, which helped offset weakness in North America.

“China is more important than ever to U.S. carmakers right now,” said Rebecca Lindland, an automotive industry analyst at Global Insight. “From a profitability standpoint, every export or sale overseas that U.S. automakers can make means a lot more money these days because of the weaker U.S. dollar; when they translate their sales back to the United States they’re suddenly making much more money.”

There are fat profits to be made in China, where new vehicles generally cost more than their equivalents outside the country. A Toyota Corolla 1.8 liter, for example, costs $14,640 in the United States and $17,324 in China, while a BMW 325i carries a 63 percent premium, costing $30,900 in the United States and $50,559 in China, according to an IBM Consulting Group report.

China boasts the world's second-longest highway system at 1.1 million miles and has seen its auto production rise quickly, from only 220,000 passenger cars in 1993 to 2.34 million in 2004, according to IBM.

Video: GM’s road ahead

Little wonder then that, in contrast to the North American automobile market, the Chinese car market is on a tear. Analysts expect the nation to take over from North America as the world’s largest automobile market by the middle of the next decade, with car sales soaring from a few million units to over 10 million by 2015. Car  ownership, which now stands at only 4 percent of the population is expected to rise to 10 percent during the same period.

What are Chinese consumers buying? Certainly not fuel-sipping, gas-electric, hybrid-engined Priuses. The Wall Street Journal recently reported that Toyota sold only 414 of the hybrid vehicles in China last year, down 81 percent from 2006.

The problem: In China the Prius costs almost twice as much as it does in the United States, and for that high price Chinese car buyers prefer the prestige of an American SUV or luxury sedan powered by an old-fashioned internal combustion engine.

China has been a boon for GM’s Buick, a brand that has been in decline in the United States but is seen as a luxury nameplate in China, where it is GM’s best-selling brand.

American manufacturers dominate the Chinese market. GM sold 507,000 cars there last year, compared with 340,000 for China’s biggest domestic vehicle manufacturer, First Automobile Works. Other local players like Chery Automobile and Geely Automobile sold 271,000 and 221,000 units, respectively.

Sales in China are growing but remain small compared to the U.S. market, where GM sold 3.8 million vehicles last year, although that number is steadily shrinking — down from 4 million units in 2006 and 4.9 million in 2001.

“Domestic automakers have been criticized for not doing well in their home market, and while they certainly want to turn that situation around they are right to look for profits overseas because that’s where the growth is right now,” Lindland said. “They have to diversify their portfolios and make money wherever that can.”

But it’s important to strike while the iron’s hot, Lindland added. Chinese consumers soon could feel the pinch of the economic slowdown in the United States, she said.

Global Insight predicts that China’s auto sales growth will slow in coming years. Sales rose 25 percent in 2006 and 20 percent in 2007. The pace is expected to keep slowing to about 4.5 percent by 2015.

“That sort of growth rate is much closer to a mature market and it points to the non-sustainability of the huge growth in sales we have seen over last few years in China,” Lindland said. “There’s still a tremendous amount of opportunity in China right now, but it won’t always be that way.”

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