Many cried wolf for China's auto industry when the nation joined the World Trade Organization (WTO) three years ago.

The auto industry was widely seen as one of the hardest-hit sectors by massive vehicle imports with China's tariff cuts and the removal of quotas after the WTO accession.

However, overseas-made vehicles failed to flood into China over the past three years and account for only a tiny slice of the domestic auto market.

Analysts expect the nation's vehicle imports to rise to 180,000 units this year from 72,000 units in 2001.

In contrast, automobile output in China is forecast to exceed 5 million units this year, up from 2.35 million units in 2002. In this sense, the auto industry has survived.

But analysts attribute the survival largely to government policies and rapid growth of domestic vehicle demand rather than Chinese automakers' own pains.

"China cuts auto import tariffs in a step-by-step manner and grants most of its import quota to spare parts to prevent an inburst of overseas-made vehicles," said Jia Xinguang from the China Automotive Industry Consulting and Development Corp.

Tariffs declined to 43.8-50.7 percent in 2002, 38.2-43 percent in 2003 and 34.2-37.6 percent this year from 70-80 percent in 2001.

The tariffs will be further slashed to 30 percent next year, 28 percent at the beginning of 2006 and 25 percent in the middle of 2006.

China will also remove quotas on vehicle and spare parts imports at the beginning of next year.

"The government also encourages foreign auto giants to team up with Chinese partners to speed up local production in a bid to curb massive vehicle imports," Jia said.

World's major automakers, including General Motors (GM), Ford, Toyota, DaimlerChrysler, Volkswagen, Honda and BMW, have joint ventures (JVs) in China with local partners.

They are also increasing investment in China, despite recent growth slowdown in domestic car sales.

GM plans to add an investment of more than US$3 billion to more than double its annual production capacity to 1.3 million units in China by 2007.

Volkswagen will spend 60 billion yuan (US$7.2 billion) expanding its annual capacity to 1.6 million units by 2008.

Analysts say China's vehicle imports will not increase sharply next year, despite the removal of import quotas and further tariff cuts .

Foreign models to be produced in China next year include Mercedes-Benz E and C-Class and Ford's new-generation Focus,

"The explosion of Chinese people's long-quenched demand for vehicles has provided huge room for domestic automakers to survive and grow," said Song Bingshen with China Securities Co Ltd.

"Otherwise, many small players in the industry have already been eliminated amid fierce competition," Song told China Daily.

Vehicle sales growth in China were "out of everybody's expectations" over the past two years, he said.

Sales of domestically-made automobiles grew by more than one-third annually in 2002 and 2003.

But sales growth has decelerated greatly this year due to a slew of factors, such as credit tightening, high oil prices and customer anticipation of further car price cuts.

Sales of domestically-made vehicles increased by 17.6 percent year-on-year to 4.13 million units in the first 10 months of this year.

The growth rate was down from 34 percent last year. Sales growth of passenger cars declined to 18.8 percent during the period from 75 percent last year.

Weakness remains

However, Chinese automakers did little to greatly enhance their own development capabilities and build competitive brands.

Both Jia and Song said Chinese producers have not made breakthroughs in developing capabilities and brands.

China's passenger car market is dominated by foreign brands, such as Volkswagen, General Motors, Honda, Audi and Citroen.

Ninety percent of car sales in China come from foreign brands.

Almost all of China's major automakers, including the top three players First Automotive Works Corp (FAW), Shanghai Automotive Industry Corp (SAIC) and Dongfeng Motor Corp are assembling cars of foreign brands.

Dongfeng, based in Central China's Hubei Province, has the biggest number of foreign JV partners Kia Motors, Honda, PSA Peugeot Citroen, Nissan and Renault.

There are only a few home-grown car brands, such as Red Flag of FAW, Chery and Geely.

Red Flag, created more than 40 years ago, is the most time-honoured Chinese car brand but controls only less than one percent of the domestic car market.

Red Flag now is of nothing more than "symbolic significance" for China's auto industry, Jia said.

"Chinese automakers will have to speed up their own development if they do not want to be marginalized, although it will be very costly and they have a long way to go," Jia said.

Foreign automakers also team up with partners to produce in China because of the government's policies.

Foreign automakers are only allowed to control a maximum stake of 50 percent in JVs with local partners, according to China's auto industry policy.

"If these requirements are relaxed one day, Chinese automakers are likely to be abandoned by foreign partners," Jia said.

Song predicts more than 10 less competitive local automakers will be absorbed or go bankrupt every year in the coming years due to mounting competition.

(China Daily December 9, 2004)