Shanghai aims to be China's
Detroit By Brian Schwarz
SHANGHAI - In its quest to make this city
China's auto-manufacturing capital, the municipal
government is increasing investment in the
Shanghai International Automobile City, according
to local media reports.
Analysts say
Shanghai has a competitive edge over rival Chinese
cities in automobile manufacturing. However, they
also caution that Shanghai's ambition to become
China's Detroit could be hampered by worsening
overproduction at home and growing trade
tensions with potential
importers of Chinese-made cars.
The
Shanghai Daily reported that the municipal
government has set the goal of turning Auto City,
in the Anting area of the city's western district
of Jiading, into a multi-functional regional hub
with an additional investment of 38 billion yuan
(US$4.75 billion) or more in the run-up to 2010
and bolstering its research and development
capacity.
The additional investment in the
manufacturing park could encourage car makers such
as Shanghai Automotive Industrial Corp (SAIC) and
Shanghai Volkswagen to increase production to
500,000 vehicles per year. Zhou Bin, manager of
the planning department of Shanghai International
Autocity Development Co Ltd, expects Auto City to
generate 300 billion yuan worth of automobile
trade revenue annually.
With the
introduction of a new Formula One racetrack, Auto
City has made significant progress. During the
past five years, 184 industrial projects have
commenced, with investment from 100 auto-part
makers. A few weeks ago, for example, SAIC,
China's second-biggest auto maker, began
construction on a new automobile research
institute, which is intended to help the firm
develop self-branded models and new-fuel vehicles.
Tongji University, which helped develop China's
first fuel-cell sedan, has also moved its
automobile research department to Anting.
And it's not just domestic producers using
the auto park to their advantage. Auto City also
hosts foreign parts suppliers such as Delphi and
Visteon, both of which work in close cooperation
with DaimlerChrysler AG and General Motors Corp in
China.
Shanghai's competitive
edge With overcapacity looming in the
domestic market and trade tensions simmering with
Western trading partners, some may question
Shanghai's ambitions. While it enjoys a superior
location, the metropolis has comparatively high
labor costs and high real-estate prices.
And other Chinese cities are racing ahead
in search of greater auto investment. How do
Shanghai's capabilities compare with those of
other cities such as neighboring Nanjing and the
southern manufacturing center of Guangzhou?
Jeff Lin, a principal at Booz Allen in
Greater China, says Shanghai has many hidden
factors that make it an attractive location. With
its international outlook and competitive energy,
there is an emphasis on quality among Shanghai
residents. Compared with inland Chinese cities, it
enjoys superior infrastructure, such as the new
Yangshan deep-water port, and a location to serve
export markets in the region.
Shanghai is
also home to many key suppliers, such Baoshan Iron
and Steel, and is close to the fast-growing
Yangtze Delta region. Baosteel is considered one
of the most competitive steel producers in the
world and has expanded its cooperation with
FAW-Volkswagen.
Lin says Shanghai also
holds an advantage in developing new engineering
and management talent. With many industries
suffering from a lack of experienced auto
professionals, Shanghai universities, on average,
have a better pool of young talent than Nanjing
and Guangzhou.
"We have attracted car
manufacturers and auto-part makers to build plants
here and have laid a solid foundation for the
development of Shanghai's auto industry," Auto
City's Zhou Bin told the Shanghai Daily.
Overcapacity looms China's
central government has identified the auto
industry as a "pillar" of the nation's economy and
offers incentives and protections to domestic
producers. And to encourage the growth of local
brands, Beijing announced plans in late June to
offer low-interest loans to domestic car makers
and aims to lift the share of Chinese nameplates
to 60% by 2008, from 20% today.
"Years of
large investments in the market have made China a
top global auto-manufacturing hub behind the
United States, Europe and Japan. The manufacturing
strength will be enhanced further," said Wang
Liangfeng, an analyst with Shanghai-based Autobeat
Consulting firm.
By the end of this year,
China is expected to become the world's
third-largest car maker, following the US and
Japan, according to a report released by Polk
Marketing Systems. Government policy will also
play a role in the nation's efforts to become a
world-class auto exporter.
Sales of
Chinese-made cars are climbing both at home and
abroad. Despite higher consumption taxes on
big-engine cars, rising gasoline prices and
stricter bank lending policies, passenger-car
sales soared 50% during the first six months of
2006 over the same period a year ago, with
second-tier cities such as Chengdu and Chongqing
in the southwest leading the way. At the same
time, China's exports of automobiles doubled in
2005 to $1.58 billion, according to government
figures.
However, while China's auto
industry has made significant progress in recent
years, serious production overcapacity and falling
prices are bound to take their toll. The
government warned this year that the country was
on course to produce twice as many cars as it
needs.
China's annual auto-production
capacity, now at 8 million units, has already
exceeded anticipated sales of 5.5 million units
this year. And the government estimates that
motor-vehicle production will hit 20 million units
in 2010, more than double the expected sales of 9
million units.
Booz Allen's Lin predicts
that this overproduction will lead to a shakeup in
the industry, with many inefficient players either
consolidating or going out of business.
Overproduction may not translate into a
greater reliance on export markets, which could
increase trade tensions, but it certainly will put
downward pressure on global prices.
Growing trade tensions In 2004,
China's vehicle exports exceeded imports for the
first time, as 172,800 units went overseas. But in
mid-September this year, China's Chery Automobile
was forced to delay its ambitious plan to export
cars to the US. In cooperation with maverick
entrepreneur Malcolm Bricklin, the firm now hopes
to send cars to the very competitive US market
beginning in 2009, two years behind its original
target date.
According to a recent report
in BusinessWeek, Detroit-based Chrysler has been
in discussions with Chery about the possibility of
jointly manufacturing a small car. Chery produces
400,000 vehicles a year and plans to increase
production by 1 million vehicles per year.
With the top Chinese auto makers making
plans to export more to the West, trade officials
are starting to raise concerns. Although import
duties have dropped significantly since China
joined the World Trade Organization in 2001,
foreign auto makers are limited to a 50% stake in
Chinese producers for the domestic market, while
there is no limit on ownership of export
operations. Government support for local auto
makers is raising the eyebrows of WTO officials
and creating friction among trading partners.
Last month, trade officials from the US,
the European Union and Canada formally petitioned
the international trade body to prohibit Chinese
duties on imported car parts, which they say are
hampering foreign car makers in China. The
complaint alleges that the government requires
foreign car makers to buy at least 40% of their
parts from local suppliers or pay almost double
the import duty applied to assembled vehicles.
Under Chinese rules, imported auto parts making up
more than 60% of the value of a car are subject to
a 28% tariff, which is the same duty imposed on
complete new cars.
And while many other
labor-intensive industries have done well by
exploiting the country's low labor costs to export
at a rock-bottom prices, the auto industry does
not lend itself to a so-called "China price", at
least not in the near future, according to Susan
Helper, an economics professor at Case Western
Reserve University's Weatherhead School of
Management in the US state of Ohio.
In a
recent Warton University e-newsletter, Helper
notes two differences between autos and many other
labor-intensive industries, such as textiles, that
China has come to dominate. Unlike clothing or
electronics, shipping costs are significant when
it comes to autos, which include more "dead
airspace". Hindering the Chinese auto industry's
efforts to become a low-cost producer are
commodity prices and the costs of developing
automotive technology and research capability.
All these pose big challenges to the
Shanghai government's ambition to turn the largest
commercial metropolis of China into a new Detroit.
The city in the US state of Michigan has ridden
the auto industry's boom-and-bust cycle for
generations. Now, if local government planners get
their way, Shanghai is poised to join the ride.
Brian Schwarz is an American
freelance writer and corporate trainer based in
Shanghai.
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