Too Much, Too Soon?
Old Chinese bomb factories never die. They just become car plants. At least that's what has happened at Qin Chuan in the northern city of Xi'an. The aging state-owned enterprise, which a decade ago made 130-mm artillery shells, now houses assembly lines that stamp out a boxy, four-door hatchback with a .8 liter engine, called the Flyer. Last year it built just 17,000 of the underpowered, Chinese-designed vehicles. Many went to taxi companies that were encouraged by provincial officials to buy them, but that doesn't dismay factory officials. China's car market is booming. In February, a Shenzhen-based maker of lithium batteries bought the Flyer factory. Although the new owner, called BYD (acronym for Brings You Dollars), has no experience building cars, it still plans to invest a war chest raised on the Hong Kong stock exchange to build a new facility that will start producing a family of Flyers as early as next year. "Once we're established," says Liu Zhenyu, the factory's general manager, "we'll use our batteries to make electric cars."
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BYD's business plan might sound more credible if so many other companies did not have similar aspirations. There's no question that demand for cars is zooming. Purchases of passenger cars in China surged last year and rose 69% through the first nine months of this year, making China the fourth largest car market in the world behind Germany and signaling that the mainland's consumer culture is finally reaching critical mass. But the country already has more than 200 carmakers, ranging from creaky Communist-era holdovers to former washing-machine manufacturers to modern joint ventures run by Volkswagen, General Motors (GM), Ford and Honda—and almost all of them have responded to growing demand with massive capacity expansion programs. The accounting firm KPMG predicts that within two years China will be capable of building 4.9 million sedans a year—that's roughly equal to the output of Germany, and will outstrip even the mainland's fast-growing appetite for personal transport by 2.3 million cars a year.
Tao might appear to some as a killjoy. After all, China at the moment is the star on the world economic stage; the country's soaring need for a host of goods, including agricultural products and commodities such as oil, iron ore and aluminum, is a major contributor to global economic recovery. China is poised this year to pass Japan as the world's third largest importer, and its economy has become potent enough to threaten even the mighty U.S.—the mainland's surging exports to America put China on track for a massive $130 billion trade imbalance that has prompted members of Congress to call for punitive tariffs. Fears that China is taking U.S. manufacturing jobs has become a front-burner political issue.
Those closest to the gears of the global economy were among the first to notice China's growing prominence. Last winter, a broker in London named Albert Stahl watched the spot-market price for cargo-vessel leases rise to $22,000 a day for a ship big enough to transport iron ore. He assumed the spike was due to the impending Iraq war. But through the summer the price kept increasing; shipowners stopped giving quotes in expectation of prices jumping again the following day. Then Stahl began hearing reports of vessels the size of three soccer fields anchored off the Chinese coast for up to two weeks waiting for a berth—sometimes paying $100,000 a day for the privilege. Finally, he pieced it together. "There's a shortage of available ships in the world because of congestion in China, and nobody knows how to deal with it," says Stahl, a director at CTI Transport and Logistics. "Maybe someone will build more ships."
Considering the acres of empty cargo containers that piled up in ports around the globe during the SARS crisis, too few ships would appear to be a positive development for world trade. But concerns are growing that the situation is temporary—that China's economy is overheating, and the consequences of a busted bubble a few years hence are worrisome. Chinese state-run banks, already technically insolvent, have in the past year shot out new loans—for factories, roads and real estate—like a confetti cannon. According to China's central bank numbers, lenders in the first half of this year handed out about $230 billion, double the amount loaned during the same period last year, resulting in an astonishing 23% increase in total debt. It's just not possible that China's banks have suddenly found so many new creditworthy ventures, says Nicholas Lardy of the Washington, D.C.-based Institute for International Economics. "We've seen the greatest credit expansion in the past 25 years," he says. "I'd expect companies that borrowed heavily to face difficulties when the next downturn starts."
Easy credit has made it simpler for Chinese firms to pile into the car industry. A few years ago, as mainlanders began amassing enough disposable income to buy TVs, appliances and consumer electronics, companies crowded into those fields, driving down prices and profit margins until now only a handful of the largest are able to compete. Today, the hot zone is autos, where sales are accelerating and margins can be fat. "It's too hard to make money from washing machines now," complains Zhao Yong, a director of Guangdong-based Midea, an appliance maker that plans to buy a bus factory near the China-Burma border. "So we'll start making buses and move into sedans." Others have devised similar strategies. Sanxing Aux, producer of China's cheapest air-conditioners, last month announced it had purchased a carmaker in Manchuria and will soon unveil a line of sport-utility vehicles. At least three other electronic-goods makers have announced intentions to buy auto plants. And China's leading liquor maker, Wu Liang Ye, has perhaps anticipated marketing synergies between drinking and driving by revealing plans to get into the car business.
These would-be General Motors will have to compete with General Motors—and Ford, Toyota, Honda, Volkswagen and other more experienced multinationals that are muscling for market share. GM, which has been making Buicks in China since 1999, will soon launch Cadillacs and plans to increase total production by 50% in the next two years. In a first for the country, the government last week announced it will allow GM to export directly to the mainland without going through a Chinese partner. Ford last month said it plans to increase production sevenfold to 150,000 cars a year. Volkswagen, maker of the best-selling autos in China, plans to invest nearly $7 billion to double capacity to 1.6 million cars over the next five years. "Many of the world's major auto makers have announced their market share targets in China, but not all of them will be able to achieve their targets," said Volkswagen CEO Bernd Pischetsrieder to the China Daily.
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