Rapidly Growing Vehicle Exports: China’s Untold Story

 

By now, everyone agrees that China is destined to become the largest market in the world for trucks, buses and passenger cars. Although it will fall a bit short of the 10 million benchmark for number of vehicles produced in 2008, China already ranks with the United States and Japan as one of the world’s three largest vehicle-producing countries.

 

Until recently, there has been a healthy degree of skepticism regarding the development of China’s auto industry. It wasn’t so long ago that Western auto executives would question my optimism for the growth of the industry. With seemingly inarguable logic, they would ask: “With per capita incomes so low, how can the Chinese afford cars?”

 

Yet, as far back as 1993, 15 years into China’s economic reform program, it had to be clear to anyone who thought about it that, as night follows day, China would develop a large auto industry. After all, if China continued to grow economically, there simply would be no way to move an ever-increasing amount of goods and people around a country China’s size without a system of highways–and a lot of trucks, buses and passenger cars.

 

Despite this history and the current scale of China’s motor vehicle industry, many still question China’s ability to export products as complicated as vehicles. This also makes no sense. Japan did it; Korea did it; so why can’t China? Besides, the fact is that China has already become a very large exporter of vehicles.

 

Few know this story, but consider the following statistics. As recently as 2002, China exported a mere 22,000 vehicles. In 2003, that number more than doubled to 46,000, and the following year exports increased by 71 percent to over 78,000. Vehicle exports more than doubled again to 173,000 in 2004, and 2005 saw another near doubling to 343,000. When vehicle exports increased a further 78 percent to 612,000 in 2007, expectations were that China might export an incredible 1 million vehicles in 2008.

 

Unfortunately, the figures through September suggest that China will fall short of that benchmark as well, but the country’s export performance this year would nonetheless be the envy of any other country. Through the first nine months of 2008, China exported almost 558,000 vehicles, a 35 percent increase over the prior year. Due to the appreciation of the renminbi against the dollar, vehicle export revenues increased over 58 percent to $7.6 billion. At the export run rate of approximately 50,000 units achieved in September, China will export over 700,000 trucks, buses and passenger cars in 2008. (Consistent with the pattern of recent years, approximately one-half of vehicle exports so far in 2008 are passenger cars, with the other half commercial vehicles.) Not the performance China expected, but impressive nonetheless.

 

China’s vehicle exports are increasing for several key reasons:

 

  • Lower Cost: Vehicles made by local, Chinese companies are much less expensive than vehicles made by traditional vehicle assemblers. A truck from a developed country, for example, might cost as much as $100,000. Yet, a perfectly functional truck might be purchased from China for 25 percent of that.

 

  • WTO Accession: When China joined the WTO in December 2001, it effectively told foreign investors and companies that the country would not turn back on its economic reform program. At the same time, it told Chinese companies that they would no longer be protected. As a result, every metric for the country went into overdrive. China’s GDP has been growing at double-digit rates ever since; exports quadrupled from approximately $300 billion in 2002 to $1.2 trillion in 2007; vehicle production increased from 2.4 million in 2001 to almost 10 million today; and vehicle exports increased from 22,000 in 2002 to an estimated 700,000 in 2008.

 

  • Stricter Emission Standards: Over the past five years, China has implemented increasingly stricter emission standards. Forced to comply with these higher standards, Chinese engine makers and truck, bus and car producers are finding that more markets outside China are now available for their products.

 

  • Market Potential in Emerging Economies: Beyond the markets in the most highly developed economies in the world with a population of approximately 1 billion, there exists a vast market in emerging economies that have a far greater population of 5.8 billion people. Chinese vehicle producers are finding these emerging economies to be fertile markets for their products.

 

The combination of lower cost with the vast market in emerging economies is a particularly powerful combination for China’s manufacturers. In the final analysis, these less-developed economies may prove to be the natural markets for China’s higher value-added products and represent a large, relatively untapped, export opportunity. My next post will explain why.

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