lots of autos from china

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    By KEITH BRADSHER (NY Times 2 Nov 2003)

    HANGHAI — China, long a nation of pedestrians, cyclists and buses, is undergoing an automobile revolution. Sales of cars, vans, pickup trucks and sport utility vehicles here overtook similar sales in Germany this year, and production surpassed South Korea's.

    For now, most of the cars and light trucks made here are sold here. But China — already the world's dominant manufacturer of products from toys to facsimile machines to furniture — is laying plans to become a big exporter of cars. Automakers are producing cars here to the same designs that they use in the United States, with Honda making Accords in Guangzhou that are identical to those it manufactures in Ohio.

    China's auto industry, mainly local companies in joint ventures with multinationals, is not internationally competitive because of quality problems and startlingly inefficient parts factories. Workers at Dickensian foundries filled with acrid green fumes still ladle chemical additives into buckets of molten steel, then tip the buckets by hand to pour the steel into molds for auto parts.

    China's auto exports to the United States mostly consist now of replacement parts shipped to repair garages, because automakers have been reluctant to make their assembly plants reliant on Chinese suppliers. But with broad support from Beijing and foreign investors, manufacturers in China are quickly improving operations — and staffing them with workers earning as little as 50 cents an hour. In a few years, they are likely to be building high-quality cars and parts for as little as, or less than, anyone else in the world. Analysts say that China could surpass Germany as the world's No. 3 carmaking country in four years.

    Executives at each major automaker say the combination of low costs and strong demand gives them no choice but to invest heavily here or risk being left behind. "Our competitors have reached the same conclusion," said Frederick A. Henderson, the president of G.M.'s Asian and Pacific operations.

    The growth of auto manufacturing in China — the number of cars and light trucks produced has jumped to 3.8 million from 1.8 million over the last three years, compared with 12 million now in the United States, 10 million in Japan and 4.8 million in Germany — has enormous implications not only for this country but for economies around the world.

    In China, where about four million families own cars and about one million more buy cars each year, this means that millions of citizens can travel more widely, somewhat eroding the political and social controls that the Communist Party has long imposed. Rising auto production, for sale to state-owned enterprises as well as families, has fostered the rapid expansion of a long list of other industries that mainly rely on sales to automakers, including steel producers. It is helping to create a consumer credit industry.

    But putting China on wheels has also created terrible traffic jams, a rising death rate in a country with an atrocious traffic safety record, and severe air pollution in a country that already has 7 of the world's 10 most polluted cities.

    Worldwide Worries The automaking boom in China worries many businesses and workers in many nations. International companies that build factories in China as they expand do not need to hire as many workers in their home markets, and may lay off some. The Cooper Tire & Rubber Company, for example, said last month that it would ship tire making equipment from its factory in Albany, Ga., to a company in in Hangzhou and buy as many as 300,000 truck tires a year from the Chinese company. At the same time, Cooper said it would expand production in Georgia of higher-performance tires, but would not expand its labor force to do so.

    China's success is also a threat to other countries, mostly close American allies, where auto parts are made, including Mexico, South Korea, Thailand and the Philippines.

    Union leaders in industrialized countries are making low-wage competition from China a political issue. Competing on wages "is a race to the bottom," said Ron Gettelfinger, president of the United Auto Workers. "And no one wins a race to the bottom."

    Auto sales in China have jumped in the last two years as two decades of some of the world's fastest economic growth have finally lifted millions of city dwellers to nearly Western standards of living.

    The domestic market alone is giving automakers and auto parts makers the economies of scale they need to compete internationally.

    Automakers here should be ready to export cars to other Asian markets in several years, and later to industrialized markets like the United States and the European Union.

    Bernd Leissner, the president of Volkswagen Asia-Pacific, the foreign automaker with the biggest share of the Chinese market, estimates that it still costs 18 percent more to produce a car in China than in an industrialized country like Germany. But with new steel mills and parts factories opening at a brisk pace, that gap will disappear by 2006, he said. "Our target is to become export ready as soon as possible," he said.

    Problems With Production Visits to auto assembly plants and auto factories across China show why it will be a few more years before this country poses a serious threat to Detroit or Stuttgart, Germany, even though a few parts are already exported and General Motors plans to start shipping Chinese-made engines to a Canadian assembly plant this year.

    At Honda's plant in Guangzhou, in southeastern China, 90 percent of the steel for the new Accord sedans and Odyssey minivans must be imported from Japan despite steep shipping costs. Chinese mills cannot make corrosion-resistant steel that meets Honda's standards.

    In Harbin, in northernmost China, Hafei, a Chinese manufacturer, has erected a factory with the latest Swedish and Japanese robots. But deliveries of steel are so irregular, because of shortages and the decrepit railroad system, that the factory must absorb the considerable cost of keeping steel for two months on hand — enough for 50,000 cars.

    In Chongqing, in western China, Ford has built a modern assembly plant. But Ford has found that many of the auto parts to build the cars must be imported by ship to Shanghai and then brought up the Yangtze River by barge.

    And at an Asimco foundry in Langfang, in northeastern China, Fan Dong-bo, 37, still ladles chemical additives into a bucket of molten steel, then turns a wheel on the side of the bucket to tip the red-hot steel into molds for auto parts. Foundries like this one are beginning to ship castings to the United States, where foundries are closing because of environmental regulations.

    Recent quality improvements have come with extra costs, too. Volkswagen has been able to reach international quality standards for cars made in China, Mr. Leissner said, but only because suppliers sometimes must discard large numbers of substandard parts, which drives up costs. Volkswagen also uses many imported parts.

    But new equipment and new production processes in assembly plants are starting to address these problems. A factory complex built here by a General Motors joint venture with the Shanghai Automotive Industry Corporation looks very much like G.M. factories in the United States.

    Capitalism in Action The rise of the Chinese auto industry is a remarkable story of capitalism, as China's dismantling of trade barriers as part of its entry into the World Trade Organization in 2001 has prompted a ruthless struggle by companies to become efficient enough to fend off any imports.

    Automakers and parts makers in China appear to have been successful, as imports have risen only slowly while production costs have plunged. The sticker price of a Honda Accord, for example, has tumbled from $50,000 to $27,000 in four years.

    For all its strengths, the Chinese auto industry, like the Chinese economy as a whole and perhaps like China's political system and even society, is a mountain created on a very narrow and possibly wobbly base. Aggressive lending by government-owned banks has been stimulating the economy for years — even though many debts are never repaid, to the point that Chinese banks now have portfolios of bad loans rivaling those of Japanese banks, but in an economy that is one-seventh the size.

    If economic growth ever falters significantly and banks stop collecting their current flood of deposits from China's ever more prosperous people, a financial crisis could ensue that would cripple China's auto industry and many other industries. If such a crisis were to happen soon, before China's auto industry brings its costs down to international levels, then automakers could be discouraged from making further investments. But if China can keep growing for a few more years and become competitive, a downturn in domestic sales could unleash a flood of Chinese cars onto world markets.

    Another potential difficulty lies in China's rigid political system. It is hard for any outsider to judge how stable China really is, as ill-organized protests and riots appear to occur frequently in smaller cities, even as the Communist Party prevents these disturbances from becoming coordinated to an extent that might threaten its legal monopoly on political power. Large-scale social unrest could seriously disrupt China's auto industry and economy as a whole.

    The biggest question these days in the Chinese auto industry is how much longer domestic sales will continue to grow at their recent, rapid pace. Some warning signs are already apparent that automobile ownership remains restricted to a very small but wealthy urban elite and not a broadening middle class.

    Henry Ford won worldwide fame nine decades ago by doubling factory workers' wages, a step that allowed to buy cars if they saved enough. But workers like Bi Hong-jian, 20, who leads a team of employees installing seat tracks in Honda Odyssey minivans in Guangzhou, earn just $240 monthly, while autoworkers in cities farther west, like Chongqing, earn even less.

    "Everyone wants a car, it's a dream, but to me it is difficult, it's too expensive," Mr. Bi said during a break from his work on the line.

    Car dealerships have had few repeat customers. In the King Full Motor Sales dealership in Zhanjiang, in southernmost China, fully 70 percent of the buyers here had never owned a car, a figure in line with the national pattern. The sales staff spends more time explaining the cars than selling them.

    Automakers are erecting factories on the assumption that repeat customers will become more common and that new buyers will continue entering the market. If anything, the biggest fear now among executives is not having enough capacity.

    Like many automakers facing worried union leaders at home, G.M. insists it only plans to serve the domestic market here, and does not plan to ship cars to the United States.

    The only automaker with explicit plans to export assembled cars to industrialized countries is Honda. Koji Kadowaki, the president of Honda's Guangzhou operations, said Honda would export cars to Europe from an assembly plant Honda has begun building in Guangzhou, although he declined to identify which countries would get the cars.

    Honda is a special case, however, because it has a shortage of assembly plant capacity in Europe and faces European trade barriers to increased exports from Japan. Exports from China, even if costly, could avoid those barriers.

    Yet China has a long way to go. Even seemingly simple parts like rubber sealings can prove hard to make. The experience of Steven Zhao, the general manager of an Asimco brake assembly factory in Guangzhou, shows the obstacles and potential of China's parts industry.

    To make brakes for cars that are built and sold in China by General Motors, Ford, Peugeot, Renault and Nissan, his workers rely mostly on bolting together imported parts. Even a small spring is imported because Chinese suppliers are too likely to weaken the steel in bending it into shape, said Mr. Zhao, a former Alcoa manager.

    But such hurdles are not discouraging anyone. "The market has always outraced our ability to keep up with it," said Phil Murtaugh, the chairman of G.M. China.
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