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ANALYSIS-China - promised land or pitfall for automakers?

By Edwina Gibbs

TOKYO, Sept 26 (Reuters) - Among a raft of recent auto deals in Asia, last week's pact between Nissan Motor Co and Dongfeng Motor Corp stands out -- not only because of its $1 billion size but because it represents a new peak in China fever.

Japan's third largest automaker and China's second largest auto group said they would form a 50-50 joint venture, aiming to roll out 550,000 vehicles by 2006.

It follows new China deals by Honda Motor Co and Toyota Motor Corp , although Nissan expects its $1 billion to give it greater scope, building trucks as well as cars, and greater control, with the CEO coming from Nissan. But the ambitious foray has also served to raise old fears.

Are foreign automakers plunging into the market going to get their money's worth? And what does the potential rise of China as an auto power mean for the rest of the region?

While China may have a population of 1.3 billion and be one of the world's fastest growing markets, for many analysts there is already too much auto money chasing too little demand.

"There is far too much over-investment and, because it's China, automakers have thrown away all their normal criteria," said Graeme Maxton, managing director of consultancy firm Autopolis Asia. "It's all going to end in tears."

ONE MILLION

China's passenger car sales are set to top one million units for the first time this year, up some 40 percent from last year, but many forecasts have the market only growing to between 1.2 and 1.7 million in the next five years.

The abundance of foreign automakers now in China, many aiming to build between 200,000 to 400,000 cars per year, will make for a fragmented market, and price wars could push margins even lower, analysts say.

Not to mention the inherent risk that their partnerships, mainly uneasy 50-50 joint ventures, may one day fall apart. Analysts point to the lessons being learnt by incumbents like General Motors Corp and Volkswagen .

GM has spent some $1.5 billion since it went into China in the early 1990s and though the cars it makes are now profitable, it has been criticised for the small return on investment.

VW, the dominant foreign maker in China, has seen a unit of its partner Shanghai Automotive Industry Corp (SAIC) build the Chery, a popular model very similar to VW's best-selling Jetta, and one that has undercut its sales.

POTENTIAL EXPORT BASE

Nissan's leap into China is fraught with these risks.

While not dismissing Nissan chief executive Carlos Ghosn's achievement in turning around the automaker from the brink of bankruptcy, many analysts say taking on a former state-run Chinese enterprise is a different kettle of fish.

"They are also embarking on truck production -- an area where neither they nor any other foreign automaker have had experience in China," says Ryuichiro Inoue, Asia auto analyst at the Mitsubishi Research Institute.

For some analysts, the logical development of too many Chinese auto plants building vast numbers of cars is exports.

"I think that automakers, out of necessity, will turn it around and make China an export base," said Michael Dunne, head of market research firm Automotive Resources Asia.

It's a road that other Japanese industries have gone down, with the electronics industry, for example, shifting much of its production of audio-visual goods to China.

Honda announced earlier this year it would work with local partners Guangzhou Auto Group Corp and Dongfeng to build the country's first export-only car plant, with initial production capacity from 2005 estimated at 50,000 units a year.

GM already exports some cars from China to the Philippines and Nissan, VW and Fiat have also said they may export.

The industry is already moving in this direction, with many Japanese automakers making no bones about their intention to procure more parts from China in a bid to stay cost-competitive.

HOLLOWING-OUT

The long-term potential for China to become an export power may also hurt Japan as the centre of Asian auto production.

"We're seeing an acceleration of the hollowing-out of production from Japan," says Dunne, also pointing to Thailand as another country likely to benefit at the expense of Japan.

Toyota said last week it would shift its global pick-up truck production base to Thailand from Japan, reinforcing Thailand's position as southeast Asia's automotive hub.

Makers like Honda are also increasingly experimenting with bringing vehicles not-made-in-Japan to the home market.

Japan's annual vehicle production has shrunk to some 9.7 million units compared to a peak of 13.2 million in 1991 at the height of the "bubble" economy.

"Another two million units could go over the next five or six years to China, Thailand and other places in the region," said Dunne.

But other analysts are not as pessimistic.

They see annual Japan auto production remaining stable at nine to 10 million, dismissing Toyota's pick-up truck move as a one-off event that reflects the near total lack of demand for pick-ups in Japan.

Both Toyota and Honda especially remain wedded to their roles as bastions of Japanese industry and are unlikely to take steps that would seriously hurt employment in Japan, they add.