China’s passenger-vehicle market is evolving and maturing in unexpected ways at an unprecedented pace.

As incomes rise, competition is stiffening, tastes are broadening the model mix and sales are continuing to soar.

Domestic deliveries climbed 21% in 2007 to 5,232,160 vehicles and jumped another 21% in the first three months of this year to 1,501,610. Year-ago’s figure does not include 282,000 import-vehicle sales, almost all luxury vehicles, with about 40% from Japan and 25% from Germany.

The most popular models sold in China today are a smorgasbord of nationalities, led by the Volkswagen Jetta and including the Buick Excelle, Toyota Camry, FAW Xiali Charade, Toyota Corolla, Ford Focus, VW Passat, Dongfeng-Nissan Tiida, Hyundai Elantra, Honda Accord and Chery QQ.

“The prices of European cars and some U.S. and Japanese models have declined 5%-10%,” says Tim Dunne, director of Asia/Pacific market intelligence for J.D. Power and Associates. “These global brands are more in reach, and Chinese consumers are earning more money.

“Ten years ago, a Chinese friend in his 30s working for a car maker rode a bicycle and took a bus to work,” he adds. “Then he bought an entry-level car. More recently, he paid around RMB400,000 ($56,000) for a luxury sedan. This is almost unbelievable.”

While the biggest sales gains last year were made by compacts, up 31% to 1,863,100 units, and midsize cars, up 29% to 946,630, SUV sales surged 50% to 357,470 and luxury-vehicle sales rose 35% to 208,670.

“Chinese consumers, like Americans, like big vehicles,” says Dunne. “Luxurious SUVs with high price tags are becoming more and more popular.”

Soaring oil prices and concerns over fuel economy so far appear irrelevant to Chinese car buyers.

“Fuel prices are still very low and controlled by the Chinese government, so consumers haven’t really felt the impact,” says Ashvin Chotai, an independent Asian analyst.

“The fuel cost story has yet to play out in China. But it will become more important as government subsidies are phased out, which is inevitable but will probably be gradual.”

The jostling for sales among China’s auto makers is growing fierce these days and accounting is sometimes creative, with some companies lumping in exports with domestic sales.

Among the top-selling auto makers, Shanghai General Motors Co. Ltd. held onto first place in 2007, but still lost market share, Chotai says.

Major Chinese Auto Makers’ Ranking
Auto Maker 2007
Unit Sales
Shanghai GM 495,400 22
FAW VW 461,370 34
Shanghai VW 453,260 5
Chery Auto 369,460* 22
Guangzhou Honda 295,300 14
Dongfeng Nissan 271,190 34
Tianjin Toyota 282,660 29
Beijing Hyundai 231,140 -20
Geely Automobile 184,176 4
Changan Ford Mazda 174,085 33
* Includes exports. Source: J.D. Power and Associates.

He disregards the sale of 522,278 SAIC-GM-Wuling Automobile Co. Ltd. small cars, trucks and buses as GM only holds a 34% stake in the company while SAIC owns 50.1% and Wuling Automotive has 15.9%.

Two leading Japanese auto makers quickly are catching up.

Combined sales of Toyota Motor Corp.’s joint ventures in Sichuan, Tianjin and Guangzhou in 2007 grew 62% to 452,912 vehicles, with Camry and Corolla models accounting for two-thirds of the total.

Combined sales of Dongfeng Honda Automobile (Wuhan) Co. and Guangzhou Honda Automobile Co. Ltd. rose 31% last year to 422,341, with the Accord responsible for 29%.

The momentum has continued into this year’s first quarter, with the three Toyota JVs posting a 45% sales gain to 136,637 vehicles and the Honda’s JV deliveries up 44% to 125,676.

The average transaction price for the Camry is RMB200,000 ($28,900), while the Accord ranges from RMB 200,000 to RMB300,000 ($43,000).

Chotai says urban Chinese consumers are becoming harder to please. “Buyers are more sophisticated, more brand conscious and more aware of fit and finish. You don’t see too many national brands in Beijing, Shanghai or Guangzhou.”

The distribution reach of international brands into Tier 2 and Tier 3 cities is not so pervasive, Dunne says. “Their market horsepower is not as strong there. Even dealer acumen is not as sharp as it is in larger cities. Incomes are lower, and people are more price-conscious.”

Yet, a shift up-market may be under way in the heartland, where China’s inexpensive national cars have done best but now appear to be losing some of their punch.

“There are 25 national brands, and last year some did not grow as quickly as the whole market,” Dunne says.

Chotai says the leading domestics are running out of steam and losing market share. “The 2007 sales figures show that foreign joint ventures have not been seriously handicapped by the development of Chinese brands,” he says.

Still, both analysts, back from recent visits to China, caution against making sweeping generalizations, as the sales pattern is so mixed. Although most of China’s independent producers are small, with limited output, several posted substantial sales gains in 2007.

For example, Shenyang Brilliance Jinbei Automobile Co. Ltd.’s sales spiked 81% to 114,317 vehicles, while BYD Auto Co. Ltd.’s deliveries jumped 58% to 94,000.

However, market-leader Chery Automobile Co. Ltd saw disappointing results, once exports of 119,890 units are stripped away. Chotai calculates Chery’s domestic sales only grew a modest 4.6% to 260,900.

Chery has been supported by the Chinese government as a flagship and beacon for other national car makers, and the slippage in 2007 sales may be a temporary blip. No one suggests national brands are a spent force, but some analysts sense a little less official push behind them.

“I don’t see much evidence of stronger pressure from Beijing in support of national cars, such as forcing government officials to buy them,” Chotai says.

What complicates matters for China’s central planners is the current decentralization.

In years past, the goal was to create a U.S.-style automotive Big Three. This was modified later into a Big Six, bolstered by a government White Paper written primarily by bureaucrats with no automotive experience.

The plan ultimately was abandoned when China’s 22 provinces, five autonomous regions and six biggest municipalities were encouraged to industrialize. A seismic shift subsequently took place in the country’s auto industry.

“Look at where auto makers are located in China,” says Dunne. “It looks like a pepper shaker spilled on the map. They are everywhere, because every province wants an automotive industry. In the past, provincial and municipal governments offered land, buildings and cheap money to help entrepreneurs get a factory started.”

Says Chotai: “The challenge now is to consolidate, not proliferate. The central government has made entry of new national brands as difficult as possible and is trying to strengthen existing national car makers by encouraging more mergers and acquisitions behind the scenes.”

The central government’s goal, as specified in its “Eleventh Five-Year Plan, 2006-2010,” is for half the domestic market to be held by Chinese brands within the next decade or so. Beijing continues to press foreign JVs to become more dynamic, entrepreneurial and technologically proficient.

More often than not, this has resulted in cries for help from the domestics, while causing a dilemma for the foreign partners concerned about the proliferation of Chinese brands yet anxious to avoid offending Chinese partners or government officials.

“(Foreign auto makers) don’t want a backlash from either (side); they’re walking a tightrope,” Chotai says. “It’s a delicate game (in which) they’re forced to cooperate.”

Their response has been a compromise, he says, passing over some technology and outdated platforms to keep partners happy and the damage controlled.

In fact, a dash of Realpolitik may be starting to color the nationalistic urges of Beijing leaders, notwithstanding the continuing U.S. and European dispute with China about the unfair tariff on imported automotive parts and components.

Chotai believes many Chinese officials are becoming more aware of the threat to their industry and economy from international trade disputes and are willing to be more accommodating.

His conclusion: “China is becoming more global.”