13 billion people. That's billion with a "B."
1.3 billion people who - for the most part - have not discovered the wonders of the personal automobile.
Not yet, at any rate. That single fact, China's mind-boggling population, has caused automakers to go headlong into world's most foreign (to the West, anyway) foreign country.
Never mind the country's lack of infrastructure. Never mind the communist/socialist government that throws in a dash of free-market capitalism. Learn to do business with the government-mandated, government-owned, equal joint-venture partners.
Sure, business conditions aren't exactly ideal in China, but its never-ending potential makes China a risk worth taking.
Ask any carmaker doing business there: the profits aren't coming now, but getting that country behind the wheel surely will compensate for initial investment costs. Today, the taxi industry, government and big business own most of China's cars.
Automakers, knowing that China is the world's largest potential growth market, are betting on 20 years down the road, when North American and European markets are built out and growth, they hope, has to happen somewhere.
"If they (China) keep their current rate of economic growth going and their auto industry growth going, their demand then would be growing at 15% a year in the auto sector over the next 10 years," says G. Richard Wagoner Jr., president and chief operating officer of General Motors Corp.
GM is making Buicks in China with joint-venture partner Shanghai Automotive Industry Corp. "In 10 years, they'd be at 6 million units," Mr. Wagoner continues. "Experts say if we keep this pattern going over the next 20 to 25 years, then China, in fact, could be the biggest automotive market in the world."
That's certainly the best-case scenario. Here's the worst: China will welcome foreign automotive companies and all of their technologies, know-how and startup money, but only until China's OEMs have learned the ropes. Then the government, known for making policy on a whim, will keep the factories and give foreign automakers the boot.
The reality of China's auto industry, come 2020, will lie in the vast in-between. The Chinese government is calling for increased private automobile ownership in its next 5-year plan. China's own auto industry, considered one of the state's least efficient but most profitable, can only get stronger, most likely with continued foreign partnerships.
The first step toward shaping up China's auto industry over the next 20 years inevitably will be a massive industry consolidation. Currently, only a handful of China's 120 automakers are significant. As was true in Detroit's early carmaking days, many of the small players will disappear, giving way to a Big Three scenario. It is widely believed there will be three large carmaking conglomerates, such as Shanghai Automotive or First Automotive Works, both of which are partnered with market-leader Volkswagen AG. Foreign makers wishing to build in China will be affiliated with such groups.
Consolidation will intensify after China joins the World Trade Organization, bound to happen soon. This status will solidify China's commitment to the market economy model and create a high degree of industry competition. WTO means drastic reduction of tariffs and the arrival of imports. (China now has plenty of imports, but most are through the black market.) Weaker domestic makers will not survive, but larger makers will grow stronger, raising production standards to keep competitive and to meet standards for export.
What products will these companies be making in 2020? Considering today's most popular car is an almost 20-year-old Volkswagen, the glib answer would be that China in 20 years will drive what the rest of the world is driving today. This will prove false. Foreign competition, paired with an increasingly sophisticated population, no longer will allow domestic makers to churn out new products from old assembly lines.
By 2020, automakers will design and produce cars specifically for the everyday Chinese driver. China is large enough to support niche cars, such as the Buick, but the companies that succeed won't be focusing on the $40,000 vehicle. Successful automakers will make a product that is decidedly proletarian.
Currently, China's true "people's car" is a tractor. The rural population uses it not just as a piece of equipment, but as transportation for the entire family. The next "people's car" logically will be a small, technologically advanced utility vehicle, with equal cargo- and people-hauling capabilities. Most importantly, the car must be priced affordably. Currently, there is little between a tractor and the $13,000 price of an entry-level car.
The 1.3 billion-person question: Which automaker will win permission to make the right product?
The Chinese government might not even know the answer. But the automaker that wins this jackpot is sure to be making an impact - and a profit - in China's hazy future.
