A Murky Outlook China's drivers dare to dream of daylight

BEIJING - On a typical summer day in China's capital, you can barely see the latest high rise under construction across the street. Blame it on sand blowing in from the Gobi desert; on sweltering summer and its accompanying humidity; on industrial pollution and vehicle emissions spewing unchecked over this city of 11 million people.

It all adds up to oppressive Peking duck soup. Smog so thick you can stab it with a chopstick. By most accounts, the condition of the air is expected to grow worse. That's because the automobile industry here is being driven by the private buyer. And that means more cars on the road.

For decades, the central government ruled over a planned economy, dictating exactly how many vehicles would be built and to which institutions and state-owned enterprises they would be sold. But the country's move toward a free-market economy means that individuals now can dictate to the industry what kinds of cars they want to buy; what features they want offered, and how much money they are willing to spend. That's good for the economy and carmakers but bad for clean air and traffic congestion.

Last year, some 70,000 minicars, alone, were purchased by Beijing's private buyers. In all, 1.56 million vehicles were sold in China in 1997 - 474,200 of them passenger cars. In a country of 1.2 billion people, the tantalizing market potential keeps foreign automakers queuing up for more joint ventures in China.

"Imagine if all the passengers on all the city buses were to buy their own car," one automotive expatriate says. "There'd be no place left on the road to drive. It would be gridlock."

There's not that much room now. Beijing's convoluted network of city streets and expressways are as jammed all day as the Santa Monica freeway at rush hour. In fact, it seemed humorous to hear a Chinese acquaintance mistakenly refer to highway overpasses as "fly-overs." On most days, flying seems the only sensible way to negotiate Beijing's byways.

If you consider the 500,000 foreign expatriates living in Beijing, most with a private driver, you begin to get a sense of the volume of traffic that segment alone brings to the city. Added to the mix of trucks, buses, taxis, motorcycles and private cars is a Chinese cornucopia of every kind of homemade farm vehicle, plus the ubiquitous bicycle rider hauling watermelons to mattresses to family members, all piled onto an attached flatbed wagon. Sprinkle in a liberal helping of pedestrians weaving their way in front of and between moving traffic and you have a snapshot of the madness that rules the roads of Beijing.

What's more, there are no tow trucks in China, so when accidents do happen, and that's frequently, the damaged vehicles often are left sitting on the road, creating even more danger. Little wonder nearly 74,000 people died in traffic accidents in China last year. The number, representing the world's highest auto-related death toll, resulted from 304,217 accidents across the country - up 5.7% from 1996.

There are about 40 million vehicles on the road in this country - one for every 30 people. Still, traffic has grown 13% a year for the past five years, while road mileage increased by only 2.49%. The number of vehicles in Beijing alone grew by 223,000 last year to 1.2 million, more than any other city.

Beijing's municipal government is trying to control the number of vehicles by slapping consumers with license and tax fees that can equal the price of a vehicle, and by restricting those with odd or even license plate numbers to certain days. But because most cars still are owned by institutions, the military and bureaucrats, taxes and fees are not an effective barrier.

As for pollution, China recently announced it intends to adopt the European Union's emissions regulation of 1983 by 2003. Already, major cities such as Beijing and Shanghai have outlawed leaded gasoline, although the quality of no-lead gas remains questionable.

Nevertheless, catalytic converters soon will be required on new vehicles in China, and major U.S. components makers including Ford Motor Co.'s Visteon and General Motors Co.'s Delphi Automotive Systems want to be ready; they are forming joint ventures in China to work on catalytic converter technology. Visteon, for example, is engaged in a rare-earth project that would enable the Chinese to build converters without the use of expensive precious metals. Both foreign and domestic auto companies are working on fuel-injection systems, electric vehicles and natural-gas engines.

"The government has so many issues to deal with, it's trying to figure out priorities," says David Sherman, chief representative of Visteon's components operation in Shanghai. "Since the party congress last year, the major priority is on addressing environmental issues and doing something about them."

Indeed, many of the 130 vehicles exhibited at Beijing's recent international auto show, "Auto China '98," touted environmentally friendly vehicles - like Ford's Courier, a natural gas-driven mini-panel truck on a Fiesta platform currently sold in Europe. Toyota Motor Corp. displayed its RAV4 EV.

Nissan Motor Co. Ltd. showed a concept minicar EV, while AXcess Australia displayed a car with a body weight of only 69 kg (152 lbs.). There were domestics that by their very nature are fuel efficient, such as the Guizhou Yunque (Skylark) and the Dongfeng-Citroen Fukang ZX hatchback.

Small, cheap, lean and clean are what industry observers say Chinese private buyers are looking for in a family car. And they aren't the only ones. A large segment of private buyers are cab drivers who seek the same efficiencies. Although most taxis seen in Beijing are Shanghai-made Santanas and Tianjin Charade models, insiders say a domestic carmaker is experimenting with an all-plastic minicar, with a local government offering a lucrative award for a cab franchise if the vehicle proves worthy.

But whether any private buyer can afford vehicles with all the environmental whistles and bells is another question. U.S. car companies doing business in China right now are positioning themselves for such future demand, but most are building vehicles they can sell today.

Ford's first venture into the China market is its popular European commercial Transit van, which the company began building with Jiangling Motor Corp. in December to compete with the Toyota Hiace and several others in that sector. Ford Motor (China) Ltd. President Vaughn A. Koshkarian says the Transit, which is priced around $26,000 and seats from 9 to 15 passengers, is getting a good reception, despite the fact that overall light vehicle sales are suffering due to the downsizing of state enterprises - the targeted purchaser. With the introduction of a long-wheelbase version in July, Ford hopes to sell 5,000 to 10,000 units in the ensuing 12 months. The ultimate goal is 60,000 units annually, with derivatives to be added as the market dictates.

It's no secret that Ford would like to build family cars in China. "There's a lot of space between top-end cars and low end," Mr. Koshkarian says. "Our Courier van and the Ka are on the same platform, which means investment efficiency. That's ideal for China. But what you produce depends on what the customer wants; what the customer will buy; and whether your partner can get government approval," he says. "The order you bring product into China is not always at your discretion."

GM, which also intends to be a major player in China, understands that. It would like nothing better than to produce its European Opel cars in China. Instead, GM will start production of Shanghai Buicks in December, with ramp up next April, to compete in the luxury import niche.

In an interview last year, GM's top executive John F. Smith Jr. told WAW he would like to see Buick-badged minivans also built at the plant. Hu Maoyuan, president of Shanghai GM, hinted at that possibility at the premier of Buick prototypes during the Beijing auto show.

Mr. Hu says trying to achieve economies of scale with a single product was risky at this time and therefore the JV chose a platform that could accommodate other models on a common line. "Shortly after the sedans, we will launch derivatives," he says.

Philip Murtaugh, executive vice president of Shanghai GM, would not confirm the plan, but industry insiders say more models will be added, with the first likely based on the Opel Sintra minivan.

A restructured $230-million deal just signed in June with FAW-Jinbei Automotive Co. Ltd. in Shenyang will broaden GM's range, offering a practical 2.2L 4-cyl. S-10 crew cab pickup truck for the Chinese market and two versions of a pricey upscale Chevy Blazer to appeal primarily to expatriates. Some 4,000 vehicles will be built the first year when production begins in 2000, with an eventual goal of 50,000 units annually.

Chrysler Corp. is adding a high-end Jeep Cherokee model made by its joint venture, Beijing Jeep Corp., with more headroom and backseat space to attract expatriate families. BJC also is introducing a sportier looking BJ2020ST City Cruiser model for Chinese consumers, complete with fender flares and special pinstripping and decals. Along with other S-series models, it offers an energy-absorbing steering column, a 2-wheel-drive version and a hardtop roof.

Andy Okab, Chrysler's vice president of BJC, says the company, which formerly sold most of its vehicles to state enterprises and the military, has a lot of image polishing to do to attract private buyers, most of whom don't understand the benefits of four-wheel drive.

Sales of both the Cherokee and BJ2020 dropped from 72,000 in 1996 to 51,000 last year. This year's target is 40,000, of which the Cherokee, priced at $23,000 at the high end, likely will only see some 13,000 to 15,000 sales.

But with the market spotlight on environmentally friendly cars that are economical to operate, gas guzzling "jipu che," as Jeeps are known here, face an uphill battle. BJC plans to phase out the Cherokee in 2001 in any event, perhaps for the Grand Cherokee to vie with the Chevy Blazer in attracting wealthy Chinese and expatriates.

Don't look for the average Chinese consumer to enter the car market at such lofty heights. The most they can hope for is to graduate from their bicycle or farm vehicle into an Alto or Xiali minicar. If it comes with a catalytic converter there might be some daylight at the end of their smog-enshrouded tunnel.