China Flexing Muscle to Become World’s Largest Car Market

From regional middleweight to global heavyweight.

That is how two J.D. Power and Associates analysts sum up the extraordinary evolution of China’s automobile industry in just seven years.

In a new report entitled “Inside Perspective,” analysts Tim Dunne and Mao Xiao Min explain how China has leapfrogged past France, the U.K., Italy, Germany and Japan to become the world’s second-largest car market.

Car sales in China jumped from 800,000 vehicles in 2001, when the country joined the World Trade Organization and opened access to its domestic auto market, to 5.4 million units in 2007. Sales this year are expected to reach 6.2 million units.

Seven years ago, there were barely a dozen models for sale in China and a limited number of people with enough money to buy them. This year, auto makers will offer 72 brands and 299 car models, both imported and domestically produced.

Increased competition has led to a drop in prices as well as declining profit margins.

For example, six or seven years ago, dealers could count on a gross margin of RMB10,000-RMB15,000 ($1,205-$1,807) on certain vehicles that now may offer a profit of only RMB3,000-RMB5,000 ($413-719).

Nor is the selling as simple as it was then, when dealers essentially could refuse to dicker and name their price.

With increased sales volumes come bigger showrooms, more staff, larger inventories, increased security and additional money needed for marketing, the analysts say.

In time, successful Chinese dealers will have to learn the same lessons as their counterparts in the world’s advanced industrial nations, specifically how to attract and retain customers.

As the Chinese market matures, dealers will have to place an emphasis on service and parts sales, which in the U.S. generate more profits than new-vehicle sales.

China will surpass the U.S. to become the world’s largest auto market by 2020, the J.D. Power analysts predict.

Adding in commercial vehicles accelerates the timetable. China already is the world’s largest truck and bus maker, with sales of 3.2 million units in 2007. With these included in the total, the analysts expect China to surpass the U.S. as the globe’s largest auto market by 2016 or 2017.