China to Remain Best of the BRICs

TRAVERSE CITY, MI – Auto sales in China have not peaked yet, and they show no sign of slowing, say General Motors Chief Economist Mustafa Mohatarem and Tsingua University’s Fuquan (Frank) Zhao.

Mohatarem says China, unlike Brazil, India and Russia, continues growing because economic reform has gone beyond the early liberalization of the market. The other BRIC countries, he says, need more local economic reform.

“Most people (in the BRICs) who can afford a car have one,” he says, so the challenge will be for governments to improve the earning power of more people. These countries have high populations, but car ownership is low, at just 322 units per 1,000 people in Russia, 198 in Brazil and 26 in India. In China, ownership has reached 91 vehicles per 1,000 people.

GM made a strategic decision in 1995 to invest in a China plant with local automaker SAIC, Mohatarem notes.

“Our CEO (John F. “Jack” Smith Jr.) decided that China was a rare strategic opportunity, and eventually he got the full support from the board to go into China,” recalls Mohatarem, who has been chief economist since 1995 and was part of the group supporting China investment. Production of the Buick LaCrosse began in 1997, he says, and “we have not been able to keep up with growth in China.”

Volkswagen also chose China early as a strategic market, and today, China accounts for 32.5% of GM’s global sales and 33.7% of Volkswagen’s, Zhao says.

Toyota, the leader of the three biggest automakers globally, has only 9.2% of its sales in China. “That means they are not doing well or could be doing better,” he says.

The poor Toyota showing is not simply a result of China-Japan antipathy, because Honda records 18.2% of its global sales in China. Ford is growing there, now at 14.8%, but Fiat-Chrysler is among the laggards at 2.9%, despite the fact Jeep was one of the first brands allowed in China, in the 1980s.

China sales were 22 million last year, and both Mohatarem and Zhao expect the growth to continue, although each sees congestion and pollution as factors that could slow expansion.

Nonetheless, by 2020, says Zhao, China sales should be between 35 million and 40 million, and the quality and low prices that will result by then should push exports to 5 million units a year.

For Zhao, the biggest constraint will be China’s reliance on imported oil, which has been over 50% since 2008 and reached 58% last year. Imported oil could constitute 70% of the China market in 2020.

Reliance on imported energy is behind China’s national strategy to enact Corporate Average Fuel Consumption rules requiring a fleet average of 47 mpg (5.0 L/100 km) in 2020, and the steadfast support for electric vehicles, despite their lack of market penetration.

Zhao believes most manufacturers will respond with hybrid vehicles to meet the rules, which could be 52 mpg (4.5 L/100 km) in 2025. And while EVs are likely to continue to drag, as there is little infrastructure to recharge them, Zhao believes plug-in hybrids could be a good opportunity, because they will benefit from government subsidies and not suffer the range problems of EVs.

China’s market is able to respond to the challenges it faces and continue to grow, says Mohatarem, because “the auto industry is a very open, liberal market, a very competitive market. The mainstream cars there are built by independent car companies (that) make the decisions about what kind of car to offer in China.”