WTO-No! China braces for big shakeout

It had been an annual event for 20 years: Every year, a bill comes before the U.S. Congress to grant China permanent normal trade relations. And every year, Congress shoots it down.

This year, the vote overwhelmingly swung in China's favor, removing the final obstacle in its 14-year quest to join the World Trade Organization (WTO) global trade body. Membership is expected to be finalized by year's end.

Accession to the WTO gives China equal access to the U.S. market, and, conversely, world superpowers will find an open door to an increasingly capitalistic consumer base of 1.4 billion Chinese.

While Chinese industries from telecoms to textiles look forward to reaping profits of an expanded trade base and elimination of barriers, the domestic auto industry is not so sure joining the WTO club is a good thing.

Membership means that China has to start playing by Western rules. No longer will foreign automakers be required to create partnerships with domestic firms in order to manufacture on Chinese soil. Local parts requirements will be removed, and import tariffs will be brought down to a level that mandates a truly competitive marketplace.

The U.S.-China WTO pact calls for China to cut import tariffs on cars to 25% by July 2006 from the present 80% to 100%. China's deal with the European Union requires the lifting of all restrictions on category, type and model of vehicles produced in Sino-EU joint ventures (JVs) within a two-year time frame.

These dramatic changes are sure to produce a fair share of big winners and even more big losers. Some pessimistic analysts forecast domestic production to drop 15% in five years, while imports double in the same period. The first casualties will be the bulk of China's 120 or so domestic automotive producers, whose products by and large boast high prices but less-than-world-class quality levels.

Analysts say only the top five Chinese makers will survive - and only on the backs of viable international partners. Others may become extinct, or find themselves transitioning to the parts business, as it still will make sense for the auto industry to source locally.

"If Chinese automakers try to match these quality standards on their own, they are going to face extremely high technical costs, as will each of their suppliers," warns Darrell Bryja, vice president-marketing/sales/service at Ford China Ltd.

Even Chinese makers now secured in strong partnerships with multi-nationals may find themselves on the side of the road. Volkswagen AG, which holds a whopping 55% market share in China and operates through two JVs, reportedly is considering buying out its state-run partners after WTO goes through. Such a move would provide VW with more flexibility, especially when it comes to choosing its suppliers.

Raising quality levels to world standards and lowering costs through its supplier base is especially important to large joint ventures such as Shanghai Volkswagen Automotive Co. Ltd, which stands to see newcomers chip away at its market stronghold. Other Sino-foreign JVs, such as Shanghai General Motors Automotive Co. Ltd., also may find themselves hit by a market shakeout that's sure to usher in less-expensive, higher-quality imports.

Automakers are gambling that though imports will increase in the post-WTO era, it still makes more sense to manufacture on Chinese soil. Hopes are that WTO membership will give Chinese consumers more economic empowerment, creating a revolution in the private car sector. Already, automobiles - once reserved for government officials and corporations - are reaching greater numbers of private citizens.

Ford Motor Co. is sealing the deal on its first passenger car JV and Toyota Motor Corp., GM and VW are planning introduction of small, personal cars. Existing JVs producing outmoded vehicles are refreshing their offerings. Even DaimlerChrysler AG, which had all but abandoned Beijing Jeep Corp., recently announced plans to reinvigorate the venture with assembly of the new Grand Cherokee and a cash injection of $226 million.

No matter how close WTO brings China economically, it still is geographically far removed from the West. Few expect China to become a formidable export base over the short-haul.

"We hope that China's auto industry will be strong enough to compete in the international market with overseas companies," says Chen Hong, president of Shanghai GM. "But first and foremost, we should be able to compete with multi-national companies in the domestic market. We are now, so to speak, swimming in a pond. We need to gradually enlarge the pond first into a river and then into an ocean in order to train our swimming abilities."