Doing Business in China

The Automotive Industry in China (Part 2 of 2)

Written by Bobby Jan for Gaebler Ventures

Some of the greatest business opportunities in China exist in the automotive sector. This article discusses the quality of cars manufactured in China, consolidation and price wars, and some market opportunities.

Chinese cars have a reputation of, unfortunately, being low quality.

Many years ago, Chinese cars were known for frequent breakdowns and failure to pass Western safety standards.

One of the reasons is that many Chinese automakers are state-owned and supported by interest-free government loans. As a result, these state-owned automakers did not respond very well to capitalism. Instead of taking the long-term view of increasing quality, these automakers chose to cut price by skimping on materials and technology.

However, as Chinese automakers gain experience from interacting with the market and partnering with foreign auto makers in the form of joint ventures, quality has increased dramatically in recent years.

Companies who were reluctant to enter the China market for quality control reasons should now reconsider. As Chinese consumers get wealthier and automakers more experienced, demand for high quality auto parts is booming. This presents a great opportunity for many entrepreneurs.

Consolidation and Price Wars in China

China has more than 6,000 automotive companies in five sectors: motor vehicle manufacturing, vehicle refitting, motorcycle production, auto engine production, and auto parts manufacturing.

Intense competition has brought about a consolidation in the automotive industry as inefficiently ran companies fail one after the other.

Price wars also mean that profit is not keeping pace with revenue. Even though companies may find that their investments in China are not immediately profitable, many executives still believe that they must enter the Chinese market because it is simply too big to be ignored.

Entrepreneurs should be wary of the current intense competition. This requires that you be well-capitalized and willing to play for long-term profits, rather than short-term gains.

Market Opportunities in China

China is currently the world's second largest new automobile growth market.

Major domestic firms include the Shanghai Automotive Industry, Dongfeng Motor Corporation, and the China First Automobile Group Corporation. Almost all major foreign car companies have also established a China presence. Entrepreneurs with little capital, expertise, and political connects will fare badly with these giants.

As a pillar industry, the rise in demand for automobiles also raises the demand for many automotive services such as insurance, financing, maintenance, etc. Although most entrepreneurs do not have the resources to start manufacturing cars, there are still plenty of opportunities in periphery markets.

For example, due to pollution problems and fuel shortages, China encourages the developed of clean, fuel efficient cars. Major cities in China, including Beijing and Shanghai, require the Euro III emission standards. There is still plenty of opportunity in the fuel efficiency/green sector.

If you are thinking about importing used cars to China, throw out that plan for now because it is illegal. The used car market in China is currently not very well developed. However, as domestic car owners start retiring their old cars, this market will quickly emerge. The used car market is another great opportunity entrepreneurs should pay attention to.

Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.

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