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Dancing With The Dragon:
China's Market Can No Longer Be Ignored

By David Leggett - Managing Editor Just-Auto.com

let's hear it for david! China is not the easiest place in which to do business. Picking a local partner is never easy and the interplay of commercial considerations, local politics and the 'Chinese way' can take time to adjust to.

The Chinese leaders know that economic reform is a double-edged sword. If they go too far, too quickly, in liberalising the economy, demands for political reform will likely get louder. Also, if the Chinese economy were to be exposed fully to international competition tomorrow, the effects on employment would be horrendous. WTO admittance for this huge developing economy was never going to be a mere formality.

A few years ago, I toured the Shanghai Volkswagen plant. The joint venture with Shanghai Auto Industry Corporation, making the VW Santana, is very impressive. But I was struck by the very much more labour intensive nature of operations than is normally the case in modern vehicle assembly plants. Of course they had some of the usual machinery, such as body stamping machines (and I still wince at the memory of workers' arms placing the steel blanks under the presses just before they came crashing down), but spot welding, for example, was largely being done by hand, not robots. People make mistakes and can never be as efficient as machines. Quality must be affected by such methods, whatever the vehicle makers may say. But in China, labour is cheap. Adopt more capital-intensive manufacturing techniques and the fabric of the economy starts to fall apart. The social consequences of a big increase in unemployment could be severe. Reform has to be gradual.

But Western automakers are in China for the long haul, whatever the difficulties may be now or in the future. A country with 1.2 billion people and an extremely low rate of car ownership clearly has great demand potential. China is modernising slowly and there is an emerging entrepreneurial and middle class that will provide buyers for cars.

However, there will be surprises along the way. On the supply-side, it has long been contended that the way forward, in terms of product, is small city cars. The cars would be affordable and surely appropriate to Chinese market conditions. But market leader Volkswagen has confirmed that a cheap car based on the relatively large Santana is at the heart of its future strategy. That makes a lot of sense as such a car would stand a greater chance of appealing to a wide section of the market; taxi firms and small businesses, as well as emerging private consumers.

The broader economic fundamentals in China are extremely positive and have never been better. China is sucking up most of the foreign direct investment in East Asia. Economic problems in South East Asia have widened the gap in recent years. The latest Asian business survey in The Economist summed it up: 'Not only has the economy been growing faster than any other of the past six years, but in stark contrast to other emerging markets this growth was not volatile. Even now, as economists scale back their growth forecasts for most of Asia to reflect lower demand from America, projections for China remain unaffected. The reason: China's economic growth is to a large extent, generated domestically rather than by exports. Last year, China was one of only two countries (the other being Venezuela) whose stockmarkets moved in the opposite direction to America's - which reflected its growing economy.'

Automakers know that they cannot ignore China. No global business can.

Dave Leggett
Managing Editor


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