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It is not hard to understand why multinational carmakers are so excited about the Chinese market.

Car sales rose 35 per cent last year and the 1m additional vehicles made China by far the fastest-growing major market in the world. At some stage over the next decade, China is likely to overtake the US as the world’s biggest market.

Although multinationals have long dominated the market, they no longer have it their own way. Despite explosive growth, they are starting to feel heavy pressure from an army of Chinese competitors.

Last year, Chinese carmakers surprised the industry by coming second in terms of aggregate market share, just behind Japanese brands. So far this year, they have gone one better, capturing 29 per cent of the market in the first two months to take the leading spot. Chery, a Chinese company founded only a decade ago, became the best-selling manufacturer in March, pipping Shanghai General Motors.

“Over the last few years, there has been a big change in terms of who is the main competition,” says Kevin Wale, president of GM China. “Five years ago it was Volkswagen. Three years ago, it was other western players. Now it is Chinese and western players.”

China’s market is divided between about 20 different companies, which has added another dimension to fierce competition: price-cutting. With many new entrants in the market, prices have inevitably fallen. “The Chinese market is the only market in the world which is deflationary,” says Winfried Vahland, chief executive of Volkswagen in China. “Prices have reduced by 33 per cent in recent years and will go down by 10 per cent additionally by 2010.”

Facing this relentless surge in competition, multinationals are wondering how to maintain a strong footing in the Chinese market without sacrificing profitability.

One answer is to reduce operating costs in China by locally sourcing a larger proportion of components. Multinational suppliers such as Bosch and Visteon have invested heavily in China in recent years, making such an approach more feasible, and the quality of products from Chinese components makers has also increased.

Local sourcing is a key part of Volkswagen’s “Olympic programme” to reduce costs by 20 per cent from 2004 to 2008; the company claims to have achieved half of the cost reductions last year. Meanwhile, Ford has set up an engineering research centre in China which will help with sourcing more components locally.

According to Mei Wei Cheng, head of Ford’s China operations, it is particularly important with more economical vehicles to find local suppliers. “For vehicles in the Rmb40,000-60,000 range ($5,200-$7,800), you have to localise,” he says.

The obvious advantage that foreign carmakers still have is quality, a factor which is becoming increasingly important in the Chinese market. Because car ownership has expanded from almost zero, most consumers in China have been first-time buyers, making them more susceptible to the appeal of a vehicle’s image and design.

However, more people are buying their second car and a second-hand market is beginning to develop, focusing consumer attention on the reliability, rather than just the look, of vehicles.

According to Michael Dunne, president in China of JD Power, the consultancy that compiles quality data on cars, this is “judgment day” for new Chinese brands, which have mostly competed on price rather than quality. “Now that it is time for people to trade in their cars, they have to decide to trade up or stick with cheaper Chinese brands,” he says.

He adds that although foreign cars are still well ahead in terms of quality, local brands are improving. “The Chinese are closing the gap year by year,” he says.

Designing cars in China with the local market in mind is another strategy some multinationals are pursuing. At the ongoing Shanghai Auto show, the largest in the country, General Motors unveiled a new Buick Riviera partly designed in China at a facility the company runs with joint venture partner Shanghai Automotive Industrial Corporation.

“The team in China and the US worked together to establish the design language,” says Ed Welburn, General Motors’ vice-president for global design. “We aimed for very fluid, uninterrupted lines, with every line like a brushstroke.” It is no coincidence that the company is seeking to use Chinese design for Buicks as the brand sells more cars in China than in the US.

If the Shanghai show is anything to go by, foreign carmakers are also putting ever greater focus in China on alternative-fuel vehicles. Toyota, Honda, BMW, GM and Ford all brought green cars to Shanghai. They are aware that the market at the moment is not huge: Toyota makes the Prius hybrid car in China but the vehicle has recorded only modest sales.

But carmakers know that China could become a huge market for these vehicles given growing concern from the government about the deterioration of the country’s environment. They also realise that China could help decide what new technologies are adopted world-wide if it were to strongly favour one or two.

However, even on this front, they are starting to see competition from Chinese companies. At the Shanghai show, SAIC demonstrated its own fuel-cell hybrid car. “We can catch up with other auto companies in the development of new energy vehicles,” said Hu Maoyuan, the group’s chairman .

Copyright The Financial Times Limited 2017. All rights reserved.
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