The cheery smiles of scantily-clad models draped over cars at this week’s Shanghai motor show may suggest otherwise, but conditions are tough in China’s maturing auto market.
The 75 per cent surge in sales in 2003 was never sustainable. Last year, growth was just 15 per cent. Nor was the business model of using an expensive production base to serve a very limited domestic market. The lack of economies of scale in auto parts, combined with higher logistics expenses, resulted in cars carrying bigger price tags than in Japan.
That did not stop carmakers piling on capacity – $10bn worth to double production in the next two years. Nor has it stopped their focus on a market that remains volatile and tilted in favour of state-owned competitors. The result is deflating prices and shrinking profit margins. Can carmakers now turn the tide by aping makers of air conditioners and PCs and using China as a factory floor?