The hot Chinese market.

One point three billion people. That's how many there are in China. So Tony Yip, managing director, QAD Asia (Wanchai, Hong Kong; www.qad.com), postulates that if just 5% of those people were in the market for an automobile, that would translate into a market of some 65 million. So if you've ever wondered why so many western companies seem so anxious to increase their so-called footprint in China, there's your answer. Well, part of the answer.

Because according to Andrew J. Cummins, executive director, Automotive Industry Action Group (AIAG; Southfield, MI: www.aiag.org), "There are high margins on cars there." He suggests that companies including GM, Toyota and Honda are making as much as $4,000 per vehicle in China. Given the present difference between the number of privately owned vehicles on the roads in China today--just over six million according to the Economist Corporate Network--and the number of people in China, there's a whole lot of opportunity to make a whole lot of money there: Daniel C. Blake, global leader, IBM Automotive Industry Business Consulting Services (Chicago; www.ibm.com), notes that there is an "emerging middle class" in China. Presently, he says, there are about 30 million in that category, with another 20 million to join them within the next five years. So no matter how you do the numbers, China is hot. In 2003, Yip notes, there were 4.44 million vehicles (not all of them cars) produced in China--which put the country in third place in terms of automotive production volume, displacing Germany.

(What's interesting to note is that while a middle class buys consumer goods other than those fitted with tires, Yip suggests, "This industry is so profitable, everyone wants a piece of the pie," and he goes on to say that there is a Chinese appliance manufacturing company that sees the opportunity in automotive as too good to pass up making an investment in. Imagine Maytag or Whirlpool getting into the car business.)

With regard to the structure of the auto industry, Cummins says there are:

* State-owned enterprises (SOEs)

* Joint ventures

* Wholly owned foreign enterprises

Given the fact that the People's Republic of China operates an economy that can be described as a "socialist market economy," it is perhaps not surprising that the state-owned enterprises dominate the environment at present. Or not surprising that Yip suggests there will be a decrease in the number of SOEs, even as the production capacity increases in the country. It's estimated that there will be a 20% capacity growth in China within the next five years.

AIAG and IBM sponsored a study of the Chinese supply based conducted by the Economist Corporate Network. Fundamentally, the study examined the use of process and production technology, as well as the suppliers' plans for export. The survey was conducted among "the top 299 firms in the industry," both Chinese firms and Sino-foreign joint ventures.

Among some of the results:

* Quality: Nearly 70% of the Chinese firms and just over 60% of the joint ventures claim ISO 9000:2000

* Management techniques: Inventory management is the top item cited for improvement, with production planning and scheduling coming in second. (Other categories: Managing inventory in transit; engineering and project management; Just-in-time sequencing; EDI; Advanced delivery notice; Bar code labeling.)

* Exports: Comparatively few firms (Chinese or joint ventures) do it, and those that do have Southeast Asia targeted for export. Number two? North America.

* IT spending: Low. Half of the firms surveyed spend less than $50,000 on IT per year; 81% spend less than $100,000 per year. There were 56 companies that spent more than that, of which 33 of the firms are joint ventures.

* Automation: Quality control is the number-one area firms are looking to automate.

* Challenge: Good people is cited as the biggest concern, followed by cost competitiveness and access to product technology.

(In case you're wondering what QAD has to do with any of this: According to the survey, of the companies that use ERP systems in China--and only about a quarter do--QAD is the number-one supplier.)

Although many people might think that the Chinese advantage is found in its low wage rates, Andrew Cummins points out, "Automotive is capital-intensive; you just can't compete on labor costs alone."--GSV

RELATED ARTICLE: CHINESE ALIGNMENTS

Match the Western OEMs with their Chinese Partners

Beijing    BMW
Jinbei     Hyundai
Guangzhou  Ford
Changan    Honda
FAW        Nissan
Dongfeng   Volkswagen
Shanghai   GM

Answers: Beijing Hyundai; Jinbei BMW; Guangzhou Honda; Changan Ford; FAW Volkswagen; Dongfeng Nissan; Shanghai GM (Shanghai VW would also work, but that would leave GM out).