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FEATURE: Prices tumble as automakers struggle for market share.

BEIJING, Feb. 1 Kyodo

Domestic and foreign automakers in China are now locked in a full-scale price war after the country's entry to the World Trade Organization (WTO) last month finally unlocked the door for many potential buyers.

Su Hui, general manager of the Beijing Asian Games Village Automobile Exchange -- the largest in Beijing -- said price cutting was inevitable as a result of Chinese consumers' persistent delays in buying cars and increased auto imports following China's robust tariff cuts earlier this month.

''Consumers have been waiting for cheaper cars for years and this is now a reality,'' he said.

On Jan. 1, tariffs on imports of cars with engines below 3,000 cc were cut to 43.8% to 50.7% from 70% to 80% -- the biggest cut in any sector following WTO accession. Cars with engines above 3,000 cc saw tariffs cut from 80% to 50.7%.

Under WTO rules, China must cut all of these tariffs to no more than 25% by mid-2006.

The current price war was ignited on Jan. 12, when Tianjin Automotive Industry Group slashed prices of all 24 versions of its Xiali compact cars by 9,000 yuan to 23,000 yuan ($1,084 to $2,771).

Chang'an Suzuki, a joint venture between the Chongqing-based Chang'an Motor Corp. and Japan's Suzuki Motor Corp., followed suit by cutting prices of Alto and Gazelle compact cars by up to 20%. The lowest price of Chang'an Suzuki is now only 35,800 yuan, compared with Xiali's 39,800 yuan.

Dongfeng Citroen, a joint venture between Dongfeng Motor Corp. and France's PSA Peugeot Citroen, also slashed the price of its recently-launched 1.6-liter Fukang by nearly 5,000 yuan to under 100,000 yuan.

Industry analyst Qie Xiaogang said he believed all domestic manufacturers of vehicles priced at less than 150,000 yuan would be involved in the price war sooner or later.

Shanghai General Motors Corp., a 50-50 joint venture between Shanghai Automotive Industry Corp. and General Motors Corp., first insisted no price cuts were planned, but within days had bowed to the inevitable. New models of its Buick Sail compact sedan and small recreational vehicles, previously priced at 100,000 to 135,000 yuan, will now sell at 92,800 to 112,800 yuan despite the addition of power steering and other improvements.

Xu Changming, from the State Information Center, said hesitant automakers would have no other choice than price cuts if cheaper rivals squeezed their market share, which is already happening.

For example, the Beijing Asian Games Village Automobile Exchange said Santana sedans made by Shanghai Volkswagen Automotive Co. declined to a record-low of 2.3% of its sales in mid-January, from a peak of 40% before, while Xiali jumped from 5% to 39%.

Xu said the price war was expected to significantly boost the domestic market as a whole this year, and he predicted sales of domestic automakers this year would reach 2.7 million units.

Domestic manufacturers sold 2.36 million vehicles last year, up 13.81% from 2000, according to statistics released by the China Association of Automobile Manufacturers. Passenger car sales increased by 18.25% to 721,500 units.

Experts believe the private sector will account for 50% of sedan consumption in 2003. Until the late 1990s, most car purchases were made by corporate or official buyers.

Automakers and major suppliers anticipate 7-10% annual growth in passenger vehicle demand in China, but new surveys suggest much of this will be fueled by imports.

According to research by the State Council's Development Research Center, local production could fall by 15% over the next five years with imports jumping by more than 100%. But that presumes China will allow a full-fledged free market in which importers can compete on a near-level playing field with domestic producers.

Some analysts believe such a scenario is unlikely. The government, they argue, will comply narrowly with WTO norms by reducing import tariffs, but if local automakers are seriously threatened many non-tariff barriers may come into play.

Even so, smaller and weaker local assemblers face an uncertain future. Those surviving will be the ones who recognized the inevitable and signed up with a major foreign manufacturer for joint model development and production.

The global auto industry has long recognized that the mainland is going to be the place to be -- given its vast population, buoyant gross domestic product growth rates, WTO membership and the automotive sector's starring role in the 10th Five-Year Plan through 2005.

Highway construction continues apace. China already has 1.4 million kilometers of paved road, of which 16,000 km is expressway, the third highest figure worldwide.

The financing sector, meanwhile, is opening up to foreign players, creating a vista of affordable finance packages for first-time buyers. In fact, purchasing a car in China will soon become not only cheaper, but also somewhat easier, as buyers will be able to procure auto loans from foreign non-banking financial institutions.

The central bank, the People's Bank of China, has just released administrative regulations on foreign non-banking financial institutions conducting auto-loan services in China.

Surveys show that only 5% of Chinese car purchasers apply for loans, while 29% decide against them because of the complicated procedures. Another 35% said that instead of applying for loans they would rather work to earn the necessary money first and make the full payment at the time of the purchase.

The main deterrents have been complicated procedures, comparatively harsh terms and an underdeveloped security system.

Take Beijing for example. A car buyer must first find a guarantor who is a registered Beijing resident with a steady income. If the car buyer wants to buy a mid-priced sedan like the Citro or Volkswagen's Jetta, the guarantor's monthly income must be between 2,000 and 3,000 yuan.

Identification, income-verification letters signed by employers and residence certificates also identifying the owner of the house must be presented by the purchaser and the guarantor before selecting a car -- constituting a powerful non-tariff barrier to greater sales.
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Publication:Asian Economic News
Date:Feb 4, 2002
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