Ma Hongman

Time to change wheels

By Ma Hongman (China Daily)
Updated: 2010-07-15 07:41

Chinese carmakers must rely on innovation and marketing strategies, rather than banking on easy profits, to spur growth

Homegrown automakers may be described in one word - as "profiteers".

Dongfeng Motor Corporation, Shanghai Automotive Industry Co, and First Automobile Works (FAW) Group, the country's three flagship automakers, together reaped billions of yuan in net profit in the first quarter of this year, far more than what international carmakers such as Toyota, Volkswagen and General Motors made in the same period.

The reason for such excessive profits - very little competition and government stimulus measures.

In addition, domestic automakers usually manage to shift the burden of assorted taxes on to the end consumer.

Yet, the intoxication with excess margins will likely prove fatal, as increasingly fierce competition at home and abroad threatens to eliminate these domestic auto giants.

China's automobile manufacturers have an average profit ratio of 30-35 percent, compared to the sharply lower 5 percent registered by Western automakers in their home markets, statistics released by Standard & Poor's show.

Although the data has yet to be crosschecked, the rapid increase in the number of auto sales stores across the nation is an indicator that the exorbitant profits made by domestic auto enterprises may in fact be true.

It takes tens of millions of yuan to set up a 4S store in China, and according to auto industry insiders, it just takes one or two years for domestic dealers to recoup that investment.

If these 4S stores also sell auto spares, then there is huge profit to be made from this downstream service.

Auto sales in China usually result in bumper profits for manufacturers. For instance, the sale price of a middle- to high-end car, generally around 200,000 yuan in the country, is much higher than the 150,000 yuan a customer pays in the United States.

This means domestic car buyers pay 25 percent more than foreign consumers.

True, higher purchase tax jacks up domestic car prices. Still, compared to well-developed Western markets, the costs of domestic labor and raw materials used to produce a car are far lower, which means the higher domestic purchase tax can be partly offset.