At the beginning of the new year, shortly after China joined the WTO, the prices of Chinese made cars -- mostly those in the economy range, but also including some middle and high-grade cars, plummeted on an unprecedented scale, from 6 percent to nearly 20 percent.

The main reason for this is the high pressure the Chinese car market is expected to undergo after China's WTO entry. Through till 2006, the 80 to 100 percent tariff on imported cars will be reduced to 25 percent, and that on the import of spare parts will decrease to 10 percent. Although this is an evolutionary process, prices of Chinese made economy and middle-range cars have been reduced as a matter of necessity, as those of imported cars have decreased in an all-round way, some to a level of 30 percent. This means an increasing number of cars will be imported, and some will be the same price as Chinese made cars. Price reduction is therefore imperative.

In order to exploit the Spring Festival to the full, in terms of making use of this golden opportunity to stimulate consumption, Chinese auto makers are employing price strategies that will increase sales volume, and make up for losses caused by price reductions. This is the only way they can seize a greater market share, and guarantee their long-term profits.

The Chinese government has always attached great importance to the development of the auto industry. Since the founding of the PRC in 1949, and in order to make it into a national industry, China has granted the auto industry a high degree of protection. However, things did not develop as rapidly as was hoped. Few of China's numerous auto enterprises are of a large scale. In 1982, there were over 2,500 auto and spare parts manufacturers, but their total annual output was less than the single shift output of an average Japanese, American or European auto-manufacturers.

Since the mid-1980s, spurred on by Chinese preferential policies for foreign investment, international auto giants, such as Volkswagen, GM, Ford, Toyota, PSA Peugeot-Citroen and Fiat, have established joint ventures in China, indicating good prospects for the Chinese auto industry. Since the middle and latter part of the 1990s, stimulated by fierce competition, various auto joint ventures have developed a line in economy cars to suit the Chinese market, and have meanwhile enhanced production localization. For instance, Shanghai Volkswagen has localized 95 percent of its regular production. But domestically manufactured cars, protected by the high tariffs imposed on imported cars, and accustomed to high profits, are reluctant to make big price reductions. Although there has been some progress, there is still a large gap between Chinese auto manufacturers and international auto giants, as regards scale and service. To date, China has still not formulated its own auto industry, as of the numerous Chinese auto manufacturers, not one has internationally competitive power.

With China's WTO entry, the domestic market faces huge challenges, of which substantial price reductions are just one. It is only through fierce competition that a powerful enterprise can be forged, and that the Chinese auto industry can grow up.

As cars are easily replaceable products, their price is a key selling factor, and has the greatest influence on prospective buyers. This is evident from the aftermath of the September 11 terrorist attack, when it was only the auto industry, within the generally depressed state of the American market, that was able to maintain its prosperity. The reason for this was the application of preferential policies, such as price reductions and loans without interest. In China, price reductions have resulted in several brands of cars being completely sold out. The current trend in China is to own a family car, but for most ordinary people, this is just a dream, as its high price presents an insurmountable problem. In addition, the consumption credit service is in its initial stage: its scale is limited, and stringent requirements must be met. Consequently, only 10 percent of cars are bought on credit -- a far lower level than that of developed countries. With China's WTO entry, foreign financial institutions now have official sanction to develop car consumption credit services, and relevant regulations will be formulated by the Central Bank that will lead to a gradual improvement in the Chinese car consumption credit market, and provide Chinese people with more choices.

Sales networking and after-sales service still need to be updated and improved. This is one main reason why a certain number of white collar workers that could otherwise afford to buy a private car prefer, for reasons of reliability and convenience, to take a taxi. Although the Chinese auto giant Shanghai Volkswagen did not participate in the recent price reductions, it has announced its plan to perfect a sales network and after-sale service, with the aim of attracting more customers. In the near future, Chinese car buyers will enjoy a good all-round service.

Price reductions mark only the beginning of the adjustments for the Chinese auto industry. With China's WTO entry, its auto industry will undoubtedly be revitalized. The Chinese government can fulfill its dream of making the auto industry its main national industry, and domestic auto manufacturers can improve their core competitive power and formulate world famous brands. Still more important, as a result of such stiff competition, the prospect of a family car will cease to be a dream for the Chinese man-in-the-street.

(China Taday March 30, 2002)