He has had a driver's licence for five years, but has never really driven a car except when taking the test for his licence.

Having bought a 500,000-yuan (US$60,000) apartment a year ago, Xiang's next goal is to buy a car, of which he still wants to know more.

Huge Demand

Xiang is just one of many Chinese who have fallen in love with the more affordable cars these days, partly because of rising incomes and partly because of the price cuts brought by China's entry into the World Trade Organization (WTO) and fierce competition among automakers.

Last year, automobile sales in China skyrocketed to reach more than 3.2 million units. The figure is expected to hit 4.7 million units by 2004, according to a report released by ING Financial Markets.

The report, entitled "Gear Box: China - FDI GTI," predicted that China will outpace Canada, Spain and South Korea over the next couple of years to become the fifth largest producer in the world, fuelled by global players scrambling to increase their China investment and boost local capacity and ease pent-up demand.

Peter So, head of ING's China Research, said China's auto sector will grow by over 45 percent over next two years as rising incomes and declining import tariffs and increase in foreign direct investment and fixed asset investments drive demand.

He also predicted favorable government policies to stimulate the automobile sector.

"China's auto industry will gain from lower transaction costs and improved infrastructure such as rapid development of road systems and an increase in additional public parking slots which have been lacking in major cities," So said.

It is also expected that the Chinese Government will introduce more consumer protection measures within the auto industry to boost consumer confidence and improve auto financing service schemes.

Demographics will also play a large role in the sustainability of a long-term demand, as the bulk of China's auto purchasers are aged between 26-45, accounting for the largest segment of China's overall population.

Bullish Automakers

China's vast growth potential has lured an increasing number of automakers to establish joint ventures with local Chinese partners in order to boost capacity.

Toyota committed in August last year of a US$1.3 billion to a 50-50 joint venture with First Auto Works (FAW). A Tianjin plant will turn out 400,000 vehicles by 2010.

Guangzhou Honda, Honda's automobile production and sales joint venture, has indicated it will almost quadruple its capacity in China by 2004 to supply the local market.

Nissan China's joint venture with Dongfeng Motor Corp is expected, when launched, to allow Nissan to make a full fledged entry into the promising Chinese market.

Kurt Sanger, ING analyst specialized in the Japanese market, said Japanese auto manufacturers are already active players in China using it as both a base for domestic sales and for the first time have begun expanding capacity to export to other developed markets

Meanwhile, Korean auto players are also keen to participate in the China race with Hyundai Motor planning to invest US$430 million by 2005 in its Chinese partner Beijing Hyundai and Kia Motors planning a US$300 million investment by 2006 in its Chinese partners Dongfeng Yueda Kia, according to ING auto analyst Sungmoon Suh.

As China remains in the spotlight, some Asian countries will have valid concerns over these foreign direct investment shifts to China, particularly ASEAN countries, according to Corinna Cheah, ING head of auto research for Asia excluding Japan.

But she said Asia's low motorization rates of only 28 per cent compared to 75 per cent in the US and rising affordability will in the long term sustain demand "but for the moment China's holds the world attention."

Growing Pains

Despite a rosy picture, concerns about excessive capacity, price wars, quality standards, low affordability levels, environment impact and energy crisis still exist among many industry insiders and environmentalists.

In fact, Shanghai General Motors, Honda's venture, Dongfeng Citroen and FAW have all lowered their prices recently in order to maintain a competitive edge.

Despite the publicity campaign by automakers, most potential Chinese buyers still look at economic cars.

During a recent auto show in Beijing, about 47 per cent of the people said they expect cars with a 100,000 yuan (US$12,000) price tag and 22 per cent look at the 100,000-200,000 yuan price range.

Back in Shanghai, white-collar worker Xiang Jun hope his car has a cool look, good quality and costs a little over 100,000 yuan.

(Shanghai Star January 31, 2003)