Stiff Competition Means Going Where the Growth Is

A few days ago, I discussed the impact of low-cost Chinese furniture on the U.S. furniture industry and how the establishment of heavy duties and trade warnings against China may be risky. I pointed to the facts that China and the U.S. will become significant trade partners and that American companies are knocking down the doors to the massive Chinese consumer market in order to find alternative areas for growing sales, which might have slowed down elsewhere. The auto sector is a clear example of American companies looking for growth opportunities in China.

 As many of you are aware, a significant area of interest for American companies is China’s rapidly growing auto sector, where estimates are off the chart, in spite of some recent concerns about slower growth.

 The reality is, the trend for American automakers is not good in our own backyard. In order to halt the declining growth, American automakers have no choice but to look at alternative growth markets. Just take a look at the May numbers–they were pitiful for American automakers! General Motors Corp. and Ford Motor Co. continue to face dwindling sales amid increased competition from Japanese automakers. Sales at GM have slipped 5.2% this year, while Ford sales have fallen 4% in 2005 and 3% in May. In fact, new vehicle demand has declined for 12 consecutive months at Ford. Do you see any other choice for manufacturers but to go where the growth is?

 Japanese automakers, on the other hand, continue to take market share away from the U.S. Nissan Motor Co. saw a record May, with sales up 15.5% and 2005 sales up 15.8%. Toyota Motor Corp. reported sales growth of 7.8% in May and 11.9% in 2005. But all is not good, as Honda Motor Co. saw a 7.5% decline in May sales and is up less than 1% in 2005.

 Given this negative trend in the U.S. for American automakers, it is not a surprise to see massive investments in China by major American automakers. They simply have no choice.

 At the recent 11th Shanghai International Auto Show, American automakers reaffirmed their commitment to ramp up investment in China’s auto industry. Both GM and Ford have invested billions of dollars in China. Given their financial struggles, this is highly risky. For American automakers, however, this high- risk investment is worth the gamble.

 GM and partner Shanghai Automotive Industry Corp. plans to have annual production capacity of 1.3 million units in China by 2007. In 2004, GM sold a mere 492,000 cars in China, but sales were 27% higher year-over-year, a growth rate that it simply cannot achieve at home.

 Ford is currently selling seven brands in China, including Ford, Lincoln, Mazda, Volvo, Land Rover, Jaguar, and Aston Martin. 2004 sales were up 70% year-over-year to 170,000.

 And, while the numbers are not impressive, both GM and Ford realize that achieving success in China may be the only solution to growth. Success in Asia will not happen in the short-term or even the mid-term, but both companies are betting that long- term success is attainable. The fact is that you can’t ignore a market growing at about 8% to 10% annually.

 Of course, nothing’s a sure bet. Just like it is here at home, American automakers will face stiff competition ahead in China from both Japanese automakers and DaimlerChrysler.