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Rubber Duck 21st April 2007 06:52 AM

So this is what the Chines spend their $100 a year on!

There is a carnival atmosphere as the Shanghai motorshow opens for business - with singers, dancers, acrobats, and drummers entertaining the visitors and press flocking to see the latest models on sale in China.

No less enthusiastic are the world's car companies, who are flooding into China to take advantage of the world's second biggest and fastest growing car market.

All the world's major companies, from GM to Volkswagen to Ford to Toyota, are planning to introduce new models and increase their production capacity in China.

And dozens of Chinese car companies are also showing their wares at the show, many with models new for this year, as competition intensifies.

Overall, there are expected to be 140 new model launches in China this year.

GM the leader

For GM, the world's biggest carmaker, China is particularly important.

GM is the biggest carmaker in China, with sales of 876,000 cars in 2006 through its joint ventures with SAIC, or Shanghai Automotive Industry Corporation, and Wuling Motors (SGMW).

Their sales grew by 25% during winter of 2007, compared with the same period last year. GM wants to boost sales by a further 500,000 cars sold by 2010, and it is investing around $1bn (£500m) per year to make it happen.

With GM still facing huge restructuring costs and strained relations with workers in both the US and Europe, GM increasingly sees its future in China, now its second largest market after the US.

GM's chief executive, Rick Wagoner, says that China is unique in that it is both a huge market and growing fast, so GM would be "crazy" not to continue to invest strongly in building its brands.

GM is launching its new luxury Park Avenue Buick, and showing a version of its Volt electric concept car powered by fuel cells at the Shanghai show.

In addition, the American giant is also looking for acquisitions, hoping to benefit from the Chinese government's view that there are too many small carmakers who should be amalgamated into world-class companies.

"It's inevitable there will be consolidation and we want to be part of that," Mr Wagoner tells the BBC and other reporters.

But although GM is still profitable in China, increasing competition is driving down car prices, which fell 5% to 7% in the first three months of the year.

Foreign rivals

Besides, GM's rivals are not sitting still.

Volkswagen Group, which was the first foreign car company to produce in China, is planning to introduce a dozen new models in the next 3 years, also saw its sales rise 23% in the first three months of 2007.

Ford, which only got into China in a major way in 2003, says its sales were up 114% in 2006 as it introduced the new Focus model.

"We are well and truly making our way," Ford's China boss, Phil Spender, tells the BBC, insisting that Ford is now well placed to expand its brands here.

Ford is building a new assembly and engine plant, raising its capacity to 546,000 by the end of the year, and will launch a new small car later in the decade.

In addition, Ford's partially owned partner, Mazda, will build a small car here.

Japanese manufacturers like Toyota and Nissan are also moving aggressively into the Chinese market, with Toyota projecting a 30% increase in sales this year after the introduction of the Camry.

Toyota will begin producing its new Corolla at its Chinese factory in Tianjin, and will target the small car segment with its Yaris.

The company aims to produce more than 400,000 cars this year in China, and ultimately wants a 10% market share.

Nissan has launched its luxury Infiniti brand, while Toyota already sells the Lexus in China.

Domestic threat

But the biggest long-term threat to GM may come from China's domestic manufacturers, and the desire of the government for a national champion, according to Professor Eric Thun, who has studied the Chinese car industry at Oxford University's business school.

Companies like Geely and Chery are rapidly expanding their production and range of models, and are competing aggressively at the lower end of the market.

Chery's entry level car, the QQ, which GM says is a copy of its Spark, is priced at less than $4,000 (£2,000). The model is outselling the GM car, which costs 25% more, by four to one.

Chery says it sold more than 100,000 cars in the first quarter of the year, and has launched a new range of smaller cars, the A1, with higher specifications.

Chery is investing 10% of its sales into new model development, vice president Jin Yibo tells BBC News, though he denies that they receive any additional help from the provincial government in Anhui, which owns the company.

Chery can charge less because it is not involved in a joint venture, he insists.

This, he says, means it can take advantage of lower labour costs and cheaper development costs, as it does not have to pay for intellectual property.

Geely, which is privately owned, has doubled production from 100,000 to 200,000 units in three years, and has now replaced its complete passenger car range with new models, according to spokesman Henry Xiong.

Both companies also want to aggressively expand their exports, although not so much to Western Europe or the US as to the Middle East, Eastern Europe, and other Asian countries.

The biggest threat to GM, however, may come from its own partner SAIC, China's largest domestic car company, which has launched its own brand based on the Rover 75, called the Roewe 750, and showed a W2 smaller family car version.

'We want to create space for our brands and in the future," says SAIC chairman Hu Maoyan. "Yes, there may be some conflict" with partners like GM, he acknowledges.

However, GM's Rick Wagoner dismisses the threat, saying that the companies continue to have a very good working relationship. Indeed, Mr Wagoner insists he always knew SAIC wanted its own brands.

Mr Hu also call for more cooperation with Nanjing Motors, which bought the MG brand and the Longbridge factory in the UK.

And for SAIC, domestic production rather than exports will remain the priority.

Declining profits?

The overcrowded China market could be heading for a shakeout that could strengthen the biggest player and eliminate the weaker companies.

And the intense competition is putting pressure on everyone's profit margins and forcing companies like GM to shift production to smaller towns outside of Shanghai, where labour costs are lower.

But with only 1% of the Chinese population owning cars, the attraction of getting in at the beginning is likely to prove irresistible to every carmaker in the world.

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