The Chinese Business Forum @ MIT Sloan

Source: Financial Times

Time: March 1, 2005 Tuesday

Title: "China looms in rear view mirror "

Author: JOHN GRIFFITHS

Original BODY:

Drivers in the Italian Alps, over the past few months, might have glanced at the occasional passing small car, thinking it oddly unfamiliar. They would have been right. They were having a close encounter of - for most of the world's carmakers - the uncomfortable kind.

Their maker, Chery Automobile of China, intends to be exporting cars to Europe within two years. It has recruited Italian design houses Bertone and Pininfarina to help do it. In a few weeks one of China's largest carmakers, Shanghai Automotive Industry Corporation (SAIC), is expected to receive Chinese Government approval of a joint venture with MG Rover, the independently owned rump of what was once the mighty UK state-owned British Leyland vehicles group.

The deal is very small beer by global automotive industry standards in every aspect but one: intent. The venture is to develop jointly a family of cars for production in both the UK and China. Through it, SAIC intends to secure the technology transfer and other know-how denied to it and other Chinese car makers by foreign partners willing, hitherto, only to let cars be made under licence for China's domestic market.

A so far undisclosed, but significant, part of the agreement is that SAIC and MG Rover will share markets, initially through the global network of dealers the UK company has managed to retain in spite of its long retrenchment.

The Chery and SAIC deals are illustrative of the same thing: China's long - and long-feared - march on to the world automotive stage as a manufacturer - not mere consumer - of cars has begun. The implications of the inevitable ratcheting up of global competition are enormous for Rick Wagoner, seated in his General Motors chairman's office in Detroit. He is racking his brains on what else can be done to stem the world's biggest carmaker's current uncomfortable dip into losses as it struggles to recover market share lost to rivals, accommodate soaring steel costs and cope with huge pension and healthcare costs adding more than Dollars 1,000 to the cost of each GM car.

The same applies to Ford chairman Bill Ford, gnashing his teeth a few miles away in Dearborn while wondering how Toyota has just overtaken what was traditionally, until last year, the world's second largest carmaker.

So, too, for Eckhard Cordes, Mercedes-Benz's newly appointed chief executive, as he seeks to take another Dollars 650m out of the financially pressed German carmaker's costs, to allow it better to participate in the world's savagely price-competitive new car markets.

And even more so for Fiat chairman Luca di Montezemolo who, having just tucked Dollars 2bn into the corporate back pocket from allowing GM to back out of a commitment to buy his automotive division, must seek an independent salvation for Italy's iconic but financially-sinking car company. "Although the GM deal could have been a bit like being rescued by the Titanic", observes Garel Rhys, head of the UK's Centre for Automotive Industry Research, wryly.

Nor is it only western carmakers concerned at the prospect of competition from the world's most populous nation. In terms of manufacturing costs, China presents a rival to which neither Japan nor Korea, nor indeed any other Asian automotive groups have an answer.

Sae-Chul Oh, president and chief executive of South Korea's Kumho tyres group which aims to become the world's fifth largest by 2010, provides a vivid illustration.

"We can make our tyres in China, charge 40 per cent less than the equivalent product from Michelin and still make double figure margins. The labour content of a tyre in China is around 4 per cent. In the west, it is 30 per cent. Even in Korea now it is 18 per cent."

There is a huge amount at stake for whole economies, not just the automotive industry.

Last year the world's biggest manufacturing industry made and sold 49.5m cars and a further 10m commercial vehicles.

For countries such as Germany, the vehicle industry is the lifeblood of the nation. Inside Germany itself, 777,000 jobs - one in seven of the total - is based on the auto industry.

It earned more than Euros 140bn in export business alone last year in spite of a 20 per cent fall in the US dollar against the euro, within a total industry turnover 17 per cent higher than in 2003 at Euros 226bn.