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Chinese auto market shifting like kaleidoscope

SHANGHAI, China—Just a year ago, China seemed like heaven for global automakers. Whopping sales increases and fat margins made life sweet.

Today, automakers are on a stomach-churning roller-coaster ride as they try to grab or retain market share amid fierce competition in the world's fastest-growing auto market.

It is Chinese car buyers who are now giddy. Auto showrooms bulge with more brands and models than ever before. Prices tumble almost monthly, quality steadily inches upward, and buyers seem to be in the catbird seat.

"This is a fantastic time to be a consumer in China," said Steven Wilhite, senior vice president of Nissan Motor Co. "It is becoming a much more crowded, much more dynamic market, and it puts more pressure on us."

As tens of thousands of consumers jostle through the Shanghai 2005 auto show this week, they see dozens of new models, ranging from Chinese-made subcompacts costing less than $4,000 to Italian sports cars and British Bentleys worth a small fortune.

"Never before have we presented so many different cars here in Asia," said Ruediger Grube, the China chief for DaimlerChrysler. He was speaking at his company's display stand, which showed 45 different vehicles.

Yet the market seems to be evolving quickly in favor of low-priced cars, upending the list of leading automakers and giving momentum to low-cost producers. The luxury car market is still growing, but not at the torrid pace of earlier years.

"In 2003, only 24 percent of cars sold in China were priced under $12,000. In 2004, it jumped to 38 percent. In `05, our projections, based on the first quarter, are close to 45 percent," said Michael J. Dunne of Automotive Resources Asia, a consultancy.

The best-selling car in the first months of this year, Dunne said, was the tiny Chinese-made Chery QQ subcompact, which has a base price of $3,600.

"Margins on that car are closer to wood shavings than anything you could really put in your pocket," Dunne said.

The longtime leading automaker in China, Germany's Volkswagen AG, has seen its market share drop by half since the year 2000. General Motors clings to the No. 2 spot with 10 percent. South Korea's Hyundai and Honda of Japan gain steadily.

China is the world's No. 3 auto market, after the United States and Japan, but growth slowed suddenly last year. After sales soared 70 percent in 2003, they skidded to only 15 percent growth last year. Auto sales actually fell 7.7 percent in the first quarter of 2005, in a year-on-year comparison, the China Association of Automobile Manufacturers says.

Constant price cuts may be a factor. Consumers could be waiting to buy to see if prices drop further. Another factor is the government's recent efforts to limit car loans through state-owned banks, part of an overall effort to bring economic growth down to a more manageable level.

All the world's major automakers now produce cars in China. But the quality of Chinese-manufactured vehicles only recently has begun to climb to world standards. Few brands have built up customer loyalty.

"For their second car, I think many customers are going to say, `Anyone but the last guys I bought from,'" said Mark Schulz, executive vice president of Ford Motor Co. "I don't think a lead in today's market guarantees anything for the future."

In the sprint to get a foothold in each market segment, automakers are trotting out new models at dizzying speed.

"I describe China's auto industry as like the fashion industry. There's a spring season, a summer season, a fall season. There are new introductions every two or three months," said Ron Tyack, president and chief executive officer of Changan Ford, the joint venture Ford operates in China.

At the beginning of 2003, Chinese consumers could pick from only 60 models of passenger vehicles. By the end of last year, the number had grown to 115 models. Today, more than 125 models of cars are on display at the auto show.

"What we're starting to see is a consumer who wants the latest and greatest and best model out there," said Denton J. Dance, senior director at J.D. Power and Associates, a global marketing firm.

Fierce competition has brought about aggressive price cuts—despite 20 percent increases in the cost of steel. Since the beginning of the year, GM, Volkswagen's Audi and BMW have all cut prices on high-end vehicles. Economy cars have fallen in price an average of 16.1 percent since the end of 2003.

Automakers trying to match price cuts are feeling the squeeze.

"If the raw material price hikes continue, it is very difficult for us, and other automakers, to keep such kinds of prices," said Katsumi Nakamura, president of Dongfeng Motor Co., a Nissan joint venture in China.

Competitors are keeping a wary eye on Hyundai, which saw sales skyrocket 160 percent in the first quarter. Hyundai produced its first car in China in late 2002, but it already has production capacity of 300,000 cars a year and vows to increase to 600,000 units by 2010.

Hyundai's strategy has included selling fleets of sedans to taxi companies. Some 20,000 Hyundais are now flooding the streets of Beijing, the capital, for use as taxis.

Some analysts say the strategy may backfire. As the taxis suffer wear and tear, consumers may decide they don't want to purchase a car that looks like a rundown taxi.

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(c) 2005, Knight Ridder/Tribune Information Services.

PHOTOS (from KRT Photo Service, 202-383-6099): AUTO-CHINA

GRAPHIC (from KRT Graphics, 202-383-6064): CHINA

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