China's auto industry brings opportunities for global auto manufacturers

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Last updated at: (Beijing Time) Friday, February 13, 2004

China's auto industry brings opportunities for global auto manufacturers

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Standard and Poor's Ratings services said in a report released Thursday that China's auto industry offers both domestic and global auto manufacturers the opportunity to increase sales and profits, but also poses risks.

"Auto manufacturers are rushing to expand capacity in the Chinese mainland, lured by optimistic growth forecasts and relatively healthy margins," said Standard and Poor's credit analyst Maria Bissinger when commenting on the report titled " China's Auto Industry Prepares for More Competition."

She said numerous foreign auto manufacturers have announced their intention to build new factories or expand existing facilities. For example, the current market leader, Volkswagen AG plans to invest 6 billion euro over the next five years to double its manufacturing capacity in the Chinese mainland to 1.6 million units a year.

Chinese mainland's auto industry is also drawing local companies to invest, produce and usually undercut their better-known competitors.

However, she warned that the auto market in the Chinese mainland may prove volatile and cash flows from joint ventures could easily outstrip market demand and lead to price competition.

An increase in import quotas and further tariff cuts is putting further pressure on domestic manufacturers' margins," said Join Bailey, director at Standard and Poor's Corporate Ratings and Infrastructure Ratings in Hong Kong.

He said the challenge for producers is to cut their production costs, but this may prove to be more difficult than the industry expects. The production costs in the Chinese mainland are currently 15 percent to 25 percent above European or US levels.

Bailey said if the industry is to become globally competitive, car manufacturers must lower the costs of the local component supply industry, increase the quality and scale of domestic assembly plants and build up research and development skills.

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