Fluctuations in the value of yuan have pushed up costs and eroded price advantages
In the first eight months of the year, 15.2 million motor vehicles were produced in China, 8.6 percent higher year-on-year, and 15 million were sold, 7.7 percent higher year-on-year, the China Automobile Association says. China thus maintained top spot in the world rankings.
In contrast, China's motor vehicle exports have continued to slow, 585,000 cars having left the country in the first eight months of the year, a fall of 8.4 percent on the corresponding period last year. Passenger cars accounted for 343,300 of the cars exported, a fall of 11 percent.
China began exporting motor vehicles in the 1950s, and since then those exports have been mainly in the form of overseas aid. In line with the country's weak motor vehicle manufacturing capacity at the time, exports developed extremely slowly. What greatly prompted the rapid growth of exports was China's accession to the World Trade Organization in 2002.
As economic reform broadened and the country continued to open up, its automotive industry has forged extensive and lucrative relationships with foreign car companies. The Chinese companies have also done a huge amount of work themselves in becoming mature, and exports have essentially been doubling each year.
In 2008 the global financial crisis presented the Chinese motor vehicle industry with huge challenges, but also with valuable opportunities. In 2012 exports surpassed 1 million for the first time. True, that milestone was reached a little later than expected, but it is an important one for the industry.
Even as the industry fetes its achievements, however, it needs to be frank in acknowledging and dealing with its difficulties.
Despite the industry being able to bask in its top ranking for production for five years, exports still account for less than 5 percent of that. Comparable figures for Europe, Japan, South Korea and the United States, range from 50 percent to 90 percent.
Given that car exports are an important gauge of how well a country's automotive industry is performing, the low Chinese figures suggest that the industry in the country, even if it is sizeable, is not particularly strong.
Before 2006, export growth was in top gear, doubling every year, but since 2011 growth has fallen to below 50 percent. In fact last year exports shrank.
As a result of factors such as brand awareness and overall car performance, the main target consumer countries of China are in Asia, Africa, Latin America and other emerging markets and less developed countries and regions. Gaining access to developed countries and regions such as Europe, Japan and the US remains problematic.
Almost all major Chinese car companies have now set up joint ventures with car giants from Europe, Japan and the US.
A welcome change is that China's vehicle exports have gradually shifted from relying solely on Asia (the proportion of total exports to that destination, excluding Japan and South Korea, is more than 40 percent,) Africa (30 percent) and South America. The proportion of exports to the four regions combined accounted for more than 90 percent of exports.
Despite the decline of market share in Asia and Africa, total volume has remained steady, and exports to South America and Europe have grown steadily.
Vehicles exported are mainly sedans and light trucks. The number of low and mid-range sedans exported keeps climbing, mainly because China's independent branded vehicle makers focus on producing cars with an engine capacity of 1.6 liters or less, sold at a very attractive price tag. About 15 percent of those cars have been exported to Africa.
In the light truck sector, due to the relatively long history of exports, Chinese products enjoy a considerable price advantage, and are fuel efficient and environmentally friendly, making them suitable for the demands of emerging markets and less developed countries and regions.
China's exports of light trucks to Africa account for 26 percent of those made.
The main destinations in Africa for Chinese vehicles are Algeria and Egypt in North Africa, and Angola and South Africa. With the political upheaval in North Africa, China's exports to Africa have fallen slightly over the past year, but by and large have remained stable.
To ensure they meet annual targets, some Chinese carmakers have shifted their focus to South America, resulting in exports to those markets surpassing those to Africa last year.
China's car exports now face a series of problems.
The fluctuation in the yuan exchange rate is a big hindrance.
Since the outbreak of the global financial crisis in 2008, developed countries have adopted quantitative easing policies, posing huge challenges to Chinese auto exports.
Many of the key components of Chinese automotive products, whether produced by a joint venture or by a local company, are imported, and the appreciation of the yuan has pushed up costs and eroded price advantages. Rising labor costs in China have also contributed to the rising cost of cars.
Some of China's big motor vehicle manufacturers have begun to set up joint ventures in target markets, negating the impact of yuan appreciation and avoiding high taxes imposed on the basis of non-localization of manufacturing.
However, there is a risk of increased production costs if the scale of a joint venture does not reach a certain level, or it fails to recruit qualified local staff and localize the operations.
Chinese car exports also suffer from what might be called product homogeneity and competition disorder. Car companies pay too little attention to after-sales service, which is bound to tarnish the reputation of Chinese automotive products even in emerging markets and less developed countries.
While we all recognize that to promote the internationalization of Chinese vehicles it is important to establish overseas marketing networks, it is just as important to have research and development institutions and car parts systems in place.
It can be relatively easy to turn an upmarket product into a downmarket one, but it is extremely difficult to develop a product in the opposite direction. Sheer determination and slogans are insufficient.
The world automotive industry is now nearly 120 years old, which makes Chinese car companies very much latecomers to the party. In the current joint venture mode of development, they still lack a lot of experience. Any wish on their part simply to make a quick buck in the absence of a vision that looks toward the future can only be self-defeating.
The author is an analyst with Guotai Junan Securities.