SHANGHAI, China - The Shanghai auto show - the traditional showcase for any auto company serious about doing business in China - was notable this year for its no-shows.
Mercedes-Benz, BMW, Rover, Renault, Peugeot, Nissan, Mazda, Hyundai, Daewoo and Kia were among the absentees, even though some had been regular attendees in years past.
Some will exhibit their vehicles at the rival Beijing auto show, beginning July 8. But their absence from Shanghai - the country's premier auto show - appears to signal a change in the industry's mindset toward China.
In recent years, foreign carmakers have jumped at every opportunity to show their stuff in China. Not anymore.
'Companies are much more realistic and sober about China these days. Anytime they hear predictions of gold around the corner, where yesterday they looked on with enthusiasm, now they look on with skepticism,' said Michael Dunne, president of Automotive Resources Asia Ltd., a consulting firm based in Bangkok, Thailand.
Drawn by the lure of a billion-plus potential consumers, companies have rushed to get into China in the belief that they needed to capture market share early, or get frozen out. Indeed, the Beijing government has encouraged that belief.
As a result, many companies have invested heavily in a market that is still years away from takeoff - and pay-back.
Official projections of car-sales growth range from 1.2 million units in 2000 up to 4 million in 2010. But those forecasts look increasingly doubtful today. A lack of proper financing, a government-imposed credit squeeze aimed at fighting inflation and a growing awareness of the country's need for infrastructure are combining to dull that outlook.
In addition, China's underlying economic growth may not support the rosy forecasts. As a rule, car ownership in most developing countries has taken off only when per-capita income has reached $3,000. China's is $680, and is forecast to rise only to $800 by 2000 and $1,500 by 2010.
As recently as 1993, car sales rose 39 percent from the prior year. But last year's sales rose a more modest 17 percent to just over 377,000, according to London-based DRI/McGraw-Hill. The firm expects sales to rise another 16 percent this year.
'We think there is enough competition out in the marketplace, in the form of price-cutting and promotional incentives, to still move the market up,' said Ashvin Chotai, Asia specialist at DRI's Global Automotive Group.
But underscoring the main certainty about China - its uncertainty - one Beijing-based analyst who declined to be named projects this year's growth at under 5 percent.
Chotai also is more cautious about the medium- to long-term. The government forecasts sales of locally built cars in 2000 at 1.2 million, but DRI forecasts sales of 800,000 units by 2001.
The government's forecast assumes that the private sector will begin to displace government agencies as the leading car buyer in China by 2000. But 'we believe that has failed to occur, and will be much slower to develop than the government projects,' said Chotai.
Despite the weakening outlook, China's central government has made few concessions to foreign carmakers.
Government negotiators continue to make exorbitant demands during protracted negotiations over new car-building projects, industry officials complain.
Chrysler Corp., once the front-runner for a project to build minivans in China, dropped out when government officials insisted on contract provisions that Chrysler felt threatened its intellectual-property rights.
Mercedes-Benz then stepped in as the anointed favored candidate. But its talks, too, appear to have collapsed. In part, that is due to rivalries between the two provincial governments involved in the project.
Foreign carmakers also are being stung by a government decision last April to cancel a critical investment incentive which had allowed manufacturers to import certain heavy equipment used to build products for export, free of import duties.
Poor relations with the local partner also lie behind the collapse of the Peugeot interest in a car plant in the southern city of Guangzhou, near Hong Kong. Peugeot claims to be owed a large sum of money by its partner; the Chinese side claims that Peugeot's failure to update its aging 505 car led to the project's woes.
For its part, the Chinese government seems unwavering in its commitment to building an auto industry. Despite some confusing signals from central planners in recent months, autos are still an official 'pillar industry' for China's development.
The current Five-Year Plan names seven 'pillar industries' that receive priority in central government planning and preferential treatment, and promotion in the economic plan.
Now and then rival industries, such as housing, and the government ministries that support them, try to replace autos in that favored spot. But analysts say it is virtually unthinkable that the auto industry would lose its 'pillar' status during China's current Five-Year Plan, which began in 1996.
With sober optimism, then, carmakers staying in China are working to strengthen their operations. No new grandiose car-making projects are due to be approved by the central government until 2001, so the focus is on improving what exists.
Companies work with suppliers to boost local-content levels and quality, build up service centers and decide what new models to add to their China lineups.
The choices they make vary considerably. 'I look for commonality among approaches across the auto industry, and there isn't one. Everyone is different,' said Dunne.
General Motors China stole the Shanghai show with the groundbreaking for Shanghai GM, a joint venture that will build two luxury V-6-powered Buick sedans at a rate of 100,000 a year starting in 1998. The $1.6 billion project also includes a technical center and an engine plant with a capacity of some 100,000 V-6s a year.
Some of those engines will be exported to North America, helping to fulfill GM's obligation to export 6 percent of the Shanghai project's output.
In addition to engines, GM will export parts made at joint ventures of its Delphi unit. Delphi has nine joint ventures, three licensing agreements and one wholly owned venture in China. In some cases, Delphi imported parts-making equipment from Europe specifically to build parts for export back to Europe.
The Buicks, however, are aimed at the domestic Chinese market, where they will be positioned as chauffeur-driven sedans for company executives and Communist Party cadres.
In theory, that puts them in competition with Audis already built in China. But Philip Murtaugh, executive vice president of Shanghai GM, denied that Buicks and Audis will end up facing off over a sliver of the total market.
'We're import fighters. Our competitors are Mercedes, Lexus, the Toyota Camry and BMW,' he said. None of those models are made in China.
According to government statistics, the luxury segment in China accounts for only 30,000 cars a year - and Audi sells 20,000 of them. But those numbers omit another 80,000 imports, many of which are either smuggled illegally into China or are brought in as parallel imports, Murtaugh said.
He predicted that those imports will decline 'substantially' after Hong Kong reverts to China on July 1. Hong Kong has been a prime entry point for cars smuggled into China.
Other carmakers aim at other market segments.
Ford Motor (China) Ltd. will launch its China-built Transit commercial vehicle in December as a nine- or 12-passenger bus at a production rate of 20,000 a year. Every six to nine months, it will boost output in increments of 20,000 and add a new variant - a long-wheelbase version, a cargo van, and then a pickup.
The Transit is built in Nanchang by Jiangling Motors Corp., owned 30 percent by Ford. It will use an Isuzu Motors Ltd. diesel engine, also built by Jiangling. To support that program, and to sell to other car-making ventures, 75 of Ford's top 100 global suppliers now make parts in China.
'We also would like to get into cars,' said Ford (China) President Vaughn Koshkarian. 'We're in discussions with other potential partners about programs that would lead to passenger-car production.'
Toyota Motor Corp. also wants to build one of its cars in the northeastern industrial city of Tianjin. A joint venture between a Chinese company and Toyota affiliate Daihatsu Motor Co. there currently builds a variant on the subcompact Charade. That venture expects to build 100,000 cars this year, up from 86,000 in 1996.
Toyota hopes to build a car powered by a 1.0-liter Toyota engine. So while it waits for government approval for the car, it is going ahead with the engine. Next summer a Toyota plant in Tianjin will begin making 150,000 engines a year.
Like Ford, Toyota has encouraged its suppliers to come to China. About 24 Toyota Group companies have set up shop around Tianjin. Next on the agenda: distribution.
'It is one of the keys to success here,' said Toyota director Koji Hasegawa. 'Without proper distribution, we cannot increase our production.'
GM is not the only carmaker with plans to build an upmarket car in China. Audi wants to make the new A6 at the VW-First Auto Works factory in Changchun, Northeast China.
'The Chinese want a car this size and Audi wants to recoup the money it invested in the A6 in Europe. Both parties want to do it; the only real issue is government approval of the project,' said a Changchun-based executive close to the negotiations who asked not to be named.
Standing beside the A6 on display at the Shanghai show, Axel Engel, a spokesman for Audi Product and Technology International, said only that Audi was in constant negotiations with its local partner. He warned not to expect anything soon.
Audi is under pressure to boost its operation in Changchun, which has been bedeviled by poor sales of its current model, the Audi 100. It also faces competition from its local partner FAW, which is turning out a cheaper copy of the Audi 100, badged as the Little Red Flag and powered by a Chrysler engine.
As makers rush to build or expand capacity in anticipation of future demand, they have created an overcapacity problem.
'All of a sudden you saw supply grossly exceeding demand,' said DRI's Chotai. 'Then it becomes a process of survival of the fittest.'