SHANGHAI - As Sun Chang Sheng surveyed the ubiquitous Volkswagen Santanas jostling for space on Shanghai's crowded streets on a recent autumn afternoon, the 20-something declared them 'too plain' for her tastes.
She wants a car, but she would prefer something sportier and more stylish, like the new VW Bora/Jetta, the English-speaking executive assistant told a recent visitor here.
'I'm past wanting any car just to have a car,' she said. 'My car must be more than just transportation.'
That possibility is becoming a fading dream for consumers across much of economically devastated Asia. As Sun's comments illustrate, though, aspirations in China still are rising, helping to keep the auto industry here away from the precipice.
Through September, new-vehicle sales here were about even with a year earlier. For all of 1998, most industry executives expect sales, including trucks, to be unchanged from 1997 at about 1.6 million.
That contrasts starkly with the rest of Asia. Through September, new-vehicle sales were:
Down 84 percent in Indonesia.
Down 69 percent in Thailand.
Down more than 50 percent in Korea.
And down 13 percent in Japan.
China: The shining star?
'China is the shining star of the region,' said Rudolph Schlais Jr., president of General Motors Asia-Pacific.
To be sure, most economists do not see China's economy growing this year by the 8 percent that Prime Minister Zhu Rongji 'guaranteed' in March.
But quite a few forecast that overall growth could be in the 6.0 percent to 6.5 percent range - slack compared with previous years, but positively exhilarating for Asia these days.
Barring a credit clampdown, many expect growth in 1999 to be in that same range, possibly even higher.
To be sure, China's economic data are notoriously foggy, if not unreliable, and some experts believe gross domestic product barely is expanding at a 3 percent or 4 percent rate. For China, which needs breakneck growth just to create enough jobs to absorb laid-off state workers and millions of new graduates, such a low rate of growth would amount to a veritable recession.
Massive public works projects
The nature of that growth, furthermore, may be problematic. To meet targets, the government is pumping up public works spending. Some of the projects will be beneficial, such as spending on badly needed new roads or rebuilding towns damaged by last summer's floods. But, inevitably, there will be boondoggles, too.
'One lesson of the whole Asian crisis is, if you waste money in an economy, it comes back to bite you,' said Jack Perkowski, chairman and CEO of Asimco, an investment company that owns stakes in several auto-parts concerns doing business in China.
According to GM's forecast, though, the massive public works spending will work to stabilize the economy and boost new-vehicle sales to about 1.7 million units in 1999. At the least, the company figures, government spending should keep the market stable.
Still, most carmakers didn't rush into China in hopes of a stable market.
'We got used to the high growth rates of the last 10 or 15 years: 20, 30, even 50 percent growth,' said Zhang Suixin, chief representative in Volkswagen's Beijing office.
One reason for the slowdown is the painful transition from a market dominated by government agencies and corporate buyers to one in which private buyers prevail. To boost private buying, China still needs better marketing and financing of cars.
'If the government and the auto industry can take reasonable measures to improve the private car market, I'm still convinced we can have a very large market and a very high growth rate,' Zhang said.
China halts makers' price cuts
For now, though, stable sales do not equal a stable industry. Slower growth has brought wrenching adjustments for the Chinese auto industry.
Price cutting by companies desperate to sell their excess production has become so widespread that the government, at the industry's request, is attempting to create price floors to stop it.
In a separate regulatory step, the government is moving toward limiting auto emissions.
On the other hand, the price wars have led to a rising cost-consciousness among manufacturers, even to the point of opening the door to layoffs at China's vastly overstaffed factories. In addition, the drive for lower costs has begun to erode the regional protectionism that previously blocked the rise of a nationwide market for auto parts.
These are both developments that foreign auto companies welcome.
Sellers began discounting cars to clear out rising inventories nearly two years ago. But price wars took on a new urgency late last year, when Shanghai Automotive Industry Co., the Chinese partner in both Shanghai Volkswagen Automotive Co. Ltd. and Shanghai General Motors, cut prices on the nation's top-selling VW Santana from 160,000 yuan to 110,000 yuan, or roughly $19,300 to $13,250.
Other makers followed. Rumors spread that some troubled domestic carmakers were even using new cars instead of cash to pay their suppliers, who in turn sold the new cars at cut-rate prices.
In late September, the government stepped in.
The State Economic and Trade Commission, at the urging of the China Association of Automobile Manufacturers, said it would issue 'guidance prices' based on production costs for different categories of cars.
Adjusted twice a year, those prices would in effect be price floors. Car marketers would be forbidden to sell at prices below them.
Cut costs, or be eaten up
Although it is still too early to say whether the price floors will work, they are necessary, said VW's Zhang, because 'everyone realizes that all this price competition doesn't benefit anyone.'
Chinese consumers might disagree. So do some managers at foreign-affiliated carmakers. Without commenting specifically on the price floor, they argued that the pressure of falling prices has forced the industry to become aware of costs in a way it previously wasn't.
'Before, we'd explain lean manufacturing to our customers, and they'd say, `That's your issue, not mine,'' said Marcus Chao, Delphi's chief representative for China operations. 'Now it's our issue.'
Andy Okab, vice president of Beijing Jeep Corp., owned half by DaimlerChrysler AG and half by Beijing Automotive Industrial Corp., observes that lean organization principles never were needed in the past in China because makers never were tested by economic realities.
'But the government of 1998 is not the same as the government of 1980,' he said.
'They'll let us go bankrupt. So you have to cut costs because otherwise you'll be eaten up.'
Cuts end weekend showers
When Okab arrived in China in the summer of 1997, Beijing Jeep had 8,200 people. Today, the work force is 6,300. At a Sept. 29 meeting of directors and managers, the company's Chinese chairman said the company would have to cut more staff.
'For them to say that in public was just unheard of,' Okab marveled.
Beijing Jeep also is cutting the featherbedding that long has driven foreign managers in China wild. For example, the company now turns the lights off when the plant is closed over the weekend. Before, the lights would be left on so workers could come in to use the plant's hot showers or eat at the company cafeteria.
'Now, when the plant goes down, it is down,' Okab said.
Management perks also are under attack. In October, the number of pool cars for managers was slashed to the minimum, and the remaining cars no longer will get free fill-ups at the company's expense, Okab said. Nor are there any more company-paid telephones in managers' apartments. And in June, Beijing Jeep sold a house it had maintained in the Detroit area for the three or four Chinese managers stationed there as liaisons with the former Chrysler Corp.
Another frustration for foreign auto companies in China has been regional protectionism. Provincial and municipal governments would lean on carmakers in their jurisdiction to use parts from local suppliers. This prevented a parts maker in northern Tianjin, say, from reaching economies of scale by supplying carmakers in both Tianjin and Guangzhou, in the south.
'That seems to be a little bit looser. With price competition, they're starting to look for price and quality,' Delphi's Chao said. 'I see some light at the end of the tunnel.'
The threat of devaluation
Also looming large in auto industry thinking is the possibility of a devaluation of the Chinese yuan.
Although the dollar's recent decline from summer highs eases some of the pressure to devalue, the topic remains hot across China. The government has vowed not to devalue this year, but if black-market exchange rates are any indication, one is imminent.
That is what the auto industry wants to hear. Many carmakers and parts makers import significant volumes of parts and equipment, which would become more expensive with a devaluation.
'We're going to require $500 million in annual imports from the U.S. to support this operation,' said Dennis Dougherty, executive director of manufacturing for General Motors' new Shanghai plant.
'That cost could become substantially more expensive if the yuan were devalued.'