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中国汽车行业调研报告(英文版)

China Auto Sector 23 July 2004

Price pressure seems inevitable

In summary, we believe downward price pressure on automobiles will form a medium-

term trend, due to the following factors:

· Exceptionally high profitability provides room for price cuts. According to the State

Development and Reform Commission, average profitability for the automobile

industry was 28.45% in 2002, compared with overseas auto companies’ average net

margin of around 5% and the highest national margin of 10-15%. GM estimates its

own margin at around 10%, which is still double the global average of around 5%. GM

and its JV partner in China earned a handsome US$2,267 per vehicle last year. In the

US, by contrast, GM earned only US$145 per vehicle. In 2003, the top three profit

earning car makers had average vehicle profit of RMB39,671 (US$4,780),

RMB34,253 (US$4,127) and RMB20,669 (US$2,490), respectively.

· Overcapacity. According to a report from the State Information Centre issued in May

2003, there are still more than 100 auto manufacturing plants in China. 27 provinces

(cities) manufacture automobiles, 17 provinces (cities) produce sedans, and 23

provinces (cities) are building production lines for sedans. According to estimates,

aggregated national capacity for automobiles amounts to over 5.5 mn units, and

sedan capacity exceeds 2.5 mn units. These capacities far exceed demand.

· Falling per-unit production costs. Increasing localisation rates and production scale,

plus improvements in the supply chain should help lower production costs. To expand

market share, automakers will need to pass on cost savings to customers, which will

be reflected in more competitive pricing.

· Import tariff cut after China’s WTO entry. With further cuts in import tariffs to 25% by

July 2006, car prices in China will align with international prices. Since China’s WTO

entry in late 2001, ex-factory prices declined 5.14% YoY in 2001. The downtrend

continued in 2002, with an average decline of 4.8%. We believe prices will come down

further in coming years.

Cost pressure

Product price cutting may not be the most crucial factor to squeeze margins. We believe

volume growth is a key influence on automakers’ economies of scale, which will

significantly affect the per-unit cost of production. Automakers’ margins may not

necessarily be squeezed if they can increase sales volume and lower production costs

through economies of scale, increase localisation rates and improve supply-chain

management in order to reduce logistics costs. However, the risk is that if auto demand

slows down significantly, product price cuts will erode automakers’ margins, as volume

cannot increase to lower production costs.

Increase in production scale

The auto industry’s profitability is often tied to the performance of the economy. The

need for big volumes in the auto industry is because of the substantial financial

requirements. Manufacturers in general have high fixed costs, require large investments

in pla
nts, tooling and training for employees to bring out new products. According to our

in plants, tooling and training for employees to bring out new products. According to our

estimates, fixed costs (depreciation, R&D, selling and distribution expenses, labour

costs and manufacturing charges) account for about 20% of the total cost of a

passenger car. If volume cannot increase, due to the slowdown in market demand,

automakers’ margins will be eroded.

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