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Analysts fear extrem profit squeeze

SHANGHAI – Industrialists are optimistic about the future of China’s auto industry growth volume, but business analysts at a luncheon sponsored by the China Daily had grave questions about profitability.

“We continue to be quite bullish about the Chinese economy and growth of the industry,” said Paul Gao of McKinsey & Co. in China,”but profi tability of the past will not repeat. “

Overcapacity, fragmentation of ownership and government regulations prevent efficient production in China, and industry consolidation, which is the government’s proposed solution, is not likely to occur in the near term.

“We are concerned about structural issues,” said Ashvin Chotai, an analyst for industry consultant Global Insight, based in London. “The 50 percent cap on foreign ownership is a buffer against consolidation, and there is no sign of the cap being removed. Will profi tability go under the international level?”

No one seems to question that China’s consumers will continue to buy more cars.

“If GDP grows at 7 percent, the automotive market growth will be 10 percent,” said Christoph Stark, president of BMW Group China Region, who was the principal speaker at the China Daily CEO Roundtable in Shanghai this April.

“The question is whether it will be profi table growth,” said Gao. “The Big 3 in the United States and mass market companies in Europe have done a good job of destroying shareholder value,” he  said. “They have had growth with no profi tability. The question is what can we do in China to do it differently? The business model has’t changed. In the United States and Europe the companies have problems with the social burden and oversized infrastructure. Why repeat those mistakes here?”

Gao expressed that automotive history has been marked by two major changes so far: Henry Ford’s introduction of mass production, and Toyota’s introduction of a lean manufacturing system.

“Unless Chinese manufacturers fi gure out the third revolution,”  he said, “they will never catch up with the Japanese and Koreans. They are starting from a fragmented business base, and they do’t have the same capital to play the same game as the Japanese and Koreans.”

Stark, whose company saw sales of China-made 3- and 5-series cars double to 8,708 units last year, said the growth in volume is an irresistible magnet for automakers. “Everybody is hanging on because they are afraid to miss this dynamic market.”

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