With car sales falling or flat in almost every country last year and the outlook for this year even less exciting, China is like the answer to a prayer. Car demand is booming.
With falling prices, more competition and more readily available car financing, demand will continue to surge in the next few years. By the end of the decade, sales should exceed four million cars a year, according to the government. Although that forecast may prove slightly bullish, according to our figures, it is not far from the mark. China is the fastest-growing car market in the world, and it will remain that way for, perhaps, decades to come.
There are other reasons to feel optimistic. China's car sector is being liberalised and transformed. Import duties are falling, provinces can approve bigger investments without having to go back to officials in Beijing, and with some of the biggest foreign direct investments ever, the industry's global giants are setting up factories which will bring a bewildering array of new models and a vastly increased choice to Chinese consumers. For an industry facing maturity in all its main markets, China is the next big thing.
Yet the prospects for foreign investors may not be as healthy as they appear, for several reasons. First, volumes are still trivial by global standards. The number of cars sold in China last year is equal to just three weeks of sales in the United States. Second, with so much new competition, it is becoming ever harder for car makers to achieve economies of scale. With every new model that is introduced, the volumes per platform - the basic structure of a car - go down, not up. This is even more of a problem for the parts makers, where scale requirements are even higher.
Third, as prices fall, margins are also dropping, making returns on any investment harder. Even the notion of making China an export hub and shipping cars and trucks across the globe is fanciful. The business is hugely capital-intensive - labour rates are comparatively unimportant to the industry, despite commonly perceived wisdom. Moreover, there are two other very good reasons why foreign firms should tread carefully. First, there are the government's plans for the industry. Second, they should remember what has happened in a host of other industrial sectors in the last 10 years.
The government has a very clear policy for the car sector, which it rightly sees as a future 'pillar-industry'. This plan is explicit, highly detailed and has been at the core of the country's aims for almost a decade. It specifies the pace of technological development for the industry, the competitive structure (including the numbers of companies in each product segment) and the types of vehicles that will be needed, and when. It seeks to build an industry around two or three scale-driven firms, the identities of which are becoming increasingly obvious - First Automobile Works, the Shanghai Automotive Industry Corporation and Dong Feng.