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FIRST, the home market. Next, the world. China is poised to become a significant car exporter as production standards rise and costs fall.
In a move that is creating big news around the world, Shanghai Volkswagen has launched its new Polo model, the first Chinese-built passenger car to be sold in Australia.
The car is assembled in Shanghai and is the German car producer's first export from China. The company said last week it would increase exports from China over the next three to five years.
VW is not alone. Cars rolling off Honda's assembly lines in the new plant in Guangdong Province will be headed for Europe by next year.
The Honda plant is the only car factory in China with majority foreign ownership and the only one manufacturing solely for export. Next year, it plans to export up to 30,000 passenger cars in the 1-1.5-litre engine-size range to Europe, company officials say.
Small Chinese car makers have also made their first move overseas: Privately owned Geely exported 500 cars last year, while state-run Chery exported 1,200 cars, mainly to the Middle East.
Success for these car producers could signal China's debut as a car exporter.
This has long been the dream of some, but until very recently, it remained only that: a dream. The Chinese simply could not meet global standards on price or quality.
Although labour was cheap, components were not - some China-made parts were up to 40 per cent costlier than world prices. Few factories had economies of scale. And, the preference for local suppliers by Chinese joint-venture partners limited competition.
In the past few years, however, the domestic market has become more competitive.
Since China joined the World Trade Organization in 2001, import tariffs have fallen sharply. And, car sales soared as private buyers became the market driver.
Last year, car sales exceeded 2 million and this year could reach 3 million - growth that is expected to continue to the end of the decade.
Vastly improving economies have lowered prices so that cars and most car parts made in China no longer cost significantly more than elsewhere in the world. At the same time, quality has improved to meet world standards and safety requirements.
No big plans
In addition to VW, General Motors have tested the export market, with trial shipments of about 1,000 Shanghai-made Chevrolet Ventures to the Philippines earlier this year.
Still, VW and GM officials say they do not have large-scale export plans any time soon. Even though the government has promised support, such as tax breaks, for car and component exporters.
So will China soon be shipping cars all over the world the way it is now flooding markets with DVD players and refrigerators? "No is the short answer," says Graeme Maxton, who specializes in vehicle industry consultancy.
There are many obstacles to actual exporting, industry experts say. For one thing, the world market is already suffering from as much as 30 per cent overcapacity. For another, car makers are realizing that it's more cost-effective to build close to the target market.
"Japanese car makers rely on local production for 70 per cent of their sales in the US," points out Sean McAlinden, chief economist at the US's Automotive Research Centre.
China's insistence that foreign firms form joint ventures with local companies is also viewed as a major obstacle.
Foreign car makers see joint ventures - in which they're limited to a 50 per cent stake - as an unavoidable cost of entry to the China market.
But there is no incentive for them to form joint ventures to make cars for export and share profits with a Chinese partner when they could make the same car in a wholly owned plant in another country.
"At the global level, exporting is a zero-sum game, and if you export out of China then you have to kill production somewhere else," says Ashvin Chotai, London-based director of Asian vehicle-industry research at Global Insight.
Source: Agencies
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