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CHINA: "The People's Republic of China: Tax facts and figures (July 2016)" Review

CHINA: "The People's Republic of China: Tax facts and figures (July 2016)" Review. 38-page Review by PwC China.

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back to index backCHINAtalk June,  2005


China: Be careful what you ask for

Opportunity and risk are close companions

It is nearly impossible today to identify an issue or trend in the automotive sector (or anywhere else, for that matter) that cannot, in some way, be tied back to China. As with anything that pervasive, there are wide-ranging consequences of a dynamic Chinese market for global automotive enterprises, regardless of whether they are the result of intentional business strategy.

The deteriorating U.S. trade balance with China continues to make headlines, as does its fixed currency peg and its status as the second largest shareholder of U.S. government debt. In the automotive industry, the Chinese market has also clearly taken center stage, with many industry participants betting their future on its continued pace of development.

On the surface, there is a sound case for optimism on the part of these companies. The current PwC AUTOFACTS Global Outlook calls for annual light vehicle assembly to increase from about 60 million units last year to just over 70 million units by 2012. And of the ten million unit gain over that forecast window, China is expected to contribute over 30 percent. In other words, even with what may be defined as one of the more moderate growth forecasts for that market (up 88% between 2004 and 2012, to nearly 7.0 million units), China represents three out of every ten incremental units of annual assembly going forward, eclipsing the contribution of any other global market.

Not surprisingly, nearly every automaker in the world is focused on getting its share of this unprecedented growth opportunity. Light vehicle assembly capacity in China will grow by at least four million units between now and 2012, representing an estimated $10 billion of investment. And the local supply base is growing right along with it – both for local consumption as well as global exports.

At this point, however, it is important to remember that China remains an emerging” market, meaning that growth will not come in a straight line. But, assuming it can avoid a total meltdown (read: South America or South Korea), China is destined to become the world's largest automotive market. Before that happens, it is likely to begin exporting high quality, low-cost vehicles in large volumes to mature markets. In addition, at least one Chinese automaker has aspirations of breaking into the ranks of the world's largest OEMs.

Not surprisingly, suppliers are scrambling to implement market expansion strategies to make China a central hub for automotive component supply. As these stories play themselves out and winners and losers emerge, there will undoubtedly be serious consequences for the world's automakers, suppliers and consumers.

For example, the growth of the Chinese economy is putting tremendous strain on the world's commodities markets. China's voracious appetite for steel has become a primary market driver. In 2004, China consumed an estimated 30% of the world's steel output, and its 42% increase in imported steel during 2003 is equal to nearly half of total U.S. consumption. The resulting price increase for raw materials has become a key issue in the automotive sector, threatening to destabilize the tenuous business model that has relied on pushing competitive cost pressures back through the supply chain. Since the last quarter of 2004, Tower Automotive, Intermet Corporation, Oxford Automotive and Meridian Automotive Systems have all entered bankruptcy proceedings, citing raw material price increases as an important contributing factor.

So, not only is there increased competition for consumers in the marketplace, there is also increased competitive intensity for the commodities to drive the sector. Ironically, we have a situation whereby the auto industry is counting on China for rapid and long-term growth, but that very growth has turned around to whipsaw the industry in the form of higher raw material prices. As long as China continues apace, pressure on key manufacturing commodities will remain.

Adding fuel to the fire”, there is one commodity that transcends a single market or industry -- oil. There is probably no bigger issue for China than its need to secure global oil supplies. Obviously this has the potential to dramatically impact the automotive industry via higher global fuel prices and the acceleration of alternative powertrain technologies. Even more importantly, it is quickly reshaping the world's geopolitical landscape.

China outgrew its domestic oil production capabilities in the early 1990's and in 2002 surpassed Japan to become the world's second largest consumer of oil after the U.S. Chinese oil demand is generally expected to grow about five times faster than the United States. In fact, the U.S. Energy Information Agency estimates that China will use the equivalent of the Middle East's annual oil output by the end of the decade.

In short, securing sufficient energy sources is a top national priority for China. In a world where a reported 22% of the planet's oil reserves are controlled by countries that sponsor terrorism or are under U.S. economic sanctions, there is bound to be some friction. For example, in addition to creating stress with both Japan and Russia, China's search for oil is taking it to places that the U.S. cannot go, such as Iran and Africa.

With China's economic focus shifting away from the traditional west, this is clearly a high stakes game. China's search for secure energy sources is redrawing the geopolitical map and testing important relationships. The faster it grows and the more energy it requires to maintain its growth trajectory, the more relationships will be tested. So, as the world's major automakers and suppliers continue their furious pace of investment in China, betting heavily on its continued development, it is important to recognize the complexity and gravity of all the risks involved. Given these high stakes consequences, individual global automotive enterprises would be well-served by a comprehensive risk management strategy relating to China.

Source: PwC AUTOFACTS Executive Perspectives - GAI


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