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Easy credit has made it simpler for Chinese firms to pile into the car industry. A few years ago, as Chinese consumers began amassing enough disposable income to buy TVs, appliances and consumer electronics, companies crowded into those fields, driving down prices and profit margins until only a few of the largest now compete. Today one of the new hot zones is autos; sales are accelerating, and margins can be fat. "It's too hard to make money from washing machines now," complains Zhao Yong, a director of Guangdong-based Midea, an appliance maker that plans to buy a bus factory near the China-Burma border. "So we'll start making buses and move into sedans." Others, often with no previous experience in auto manufacturing, have devised similar strategies. Sanxing Aux, producer of China's cheapest air conditioners, last fall announced it had purchased a carmaker in the country's far northeast and would soon unveil a line of sport-utility vehicles. At least three other electronic-goods makers have announced intentions to buy auto plants. Even the maker of one of China's best-known liquors, Wu Liang Ye, has revealed plans to expand into cars.
These homegrown carmakers will have to compete with multinationals like General Motors, Ford, Toyota, Volkswagen and Citroen, all of which have invested heavily in Chinese joint ventures and are muscling for market share. GM, which has made Buicks in China since 1999, will soon launch top-of-the-line Cadillacs and plans to increase total production 50% in the next two years. In a first for the country, Beijing recently announced it will allow GM to import cars made overseas without going through a Chinese partner. Ford plans to increase production sevenfold, to 150,000 cars a year. Volkswagen, maker of the best-selling cars in China, plans to invest $6.5 billion with its joint-venture partner to double annual capacity at its Shanghai plant to a million cars by 2007.
With Japanese and U.S. technology battling it out at the top, the only hope for domestic carmakers without joint-venture partners is to capture the bottom end of the market, then begin the slow ascent up the price-and-sophistication ladder. That's the path chosen by BYD, the former bombmaker. The Flyer retails for about $4,700, making it affordable to the 50 million Chinese earning at least $7,000 a year, whom the government considers middle class. "Look around my office," says Liu, the BYD general manager. He has one dusty filing cabinet, bare whitewashed walls and a view overlooking the decrepit former bomb factory. "We can get by on the slimmest profits."