China - A market which must still keep our eyes on
- Transportation & Construction Systems Business Unit
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In December 2014, as the end of the year approached and the streets were filled with Christmas decorations, I visited Shanghai for the first time in around seven years to attend a meeting of the Sumitomo Corporation's East Asia Group. Taking this opportunity, I hereby report on the current situation of the Chinese economy, which I observed and sensed through my quick visit to our subsidiaries.
Automobile market in China
In 2014, China's new car sales increased by 6.9% year on year to 23,491,900 units, according to the China Association of Automobile Manufacturers. Global new car sales, meanwhile, are expected to grow 3.5% from the previous year to more than 89 million units. This means China is by far the largest auto market in the world, with the United States trailing behind in second place. Accounting for about one-quarter of global car sales, China's gigantic market is driven by Volkswagen of Germany and General Motors (GM) of America, followed by Hyundai Motor Company of South Korea. Japanese auto companies, such as Toyota and Nissan, have fallen behind.
I made a visit to Fujiwa Machinery Industry (Kunshan) Co., Ltd.detail, an auto parts manufacturer located in the city of Kunshan in Jiangsu Province (west of Shanghai).
The company boasts strengths in iron casting and foundry techniques for automotive brake systems, drive train products and engine parts, producing 8,000 tons of products monthly. It is also equipped with assembly lines for these casted products and produces about 110 types of finished products.
The company supplies its products to a wide range of auto manufacturers, including GM, Volkswagen and other major foreign capital companies, as well as Japanese and Chinese manufacturers. It has earned a good reputation for itself and its products among client companies for its continued efforts to improve its manufacturing facilities and technologies in accordance with customer needs. It has also received a number of commendations, such as an excellent supplier award and a good quality award, from client manufacturers.
Car ownership in China stands at around a mere 10% of the total population. Compared with the 60 to 80% car ownership figures for Japan, the United States and Europe, there is considerable room for growth in the country's auto industry. While the market for new European and American cars for the wealthy echelons of the population is expected to grow, a used car market is also expected to emerge for the cohort of consumers who put more emphasis on convenience and price. Accordingly, an increase in demand for repair parts is also expected, which may unlock new business opportunities for the company.
A well-organized work floor inside the factory. Precise operation is key to the high quality.
The production process for cast components consists of melting, molding, pouring and finishing.
Chemicals market in China
In tandem with the rapid expansion of automobile production and sales in China, the plastics market is also growing rapidly. With a market size of 700 billion yen, the Chinese plastics market is now the largest in the world, accounting for about 20% of the global plastics market, worth 3.5 trillion yen. The market has been growing at an average annual rate of 6 to 7%, in line with the growth of production of liquid crystal display televisions and other consumer electronics in the 1990s and 2000s, as well as in response to the growing needs for lighter materials for use in hybrid and electric vehicles in and after 2010.
In April 2014, Sumitomo Corporation announced its participation in a petrochemical production project with CEPSA Química S.A., a major Spanish petrochemical firm. Through CEPSA CHEMICAL SHANGHAI CO., LTD., a joint venture established in Shanghai by the two companies, a new factory was established inside the Shanghai Chemical Industry Parkdetail. Production of phenol and acetone, key raw materials in the manufacture of plastics used in auto and electrical parts, is scheduled to begin from early 2015. Products will be supplied to the German firm Bayer, the world-largest resin manufacturer, whose factory located in the same industrial park, as well as to other large resin manufacturers from China and other countries.
Prior to the start of operation, President Pierre Lahaye of CEPSA CHEMICAL SHANGHAI CO., LTD. expressed his commitment to the project. “Production will be carried out in three shifts around the clock," he mentioned. "The unique characteristics of our products require us to take a meticulous approach to quality control and safety management. One of the keys to meeting this requirement is whether we can secure capable personnel and provide sufficient training. I am confident that we now have a pretty good team."
Once fully operational, the plant will be capable of producing 25 tons of phenol annually, making it one of the largest producers in China. Sumitomo Corporation will contribute to the procurement of raw materials, product marketing and running highly sophisticated logistics, aiming at annual sales of 60 to 70 billion yen.
The phenol plant of CEPSA CHEMICAL SHANGHAI CO., LTD., soon to start operation.
President Pierre Lahaye (center, front row) and staff (first and second from the left, rear row) at CEPSA CHEMICAL SHANGHAI CO., LTD.
Housing Market in China
China's housing prices have fallen for eight straight months since May 2014. The rates of decline, however, have gradually improved to a decrease of 0.42% in December, after recording the largest drop in August. To underpin the housing market, the contraction of which is regarded as a major contributor to China's economic slowdown (the construction and real estate industries account for approximately 15% of the country's GDP), the People's Bank of China cut the interest rate in November 2014 for the first time in two years and four months. This interest rate cut seemed to have a positive impact on the market. Potential demand for housing in urban areas also supports the housing market. It is expected that an influx of people into urban areas will increase significantly and the housing market will get back on course for a recovery.
Sumitomo Corporation has participated in a large-scale real estate development project since June 2010, providing investment to Shanghai Yihao Real Estate Co., Ltd., a developer based in Shanghai. The large residential and commercial complex being built under the partnership consists of 39 detached houses (50 housing units), six townhouses (72 housing units), three condominium buildings (521 housing units) and one commercial facility on a site measuring approximately 92,000 m2. Named “Oriental Palace,” the project will provide a total of 643 dwelling units.
The site is located in the town of Malu in Shanghai's Jiading District, approximately 23 km northwest of the city center. Although on the outskirts of the city, it lies along the newly opened Shanghai Metro Line 11. Housing units are offered across a broad price range, from condominiums for middle-income families (average floor area of 96 m2 for 1.7 million yuan) to homes targeting the wealthy (average floor area of 384 m2 for 16 million yuan).
It was feared that the sluggish housing market might negatively affect sales of condominiums for middle-income families, which started in July 2014. However, the condominiums are selling steadily, supported by brisk real demand. As the People’s Bank of China has also announced an easing of mortgage restrictions, buoyant sales, including of property at the higher price ranges, are expected over the coming months.
Detached houses and townhouses in the Oriental Palace project site (first phase). As residents move in, the area has developed the character of a neat and quiet housing estate.
Condominiums and commercial facility buildings under construction and on sale (the second phase of the Oriental Palace project site)
Although the slowdown of the Chinese economy has drawn a lot of attention in recent years, the economy still has room for growth, with a real economic growth rate of 7.4% recorded in 2014. I admit that the overheated economy, sensed when I visited China seven years ago, no longer remains. Yet I could feel a promising potential and dynamism of the industries at the frontlines I observed during my most recent stay.
Meanwhile, what really struck me was the very small number of people that could be seen in the malls, which is no doubt partly because there are too many retail facilities. Despite this, stores stay open around until 10:00 p.m., just like the restaurants. I also heard that the luxury brand stores in Shanghai have become nothing more than showrooms. Wealthy customers visit the stores in Shanghai to check the products, but actually buy them overseas. In light of this information, it makes sense that consumption by inbound tourists in Japan jumped during the Chinese New Year holiday in February.
With so much going on, we can’t afford to take our eyes off from China.
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