Lured by the prospect of the world's largest potential market, even Mercedes-Benz and Porsche offered specially designed, small models in the hope of being chosen by the Chinese government to spearhead the family transport revolution.
The optimism was tangible. The family car industry would become a "pillar" of the economy, said officials, forecasting that by 2,000 the annual demand for new cars could be as high as 1.4 million. China had "about 300 million potential car owners", gushed the official China Daily. And within a few months, it was promised, the Chinese government would name a few of those foreign car companies to develop a Chinese family-car industry.
Two years on, the atmosphere is very different. The combination of scaled- up production, too few customers, rampant smuggling of vehicles from abroad, and fierce local taxes, has driven the car industry into the doldrums. The "Family Car Project" was quietly put on the backburner.
No one doubts the potential is still there in the long term, but it is clear that early projections of private car ownership in China have proved wildly optimistic. For the time being, the industry must endure a lean period.
At the Ministry of Machine Industry's department of automotive industry, Xie Penghong agrees: "In fact, almost every car factory is reducing production because of the market," he says.
Sales of domestically produced passenger cars are this year expected to be only between 4 and 5 per cent higher than 1995's 322,000, well below earlier forecasts of 400,000. After scaling back from earlier plans, domestic car production may end up at around 380,000 or even lower. Even at this level, 1996 will close with yet bigger stockpiles hanging over the market.
The simple problem is that the customers have not emerged in the numbers expected. The credit crunch over the past two years and the anti-corruption drive have dampened purchases by companies and work units. Prices have been cut in the slack market, but there is broad public perception that they have further to drop, especially if China is near entering the World Trade Organ- isation. So, anyone who is thinking of buying a car is waiting.
For most Chinese people, cars are still too expensive. One of the cheapest models, a Tianjin-made Daihatsu Xiali, for instance, sells for about pounds 6,700, double the annual salary of a young well- educated employee at a foreign joint venture company in Peking. On top of that are fees and taxes which routinely add 20,000 yuan (pounds 1,600) to a car, but which can be set at seemingly arbitrary - and extortionate - rates by some local governments. "In some cities, you must pay 140,000 yuan in fees!" says Mr Xie. Fewer than 10 per cent of cars are bought privately, he adds.
This has left many of the foreign joint venture car manufacturers feeling the pinch and also competing for customers. Volkswagen's Santana factory in Shanghai, by far the dominant manufacturer, will produce about 200,000 cars this year. In Changchun, north-east China, however, Volkswagen's joint venture with the First Automotive Works to produce the Jetta, is far less healthy. Production will probably be about 24,000 this year, half the original target.
Given its difficulties defining a customer base, Volkswagen suffered a further blow last month when the central government abruptly cancelled an innovative hire-purchase loan scheme for Jetta buyers after just four months. Also competing in this price range is Citroen's joint venture in Wuhan, producing the ZX Fukang. The other main foreign passenger car tie-ups are Volkswagen's Audi, the Daihatsu Xiali, Chrysler's Beijing Jeep, and the ailing Peugeot factory in Guangdong.
As part of the deal to enter China, many companies have had to commit themselves to big increases in capacity over the next few years, to levels that now look ridiculously premature. Existing and planned car production will exceed demand for a decade or more, say analysts.
All this must be taken into account by the British car component companies that have set up in China to supply either the joint venture lines or the domestic aftermarket.
Components companies are less vulnerable at the moment because they can focus on after-sales and aim products at the healthier commercial vehicles' manufacturing lines.
GKN, Bundy, Lucas, T&N and Pilkington are among the British players in this sector. Lucas has three joint ventures serving the passenger car market, including the Langfang Halla Lucas Brakes company outside Peking, which in April started work for the Jetta and Audi.
"Despite the problems, we are getting orders," said Andy Wei, Lucas's chief representative in China. "Over the next few years, I believe that the car industry will further develop, despite the recession at the moment. But it needs some government measures to encourage it."
In February, TI Group's Bundy Asia Pacific, in Wuhan, established a venture to supply brake-lines to the Citroen plant. "We are facing a low-volume requirement from our customers. It is really quite hard for us," said a Chinese manager. "But we have to be here for the future."
Foreign components companies have been strongly encouraged to come to China by the big car manufacturers because of the level of localisation of parts demanded by the Chinese government. T&N has set up three joint ventures (asbestos-free brake pads, gaskets and piston rings), and in August GKN announced that it was increasing its stake in its Shanghai drive-shaft joint venture, which supplies the Santana, and that it was setting up a new venture in Jilin.
In the end, China will be a huge market, and plainly the big global car manufacturers are still scrambling for any chance to set up on the mainland. One Western car consultant in Peking commented: "The car market will get there. But it will take its time, and it will burn a lot of people's fingers."
Buying a car is increasingly an aspiration of young Chinese. Chun Ming, 25, a clerk at the China Commercial and Industrial Bank, said: "Of course I want to own a car. In my opinion, it is better to produce family cars, priced at about 70,000 to 80,000 yuan so that every family with a reasonable income can have a car. But I think we will have to wait another five to 10 years to reach that level."
Many would argue that a slower pace of development of the car industry in China is necessary for very basic reasons. China's 683,000 miles of roads are generally poor and they can only slowly be upgraded. According to a report last year in the People's Daily, China has 2 per cent of the world's vehicles, but 14 per cent of the world's road accident deaths.
And traffic jams in the main cities are fast reaching the gridlock that occurs in other cities such as Bangkok and Taipei. As the China Daily said last week: "Jammed traffic arteries in major Chinese cities have for the time being literally blocked China's ambition of making the auto industry a pillar of its economy."Reuse content