SHANGHAI: China's auto industry is growing up, but the enormous profit margins of yesteryear may be gone forever, said a group of CEOs and industry watchers at the 10th CEO roundtable, with the theme "Auto China," organized by China Daily in Shanghai yesterday.

Instead, the Chinese auto market of the future will take more of its profits from derivatives, like financing and post-sale products, than directly from production.

"Market growth over the years will continue slightly ahead of GDP growth," said Dr. Christoph Stark, Honorary Chairman of the roundtable and President and CEO of the BMW Group in China. However, "the one thing we all agree upon... is that those days of high profits, for the time being, are over."

"I see generally the trends of a maturing market," said Stark. "I think the market will become more similar to... markets in other parts of the world."

"Everybody still sees (China) as the most attractive market and nobody wants to miss out," Stark said. "Everybody is holding on for the China magic to come back."

But the magic, while not altogether gone, is fading and the industry, instead of racing forward with its pedal to the floor is proceeding at a slower, but steadier, speed.

The tide of mergers and acquisitions, price fluctuations, new models and new companies is likely to continue for a while though.

Long term prospects

"Has the Chinese bubble burst? Our view is that the bubble is a long way from bursting in the next five to ten years. We have quite a bullish view in the longer term," said Paul Gao, a partner at consultants McKinsey and Company China.

However, the huge profit margins of 2002 and 2003 have probably gone for good, Gao said.

Three main factors are likely to determine the future growth of the auto industry: Deregulation, infrastructure and consolidation.

These are likely be affected by other factors, such as environmental protection and China's huge employment needs, which may pose a challenge to the immediate growth prospects of both Chinese and foreign manufacturers.

"It's a hot topic in China right now. Perhaps the hottest topic," said Stark. "To my mind one word keeps coming up and that's change."

Growth

If one wanted to describe the Chinese auto market with a single word, then fluidity might best fit the bill.

According to Stark, change is the mainstay of the market, both in growth rates and market share.

"We have an almost dramatic increase in new companies and new models. Anyone who has been to the Shanghai Auto Show can see that," he said. The Shanghai Auto Show ends today and has brought together just about every auto manufacturer in the world. "I think now we have the largest number of manufacturers in China worldwide."

Stephanie Koenig of Internationaler Messeund Ausstellungsd GMBH, organizer of the Auto Shanghai 2005 Show, agrees," For the first time we've seen major global brands coming in as groups. We've seen a lot of new technologies, products and concepts displayed at this A level show."

At the same time, local companies are following the Korean model of developing local and foreign markets simultaneously.

However, one of the challenges for automakers may well be developing new business models that combine both growth and profitability.

"Mass market brands in other markets have done a very good job in destroying shareholder value, by achieving growth without profitability," said Gao.

"The question for many of them is what are they doing differently in China to ensure they are achieving profitable growth. Unfortunately, most of these companies are not doing anything different."

He said a quantum leap is needed in the industry, like the two during the last century that caused shifts in the auto market paradigm.

The first, Gao said, was the development of mass production by Henry Ford. The second was Toyota's innovative production system, which ensured reliability and elevated Japanese auto makers to the world stage.

"Unless (Chinese manufacturers) can figure out the third revolution in the auto industry... they will never be able to catch up," Gao said. "They don't have the required capacity to play the same game."

Foreign automakers also face different challenges in coming years. With many having already established a foothold in the country, the next step will be establishing steady growth.

Ashvin Chotai, director of Asian automotive industry research at Global Insight, warned though, that the double-digit growth of two and three years ago is gone forever.

"The question now is... when will profits converge with the very low margins we have seen in the global industry," Chotai said.

However, others still look at the Chinese market and see dollar signs.

"Everybody is talking about stagnation and about reduction of profits and growth, but nobody is talking about the last month of March when we produced more vehicles in China than ever before," said Dr. Peter Kilgenstein, executive vice-president at Bosch (China) Investment Ltd.

Government

The future of the auto industry in China may very well depend on the central government, its approach to deregulation and how it balances the many issues it faces - such as local employment needs, the economy and market openness.

"You have an industry that is regulated by government policy to a large extent," said Stark.

Both a push for exports and integration into the world market will continue to affect domestic development.

Also, new government regulations on issues like local contents, service networks and used car policy, will have a great impact on market development," Stark said.

At the same time, as the market matures profits may decline while risks increase.

That, said Gao, may be a factor in the government's approach to the auto industry. To date, the government has encouraged the growth of multinationals, but it has also shared in the profits.

"Moving forward, there's going to be less profit to be shared and there's going to be more risk," Gao said.

In the future, said Stark, Chinese auto manufacturing may be focused on one or two top manufacturers.

Freeman Shen, President of BorgWarner China, believes that while industry consolidation is inevitable, some local companies are actually adapting quite different market development strategies, such as targeting the mid size market in Germany and the rest of Europe, instead of following what the Koreans and Japanese did.