Chinese car market - both boon and headache

It's more than just tires. Despite exploding auto sales, manufacturers still face unruly business practices in mainland Asia's largest market.

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By Alex Taylor III, senior editor

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NEW YORK (Fortune) -- With Western markets still struggling to escape the effects of the recession, automakers are increasingly focusing their attention on China -- and rubbing their hands with glee. Car sales in August rose 78% over the same month a year ago, according to J.D. Power Asia Pacific and are running at an annual rate of 14 million units.

Compare that with the U.S. Back before the Cash for Clunkers program kicked in, the car market was chugging along at the rate of a mere nine million units.

But doing business in China still contains plenty of obstacles, as several recent events make clear. Beyond the trade dispute over tires, there are a host of challenges for Western manufacturers, ranging from difficulty in enforcing contracts to maintaining intellectual property rights.

First the good news. China has rebounded resoundingly from the global recession, the effects of the government tax incentives and subsidy policy notwithstanding. For the year, sales are up a robust 32%.

More growth is predicted.

J.D. Power forecasts that Chinese consumers will be buying more than 11.4 million vehicles annually by 2015. The reasoning is simple. The U.S. has about 820 vehicles for every 1,000 people. China today has roughly 34 vehicles per 1,000 people.

The Chinese car market is something of a free-for-all, with more than 90 local and foreign brands offering more than 400 different models. Western manufacturers dominate the list of bestsellers -- Volkswagen is number one -- but independent Chinese makers are moving up fast. Chery ranks seventh, BYD eighth, and Geely is 11th in overall sales.

Cashing in on this bonanza can tax the patience of even the most determined. Entrepreneur Malcolm Bricklin put out a news release to announce that his company had done something usually considered routine: It successfully served a lawsuit on Chery Automobile that it filed more than a year ago. Bricklin complained that Chery "repeatedly avoided service by refusing Federal Express packages containing the legal documents."

Even business people less mercurial than Bricklin find practices in China challenging. Take battery maker A123 Systems (AONE). In a prospectus for an initial public offering, it lays out the risks of operating in China, including "the potential inability to control our operations and relationships; enforce any agreements we have with Chinese partners, to find, retain or train suitable employees and to effectively protect our intellectual property rights."

The risk sections of IPO prospectuses frequently contain scary language, but the paragraphs on China invoke more fears than unusual.

They include:

• "Difficulty in enforcing agreements, judgments and arbitration awards in foreign legal systems" -- Malcolm Bricklin knows something about that;

• "Impediments to the flow of foreign exchange capital payments and receipts" -- some companies have been barred from withdrawing their profits from China and been forced to reinvest it in the country;

• "Additional regulation of rechargeable batteries, which may reduce our ability to sell in certain markets" -- it wouldn't be the first time the rules were changed in the middle of the game to protect the home team;

• "Longer payment cycles and potential difficulties in collecting accounts receivable" -- you mean you weren't planning to pay 30 days net?

It isn't exactly bedtime reading, but the A123 prospectus is more engaging than the typical legal boilerplate. Whether any of it materializes is another matter. But buried in one paragraph is the warning that "in the future may be opposition to normal trade relations status with China." If that part came true, who knows what's next? To top of page

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