This afternoon, I returned to my office from an Amcham luncheon to find everyone preparing to evacuate our offices on the fourth floor of Parkview Center near the Holiday Inn Lido Hotel in Beijing. Moments before, my colleagues reported, our building shook and there were already reports of buildings throughout Beijing being evacuated.

Believe it or not, an earthquake in far away Sichuan Province was felt in Beijing. This is equivalent to an earthquake in Denver being felt in New York City. The earthquake occurred today (May 12) in Wenchuan County, Sichuan Province at 2:28 PM local time measuring 7.8 on the Richter scale. According to China Central Television (CCTV), Beijing had its own earthquake, a much smaller 3.9 temblor, seven minutes after Chengdu’s shake, but it seems most people were reacting to the event farther away. In addition to Beijing, Shanghai, and Chonqqing, cities in Shanxi, Shaanxi and Hubei provinces felt the quake.

ASIMCO has a small factory in Sichuan Province, which is the only one of ours I know of to suffer any damage. Minimal structural damage consisted mainly of broken windows and cracked walls. Thankfully, no one was hurt.

“Of all the industries you could have picked,” I am frequently asked, “Why automotive components? It’s a mature industry.” And that’s true. In developed economies like the United States, automotive is a mature industry. But in developing economies like China, it can be a growth industry.

Ever since it joined the World Trade Organization in December, 2001, the production and sales of vehicles—trucks, buses and passenger cars— in China has increased by at least one million units each year. China’s auto industry has grown by an incredible 20 percent to 50 percent each and every year since WTO entry, and in 2008, China will produce over 10 million vehicles, most likely surpassing vehicle production in the United States.

Although everyone is on the China bandwagon today, that was not always the case. It wasn’t long ago that global auto executives questioned how a country whose per capita income is only $1,000 (approximately the level for China at the beginning of this century) could possibly afford to buy passenger cars. No one asks that question anymore. But, it should not have taken so long for industry observers to become believers. As early as 1992, anyone who believed that China’s economy would continue to grow, could easily predict, as day follows night, that China would have a very large auto industry. Quite simply, there is no other way to get people and goods around a country the size of China without a system of highways—and plenty of trucks, buses and passenger cars.

When I came to China in 1992, the first thing that struck me about the country was its size. China is big. Almost to the square kilometer, China is the same size as the United States, which meant that every industry was fragmented, and companies were doing business locally rather than nationally. As China’s transportation and telecommunications infrastructure improved, I reasoned, industries would begin to consolidate, and companies able to do business nationally would come to the forefront. Rather than investing in individual companies, therefore, it became more important to pick an industry and develop a strategy for creating the leading company in that industry.

But that begged the question: What industry? Fortuitously, I was invited to attend a Euromoney Conference in Shanghai in September, 1992, and I went there hoping to get some answers. As I describe in Managing the Dragon, here is what happened:

One of the featured presenters at the conference was Dr. Stefan Messmann, a senior executive with Volkswagen. In his remarks, he explained to the roughly 300 people in attendance that Volkswagen viewed China as one of its key growth markets. The company had already invested more than $350 million in two joint ventures, in Shanghai and Changchun, and had clearly taken an early lead in the race to develop China’s automotive industry.

I was surprised. At that point, it wasn’t clear that China even had an auto industry. The streets were filled with bicycles and a couple of trucks here and there, but passenger cars were few and far between. The ones you did see were typically imported Mercedes, which usually belonged to government officials. But here was a high-ranking Volkswagen official saying that China was going to develop a major automotive industry. More important, he was saying that Volkswagen, a major player in the global industry, was counting on China for a great deal of growth. I sat up in my seat and started to listen more closely.

But, autos are a big industry that accounts for over 12 percent of global GDP. What segment of the auto industry should I focus on? When he finished his presentation, Dr. Messmann opened the floor for questions. His response to the first provided an answer.

“What’s your biggest problem?” somebody asked.

Without a moment’s hesitation, Dr. Messmann replied, “Our biggest problem is getting an adequate supply of high quality parts.”

When I’d been in investment banking, I had called on a number of companies in the automotive components area. Though times were tough then, in the late ’70s, I looked back at financial statements from the ’50s and ’60s and saw that these companies had all been very profitable. This had been America’s growth period in autos. GIs returning from World War II, people like my dad, wanted to get on with their lives and were buying houses, refrigerators, and cars in huge numbers. As General Motors, Ford, and Chrysler expanded production, components companies could literally fill up their plants for the year after three golf dates with buyers from the Big Three. If Messmann was right, the same thing was now about to happen in China 40 years later.

“Wow!” I thought to myself. As Yogi Berra had said, “This is déjà vu all over again!”

Dr. Messmann gave me the first hint that auto components might be a good industry to investigate. After all, if companies like Volkswagen were looking for new suppliers in China, there seemed to be a vacuum that needed to be filled, and that spelled opportunity.

I didn’t see Dr. Messmann again until last week, nearly 16 years later. In writing Managing the Dragon, I learned that he had left Volkswagen and was now teaching law at Central European University, a very interesting English-speaking graduate school in Budapest that was founded by George Soros, one of Hungary’s most famous émigrés. After communicating by e-mail, Dr. Messmann invited me to Budapest to meet CEU’s senior faculty and to deliver a lecture at the school.

What a great two days! Dr. Messmann and CEU could not have been more hospitable, and Budapest is a fabulous city that is full of history. As I also learned, CEU is one of a kind. Founded in 1991 with the explicit aim of helping the countries of Central and Eastern Europe and Central Asia transition from dictatorship to democracy. CEU’s 1400 students come from 80 different countries. As I stood there answering their questions, I was struck by the fact that the students surrounding me were from Slovakia, Russia, Uzbekistan, Kazhakstan and Nigeria, countries I rarely come in contact with. Like students everywhere, they were eager to learn more about China and how they might do business here.

Just as Dr. Messmann opened my eyes to the auto components opportunity in China 16 years ago, he has now opened my eyes to a new part of the world. I want to learn more, but my instinct is that this is a very interesting part of the world that may be a great connection for any China business. The region is comprised of countries that, like China, have emerged from closed economies and are now rapidly making up for lost time. These countries have much in common with China, including a lower cost perspective, and are rich with many talented and motivated people with a strong desire to get ahead.

Several months ago, Joni Evans, a good friend of mine, began a new Web site www.wowowow.com (“The Women on the Web”) that is oriented to women, 40 years of age and over. Joni, a veritable powerhouse in the publishing industry whose career includes serving as president and publisher of Simon & Schuster and publisher at Random House, identified women over 40 as an underserved market on the Internet, and decided to create a Web site targeting this segment. To help her create, run and write for the site, Joni organized 15 extremely successful women, including Lesley Stahl (broadcast journalist), Peggy Noonan (political columnist), Mary Wells (inventor of modern day advertising); and entertainers, Whoopi Goldberg, Candice Bergen, Lily Tomlin, and Marlo Thomas into a powerful team.

Why do I mention this on Managing the Dragon, a site devoted to China? Trust me, there is a China angle– I’m getting to it. But first, a bit more background.

A popular feature of the site is the “Question of the Day” which each contributor is asked to answer. One of the first questions was a doozy. Followers of New York politics will recall that in mid-March, Eliot Spitzer, the self-righteous former Attorney General of New York who had been elected Governor in 2006, was literally caught with his pants down when an investigation uncovered that he had been spending tens of thousands of dollars on hookers over a 10-year period. All of New York and the United States watched as Governor Spitzer stepped down, effective March 17, a distraught Mrs. Spitzer by his side. wowowow’s Question of the day: “Should Silda Spitzer Stand By Her Man?”

Now to the main point. As the Olympics draw near, and all things relating to China take center stage, one of last week’s questions of the day on www.wowowow was: ”It’s been 19 years since the protests in Tiananmen Square. What do you think about China today?mebeli”

One way or another, this question will be asked over and over again in the coming months. Whether you think the views of these very accomplished women represent a cross section of Americans or not, they are opinion makers and their comments provide interesting reading.

I confess to being most impressed with the comments made by Mary Wells, whose opening lines demonstrate a refreshing open-mindedness regarding China:

It is easy to complain about China but can you find a country you fully admire and have no complaints about? Including America? There have been big differences in China since Tiananmen Square and if you haven’t been there in awhile a visit there is astonishing. You can’t think about Tibet without being reminded of America’s own mistakes and you can’t visit Beijing without being reminded of America’s past capitalistic growth.

Well said.

She continues with a common sense, pragmatic prescription for the future:

I think this is the time to start encouraging our young people to learn to speak and to write Chinese in school. I would guess that in their primary career years the timing will be such that to be expert in Chinese will enhance a career and, in an important competition, make the difference.

Unfortunately, many Americans and Europeans do not share the same balanced perspective as Mary Wells. On my recent trip to the United States, I was surprised by how frequently I heard negative remarks made about the country and its leaders. The focus on the Olympics and the publicity surrounding anti-China demonstrations is drawing true sentiments to the surface. Jack Cafferty of CNN said it most crudely, but I suspect his comments speak for many.

If the Beijing Olympic Games, by bringing millions of first-time visitors to China, help to close this “understanding” gap, they will be considered a great success.

In my recent post, “Industry Week: China’s Different Cost Perspective” and in the related article I wrote for the magazine, I discuss the fact that Chinese managers have a different, and much lower, cost perspective than managers from more developed countries. Briefly stated, when Americans look at a 100 yuan bill, their immediate reaction is to divide by eight, the approximate exchange rate that has been in effect for most of my time in China, and to see the equivalent of $12.50. When Chinese look at that same 100 yuan bill, however, they see the equivalent of $100. In other words, a $100 bill and a 100 yuan bill are looked at and treated exactly the same way in their respective countries, with very important implications for relative economics.

This explains why the Chinese can make things so cheaply, and also begins to explain why there are two markets for any product in China. See “China’s Two Markets.” It also is the single most important reason why companies need to localize their management in China. Quite simply, to have long term success in China, a company’s managers should have the same cost perspective as its customers and its competitors.

This is one of the themes I stress when speaking to various student and business groups in China and the United States in connection with the launch of my book, Managing the Dragon. As I explain to audiences how I came upon this insight and the many ways in which it impacts the daily operations of our business, I can literally see the heads nodding. The Chinese immediately recognize that this is in fact the way that they look at money, and non-Chinese begin to relate what I am saying to their own experiences.

I noticed that The Hindu, a news update service in India, devoted an entire article to this idea, quoting extensively from my book and finding the concept “immensely instructive” in their words. I suspect that a similar phenomenon exists in India and helps account for that country’s cost competitiveness.

Chris Devonshire-Ellis, a longtime friend from Beijing, also found this idea useful and saw fit to write it up in his China Briefing News.  Chris had heard me explain my views on China’s lower cost perspective in a presentation I gave at a conference held recently by the Young Presidents Organization recently in Beijing.

One question naturally arises when I discuss this topic, though. Many are curious to know how long the Chinese will have this lower cost perspective, and wonder whether it will quickly go away with all of the wealth now being created in the country. My answer is that it is here for at least one or two generations, and perhaps longer. Once ingrained in an individual’s psyche, something this fundamental tends to remain for a long time. That is why even wealthy people in China still look at money differently than their foreign counterparts.

Also, 900 million people even today live in China’s countryside and subsist on substantially lower levels of annual income than the rest of the country. By definition, this group of people has a much lower cost perspective than individuals from wealthier economies. As China’s economic development continues in the years ahead, many more from this group will be drawn into the country’s economic mainstream. As they do, China’s lower-cost perspective will be constantly reinforced by a new group of participants who will keep it very much alive.

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On matters economic, I generally give the Chinese government high marks. Starting in 1978 with an economy that could barely feed its people, the government has guided China through 30 incredible years of economic reform and development.

I have been here for half that period, and have personally witnessed how China has built out its infrastructure, deregulated one industry after another, privatized many of its state-owned companies and embraced globalization by joining the World Trade Organization. As a result of these reforms and more, China is now the third-largest economy in the world, and everyone is waiting to see what the next 30 years will bring.

Despite the impressive growth of China’s economy, though, the country’s capital markets remain stuck in an earlier time and have not played the role they should have in supporting economic development. That’s a shame because it represents an enormous lost opportunity for China. Well-developed capital markets ensure that capital is used most efficiently and that companies and people with the right ideas get proper funding, and companies and people with bad business propositions do not. There is plenty of capital in China. The country has created enormous wealth over these past 30 years, and the Chinese are savers. Problem is, there is no way to efficiently distribute those savings and provide investors with a range of investment opportunities from which to choose, and companies with the financing needed to grow their businesses.

Unlike developed markets such as the United States, it is very difficult to finance a business in China. Ask any entrepreneur. Other than bank loans based on working capital or secured by real estate, there is no debt market for small and midsized companies. The large state-owned companies seem to get all the financing they need or can possibly use, but smaller private companies and foreign invested enterprises must rely primarily on their own sources of equity capital to finance growth. The Shanghai and Shenzhen markets are merely extensions of policy lending with government regulators, not underwriters, deciding which companies can list their shares.

Rather than focus on ensuring a fair and transparent stock market, China’s stock market regulators seem to believe that their job is to ensure that share prices always go up. The Chinese government is understandably concerned about the 40 percent drop in share prices this year and the pictures of forlorn investors that accompany each story about the stock market, but that’s just the way the markets work. Share prices are a reflection of the sum total of investor sentiment on a wide range of issues: the health of the economy; inflation; prospects for corporate earnings; political factors and others. In some cases, a country’s stock markets may even be impacted by global events that are only indirectly related to its economy. If investor sentiment is positive, share prices will rise. If the opposite is the case, they will fall. There is nothing that regulators could or should do.

Chinese investors today are worried about a number of factors. Inflation is at its highest level in over 10 years. The government is trying to reign in the economy, calling into question prospects for corporate earnings. The economy of the United States, China’s largest customer, is slowing, and the yuan is appreciating against the dollar, both factors raising concerns about exports. Apart from economic fundamentals, the A share market soared last year to nose-bleed levels of valuation and no market anywhere only goes up.  China’s A share market was overdue for a correction, and even at current levels is overpriced compared to global markets.

In this environment, stock market intervention by government regulators is counterproductive. Slowing IPOs and limiting big share sales, as the government is currently doing, works against the integrity of the stock market as a true market and only serves to weaken investor confidence. Moreover, intervention by the regulators raises false expectations that the government will somehow be able to reverse the market slide. Analysts last week called on Beijing to reduce the stamp tax, launch stock-index futures and allow margin trading.

Cutting taxes on stock market transactions is positive because it reduces the friction costs of investing. However, reducing friction costs will only increase the volume of share trading, not necessarily cause share prices to rise. Likewise, allowing investors to buy stocks on margin and creating a futures market may be healthy developments for the market, but they will only serve to increase market volatility. When investors are positive, shares may go up faster, but when they are negative, share prices may decline even faster than they are now.

As stock market regulators in the United States and other countries with well-developed capital markets have found, sometimes markets just want to go down. In all but the most extreme cases, it’s best to let them do just that.

My recent interview with Laura Ramsey of Canada’s Financial Post focused on China’s two markets, one of my favorite topics. I devote an entire chapter to this subject in my book, Managing the Dragon, and believe that the way in which these two markets evolve in China in the coming years will have a profound impact on nearly every global industry.

Before China began its economic reform program in 1978, every market in the country was by definition purely local. Little, if any, foreign goods were imported into the country, and there were no foreign invested companies in China to produce the higher priced, higher technology products commonly found in developed economies. The trucks, industrial equipment, household fixtures and other products used in the Chinese economy were produced by local, Chinese companies that did not have access to more advanced technologies and had to keep prices low because income levels for the vast majority of China’s population were very low. Because both the consumers and the suppliers in this market were local, China had one market, an entirely local market, at the onset of its economic reform program.

As China’s economy developed and expanded under Deng’s reforms, it became “glorious to be rich” and more and more Chinese reached levels of affluence that enabled them to afford better, higher priced products. This dynamic created a new market, characterized by higher priced, higher technology products, which was layered on top of China’s purely local market and which I refer to as the “foreign/local market in China. In this higher end market, imports and products made by foreign invested enterprises in China compete head to head with the products from other foreign companies and the best of the local, Chinese companies.

One only has to look at the streets of any major city in China and see the vast number of modern, foreign made vehicles, or stroll through any one of the many new department stores in China, to understand that China’s foreign/local market alone has become one of the largest in the world. China’s annual demand for over 10 million trucks, buses and passenger cars, for example, is only second in the world to that of the United States. In product after product, China has already become one of the largest, if not the largest, market in the world.

But that’s not the end to the story. As the China economy, and its foreign/local market, has grown, so has its purely local market. That is because China’s economic growth has been distributed disproportionately across its 1.3 billion people. Although as many as 400 million people in China have average incomes of $7,000 per year, there are 900 million or so who have not benefited to nearly the same degree from China’s economic development and have annual incomes that average less than 10 percent of that amount. This vast number of people at the bottom of China’s income ladder keeps China’s local market alive—and growing. In this segment of the market, a company can sell any product, no matter how bad its quality or how low its technology, as long as it’s cheap enough. In this rough and tumble, purely local, price driven market, few foreign companies dare to tread.

China’s vast local market makes it a fertile breeding ground for future global competition. Companies that could not survive in a more uniformly developed, uniformly priced marketplace live to fight another day in China. While many of these companies will ultimately fall by the wayside, others will manage to survive, pull themselves up by the bootstraps, improve their quality and become battle hardened, low priced competitors to the foreign invested companies in China. With the glint of global domination in their eyes, the next step for China’s local companies as they successfully compete with the best of the foreign companies in China is the global market.

My advice: Pay attention to China’s purely local market. That’s where your next, and perhaps toughest, competitors will come from.

I’ve been using an iPhone with a China Mobile SIM card for over half a year now. The device is without rival in the industry, so when I put it on my wish list of things to get when they come to China, (let’s put Lou Malnati’s Chicago style pizza in there) I was ecstatic to find that friendly hackers had engineered a method for me to get around the barriers that the failed Apple- China Mobile talks presented.

While the Apple-China Mobile talks non-delivery is as common knowledge as the fact that thousands of the hacked phones run on other-than-AT&T networks, what is not so well known is that the Apple-China Unicom talks seem to have nonetheless gingerly moved along. In fact, I’ve been informed that you can buy a 4GB iPhone through China Unicom for around 4 thousand RMB. Mind you, every Chinese national that I know with the Apple phone has an 8GB version, which tells you something about the supply line it came from, but never mind that. I’ll be investigating the veracity of the Unicom situation this week. Still, I can’t get the Apple-China Mobile talks out of my head. While not seeing eye to eye on profit structures and distribution are to be expected, its a shame that Apple didn’t stay the course and decide to go another route, one that would have been better for them now and more importantly for their future in China.

The mistake that Apple made here is one bigger than just approaching the deal the wrong way. If that was it then I’d be lumping it together with the NFL’s unfortunate attempt at an exhibition game in Beijing and call it a day. Suffice it to say Western companies using Western “tried and true models” will land face first in a fall. First of all, Apple has failed to see the value of the street credentials they already have here: the iPhone is already desired by the Chinese consumer for its revolutionary combination of technologies, excellent usability, and its just more than slightly back breaking high price. One thing stands salient about the target relevant consumers here, the device’s price conveniently nestled just within a few months salary can do nothing but attract them to it, whether they can afford it or not. This is something China Unicom and China Mobile can confirm for us; they have phones for sale in their service centers that run past the 2500 RMB mark that do nothing to scare buyers off. Second of all, if Apple sold the devices out of their own stores, bypassing an exclusivity deal with the provider for a piece of the services take, then they would see realistic and long term tactical results in creating a sales channel and a brand exposure all in one. China is a market where brand recognition is nascent and rapid wealth accumulation is coupled with an appetite to spend and have the latest and greatest. Even if Apple sold the device out of flagship stores at a loss, they would be benefitting by associating themselves with the mystique of a product that almost stands apart from its brand. An early take on this approach would have been substantially more impressive, not least of all on a balance sheet, than the strike heard ’round the world that the China Mobile talks became.

Creating a lifestyle product at relatively or outright high prices is not a new winning concept in China. If Apple needs to know where to steal some good ideas from, the answer is Nokia’s Vertu brand. By Creating an association with luxury and exclusivity, Vertu continues to expand and turn heads even at an entry level price of around 35,000 RMB. Adjust the Vertu message and tone of voice to match the iPhone price and volume expectations as necessary, and Apple could recover gracefully from passing by a great opportunity. With their recent underwhelming unveiling of the Mac Book Air, now is as good a time as any.

I had an opportunity to spend a very enjoyable day at Eastern Michigan University recently. David E. Mielke, Dean of EMU’s College of Business, invited me to speak at a Dean’s Breakfast which he hosts periodically for students, faculty and alumni, and later in the day on Friday, April 11, I was the keynote speaker at the business school’s 59th Annual Honors Banquet.

I first became acquainted with EMU’s College of Business several years ago when I spoke to a class at Tianjin University of Commerce, taught by Dr. Mary Vielhaber and Dr. Diana Wong, two EMU professors. Mary and Diana were using a case that had been written about ASIMCO’s program of developing local management and thought it would add color to have someone from the company give the class a first-hand account. They called over to ASIMCO to see who might be willing to make the two-hour-plus trip from Beijing to Tianjin, and were somewhat surprised when I showed up with several of my young managers in tow.

Given the management gap in China, I do all that I can to support classes like the one that Mary and Diana were teaching and programs that provide for an exchange of information among universities and students in China, the United States, Europe and other parts of the world. I just think it’s good for everyone on both sides of the ocean to have more of these kinds of exchanges. Besides, several young managers had recently joined us, and I thought they would benefit from sitting in on the class, hearing me speak about ASIMCO, and most importantly, hearing the questions and the reactions of the students.

Needless to say, I was pleasantly surprised to hear what interesting things EMU is doing in China. EMU has had a partner relationship with Tianjin University of Commerce for four years where it runs an 18-month program providing a Master’s of Science degree in Human Resources and Organizational Development. Each course involves two weeks of intensive classes in Tianjin taught by EMU professors, and six weeks online. Every year, 20 to 25 students participate in the program.

Eastern Michigan University is located in Ypsilanti, Michigan, just minutes from the Detroit airport in one direction, and minutes from Ann Arbor in the other. EMU’s College of Business has 2,600 undergrads and 850 graduate students.

What I found most interesting about EMU’s College of Business is the tremendous diversity of its students. The graduate program includes a high percentage of students who are working full-time and taking graduate courses at the same time. In both programs, approximately 30 percent of the students are international and come from all over the world including Europe, India, Saudi Arabia and China.

At the reception before the Honors banquet, the first three adults I spoke to were graduate students themselves, not the parents of graduate students as I had assumed. All three either had full-time jobs or had returned to school to continue their education after the kids were grown. I also met a number of Chinese students. In fact, 30 to 40 of the undergraduates and 30 to 40 of the graduate students at EMU’s College of Business are Chinese.

In March 2007, EMU entered into a very exciting program with the Macau University of Science and Technology whereby students spend two years at Macau University, two years at EMU and earn a degree from EMU. In the fall of last year, the first six undergraduates from Macau were on campus. This fall, another 26 will arrive, bringing the number of students in the program to 32.

At the Dean’s Breakfast in the morning, I talked about how I came to China, the importance of local management, China’s different cost perspective and the development of the local market. Nathan Bomey of the Ann Arbor Business Review interviewed me in advance of the event and reported on it afterwards.

The Honors Banquet was a special treat. Approximately 200 graduate and undergraduate students were honored, and they were there in force, along with their mothers and fathers, husbands, wives and significant others. In all, over 400 people turned out for the Friday night reception and dinner at the EMU Student Center Ballroom. I gave my keynote where I stressed the value and importance of hard work, and described to the students how much the world had changed since I received my MBA, and how much more it will change in the course of their careers. In a state that has suffered more than most from the forces of globalization, it was very encouraging to look out over the audience and see so many students confidently looking ahead to the future.

In the final moments of the banquet, a dozen large vases of yellow roses were brought on stage, and Dean Mielke explained a tradition that he had started three years ago. Each Honor student was asked to take one rose and give it to the person who had had the greatest influence on them. What a great way to end the evening!

In a world that is changing as rapidly as ours, it is inspiring to see what far sighted educators like Dean Mielke are doing to embrace globalization and prepare their students for the challenges and opportunities that lie ahead. Apart from what is being taught in the classroom, the diversity which Dean Mielke has created on campus by developing programs around the world in China, India and the Middle East is an education unto itself.

My hat is off to Dean Mielke and EMU!

This year will forever be known as the year of the Olympics in China. But long-term, 2008 may be better remembered as the first year in which China’s auto industry out-produces vehicle assemblers in the United States.

While the U.S market, at 16 million vehicles or more per year, is still considerably larger than China’s, the output of U.S.-based assembly plants is approximately 11 million units annually, with 5 million or so vehicles imported each year from Japan, Korea and Europe. Due to the slowdown in the U.S. economy, many analysts are predicting that U.S. vehicle output in 2008 will be less than 10 million vehicles for the first time since 1992. Meanwhile, vehicle production and sales in China are forecasted to exceed 10 million units in this year of the rat.

Based on the first quarter figures, China’s auto industry is on track to do just that. For the first three months of the year, assembly plants in China churned out almost 2.6 million vehicles, a 21 percent increase from production levels in the Q1 of 2007. Passenger car production, which accounted for 1.9 million units, increased by 20 percent over last year, while commercial vehicles (trucks and buses) accounted for 728,000 units and grew at a 24 percent pace. Of all vehicle categories, heavy-duty truck production led the way with a stunning 59 percent increase. During the quarter, 167,232 heavy-duty trucks were produced in China, making China the largest market for vehicles of this size in the world.

In passenger cars, Volkswagen, with joint ventures in both Shanghai and Changchun, leads the pack with an 18.7 percent market share. General Motors at 9.2 percent is second, but Toyota is close behind with a 9.0 percent market share, followed by Honda at 8 percent. Chery is fifth and is the highest-ranked Chinese assembler with a 7.1 percent market share.

With Asian assemblers accounting for eight of the top 10 slots, the China market may provide a preview of the new world order in the global auto industry. Japan leads the way with four positions (Toyota #3, Honda #4, Nissan #6 and Suzuki #9; China has three (Chery #5, Geely #8 and Tianjin Auto #10) and Korea one (Hyundai #7). The remaining two positions are held by Europe (Volkswagen #1) and the United States (GM #2). As a group, the top 10 assemblers account for 70 percent of passenger car production in China.

Production and sales of heavy-duty trucks were unusually high during the first quarter due to the strength of the underlying economy and a certain level of pre-buying. In July, China will begin implementing regulations that require all six-cylinder diesel engines used in over the road vehicles to meet Euro III emission requirements.

Because of China’s history of on-again, off-again enforcement of emissions and other regulations that increase the cost of doing business for basic industries such as trucking, the market has been taking a wait-and-see approach to July 1. During the first quarter, it appears that truck buyers have decided to take no chances and to purchase the cheaper Euro II vehicles while they can. A truck that meets Euro III emissions standards may cost as much as 10 percent more than the EURO II version of the same truck.

The global auto industry is the largest industry in the world and accounts for approximately 10 percent of global GDP. Long dominated by the markets in the United States and Europe, the center of gravity has now shifted to Asian countries which now represent 40 percent of the global market for vehicles.

Every year since 2001 when China’s entrance into the World Trade Organization reignited the growth of China’s auto industry, vehicle production has grown by at least one million units, registering annual increases of from 20 percent to 50 percent. The numbers for the first quarter suggest that the torrid rate of growth of China’s auto industry is showing no signs of letting up.