Beijing's Yafun Automobile Company gets up to 1,000 hotline phone calls a day from potential customers who want more information on the rapidly changing prices of imported and local cars. In the glitzy showroom, prospective car owners check the prices up overhead flashing on a big board. This is the latest salvo in the car wars and people are hoping to benefit from yet another effect of China's joining the World Trade Organisation. In true WTO spirit, China slashed tariffs on imported cars on January 1, with tariffs on limousines dropping from 80 per cent to 53.7 per cent and on sedans they went from 70 per cent to 40.8 per cent. Prices of imported cars fell an immediate 10 per cent on average. Mainland media did their part by highlighting price cuts on top-of-the-line Lexus, BMW, Mercedes, and Volvo models, which fell several hundred thousand yuan overnight. Ms Hu described another oddity: 'We have to explain to customers that they cannot get an imported car at local price.' She meant that people thought the imported models could be had for the price of a Chinese joint-venture model, but the only imported cars that lost market value were Japanese models affected by the Yen devaluation. Keeping buyers in check Auto industry analysts companies have tried hard to make things clearer by pointing out that it took five years just to bring tariffs on imported cars down to 25 per cent. The Ministry of Foreign Trade and Economic Co-operation, criticised by some state-run enterprises for offering too many concessions during WTO negotiations, announced on national television that the flood of car imports was 'mainly just temporary' as punitive tariffs on Japanese cars came to an end. Although it was not stated, it seemed domestic cars would be the main choice in the near term. Many new buyers have turned a deaf ear and adopted a wait-and-see attitude, bringing the local car market to a complete standstill. Finally, some manufacturers gave in. The most dramatic cut came from Tianjin Automobile on its basic Charade model, from a Daihatsu design. It went from 48,900 (about US$6,000) yuan to 39,800 yuan (about US$4,883) on January 12, making it China's cheapest car. The price of its premier model was cut by more than 20,000 yuan. The effect was dramatic. Tianjin Automobile sold 561 different Charades the first day of the price cut and another 636 were ordered. The company struggled to keep up - a far cry from last year's 30 per cent drop in sales. The competitors responded quickly with record breaking low prices. But the biggest players -Volkswagen in Shanghai and Changchun; Citroen in Wuhan; and Shanghai GM - refused to budge. But pressure has been mounting. Most local media suggested that buyers wait for the Lunar New Year because they predicted major manufacturers could not stand the bad sales and would be pressured into offering better deals. Local discontent Talk like this bothered Chinese manufacturers and they openly criticised the media hype for raising people's expectations, which affected sales. Manufacturers insisted that their prices were 'proper' and argued on different occasions that their sales network and after-sales service would make their cars competitive even after WTO. Few analysts are sympathetic. China has 102 car manufacturers producing only 650,000 cars a year and 52 produced fewer than 1,000 cars last year. That means that few of them knew anything about an economy of scale. So, in spite of China's cheap labour costs, its parts and cars cost much more than the US and Japanese products. The Chinese government has tried for years to create Korean-style chaebols (conglomerates) through financial and policy support for major factories and by limiting investors interested in the sector. But even the largest manufacturers were still far too small to compete internationally. Local governments also managed to keep smaller plants operating as cash cows through protectionism. But, perhaps the real problem is a lack of incentives. Chinese manufacturers are accustomed to the easy money brought by high tariff barriers and, even with major price cuts in recent years, have still managed to sell their cars for twice the price of Western models. A Chinese car brings the producer about 20,000 yuan - far more than western manufacturers get. Guangzhou's Honda, according to Jia Xinguang, an analyst at the China Auto Industry Consulting Firm, gets 125,000 yuan for each of its Accords. Mr Jia said he believed the price cut would force some manufacturers to close shop, leaving growing room for the others, making for a more efficient industry. Old dreams die hard At the same time, the old dream of a real Chinese car refuses to die and is part of a national identity fixation. It lay behind some of the tit-for-tat skirmishes during the WTO negotiations, for example Beijing's insistence of the 50-per-cent share in any joint venture. China made its first car in 1958, but did not make much progress until 1983, when the first joint venture plant was set up in Shanghai. The idea was to use foreign technology and management skills to improve the vehicle industry. But, when foreign investors played along with the highly regulated industry and its tariff protections, they took the easy way out, producing somewhat outmoded cars as long as they sold well. For example, Shanghai Volkswagen has produced more than 1.1 million Santanas since 1983. Back to WTO But WTO is changing all that. Last year, foreign investors introduced more new models into China than they did during the previous decade. They began seeing that their factories in China would have to compete with the world's best on a more or less equal footing. When tariffs come down, imported quality and technology could get the upper hand. Mr Jia said that the foreign investors might want to take a closer look at their relations with Chinese partners after WTO and some might want to buy the Chinese partners out or even get out. Local car analysts are bothered by the fact that foreign investors have gained some advantage after WTO. If they pull out of the partnership completely they can still export cars to China but the Chinese partner may not be able to develop a new car. What's the alternative? That has prompted some insiders like Chen Zutao to call for a change. He wrote to the central government leaders before China joined the WTO asking them to deregulate the industry to improve Chinese manufacturers' competitiveness. He said the government should stop pouring money into the sector. The 72-year-old Mr Chen was one of the founders of China's two major vehicle manufacturers - FAW and Dongfeng. He has argued that in the new era of globalisation the idea of a 'local car' should replace that of a 'national car' and has suggested that it be underwritten with state-controlled shares. 'We need to open the sector to all investors as soon as possible. Otherwise foreigners may lose interest in producing cars in China and establish a sales network for imported cars,' he has warned. But the old-timers were offended by that and said so in the state media. But, Mr Chen said he still had some powerful support and was optimistic. This has got some attention from foreign investors and Dang Hui, the deputy head of Citroen's China Representative Office, said they were following the situation closely. He said that, after WTO, the small scale of production of local cars and high cost of parts could make them costly. The one thing the experts seem to agree on is the huge potential. Mr Dang said his company believed the car market potential would mean plenty of opportunities for foreign investors. Several consulting firms predicted recently that China's car business would grow 9 per cent annually for the next five years. A recent study by China's central bank found that 12 per cent of the customers of urban banks planned to buy cars in 2002. Most likely, few foreign investors will choose to leave. As China removes the tight investment restrictions in accordance with WTO, investors come. Still, as Yale Zhang, a consultant at Automotive Resources Asia, put it: 'Few countries would really allow themselves to become a truly free market for imported cars.' But, the initial shock of the WTO entry could breathe some life into the stagnant market and benefit dealers like Yafun. 'Our sales will at least double this year,' Ms Hu said confidently.