China's Cars, Accelerating A Global Demand for Fuel

By Ariana Eunjung Cha
Washington Post Foreign Service
Monday, July 28, 2008

SONGJIANG, China -- Nodding his head to the disco music blaring out of his car's nine speakers, Zhang Linsen swings the shiny, black Hummer H2 out of his company's gates and on to the spacious four-lane road.

Running a hand over his closely shaved head, Zhang scans the expanse of high-end suburban offices and villas that a decade ago was just another patch of farmland outside of Shanghai. To his left is a royal blue sedan with a couple and a baby, in front of him a lone young woman being chauffeured in a van.

"In China, size matters," says Zhang, the 44-year-old founder of a media and graphic design company. "People want to have a car that shows off their status in society. No one wants to buy small."

Zhang grasps the wheels of his Hummer, called "hanma" or "fierce horse" in Chinese, and hits the accelerator.

Car ownership in China is exploding, and it's not only cars but also sport-utility vehicles, pickup trucks and other gas-guzzling rides. Elsewhere in the world, the popularity of these vehicles has tumbled as the cost of oil has soared. But in China, the number of SUVs sold rose 43 percent in May compared with the previous year, and full-size sedans were up 15 percent. Indeed, China's demand for gas is much of the reason for the dramatic run-up in global oil prices.

China alone accounts for about 40 percent of the world's recent increase in demand for oil, burning through twice as much now as it did a decade ago. Fifteen years ago, there were almost no private cars in the country. By the end of last year, the number had reached 15.2 million.

There are now more Buicks -- the venerable, boat-like American luxury car of years past -- sold in China than in the United States. Demand for Hummers has been so strong that starting this year, Chinese consumers can buy a similar military-style vehicle called the Predator at more than 25 new dealerships.

Yet strong demand for oil isn't limited to China and its automobiles. Ever since an investment group led by a New York lawyer and a New Haven, Conn., banker came up with the notion of using Pennsylvania oil for lighting in the 1880s, petroleum has been an essential component of the industrial age. It fuels ships, planes and cars, and goes into road asphalt, home heating fuel, lubricants, plastics and petrochemicals.

The United States is the world's single largest consumer of oil, burning through more than 20 million barrels per day last year. This year, U.S. usage is on track to decline the most in 25 years, the result of high fuel prices and a sluggish economy. Still, about one of every eight barrels of oil produced worldwide ultimately ends up in the fuel tank of an American car or truck.

Demand in many developing countries, in the meantime, is accelerating because of the spread of middle-class lifestyles and populist policies that subsidize fuel to keep it cheap.

India's government, for example, will spend $24.5 billion this year on oil subsidies. And that's after subsidies were scaled back in June, triggering riots over the cost of diesel, which fuels most of the country's vehicles, and other oil products. "The hike in fuel prices last month has done little to damp soaring diesel demand," said Seema Desai, an analyst at the Eurasia Group. Indians are paying about $3.60 a gallon for diesel, far below market rates, and demand is still growing at an annual rate of more than 20 percent.

Oil-producing countries are even more generous to their residents. In Venezuela, gasoline costs 12 cents a gallon. In Iran, it costs 41 cents. In Saudi Arabia, it costs 47 cents; in Russia, $3.90.

All this growth is more than offsetting the conservation measures taken in the United States, Europe and other industrialized nations. This year, the combined consumption of China, India, Russia and the Middle East will increase 4.4 percent and for the first time exceed that of the United States, according to the International Energy Agency.

For energy planners in the industrialized world, this is a cruel irony, coming after a concerted effort by consumers and lawmakers to steer consumption downward. If China continues to increase its use of oil at the average pace of 6 to 7 percent a year, as it has since 1990, it will consume as much as the United States in more than 20 years.

But China bristles at criticism of its growing oil use, noting that per capita it will remain a small fraction of U.S. consumption for decades to come. Moreover, industrialized nations all relied on heavy petroleum use as they developed. Why should we be penalized, the Chinese ask, for coming late to the game?

* * *

While a number of factors contribute to China's surging demand, including rapid industrial development and hoarding by the government to ensure adequate supplies for this summer's Olympic Games in Beijing, it is autos that are having the biggest impact.

Yet despite this dizzying increase in passenger cars, less than 4 percent of the country's 1.3 billion people have already bought one. That's where the United States was in 1915.

"The entire energy market of the world is being affected by this country already. Can you imagine when we get to 50 people out of every 1,000 in China owning cars?" asked Friedhelm Engler, design director for General Motors and Shanghai Automotive Industry's joint-venture engineering and design lab in China.

For the previous generation, owning a car was the province of a privileged few -- those in government, heads of state-owned companies and others in positions of power.

But starting in 2000, China began to aggressively promote consumption to balance its export-driven, white-hot economy. Zeng Peiyan, who was then director of the national planning committee, created a list of things average citizens should be encouraged to buy. At the top of that list was cars.

Beijing has simplified procedures for buying cars, cut sales taxes and improved the availability of bank loans. It encouraged local governments to build more parking areas. It banned bicycles on some larger streets. And it laid thousands of miles of gleaming, multi-lane superhighways around the country.

In the meantime, gas has been kept artificially cheap. Even after subsidies were partly lifted last month, a gallon of gas in China costs only $3.40, well below market prices.

Some Chinese cities actually promote bigger, fancier cars to help foster the image of a more "wenming," or civilized, modern society.

The northern port city of Dalian; the Hunan provincial capital, Changsha; Shenzhen, across the border from Hong Kong; and many other cities ban cars with engines smaller than 1 liter from entering their downtowns on the grounds that those cars are old and dirty. Some other municipalities ban smaller cars from expressways, claiming the cars are so small they may endanger their owners when going at high speed. Other local governments single out owners of small cars for special charges -- "traffic capacity expansion" or "road and bridge maintenance" fees -- that can run $150 to $1,500.

In 2006, when China released its most recent "five-year plan," a national road map of priorities, a newly environmentally conscious central government began to encourage local governments to remove any disincentives for consumers to buy and for manufacturers to produce small cars. But legislation that would require local governments to revise their old practices is still pending, and change has been slow.

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The impact of China's official car polices is perhaps most evident in the manufacturing center of Dongguan, a maze of motorways and parking lots close to the country's southern border in the heart of the Pearl River Delta. For every 1,000 residents in Dongguan, 520 have cars -- the highest rate in the nation and nearly 15 times the average.

Spread out over 952 square miles of industrial parks and housing complexes, Dongguan may be the closest thing to a Washington-style suburb in China. With no local subway system, a shortage of taxis and buses with limited routes, Dongguan's 7 million inhabitants often have no way of getting around without a car.

To help residents purchase cars, the government has offered numerous financial incentives. In 2007, the city worked with local banks to allow consumers to put zero down and get a car loan. Civil servants receive generous subsidies for using their own cars for official business, which prompted a rush on automobile purchases by local government workers. Dongguan also ordered operators of parking garages to cap their monthly charges at half the market price in neighboring cities.

All this has been good news for Feng Jiangming, 28, who owns a small business that sells nails, screws, ball bearings and other hardware to stores. Earlier this month in Dongguan, Feng was at the Zhicheng car dealership shopping for a new car to supplement the one he has had for five years.

In 1998 at the age of 17, Feng arrived here from Hunan Province to try his luck as a laborer at the many export-oriented factories that were opening. He remembers that the area was dotted with small villages and that the dirt streets were packed with bicycles. Back then, he said, no one he knew had a car. These days, few of his friends don't.

Feng ran his fingers along the shiny four-door, brown Buick Excelle sedan in front of him and nodded at the roughly $22,000 sticker price. He inspected the sunroof, extra-large headlights, all-leather interior.

When he first heard about the increase in fuel prices in China, Feng said he gave the idea of a smaller car a few seconds of thought -- and ruled it out. "If you want to go golfing or fishing, it's not very convenient," he said.

Salesman Xie Bin elaborated: "A small car is for people with money problems or if they want it as an extra car to give to their wives, daughters or girlfriends to go buy food."

As recently as a few years ago, automakers were betting that the future of the Chinese car market was in small vehicles that could easily maneuver the narrow alleyways of its ancient cities. Then they discovered a quirk in Chinese consumers' tastes.

Many car owners, even those who are lower middle-class, want to appear wealthy enough to have a chauffeured automobile. That means extra room for the owners in the rear. As a result, even big cars in China tend to be a third of a foot or more longer than their American counterparts.

This helps explain why roomy cars, such as the Volkswagen Santana -- a family sedan based on the Passat that is the country's top-selling car -- the Audi A6, Honda Odyssey and various Buick models are doing so well in China.

In China, the roomy Buick is associated with Sun Yat-sen, the father of the modern Chinese state, and Zhou Enlai, one China's most respected leaders. Both used to ride around in classic black Buicks. Buick's advertisements in China these days add a modern twist, depicting two tall businessmen in suits giving each other high-fives as if they have just closed a sweet business deal.

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Another factor driving the sale of bigger cars in China is the rapid emergence of suburbs. Many of these satellite cities are romanticized versions of how the Chinese imagine the United States and other Western countries, rich with spacious villas and two-car garages, big-box chain stores, strip malls and office parks.

Zhai Yongping, an energy specialist with the Asian Development Bank, fears the Chinese are buying into the American lifestyle: "big houses, big air conditioning, big roads." Compared with the breakneck pace of road construction, public transit has developed slowly.

To encourage the Chinese to go green, General Motors, which has ranked first for passenger car sales in China in each of the past three years, is preparing to market hybrid vehicles or cars that run on alternative fuels.

But Zhang doesn't expect Chinese consumers to change their car-buying habits. "Fuel economy is probably the last thing Chinese look for," Zhang said as he drove around the Shanghai suburbs in his Hummer. He said he wasn't worried about filling up the tank even after the government trimmed oil subsidies last month, raising gas prices about 18 percent.

Zhang bought the Hummer in 2006, on special order from the United States. It cost him $220,000, including hefty shipping and import fees. "It feels like a man's car," he said.

Last month, he and two friends set up a Web site announcing the formation of a Hummer club in Shanghai. Some 20 other owners e-mailed him within days. They included several other businessmen but also coal mine bosses from inland provinces and three women in their 30s who are friends and purchased identical Hummer H3s.

Zhang said he and other club members were talking about organizing off-road trips, perhaps to the mountainous parts of Sichuan Province to help with reconstruction efforts in areas hard hit by the recent earthquake. For now, however, Zhang said he's happy just using his car to visit friends, cruising along at 17 miles per gallon on China's ever-growing network of highways.

Staff writer Steven Mufson in Washington and researchers Wu Meng and Crissie Ding contributed to this report.

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