1.28.2015

Restructuring will set stage for new golden age of China's auto industry

South China Morning Post, January 21, 2015



The old automotive industry model - a way to provide mobility for middle-class consumers - no longer 
fits the Chinese context, creating opportunities for innovation.
After a decade of breathtaking growth, China surpassed the United States as the world's largest automotive market in 2009. Since then, in spite of a recovery in US sales, China has widened the gap, with sales of 23.5 million vehicles compared with 17 million in the US. 

However, the 7 per cent growth of last year was about half that achieved in 2013. In fact, China has witnessed single-digit growth in three of the past four years, prompting many market followers to label this the "new normal". Some say the best times for China's automotive industry are now in the past. 

Indeed, there are many reasons to worry. In addition to the overall slowdown of China's economy, a growing number of cities are implementing curbs on car sales, seeking to address concerns about congestion and emissions. Last month, Shenzhen joined a growing list of cities, including Beijing, Tianjin , Shanghai, Guangzhou, Hangzhou and Guiyang , in an effort to cut the growth of the car population by limiting purchases. 

Meanwhile, the rising inventory of unsold vehicles has prompted the China Automobile Dealers Association to openly challenge global brand-name manufacturers, including BMW and Toyota, to increase incentives to their dealers and lower sales targets for 2015. While there is certainly cause for concern in the near term, we believe China's auto market is moving into a new phase, one that still offers the most profitable growth opportunities in the world for both local and global carmakers. Indeed, China's auto industry is on the cusp of major change that will fundamentally reshape things, bringing both opportunities and challenges. 

The age of inefficient, asset-driven growth is over. Overall, there is a capacity bubble after some manufacturers over-estimated growth prospects.  The problem is worst at the middle and lower end of the market. An already hyper-competitive environment will become more cutthroat as manufacturers try to undercut competitors' prices to sell excess stock.

Restructuring China's auto industry is essential to ensure its stable and healthy development. Government policies were implemented over 30 years ago to allow China to acquire the capabilities and capital from foreign sources to build up its domestic industry. While this has helped spur overall growth, it has not yielded a strong base of domestic carmakers. Consolidation and the elimination of weaker brands is inevitable. 

China's automotive industry will continue to expand, but at a more sustainable rate, with a steady stream of first-time purchasers from lower-tier cities joining the repeat buyers and those upgrading in the more established regions.  

A more "binary" market will emerge, with consumers in upper-tier cities continuing to prefer global brands, while those in lower-tier cities will seek no-frills products.  

However, pockets of "new wealth" will emerge in lower-tier cities, too, and these people will begin to mimic the buying patterns of more affluent customers.  

This presents unique opportunities for both foreign and domestic manufacturers. For example, Ford and Great Wall anticipated the shift towards small SUVs and have been enjoying above-average growth. Likewise, European luxury carmakers, such as Audi, BMW, Mercedes-Benz and Land Rover, have seen sales rise exponentially in recent years as a result of the growth in the number of high-net-worth consumers. 

In future, new segments, such as crossover and multi-purpose vehicles, may emerge but they may not be as large or as profitable as the SUV/luxury sectors. Thus, we believe a new golden age is on the horizon for China's auto industry. China remains the largest and fastest-growing automotive market in the world. After years of advances in mobile connectivity, big data and social networks, "internet of vehicles" technology is now shaping the industry as "connected mobility" drives advances in navigation, analytics, driver safety and driver assistance. 

The old automotive industry model - a way to provide mobility for middle-class consumers - no longer fits the Chinese context, creating opportunities for innovation.  

A new solution to personal urban mobility is likely to emerge in China, given the scale of its urban transport challenges and increasing concerns over the environmental impact of conventional vehicles. Indeed, the traditional car-ownership model is being reshaped by urbanisation, the rising aspirations of young consumers, and the development of communications technology and "big data".  

A number of new concepts are emerging, bringing non-traditional players, many of whom are Chinese, into the ecosystem. Examples include taxi-hailing apps such as Alibaba's Kuaidi Dache and Tencent's Didi Dache, which each process over 5 million transactions a day. 

As the leading automotive market, China is poised to revolutionise the global car industry, ushering in the next age of smart vehicles and connected mobility.  

Edward Tse is founder and CEO, and Bill Russo is managing director, at Gao Feng Advisory Company, a global strategy and management consulting firm with roots in Greater China

Click here to read this article at SCMP.com 

Toyota Isn't in Tune With China's Needs: Russo

Bloomberg Television, January 22, 2015

Gao Feng's Managing Director Bill Russo discusses China's car market snd why the country is so important for automakers with Bloomberg's Rishat Salamat on "On The Move".




http://www.bloomberg.com/news/videos/2015-01-22/toyota-isn-t-in-tune-with-china-s-needs-russo

Toyota Poised to Lose Global Sales Lead to VW on China

Bloomberg News, January 22, 2015



Toyota Motor Corp., which fended off Volkswagen AG to remain the world’s top automaker in 2014, may lose the sales crown as early as this year as it falls behind in China, the world’s biggest auto market. 

Toyota is predicting its global deliveries will decline 1 percent in 2015 to 10.15 million vehicles, or just 10,000 units more than what Volkswagen sold worldwide last year. A new factory the German company is opening this year in Changsha, China, will add capacity for another 300,000 vehicles annually. 

As Volkswagen and General Motors Co. add factories to bolster their already-dominant position in China, Toyota President Akio Toyoda’s strategy of foregoing new car plants until at least next year could result in the first shakeup in auto-sales leadership since 2011. Toyota ranks sixth among global automakers in China and sells less than one-third as many vehicles as its two main competitors in China. 

“The difference is that Volkswagen has a jet engine strapped to its back called ’China’,” said Bill Russo, Shanghai-based managing director at Gao Feng Advisory Co. “Toyota, unfortunately, is in a position of weakness when it comes to the China market. It would be almost impossible to hold on to a number one position without being in the lead in China, and Toyota’s not even in that league.” 

Worldwide sales for Toyota, including at its Hino Motors Ltd. and Daihatsu Motor Co. units, climbed 3 percent to 10.23 million vehicles in 2014, according to a company statement. Volkswagen last week reported a 4.2 percent gain to 10.14 million vehicles, that included its two heavy-truck units. GM followed with sales of 9.92 million units, up 2.1 percent. Volkswagen and GM haven’t announced projections for this year. 

China Capacity 

Toyota, which hasn’t built an assembly plant in China since 2012 and faces a self-imposed moratorium on new factories until next year, will fall behind even further as Volkswagen and GM step up their expansion plans. 

GM has announced plans to add five new plants in China by 2018 even though President Dan Ammann said the market is “maturing rapidly.” 

Volkswagen expects to raise its China plant capacity to more than 4 million vehicles by 2018 from 3.1 million at end 2013, according to the company. Mainland China and Hong Kong accounted for a record 3.67 million deliveries at Volkswagen group last year, up 12.4 percent and extending the country’s lead as the German manufacturer’s largest single market. 

Sales Target 

By comparison, Toyota missed its sales projection for 1.1 million units in China in 2014, even as the Corolla and the Levin compact cars helped boost sales 13 percent to 1.03 million units. The company kept its China sales target unchanged for this year. 

Even though Toyota may cede the sales leadership, it still outearns Volkswagen. Analysts estimate Toyota earned a profit of 1.96 trillion yen ($16.7 billion) last calendar year, compared with 10.7 billion euros ($12.4 billion) at Volkswagen. 

“Their focus is not No. 1,” said Peggy Furusaka, a Tokyo-based auto-credit analyst at Moody’s Investors Service. “Toyota is more concerned about keeping profitability than chasing numbers. So for coming years, I wouldn’t be surprised to see Toyota selling fewer cars than Volkswagen.” 

Toyota’s also-ran status in China is compounded by threats by its dealers to drop out of its network, citing poor sales and a lack of profit. 

Dealer Threats 

As many as 10 percent of dealers for one of Toyota’s China ventures could abandon the brand, according to the China Automobile Dealers Association. Among the 523 distributors in the FAW-Toyota Motor Sales Co. group, 95 percent are losing money, with some dealers stopping sales or shutting down altogether because of the losses, the state-backed dealer’s group said. 

Vehicle sales growth slowed last year in China in tandem with the nation’s weakest economic growth since 1990. Deliveries are forecast to gain 8 percent to about 21.3 million passenger vehicles this year, according to the state-backed China Association of Automobile Manufacturers. 

“As long as China is growing rapidly, Toyota will need to build new factories there,” said Yoshiaki Kawano, an analyst with IHS Automotive in Tokyo. “They are probably reserving some energy for growth in the longer term, as they are trying to improve the efficiency at their existing plants.” 

To contact Bloomberg News staff for this story: Alexandra Ho in Shanghai at aho113@bloomberg.net; Ma Jie in Tokyo at jma124@bloomberg.net; Masatsugu Horie in Osaka at mhorie3@bloomberg.net

To contact the editors responsible for this story: Chua Kong Ho at kchua6@bloomberg.net Suresh Seshadri 

http://www.bloomberg.com/news/articles/2015-01-21/toyota-poised-to-lose-global-sales-lead-to-vw-on-china 

1.19.2015

Chinese Car Buyers Embrace Online Sales, Dealers Still in the Loop

Car Scoops. January 11, 2015



E-commerce is nothing new, especially in what is probably the world’s most connected country: China. The thing is, Chinese are embracing online sales for new cars, too – and that’s good for business.

Local automaker Geely estimates that it has sold nearly 3,000 units in 2014 online five years after first launching its e-commerce website. “The impact of Internet firms has been a major success for the company”, company spokesman Ashley Sutcliffe said.

Paul Hu, Volkswagen Group China’s chief marketing officer for Greater China and ASEAN, is even more buoyant: “E-commerce in the automotive market is taking off”, he told Wards Auto. “In my personal opinion, online sales in the total car market in China will account for 10 percent in the near future.”

Still, traditional dealers are not left out of the game. One of VW’s joint ventures, Shanghai Volkswagen, is selling cars online through a number of websites; customers place the order in one of the sites but have to close the deal and pick up the vehicle from a dealership.

Kyle Dickie, CEO of dealership best-practices consultancy Sewells Group, thinks that “there is some disruption to come to the distribution model, but it is not imminent. In China, there is an unusually high level of trust still placed in the sales consultant. Consumers want to interact face to face.”

The “disruption” mentioned by Dickie are smartphones. Right now, China is estimated to have more than 500 million smartphone users who, naturally, use their devices buying stuff online. Beijing-based iResearch forecasts that 2014 online retail sales in the country increased by 45.8 percent to 2.76 trillion RMB (US$444 billion).

“Empowered with technology, consumers of mobility services are likely to make choices other than what the automakers and their dealers are offering today”, commented Bill Russo, the managing director of the Gao Feng consultancy firm.

In other words, e-commerce may bring customers to the dealerships – they just might not be interested in the same vehicles the dealer and the brand want to promote.

http://www.carscoops.com/2015/01/chinese-car-buyers-embrace-online-sales.html

1.17.2015

China in 2025 and Implications for Automakers

Gao Feng Insights Report, January, 2015

Dear Friends of Gao Feng, 
  
We are pleased to share with you a report titled: China in 2025 and Implications for Automakers.  As we know, China’s economy has been growing dramatically for more than two decades.  China is now the second largest (and will inevitably soon become the largest) economy in the world.  Yet we are recently confronted with rising concern over the impact of a deceleration in overall economic growth, especially in the automotive sector.

Since 2011, we have seen single digit growth in 3 of the past 4 years, raising questions over the future prospects for the industry.  In this analysis, we seek to avoid the trap of “driving by looking in the rear-view mirror”, and instead look in front of us at the plausible scenarios which may unfold which will impact the auto industry over the next decade.

We believe that China’s economic growth is likely to continue over the next decade, driven by a mix of continued (albeit more selective) fixed-asset investment and growth in consumption.  A broad transformation is expected to continue and will present an environment that is characterized by a long-term and sustained shift towards a middle-income, consumption-based economy.  This trend would lead to a profoundly different economic landscape.

We also believe that discontinuities int eh political, social and economic landscape have the potential to reshape China dramatically by 2025.  While the outlook is positive, there will likely be discontinuities - both upward ad downward - along the way.  The key to sustainable success for businesses in such an environment depends on an ability to anticipate the trends and challenges that are in the “blind spots” today - but which can create disruptive threats or discontinuous opportunities for those who can respond rapidly.  In essence, and “early warning system” is needed which leverages unique insights which can be brought to bear on the question of how the market, the regulatory system, and business models may develop over the next decade in China.
  
We welcome your comments and feedback on our briefing paper or in general about our firm. We would be glad to meet you in person to share our data and perspectives in a fuller manner. Please let us know if you are interested in meeting and discussing directly how we can help you to operationalize these insights. 
  
Thought leadership is core to what Gao Feng does. We will, from time to time, share with you our latest thinking on business and management, especially as it relates to China and China’s role in the world.   
  
  
Best Regards, 
   
Dr. Edward Tse
CEO, Gao Feng Advisory Company
edward.tse@gaofengadv.com
Bill Russo
Managing Director, Gao Feng Advisory Company
bill.russo@gaofengadv.com
Chee-Kiang Lim
Principal, Gao Feng Advisory Company
ck.lim@gaofengadv.com
Tel: +86 10 8557 0676 (Beijing); +852 2588 3554 (Hong Kong); +86 21 5117 5853 (Shanghai)
Gao Feng website: www.gaofengadv.com


1.06.2015

Bill Russo to Brief Investors on the Internet of Vehicles

Coleman Research Group Conference Call
TOPIC:
Building the Internet if Vehicles and Related Smart Car Technologies in China
Date: Tuesday, January 13, 2015
Time:  10AM EST, 11PM China
Venue:  Conference Call
Click here to register (sponsored by Coleman Research Group)
  • Traditional auto ownership model re-shaped by rapid urbanization in China
  • Disruption of the automotive value chain
  • New mobility concepts changing traditional business models
  • Unique context of China’s urban transportation challenges
  • High rate of adoption of mobile device connectivity driving need for connected car technologies
  • Need for OEMs to develop strong relationships with telcos and technology players
  • Companies: Ford (F), General Motors (GM), Volkswagen (VOW), Toyota (TM),Honda (HMC), Fiat Chrysler (FCAU), Nissan (NSANY), Hyundai (HYMTF),Daimler AG (DDAIF), BMW AG (BMW), Continental AG (CON), Valeo (EPA),TRW Automotive (TRW), Mobileye(MBLY), Uber, Yidao, Relay Rides, Baidu(BIDU), Alibaba (BABA) and Google (GOOG)
China is the world’s largest auto market and also has highest number of internet and smart phone users which will likely make it an innovator and incubator of smart car technologies. China’s urban transportation challenges, the high rate of adoption of connected mobile devices, combined with the rapid and aggressive introduction of alternative mobility and vehicle ownership concepts will ultimately compress the time needed to commercialize smart, connected car technologies and services.  Investors, automakers and dealers are optimistic that these developments will dramatically revolutionize the Chinese auto market. As a result, OEMs are investing rapidly in the marketplace to gain first mover advantage in the most promising auto market in the world.


ABOUT OUR EXPERT:
Bill Russo is President of Synergistics Ltd and Managing Director and Automotive Practice Leader with Gao Feng Advisory Company, Ltd. He has more than 25 years of experience in the auto industry. He was formerly the VP of Chrysler Northeast Asia, where he successfully negotiated and secured government approval for six vehicle programs with three different Asian partners. In this time period, he launched a regional holding company as well as two distribution companies and oversaw the industrialization of the first Chrysler and Dodge-branded vehicles in Asia. He holds a U.S. patent for his innovative efforts towards reducing automotive new product development cycle time and is a published author and opinion leader whose viewpoints have appeared throughout several media outlets.

12.20.2014

Chinese Electric-Car Maker BYD’s Shares Plunge

The Wall Street Journal, December 18, 2014


A BYD Co. electronic vehicle is charged at an EV charging station at the company's campus in the Pingshan district of Shenzhen, China, Aug. 5, 2014. Bloomberg News
By Colum Murphy
SHANGHAI—An executive at Warren Buffett -backed BYD Co. defended its business prospects after shares in the Chinese electric-car maker fell as much as 47% on Thursday.

In a conference call late Thursday, company secretary Qian Li said BYD’s operations were normal despite the share plunge and sought to dispel what he called rumors about the company. BYD’s Hong Kong-traded shares regained some ground later Thursday and finished at 25.05 Hong Kong dollars (US$3.23), down 29%.

Mr. Li described rumors circulating in the market about BYD—including suggestions that its founder and chairman had been arrested—as “ridiculous” and urged investors to ignore them.

He also dismissed talk of BYD having large exposure to the troubled Russia market, describing the company’s investment in that country as “very small.”
BYD also produces mobile-phone components and solar panels.

Asked whether the price movement could be related to a selloff in shares by Mr. Buffett’s Berkshire Hathaway investment vehicle, Mr. Li said BYD had been in recent contact with Mr. Buffett but there was no sign that Mr. Buffett was considering a sale. He added BYD didn’t reach Mr. Buffett on Thursday due to the time difference between China and the U.S.

Berkshire Hathaway owns a roughly 9% stake in BYD, according to previous company filings, including about one-quarter of its Hong Kong-traded shares. In the Chinese city of Shenzhen, BYD’s shares fell about 10% on Thursday, the daily limit.

In October, BYD reported a third-quarter profit drop of 26% and said it expects this year’s profit to fall by up to 22%. Auto-sales growth in China has slowed in recent months amid a broader drop in China’s economic momentum.

Overall in the first 11 months of 2014, BYD has sold 384,977 vehicles, down from 458,042 vehicles sold in the same period the year before—a 16% drop, according to data from research firm IHS Automotive.

While the company frequently touts its line of electric vehicles and plug-in hybrids—vehicles that can run on both gasoline and electricity—it relies heavily on sales of traditional gasoline engine cars for the lion’s share of its automotive revenue.

Bill Russo, managing director of consulting firm Gao Feng Advisory, said BYD, like many other Chinese car brands, need to create a brand that appeals to Chinese consumers. “It has to go beyond just being a cheap car,” he said. 

Mr. Li said BYD faces “hot competition” and decreasing margins in the traditional car market in China but said it was transforming into a manufacturer of new-energy vehicles.

China has a long-stated goal of reducing its dependency on imported oil by promoting new-energy vehicles, including passenger cars and buses. China wants half a million such vehicles on the road by next year and 10 times that by the end of the decade.

But in the first nine months of this year, fewer than 40,000 electric vehicles were sold in China, according to data from the government-backed China Association of Automobile Manufacturers. Around three quarters of these were passenger cars. By comparison, around 14.2 million conventional passenger cars were sold in the period.

IHS Automotive researcher Namrita Chow said the high cost of replacing batteries, lack of adequate charging infrastructure and range anxiety—where buyers worry about how far they can travel on a single charge—are all obstacles in the path to high sales growth rates.

She said that BYD had doubled sales of its pure electric e6 car to 2,203 vehicles in the first 10 months of this year compared with the same period last year. Sales for the hybrid Qin had so far reached just over 11,000 vehicles in its first year on sale.

Mr. Li dismissed talk that the Chinese government could be reducing its support of new-energy vehicles, including buses, saying BYD continued to see good order flow for them. “We’re confident on the future of electric buses,” Mr. Li said.
A nearly 50% drop in oil prices over the past six months has pressured green stocks in a number of areas.

“With the oil price down, the global outlook for electric vehicles looks very different from just a couple of months ago,” said Jochen Siebert, a Shanghai-based managing director at JSC Automotive Consulting. “BYD’s electric and hybrid car business will likely be impacted,” he added. 

Write to Colum Murphy at colum.murphy@wsj.com