September 30, 2009
by Bill Russo
The sixth of the Eight Overarching China Automotive Trends That Are Revolutionizing the Auto Industry concerns the rapidly changing structure of the China automotive market and its impact on the competitive landscape. While many Vehicle Manufacturers have reported robust sales in 2009, what may not be understood or appreciated among those who are observing the growth in sales is that this is a market where quantity of sales should not be confused with quality of sales. The China market is now experiencing what many companies doing business in the United States have come to understand for many years: hyper-competition.
With Tremendous Growth Comes Hyper-Competition
As described in detail in Trend #2: Global Redistribution of Assets by Non-Chinese Companies to Capture China Market Growth, China’s vehicle market has more than doubled in size from 4.56 million units (in 2003) to 9.67 million units (in 2008). Global Insight has forecasted that the Asian markets represent the largest growth potential in the global auto industry - with a combined 4.7% compound annual growth rate over the next 10 years (compared with 2.9% in NAFTA). Within Asia, 54% of that growth is expected to come from China. With the promise of tremendous growth, many international firms as well as Chinese firms are encouraged to allocate resources to seize the opportunities presented by the Chinese market.
The high popularity of the April 2009 Shanghai Motor Show further illustrated the attraction of the Chinese market. The show stand covering 170,000 meters attracted over 660,000 visitors with over 900 models on display, over 300 of which were imports. Over 1500 exhibitors were present at this year’s show.
Early-movers in the China market such as Volkswagen and General Motors have enjoyed significant profit margins by occupying mid-size, full-size and MPV segments without a great deal of competition. In such a market environment, profits could be made on products such as the VW Santana and the Buick GL8 minivan – older technologies that dominated their segments with good margins. However, today’s China market no longer offers such an easy road to profitability. Virtually every major vehicle manufacturer is now present in the China market. A recent J.D. Power & Associates study has reported that many of the cars sold in 2009 were in low-end segments that are eligible for tax incentives and that many of these cars earn the manufacturers as little as $100 each.
However, hyper-competition actually began several years ago, with the onset of a phenomenon called “net negative pricing”. In fact, Global Insight reported the following net segment price declines over a four-year period (starting 2004):
- Micro (A-segment): 20.4%
- Small (B-segment): 27%
- Compact (C-segment): 32.5%
- Standard (D-segment): 26.3%
- Luxury (E/F-segment): 12.1%
The future outlook is that local brands and international brands will install more capacity in China, placing even more pressure on pricing in order to increase capacity utilization. Weak brands and older models will become the first casualties as market and competitive forces squeeze them out. The competitive battle can only be won with strong brands and contemporary models that can be delivered profitably to savvy Chinese consumers with choices that demand a competitive price.
The Problem of Overcapacity