The year 2009 was a year of tremendous historical significance to the China auto industry. Triggered by the global financial crisis, the global automotive industry witnessed a year of unprecedented restructuring, as many industry icons struggled for their survival. After peaking in 2007 at 70 million units, the global automotive markets have experienced a contraction of nearly 10 million units over the past 2 years. The mature “triad” markets of North America, Western Europe, and Japan have led this decline.
China is the noteworthy exception. In 2009, China will easily surpass the US in total car sales to become the world’s largest automotive market. China’s vehicle sales will surpass 13 million units – approximately 3 million units more than the second largest market, the United States. To highlight how fast things have changed, auto sales in 2009 will be about the mirror image of sales in these same markets in 2008, when the US sold a little over 13 million versus China’s 9.7 million units. While it may not be apparent to the rest of the world, these initiatives are accelerating not just China’s economic development – they are also accelerating the transformation of the automotive business model, as global auto makers shift their focus to the growth markets, led by China.
The astonishing growth in car demand is a direct result of many factors that are fueling China’s economy. This includes aggressive tax cuts as well as a significant investment made in the development of the infrastructure to support transportation. The China government views the automotive industry as a “pillar” of its economy since it brings technology, jobs and investment to the economy. As such, several agencies of the China government play an active role in sponsoring initiatives to further stimulate automotive development and growth.
Driven by the onset of the global financial crisis, the Automotive Industry Stimulus Plan published in early 2009 took specific measures designed to spark the growth of consumer demand. Measures including the reduction of sales tax for cars below 1.6L engine displacement, along with subsidies for new minibus or light truck sales for rural residents have accelerated the auto market expansion particularly in China’s lower-tier cities, helping to boost the performance of the manufacturers of these smaller vehicles.
While aggressive tax cuts and subsidies have been behind much of the demand growth in 2009, the question now turns to whether this robust demand growth can be sustained in 2010. While very few expect a repeat of the 45% growth experienced this year, most auto executives believe that the fundamentals are there for growth to push sales up at least 10 percent in 2010 even without the incentives.
A key reason for continued growth is the rapid development of China’s lower tier cities. While China’s explosive automotive growth has been most evident in the Tier 1 cities, it is important to note that the trends of urbanization and growth of per-capita GDP will continue into the foreseeable future. As these factors are directly linked to the growth in demand for automobiles, one can expect a continuation of growth next year and thereafter. Urban wealth accumulation is undoubtedly fueling the growth in automotive sales. The fact that 85% of all vehicles are sold to urban residents is a clear sign of the relationship.
There is no mistaking the trend of permanent migration of rural population to existing urban areas. Looking forward, it is expected that nearly two-thirds of China’s population will be in urban areas by 2020. This represents a whopping rise in urban population of nearly 200 million people in just over 10 years. Essentially, China creates the population-equivalent of a city of between 1.5 – 2 million people each month! It is no wonder why China’s cities are continually under construction.
Independent of whether stimulus measures are extended, it is likely that next year’s demand will likely shift to from an “exponential” to “stable” path. As income levels continue to rise, demand may begin to shift towards vehicles and segments offering more appealing content and features, which may create opportunities for manufacturers to improve their product mix.
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 globally have come to call “hyper-competition”.
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, strong 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”. 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.
In 2010 we can expect to see even more intense competition among the foreign and domestic brand vehicle manufacturers as they attempt to capture growth opportunities in China. As this is happening, the local manufacturers will strive to upgrade their brands and product portfolios to meet the more upscale image aspirations of Chinese consumers.
The dramatic shifts that have occurred over the past year in the structure and brand portfolios of the vehicle manufacturers are simply the early stages of a process of asset reallocation and global realignment that will unfold over many years. These trends are reshaping the brands, products and global footprint of those who hope to prosper in the 21st century automotive industry. Indeed, China has taken center stage in the battle for global auto industry dominance.