The fifth of the Eight Overarching China Automotive Trends That Are Revolutionizing the Auto Industry deals with how the growth and development of the China automotive market changes the automotive business model for the global auto industry. While it is obvious that China already has become the world’s factory for “everyday low price” merchandise, the ramifications of the rapid development of the Chinese automotive base on the global auto industry may not be as intuitively obvious. I call this trend "Utilization of China's Automotive Capacities for Global Expansion", but it is not simply about exporting finished vehicles from China. Rather the more significant trend is how other elements of the automotive value chain are impacted by the development of China's automotive capacities and capabilities.
China has rapidly become the largest car market in the world. For the first half of 2009, China posted sales of 6.1 million units versus 4.8 million vehicles sold in the US market. It now seems like all the ingredients are there for the “Chinese automotive factory” to expand to the global markets. In fact, much of the content in cars sold in the US and elsewhere today already does come from China. Because a significant percentage of the total cost of a car is in the manufactured components, there has already been a significant movement of the production of supplied parts to China. A great many of the components used in cars today either are or can quickly be manufactured in China. This is purely driven by the efficiencies gained from sourcing in China. As noted in the NPR piece U.S. Cars Have a Little Bit of China: what you may not realize is how much Chinese content may already be in your current car. However, our focus here is on the globalization of China’s automotive capacities.
Despite the rally in China’s domestic sales, China’s largest car exporters reported fewer export sales in 2009 when compared with last year. China auto insiders have pointed to the overall decline in worldwide demand as the reason, particularly in such key markets as Russia where protectionist measures have had a direct impact on vehicles entering the market. But this is not a complete explanation. The challenges faced by China’s domestic companies in their efforts to go global were covered in detail in my previous article entitled The Path to Globalization of China’s Automotive Industry (posted on this blog on May 18, 2009).
As a result of the unprecedented restructuring of the global automotive industry, several OEMs and suppliers have filed for Chapter 11 bankruptcy protection, and are in the process of restructuring and selling assets. Going forward, global automotive companies have been forced to radically and often involuntarily rethink their global footprint. Several examples have already been noted in TREND #2: Global Redistribution of Assets by Non-Chinese Companies to Capture China Market Growth. Clearly, the global center of gravity of automotive strength is shifting east.
If we look out over the next decade, one can with confidence anticipate a resumption of global auto market growth, particularly fueled by economic recovery and robust demand from emerging markets. This will create many opportunities for the reconfigured industry with its new “Asia –centric” footprint.
Leveraging Regional Automotive Capacities and Capabilities
The reality of the 21st century globalized auto industry is that businesses models must be redesigned to fully leverage the capabilities that are now accessible in newly emerging markets. Unfortunately, in order to become global, most automotive OEMs have attempted to export a business model optimized for their home market to their international locations. Migrating development capacities to markets that lack the competency to perform the work misses the entire point of globalization. Pursuing cheap parts or cheap labor is ultimately self-defeating when doing so robs an organization of its core competencies, thereby accelerating their demise. Similarly, exporting a business model designed for the home market to foreign markets only serves to limit the ability of the organization to embrace the capabilities of the foreign market.
Automotive manufacturers in concert with their key stakeholders must redefine their business models for the new reality of 21st century competition. Going global is not a simple transplant of the current business model to a foreign location. This implies a transformation of the entire automotive value chain to leverage the opportunities made possible by globalized capabilities. It involves redesigning business processes across the value chain in order to deliver to the customer a brand with a Unique Selling Proposition (USP) relevant to the local consumer. This will require that 21st century global auto companies fundamentally rethink their entire value chain from the consumer back through sales and service, production, supply and R&D. Key stakeholder groups, including the national governments with an interest in the global competitiveness of their domestic auto industry, must contribute to this development.
Businesses capable of leveraging global capabilities will ultimately be able to deliver a relevant USP at much lower cost. The Logan produced by Renault in India is one good example. Through engine re-engineering and parts simplification, Renault successfully adapted this car to be more cost efficient and easy to repair for Indian customers.
International OEMs are doing two types of differentiation in overseas markets, such as China. The first practice is the local adaptation on top of existing platforms. This is represented as changes to styling, functions and features to meet local regulatory requirement and market tastes. Recent examples are extended wheelbase luxury cars such as Volvo S80L and Audi A4L, the refreshed Buick Regal and LaCrosse, and the Hyundai Elantra Yuedong. Excellent sales have resulted from delivering products tailored to the local consumer taste - delivered at a cost made possible from the cost efficiencies and scale achievable in the China market.
The second type of differentiation is development of a brand new vehicle “top hat” (uniquely styled upper body with common chassis and powertrain). Products such as the Lavida by Shanghai VW are excellent examples of low-cost derivatives from a global VW platform tailored to the taste of the local consumer.
China’s Emerging Role in the Global Auto Industry
Over the next 5-10 years, China will be the world largest auto market, and for reasons noted in TREND #4: China's Investment in New Energy Vehicles and Associated Infrastructure also the most fuel-efficient market. China’s sales growth will be also fueled by small displacement cars demand from those 1st time buyers from Tier 3 and 4 cities. This has a profound impact on China's capacity to leverage the scale and competencies which accrue from becoming the largest production base for energy efficient vehicles.
From the supply side, we can foresee the trend of consolidation of vehicle makers, growth of local brands, and development of New Energy Vehicles. The future belongs to those who can extend their capabilities beyond low-cost production and supply to areas of world-class R&D and brand management - essential steps on the path to globalization. It is important to note that opportunities to integrate these capabilities into the business system are available to both local firms as well as multi-national companies. One of the poorest assumptions made by industry analysts when observing the China auto market is they often assume that only Chinese firms will ultimately benefit from the growth of the Chinese market - and they must therefore eventually dominate the global industry. This is a simplistic view, particularly when one considers that foreign brands still hold about two-thirds of the share of the Chinese domestic market.
However, Chinese auto companies are developing rapidly and aspire to become global companies. SAIC and FAW already possess significant scale advantages as a result of their successful JVs. FAW’s own brand B50, B70 and Xiali products are well received by market. Chang’An group has recently demonstrated market leadership and capability in the small car segment. Chery has developed full range of products with their own platforms, transmissions, and engines.
One must also take note of the astonishing rise of independent companies such as BYD, Great Wall and Geely. BYD – a cell phone and battery maker aspiring to become a leader in electric vehicles has clearly startled the world by delivering the first mass-produced plug-in EV. Several of these independent companies can become successful global car companies.
Several Chinese companies may prove capable of becoming icons of the 21st century global auto industry. However, they must also learn the lessons from the failure of the 20th century industry icons, who ultimately became “healthcare and insurance providers backed by vehicle sales”.
In the next posting in this series, I will describe the trend "Hyper-Competition Across the China Automotive Market Segments".
Click here to read this article on GLG News
Click here to view article published in Gasgoo.com China Automotive News
Click here to read this article published in GlobalAutoIndustry.com CHINAtalk