China’s Innovation Challenge: Reinventing the Automobile

by Bill Russo

Click here to read this article at auto.sohu.com

in Chinese

in English

In 2010, China's automotive industry achieved world record sales of 18.06 million units, a 32 percent rise from 2009.  However, about 70% of the sales came from foreign brands. In spite of great progress, China’s domestic automotive industry is still in its infancy, and still lacks core technology development and innovation capabilities.  The strong growth in automotive consumption means that China will continue to attract foreign companies to invest and cooperate in the development of technology that is relevant to the China auto market. As the world’s largest automotive market, China has the opportunity to assume a leadership position in defining the standards and architecture for automobiles in the 21^st century. 

One such development challenge is in the development of energy saving and new energy vehicles. The rapid growth in the consumption of automobiles has a direct impact on air pollution, energy reliance and traffic congestion. For these reasons, the Chinese government has actively promoted the development of alternative energy vehicles.  The development of a domestic electric vehicles industry has been set forth as one of seven key strategic industries in the 12^th five-year plan.  The government is investing 100 billion RMB over the next 10 years and has set an ambitious target to have between 5 – 10 million alternative energy vehicles on road by 2020.  Domestic auto manufacturers have responded with demonstration projects, and investment is being made in building the infrastructure needed for charging and servicing electric cars.  However, market acceptance of these solutions remains limited, since the purchase costs of the technology outweigh the operation cost savings when compared with cars powered with internal combustion engines.

Over the next decade, we can expect the Improvements in EV technology can help reduce the cost of ownership gap. Closing such a gap will require innovation in the core battery, battery management system and electric motor technologies of the electric vehicle.  While China possesses several resource and infrastructure advantages, it is clear that Chinese automotive manufacturers lack overall vehicle and drivetrain systems engineering capabilities that will be needed to achieve the necessary breakthrough to drive market acceptance of EVs.  Such capabilities should be developed in partnership with multi-national players in order to accelerate the process.

Though China has the opportunity to lead the commercialization of EVs, it must be open to overseas as well as non-traditional partners (including new entrants) in the EV ecosystem.  Companies that provide integrated drivetrain system solutions, as well as companies from outside the traditional automotive ecosystem (such as utility and infrastructure servicing companies), must play a role in the commercialization of EVs. Chinese automotive manufacturers should conduct joint research and development with such organizations, and pursue new business models in partnership with the government to create solutions that make economic sense to consumers.

China’s automotive industry developed rapidly as a result of policies that encouraged foreign investment to realize rapid creation of a domestic supply and production system to mass-market affordable transportation solutions for Chinese consumers.  Repeating this success for electric vehicles requires even more collaboration to achieve mass-market acceptance. China has the opportunity to lead the reinvention of automotive propulsion technology. However, this cannot be achieved efficiently or effectively without assimilating leading technologies from around the world toward achieving the ambitious targets for the electrification of transportation. Industrial policies that encourage foreign investment in the development of the EV market should be pursued. The talent and technology spillover will accelerate the development of China’s domestic automotive industry.

China’s industrial strength is derived from its ability to leverage its huge domestic market to encourage rapid introduction and assimilation of technology from the best global companies with the goal of “making breakthrough innovations affordable” – this is the Chinese value proposition.  The technology sources needed to achieve China’s electrification strategy should not be associated with national flags.  China’s automotive manufacturers should strive to make such innovations affordable to mass-market Chinese consumers through the scale and cost benefits of producing such solutions in China. 

BMW Dangles 19% Discounts as China’s Luxury Market Cools: Cars

Bloomberg News, October 4, 2011

China is turning into a buyer’s market for luxury cars as dealers forBayerische Motoren Werke AG (BMW), Daimler AG (DAI) andVolkswagen AG (VOW)’s Audi offer discounts to maintain sales as demand cools.

In Beijing, BMW dealerships are giving markdowns of as much as 19 percent on a 3-series car, while some Mercedes dealers are selling theC-Class Elegance model at 20 percent less than the suggested retail price, according to cheshi.com, a pricing guide tracking more than 3,000 dealers in the country.

BMW, Daimler and Audi, the three largest luxury carmakers, face slowing sales growth and falling prices in China, the world’s largest automobile market, as some cities impose driving curbs and the central bank tightens lending. The growth in demand for high-end vehicles cooled to 29 percent the first eight months of this year from 48 percent in 2010, according to researcher J.D. Power & Associates.

“We’re in a cycle of dropping prices,” said Scott Laprise, a Beijing-based analyst at CLSA Asia Pacific Markets. “Dealers are worried about sales slowing and are cutting selectively in the luxury segment. They see where the overall market is going. They want to be preventive and keep their sales going.”

‘Aspirational Buyers’

A tightening Chinese economy may cause “aspirational” buyers, such as those in mid- to upper-level management jobs, to rethink or delay luxury purchases, Laprise said.

China’s central bank raised interest rates five times in the past year to curb inflation, and the city of Beijing started restricting the number of license plates available beginning in January to fight pollution and congestion. The measures are contributing to slowing car demand, according to analysts at CLSA, J.D. Power and Booz & Co.

BMW, Daimler and Audi are targeting record sales in 2011 on growing wealth in China, which overtook Germany to become Audi’s largest market this year. Rising affluence has helped luxury brands outperform growth in the overall auto market, which the China Association of Automobile Manufacturers forecasts will slow to 5 percent this year from 32 percent in 2010.

Audi A6L

Even so, high inventory levels for luxury brands are pressuring Chinese dealers to cut prices, J.D. Power said in a Sept. 11 report.

“While we expect luxury to outperform the sector, we are seeing early cracks in sales slowing and discounting,” CLSA’s Laprise said.

Audi’s A6L, China’s most popular premium sedan last year, sells for as much as 16 percent below the suggested retail price in Beijing’s Fengtai district, according to cheshi.com, which started tracking car prices in 1999 and says it has provided consumers data for as many as 7 million cars.

Fiercest Level

Competition in the local passenger vehicle market reached its fiercest level this year since J.D. Power first started tracking sentiment in 2003, the researcher said Sept. 29. Chinese buyers can choose from 471 models across 94 brands, and two in three consider more than one model before making their purchase, it said.

Softening demand has cut or eliminated waiting times for high-end models, and the biggest discounts are offered in large cities such as Shanghai and Beijing, according to cheshi.com. In September 2010, customers waited about three months for entry- level luxury sedans such as aBMW 3-series or Mercedes C-Class, according to the vehicle pricing guide. Now, there is no wait for these models.

‘Cars Are Cheaper’

“Competition in the industry is stiff, and the automakers are bringing in more vehicles,” He Guo Chang, a 50-year-old artist in Jiangsu, China, said during a visit to a Mercedes dealership in Shanghai, where he was shopping for a sport- utility vehicle. “Luxury cars are cheaper, and there are vehicles readily available.”

Nine years ago, He had to wait two months for his first luxury car, a 480,000 yuan ($75,000) Mercedes-Benz E-Class sedan, even after paying 80,000 yuan on top of the sticker price to speed up its delivery.

Price cuts have gotten steeper in the past year. Consumers can drive away with a C-Class sedan for 7,000 yuan less than a year ago, data from cheshi.com shows, even after Daimler introduced a revamped version in July.

“The market has slowed, but last year’s huge rise was unsustainable,” said Leon Tang, a 32-year-old executive general manager at BMW dealer Shanghai Baozen Auto Sales & Service Co.

Even if growth may have peaked, luxury carmakers say they expect to reach their sales targets this year.

‘Strong Growth Momentum’

Daimler is on track to meet its goal and expects “considerable” market growth to continue, said Arnd Minne, a Beijing-based spokesman for Stuttgart, Germany-based company.

“Mercedes-Benz has maintained its strong growth momentum during the first eight months of 2011 through sales of 123,590 units, an increase of 41 percent,” Minne said in an e-mail. “For most of our key models, pricing has remained stable and consistent.”

Martin Kuehl, a spokesman for Audi in China, said the carmaker doesn’t have “substantial incentive programs” in the country. In the first eight months of 2011, the Ingolstadt, Germany-based company sold 196,534 cars in China, including Hong Kong, an increase of 29 percent from a year earlier, he said.

Audi expects China deliveries in 2011 to top 300,000, exceeding those of Daimler’s Mercedes-Benz.

BMW

BMW is confident it will achieve record sales in China this year, said Lu Yi, vice president of sales at its local unit.

“It is predictable that the Chinese car market will keep growing at a comparatively lower rate,” Lu said in an e-mail. “BMW has maintained a strong and sustainable growth.”

The Munich-based company raised its 2011 profit and sales forecasts on July 12, citing demand for its vehicles in markets including China. Sales figures for August nonetheless indicate a slowdown for the high-end carmakers.

BMW increased deliveries 6 percent for the month, compared with a 67 percent surge to 169,058 vehicles during the first eight months of the year, London-based Credit Suisse AG analysts Arndt Ellinghorst, Erich Hauser and George Galliers wrote in a Sept. 5 report.

Mercedes-Benz

Mercedes-Benz sales in China and Hong Kong grew 3.2 percent last month, the company said, down from its 41 percent increase in the first eight months. Audi sales in China and Hong Kong rose 26 percent in August, according to the company, compared with the 29 percent rate for the first eight months.

Luxury vehicle makers will need to expand into less developed cities to tap the next wave of demand, as wealth in those regions grow and more developed cities restrict driving, said Bill Russo, a senior adviser at Booz.

“Luxury brands concentrated in areas where they have historic strength, not in the areas that are growing the fastest,” Beijing-based Russo said. “If you look forward in time, you have to look to the lower-tier cities for growth.”

Click here to read the article at bloomberg.com