Auto.Sohu.Com, November 16, 2011
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in Chinese (中文) : 罗威：入世十年 中国汽车业未来任重道远
by Bill Russo
Since joining the World Trade Organization (WTO) at the end of 2001, the Chinese car market has grown from about 2 million vehicles to over 18 million vehicles sold in 2010, an increase of nearly nine times. In fact, over the past decade from 2001-2010, the compound annual growth rate of the Chinese car market was an astonishing 34 percent. As the largest market in the world, China has taken the center stage in the battle for dominance of the 21st century automotive industry.
However, automotive companies in China today are finding themselves confronted with a different set of challenges from what they were facing just a few years ago. From the demand side, Chinese consumers are becoming more selective and are making more diverse and personal choices: making their own individual choices, not just for their family. Meanwhile, demand growth is increasingly driven by lower-tier (Tier 3 and below) cities more than large and mega cities. The Chinese government has also released more restrictive regulatory requirements for safety, environmental care and foreign investment. From the supply side, almost every international player has recognized China as their largest source of future profit and has thereby committed significant investment. Additionally, Chinese local brands have never been so aggressive in fighting for market share than today. All these challenges are pushing global as well as local vehicle manufacturers to alter their thinking and adopt new strategies to win in the China auto market.
In addition, there are numerous structural problems in the China automotive industry. While light vehicle sales stand at historic highs, overcapacity and lack of scale remain major problems. This is true largely because of the highly fragmented and scattered OEM landscape. China’s auto industry today includes over 100 registered automotive manufacturers. This creates a significant challenge to the health of the many businesses that struggle to sustain operations in an environment where economic growth is by no means assured. Additionally, approximately 70% of passenger vehicles sold carry a foreign brand, which makes it very difficult for Chinese domestic brands to generate sufficient volumes or profit margins to remain economically viable.
This fragmentation also makes it very difficult to focus and allocate resources to the development of critical technologies related to safety and fuel economy. This is an area of particular weakness for Chinese OEMs who have relied on their foreign partners to lead the development of key component technologies.
The remarkable growth of Chinese car market was created in partnership among international and domestic car manufacturers. Foreign manufacturers provided funding, technology and managerial expertise to support the development of Chinese car manufacturers and suppliers. However, Chinese car companies remain dependent on international sources for technology innovation and product development.
The determining factor in whether a car company can compete in the international markets is whether they have the capacity to meet local consumer as well as regulatory requirements. While Chinese firms have learned very quickly how to assemble cars and develop supply chains, they are very inexperienced at the vehicle development and synthesis process. An automobile is a complex engineered system requiring advanced technology and know-how in order to test and validate the achievement of benchmark targets in the areas of performance, fuel economy, safety and quality. It is in this area that Chinese firms are weakest. Chinese vehicles, while improving rapidly, are still not up to the world-class standards required to compete in the mature markets of the world.
Chinese automotive makers typically lack the knowledge and experience of developing core technologies of important vehicle components and doing sub-systems integration. Overseas car companies started by developing and integrating core component technologies internally and have only recently been seeking external outsourcing partners. World-class vehicle manufacturers retain the critical skills that define their brand identity in order to deliver a unique value proposition.
The capabilities of local Chinese OEMs have come a long way in a short time. This is, after all, a relatively new industry for China and the Chinese firms will learn quickly as they grow their share of the domestic market. However, much work needs to be done to gain acceptance of the Chinese consumer of Chinese manufactured goods. This must be the first priority as it stands to reason that if it is difficult to convince a Chinese consumer, it will be even harder to convince a foreign consumer to accept a “Made in China” car. The fact is that with the proper attention to quality management discipline and with the transfer of critical know-how in the area of vehicle synthesis and development, it is indeed possible for Chinese firms to compete globally.
Several Chinese companies are attempting to acquire these capabilities “inorganically” by acquiring the assets of distressed but well-known international manufacturers. Geely’s acquisition of Volvo, and Pangda and Youngman’s bid to acquire Saab are recent examples. It stands to reason that such an approach could significantly shorten the time frame for going global. However, such acquisitions are difficult and often unsuccessful. For example, SAIC’s acquisition of Ssangyong ultimately failed because the interests of both parties were not aligned. Those who dare take on such acquisitions are also wise to learn the lessons from others who have tried – and often failed – to use an acquisition to accelerate the process.
It is clear that China’s auto companies aspire to become leading global auto companies. However, for Chinese brands to successfully compete in the global auto industry they must:
1. Strengthen their domestic base through consolidation
2. Determine the Chinese brand value proposition
3. Build critical vehicle development competencies required to achieve benchmark targets in line with their brand’s Unique Selling Proposition
And China’s policy makers must help by accelerating the consolidation of today’s fragmented auto industry and eliminating the weak brands in order to ensure the survival of the stronger brands.