VW Races With GM for 2013 China Crown as Toyota Struggles

Bloomberg News, December 26, 2012

Volkswagen AG (VOW) will vie with General Motors Co. (GM) for the sales crown among foreign automakers in China next year, gaining share as Japanese carmakers led by Toyota Motor Corp. (7203) struggle to recover amid a territorial dispute.

VW, whose luxury Audi sedans are popular with Chinese bureaucrats, hasn’t held the lead in the country since 2004 and will probably sell 2.7 million vehicles in the country next year to GM’s 2.65 million, helped by eight new or revamped models including the Santana, Golf, Skoda Octavia and Audi Q3, according to industry researcher JSC Automotive Consulting. GM’s new offerings include the Cadillac XTS and three Opel models.

Passenger-vehicle sales in China will probably accelerate and gain as much as 10 percent next year, as a rebound in economic growth gathers strength, according to eight analysts surveyed by Bloomberg News. Chinese leaders assuming power in a once-a-decade handover to be completed in March may introduce economic stimulus to increase domestic demand, Autoforesight Shanghai Co., LMC Automotive and Synergistics Ltd. forecast.

“When the economy stabilizes, Chinese consumers will have more confidence to buy cars,” said Lin Huaibin, a Shanghai- based analyst at IHS Automotive. “A lot of indicators have shown economic improvement since September.”

Foreign automakers are stepping up their investments in China, counting on the world’s largest pool of first-time car buyers to help offset declining sales in Europe. Total vehicle sales may surpass 19 million units this year, according to the China Association of Automobile Manufacturers on Dec. 10.

Sales Crown

Globally, Toyota is poised to take back the title of world’s biggest automaker for 2012, as VW fights GM for second place in the final week of the year. Toyota said today its vehicle sales may rise 2 percent next year to reach a record 9.91 million vehicles, spurred by overseas demand.

In China, SUVs will remain the fastest-growing segment as it is “under-penetrated” and caters to the preference of Chinese consumers for roomier vehicles, while smaller cities will become more important for sales, said Steve Man, a Hong Kong-based analyst at Nomura Holdings Inc.

The new leadership, helmed by Communist Party chief Xi Jinping, must decide the pace of market-driven change to boost consumer demand and balance the role of exports and investment.

China said it will seek a higher “quality and efficiency” of growth next year, and target “sustained and healthy development,” the state-run Xinhua News Agency reported Dec. 16 after a meeting of senior leaders in Beijing.

Economic Status

“The new government probably doesn’t want to start its tenure with a weak economy, so in China that usually means more investment spending,” said Bill Russo, president of Synergistics Limited. “The commercial-vehicle segment could be a beneficiary of any economic stimulus as businesses replace products like trucks for construction projects.”

Sales of commercial vehicles, which include buses and trucks, are down 6.8 percent in the first 11 months of this year, compared with a 7.1 percent gain in passenger vehicles, according to auto association data.

The pace of sales may slow in China if more cities implement or tighten measures to control vehicle populations to curb pollution and traffic congestion.

By 2020, another 20 Chinese cities may exceed the car- density threshold of 250 vehicles per kilometer of road, according to McKinsey & Co., which may prompt officials to impose similar restrictions to those in Beijing, Guangzhou and Shanghai.

Santana, Skoda

For Wolfsburg, Germany-based VW, a revamped Santana sedan and expansion of its Skoda brand will help the automaker push into the less-developed Chinese cities, which China Executive Vice President Soh Weiming said last month was its “bread and butter.”

The company didn’t respond to e-mail and phone requests for comment on its plans for China.

The Santana, which starts at 84,900 yuan ($13,625) for the revamped version, is the 10th best-selling car in the country this year, according to the auto association. GM’s Buick Excelle topped the list, with Ford Motor Co. (F)’s Focus in second place and the Chevrolet Sail and Cruze in third and seventh. VW’s Lavida, Passat (PSAT), Jetta, Bora and Hyundai Motor Co. (005380)’s Elantra Yue Dong make up the rest of the top 10 models.

Sales for VW’s mass-market brand Skoda, the Czech carmaker that it took over after the collapse of Communism, rose 6.8 percent to 181,900 units in China in the first nine months, company data show. The country became Skoda’s biggest market in 2010, three years after it started local production.

VW Expansion

“Volkswagen is currently in a position where they can look with a lot of confidence into the next year,” said Klaus Paur, the Shanghai-based global head of automotive coverage at researcher Ipsos. “The Volkswagen portfolio is quite wide. If you take it from a group perspective, maybe they could be number one.”

Along with its joint venture partners, Volkswagen will invest 9.8 billion euros ($13 billion) in new production facilities and products through 2015. GM said last year it planned to invest as much as $7 billion in China in the five years to 2015.

GM could fend off VW with new models coming up next year, such as the Buick Lacrosse and Regal, according to IHS.

“We don’t get too hung up on trying to, in a single year, be too concerned about number one position,” Bob Socia, GM China president, said in a Dec. 18 interview in Shanghai. “But make no bones about it, we’re here to win.”

More Showrooms

GM has the capabilities in manufacturing, dealership and product to compete with the “best of them,” he said. The automaker plans to open 400 more showrooms across its brands next year in China, bringing its total to about 4,200 in the world’s largest vehicle market.

The Detroit-based automaker’s joint venture with SAIC and Wuling Motors, which builds mini-commercial vehicles, will construct a third manufacturing plant in China and increase production capability to 2 million annually at the end of 2015.

In China, Japanese automakers will play catch-up as they step up efforts to regain market share lost after tensions soared over sovereignty of a group of uninhabited islands known as Senkaku in Japan and Diaoyu in China.
Japanese automakers may suffer production cuts into 2014 and lose a combined 650,000 units in vehicle output if tensions don’t abate between the two countries, according to IHS estimates.

That could hurt Toyota, Nissan Motor Co. and Honda Motor Co. (7267)’s plans to reach first-time buyers in smaller Chinese cities, where car sales is estimated to grow around 10 percent annually till 2020, compared with 4 percent in larger cities like Shanghai and Beijing, according to McKinsey.

‘Very Tough’

The situation in China is still “very tough,” Akio Toyoda, Toyota’s president, said on Dec. 20 at a briefing of the Japan Automobile Manufacturers Association, which he chairs. “I hope for the situation to recover as soon as possible.”

Sales of Japanese brands began to show evidence of a recovery in November, according to the Chinese auto association.

“The winter for Japanese brand cars is over,” said Dong Yang, secretary general of the industry group, in Beijing on Dec. 10. “The winter for China’s indigenous auto brands continues. They may face even more challenges next year than this year.”

Chinese automakers’ collective market share in the first 10 months slipped to 41 percent from 42.2 percent a year earlier, according to Mizuho Financial Group Inc. (8411)

Market Share

Foreign automakers will continue to gain market share at the expense of local Chinese carmakers as the Chinese consumer becomes more sophisticated and differentiates between products and brands, said Max Warburton, a Singapore-based auto analyst at Bernstein.

Carmakers like VW will compete to hold on to existing customers like Zhou Weiguo and try to win new converts.

“The quality of a Volkswagen car is undisputed,” Zhou, 54, said while browsing in a Volkswagen dealership in Shanghai on a weekday afternoon. “There isn’t much of a need for maintenance and the cars don’t age or deteriorate quickly.”

The Shanghai schoolteacher bought his first car -- a Santana -- more than a decade ago and plans to stick to the brand. He is considering the Tiguan SUV to replace his Touran.

“If I had to change a brand for my next car, I might consider an Audi,” he said.

To contact Bloomberg News staff for this story: Alexandra Ho in Shanghai at aho113@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

Click here to read the article at bloomberg.com


Credit makes inroads on China forecourts

The Financial Times, December 26, 2012

Click here to read the article at FT.com

In China, cash is still king at the car dealership. But many younger car buyers in the world’s largest auto market are rapidly taking on western habits – including using credit to buy a more expensive car than they could otherwise afford.

Carmakers, both foreign and Chinese, are keen to encourage a more profligate attitude in a country whose financial conservatism sets it apart. Some have recently set up finance companies in the hope that credit will play the role in China that it plays in Europe and the US: boosting demand for their products.

Many homes are paid for in cash in China, so buying a car with cash is considered no big deal. The idea of paying by credit is catching on among the younger generation, though older Chinese still abhor the notion. As recently as five years ago the percentage of buyers using credit to buy a car was tiny. But that is changing, say auto analysts.

Eva Chan, who is buying a new car, says she could afford to pay cash but has decided to use credit because a local bank is offering an interest-free loan as part of a dealer promotion. She ends up with a Rmb200,000 ($32,000) car, bought with Rmb120,000 of credit.

“The vast majority of customers throughout China continue to pay in one lump sum,” says John Lawler, head of Ford Greater China. But, in the past few years, “the benefits of financing have become much better understood . . . although [it is] still well below other markets around the world”, he adds.

General Motors, the market leader in manufacturer finance through its GMAC-SAIC Automotive Finance joint venture, has had its customer base more than double since 2010 to nearly 900,000 in August. GMAC says the car finance market is growing faster than the car market itself – where sales are expected to end the year up 5 to 10 per cent – and forecasts that market penetration will as much as double by 2020 to about 30 per cent.

Minsheng Bank, in a report this month, says outstanding consumer car loans last year totalled Rmb300bn, about a quarter from car finance companies, a quarter from credit card loans and 40 per cent from commercial banks. That was double the figure for 2010 and could exceed Rmb1tn within 10 years, the report says.

But GMAC says that, while market penetration in China could reach that seen elsewhere in Asia, it is unlikely to match US or European levels.

Bill Russo, head of the Synergistics auto consultancy in Beijing, puts the penetration rate of all forms of auto finance – provided by manufacturers through their credit companies and by banks – at 15 to 20 per cent, compared with 92 per cent in the US, 70 per cent in Germany and 74 per cent in the UK.

“The Asian mindset about credit is quite different,” Mr Russo says, noting that market penetration in Japan is still below 50 per cent. “Maybe 40-plus per cent is the ceiling in China.”

Global carmakers are eager to extend the availability of finance in China, he says, because credit expands the pool of potential buyers and shortens the life cycle of car ownership because those who lease a car will often change it when the contract ends.

South Korea’s Hyundai Motor this year set up a car financing joint venture with Beijing Automotive Industry Corporation. Lee Kyo Chang, chief executive of Beijing Hyundai Auto Finance, says that while only 15 per cent of buyers use credit, 30 per cent say they would be willing to. Commercial banks, Mr Lee says, approve only half of applications, so car financing companies, which have less conservative approval policies, can step into the breach.

BMW launched a Chinese car finance joint venture in 2010 with Brilliance China. Kirk Cordill, its chief executive, says establishing a credit history for potential buyers is not easy. “Sometimes we have to do home checks to make sure the customer really lives where they say they live,” he says. In the west, most car finance companies would only visit a customer’s home to repossess a vehicle in default.

The shift in China’s attitude to credit is only beginning, say market analysts such as Klaus Paur, global head of automotive research at Ipsos. “In the past five years there has been a tremendous change in how people approach their lives in China, and this extends to buying a car, and using a car, and financing a car, and that is a very significant change,” he says.


Competing in the China Truck Market - An Introduction

December 17, 2012

by Bill Russo

Driven by strong economic growth and infrastructure investment, the China auto industry has enjoyed explosive expansion in the past decade, at a compound annual growth rate of 25% over this period.  However, the year-over-year growth rate slowed down to 2.5% in 2011 due to a combination of policy and economic factors, such as the termination of the tax incentive policy, the credit crunch, purchase restrictions in China’s largest cities, supply-chain disruptions and the global debt crisis. 

This market slow-down has continued into the first seven months in 2012.  According to the China Association of Automobile Manufacturers (CAAM), year-to-date automobile sales are 10.98 million units in the first seven months, only 3.6% higher than last year.  Although CAAM maintains their optimistic forecast of full year growth as 8% higher than 2011, few analysts doubt that China’s automotive sector has arrived at an inflection point where future sales will expand at a more stable and moderate growth rate.

Commercial vehicles in China consist of trucks and buses, which have been negatively impacted by the economic slow-down.  While declining by 7% from 2010 to 2011, the commercial segment has seen a further decline of 9.4% in the first seven months of 2012 to 2.24 million units sold.

Over the past decade, the truck sector has grown to meet the demands from China’s expanding economy.  Historically, the sales of MDT and HDT accounts for 30% to 35% of the truck sector, which tripled in size from 409,000 units in 2001 to 1,287,000 units in 2010.  This growth momentum has not been linear.  Instead, several waves of fluctuations have occurred caused by macroeconomics and policy changes which directly impact the amount of capital available to businesses that typically invest in commercial trucks.  Government policies, which directly determine the levels of investment in infrastructure, along with measures to introduce stricter emission standards, have resulted in big fluctuations in the market.

In particular, the large stimulus package launched in 2009 sharply accelerated demand.  “Cash-for-clunkers” schemes introduced in 2010 helped drive replacement demand as well as improve the quality of the overall vehicle parc. When nearly all government stimulus measures expired in 2011, the truck segment entered a downward cycle and is expected to go down to 869,000 units sold in 2012.

Contrary to the US and Europe, where most sales are replacement sales, in China MDT & HDT are predominately new sales which increase the size of the fleet.  Though the parc of HDT and MDT has reached 3.9 million units by 2010, there is still a large gap relative to the developed markets in terms of per capita vehicle ownership.  Moreover, several fundamental drivers will prevail in next few years to push forward the demand for MDT & HDT.

First, industrialization and urbanization in China drives higher fixed-asset investment.  Fixed asset investment of China (adjusted by Purchase Power Parity) is 1.3-1.6 times higher than that of Western Europe and the U.S.  Such huge investment is mostly spent on the railway, highway and other infrastructure projects, which in turn drives demand for more commercial (mainly heavy duty) trucks.  Meanwhile, China’s current urbanization rate is about 50%, and this will increase to over 60% by 2020.  Clearly, these trends will continue to fuel higher demand for commercial vehicles for the foreseeable future.

Second, cargo transportation demand of China is larger than that of the U.S with a higher growth rate.  High cargo transportation demand is a result of inefficient logistics, urbanization and the size of country.  All of these factors will push higher demand for Long-Haul HDT.

Third, the replacement cycle of HDT/MDT in China is much shorter than that of the developed markets.   This will create significantly more replacement buying in China than international markets.  In China, line-haul HDT can typically only be used for 0.9 to 1.1 million Km while in the US, the number is as high as 1.5 to 1.7 million Km. As a result of such differences, the average age of MDT/HDT in China is only 6 years, much lower than 11.3 years in US.

Taking a broader look at the global context, several macroeconomic and sociopolitical developments are altering balance of power in the automotive industry.  These include the recent financial crises, which have effectively resulted in a redistribution of global economic power, altered the global trade balance, and have renewed concerns with energy security and environmental issues.   The growing size and influence of the Asian economies – especially China – are triggering a transformation of the automotive business model, with automotive enterprises seeking to leverage the momentum of the region.  The recent shift underscores the importance of the Asian economies to the future growth and profitability of the global auto industry.

Most of the recent growth in the world’s auto industry has been in the Asia-Pacific region, and more than half of that growth over the next decade is forecasted to come from China.  Similar regional demand migration also applies to the MDT/HDT sector. 

Driven by continuous industrialization, urbanization and cargo transportation demand, China’s MDT/HDT market is anticipated to come through the current down-cycle and experience a strong rebound thru 2015.  As illustrated in Figure 4, by 2020 the parc will increase by almost 7 million to 10.7 million units (up from 3.8 million) and sales forecast for 2020 is 1.7 million units (up from 1.3 million in 2010).

Going forward, several overarching market trends will shape the MDT & HDT demand structure: 

  1. Line-haul HDT demand will be even larger than vocational trucks in China resulting from the comparably lower professional level and lower operational efficiency of the logistics infrastructure.   This creates opportunities for international entrants who have a strong on-road tractor line-up.
  2. A push to meet stricter fuel economy and emissions standards will drive a need for advanced technology and accelerate the truck manufacturers’ emphasis on technology upgrades and alternative fuel application. 
  3. The source of OEM’s profitability will increasingly shift from new truck sales to after-sales services, including vehicle logistics, value-added services, parts sales, and auto finance, etc.  

All of the trends noted here will raise the level of interest among China’s local truck manufacturers to form alliances international truck manufacturers.

The growing influence that China wields is not simply derived from the size and scale of its domestic market, which is an increasingly important focus in a growth-challenged industry.  Increasingly, financially weakened automotive companies and their suppliers must strive to deepen their participation in the China market if they hope to remain viable. It only stands to reason that companies that have weakened positions in their domestic market would benefit by redistributing some of their focus to the growth markets and in particular China.

In summary, China’s HDT/MDT market is expected to come through the short macroeconomic cycle into a sustainable growth track from now through 2020, and global truck makers should position themselves to participate in the market by forming alliances to leverage their unique capabilities in the areas of product, technology and after-sales services.

This is the first installment in a series on the China Commercial Vehicles market.  Click here to read the second installment.