Plausible Scenarios
for China in 2025
Urbanized world
China has gone through rapid urbanization over the past few
decades, with urban population share rising from 17.9% in 1978 to 53.7% in
2013. City clusters such as
Beijing-Tianjin, Shanghai and Guangzhou are home to 18% of China’s population
and generate 36% of the nation’s GDP.
Cities are the main engines of China’s unparalleled economic growth in
the past few decades. Nonetheless, the
development is highly unbalanced with urbanization rates of 62% in the coastal
regions, but only 44%-48% further inland.
The urbanization momentum will continue, on a size and scale
never before experienced in history. By
2025, 65% of Chinese citizens will live in high-density urban population
centers. This will no doubt place significant stress on the environment as well
as the urban transportation infrastructure, which is already struggling to keep
up with the current urban population.
While limits placed on car registrations has limited growth rates in the
more mature coastal tier 1 and tier 2 cities, China’s automotive industry will
continue to expand with a steady stream of first time purchasers from
lower-tier cities joining the repeat buyers and upgraders of the more mature
regions. Emergence of the less
developed lower-tier regions will be the key driver to incremental demand for
personal mobility.
Demand for mobility solutions will need to anticipate the
emergence of a more “binary” market with consumers in the more mature
upper-tier cities continuing to prefer globally recognized brands, while those
from lower-tier cities will seek no-frills products and solutions from brands
that deliver “the greatest bang for their RMB”.
This presents unique opportunities for both foreign and domestic
manufacturers.
Figure 2: China 2025 Scenarios: Urbanized World
Possible 2025 scenarios
|
Implication to automakers
|
·
Emerging
from China’s lower-tier region, a Chinese automaker has become the first to
sell 1M cars in overseas markets, and they are commonly called ‘the Chinese
Hyundai”. Chinese OEMs are now
competing in the EU and North America
|
·
To
secure long-term growth, automakers must strengthen offerings in the
entry-level segment
·
Leverage
China as the base to develop entry-level models for export to other
developing markets
|
·
Having
successfully penetrated China’s lower-tier markets with cars engineered in
China, automakers are selling “Engineered in China” cars in the global
markets
|
|
·
To
expand the market, auto loan penetration reaches 50% in China and financing
becomes a critical lever for growth, particularly with younger, budget-conscious
buyers.
|
·
Leverage
automotive financing as a platform to sell a full range of mobility services
|
Domestic brands are more popular among lower-tier cities
consumers as they penetrate the market with lower-priced cars “good enough” to
meet their mobility needs. Chinese
automakers could continue to serve this base by leveraging their low-cost
advantage improving their product safety and quality performance. International OEMs must also seize the
opportunity to develop competitive entry-level models and no-frills platforms
tailored for the Chinese market, while subsequently leveraging such “Engineered
in China” offerings to penetrate other developing markets.
New mobility solutions
Today, China has 14 cities with more than 10 million
residents. This number will perhaps
double by 2025. As the home to so many
densely populated urban areas, China will require unique solutions for traffic
congestion, energy consumption and pollution. The privately owned,
energy-intensive and people-driven cars we have today are not viable and
sustainable options for future urban mobility.
By 2025, new urban mobility solutions will comprise of a
mixture of public transportation, non-motorized alternatives and
energy-efficient personal transportation solutions. Innovations in technology, business models
and regulation will come together to disrupt the automotive industry. We anticipate a number of discontinuities:
Innovative car use model
In an effort to rebalance supply of transportation solutions
with demand for mobility, we believe a car ownership model will gradually
migrate to a “pay per use” service model.
This migration can be significantly accelerated with regulatory
intervention forcing higher usage charges on those who choose to own
vehicles.
By 2025, a pay-per-use model will emerge as a preferred
option for providing personal mobility in populous urban areas. On the one hand, the China government will
continue to regulate new car registrations through tax or quota to limit the
growth of private car ownership in large urban areas to within 1% per
year. On the other hand, high fuel
prices, parking and traffic congestion charges will make private vehicle
ownership less economical and therefore less attractive.
A technology-enabled intelligent model will supplant
traditional car leasing and rental companies’ asset-heavy offline model. This will confer advantages and pave the way
for internet-powered “mobility services” companies to emerge in the market. Moreover, person–to-person (P2P) car sharing
will position platform companies at the center of the eco-system, connecting
online and offline activities through advanced mobile technology. As the ownership-usage model evolves, OEMs
will need to partner with digital players and service providers to offer
innovative products in order to maintain their market shares.
Figure 3: China 2025 Scenarios: New Mobility Solutions
Possible 2025 scenarios
|
Implication to automakers
|
·
Chinese
internet companies vertically integrate car leasing services into their
internet portals
|
·
Partner
with innovators and internet companies to deliver “urban mobility services”
for different markets
|
·
Alibaba
successfully builds alliances with a leading Asian OEMs to develop synergies
with the “Internet of Mobility”
|
|
·
Tencent
has successfully acquired a recognized automotive brand
|
Connected “smart” cars
In big cities, driving is becoming a frustrating, time
consuming chore for people who have to commute. At the same time, traffic
accidents and congestion are a by-product of human driving behavior and
inadequate traffic and urban infrastructure planning. Smart connected cars will rely on
telecommunication and sensor technologies to respond to vehicles, objects and
people while navigating, and communicating with its passengers through their
on-board telematics system. A smart
transportation system has the potential to eliminate accidents, increase the
capacity of existing road infrastructure, collect and disseminate useful real-time
traffic data, and at the same time facilitate new models of vehicle ownership,
increase travel time predictability, and improve productivity and energy
efficiency.
Figure 4: China 2025 Scenarios: Connected “Smart” Cars
Possible 2025 scenarios
|
Implication to automakers
|
·
Driven
by policy in tier 1 and some tier 2 cities, China has invested in building a
smart transportation infrastructure and 300M “Smart Vehicles” are on the road
|
·
Consider
leveraging China as a base platform for smart car technology development for
the global markets
|
·
Just 17
years of age, Jasmine summons her car via her Xiaomi device, which arrives at
her door step within minutes and delivers her to school, while allowing her
to do her last minute revision for her Gaokao (高考) en-route
|
·
Invest
in disruptive technologies at the intersection of automotive and internet - leveraging
both organic and in-organic business development
|
·
“TencentCar”
competes with “Apple Car Play” and “Android Auto” on user experience, network
connectivity and localized content – and enjoys strong user acceptance
|
According to China’s Ministry of Industry & Information
Technology, as a strategic focus of the national development plan, the Chinese
Government will provide up to 10B RMB in subsidies to catalyze the development
of “smart mobility”.
Energy Saving & New Energy Vehicles
China has become the largest world’s carbon emitter. Big cities suffered from smog, often
exceeding “hazardous” levels. By 2025,
China will become the world’s largest oil importer, spending USD500B a year on
crude oil imports, 66% of which will likely be from OPEC nations. Worsening pollution and energy security has
compelled China to seriously invest in NEV and related infrastructure
development. The Government will
continue EV subsidies and qualify a wider range of fuel-efficient and environmental
friendly technologies.
City cars will adopt fuel-efficient and environmentally
friendly technologies, such as lightweight composite components and electric
powertrains. New generations of ultra-light weight personal urban mobility
(PUM) devices will become popular – designed specifically for city-use to
transport 1-2 persons and light cargo over short distances. OEMs will partner
with non-traditional suppliers and utility companies to complete the
eco-system.
Figure 5: China 2025 Scenarios: Energy Saving & New Energy Vehicles
Possible 2025 scenarios
|
Implication to automakers
|
·
China’s
investment in EV charging stations and smart grid construction has created
the complete eco-system for “Made in China” New Energy Vehicles, which are
now being exported to the US and Europe
|
·
Engage
with Chinese partners (auto, government and infrastructure) to build the
supporting ecosystem in order to make EV technology value proposition
accessible in the China market
|
·
New
generation of ultra-light weight personal urban mobility (PUM) devices are
popular – designed specifically for city-use to transport 1-2 persons and
light cargo over short distances
|
|
·
All
taxi and bus fleets in China are fully electrified, with foreign brands
excluded from the approved vendor list
|
|
·
Energy
Saving and New Energy Vehicles achieve 25% share of a 40M unit market as
traditional gasoline-powered cars are banned from densely populated cities
|
Emergence of mega-SOEs and mega-Suppliers
As we have witnessed in the time since the opening of
China’s economy to foreign investment, the changes in the market have occurred
rapidly, making China the engine for growth of many multi-national
corporations. However, China’s policies
and industrial developments are typically implemented via investments made with
government-backed State-Owned Enterprises (SOEs). While SOEs and huge investment holding
companies and are often contained profitable businesses, they often lack the
capabilities and entrepreneurial spirit of independent, market-driven
businesses.
In the coming decade, China’s state-owned automotive OEMs
and suppliers will be influenced by a new round of SOE reform led by the
State-owned Assets Supervision and Administration Commission of the State
Council (SASSAC). The reform will focus
on diversifying ownership, adopting modern corporate governance and
establishing a state-owned asset management company. As a result, state-owned automotive OEMs and
suppliers will become more efficient and market-driven, and gradual consolidation
will eliminate several weaker players.
Several of these OEMs and suppliers will play an even more important
role in the international market.
Meanwhile, we expect to see new entrants into the automotive
ecosystem, especially innovative companies armed with disruptive
technologies. It is entirely plausible
that an Internet mobility services provider becomes a major player the
automotive industry by initially offering a portal to provide “mobility
services”.
MNC players will need to adjust their strategies to address
a competitive landscape that includes a new breed of mega-SOEs and
mega-suppliers, as well as nimble Internet mobility services suppliers who aim
to create a new ecosystem of personal transportation services. Many of these services may be first
incubated in China before being rolled-out to the rest of the world.
Figure 6: China 2025 Scenarios: Emergence of Mega-SOE’s and Mega-Suppliers
Possible 2025 scenarios
|
Implication to automakers
|
·
More
efficient SOEs and innovative new entrants with preferred access to the 40M
unit China market provide a platform for rapidly scaling up new
transportation solutions for global deployment
|
·
Strike
a balance of power with local SOE partners, e.g. become strategic partners to
jointly exploit overseas market leveraging China as a base
|
·
飞马 (Fei Ma, or Flying Horse) is the top selling luxury sedan
globally for the past 5 years; fully designed and crafted by skilled artisans
in China, it offers unparalleled but understated luxury with strong oriental
themes and innovative technologies that have become the rage of the globally
mobile elite around the world
|
Conclusion
The discontinuities we have described are all very plausible
– the key question is whether traditional auto OEMs at first recognize the
potential disruptive threats, and are then willing to seize the discontinuous
opportunities that may ensue. Like Nokia
and Motorola 10 years ago, auto OEMs may be facing an existential threat from
new entrants from outside their traditional competitive set. Such competitors are anxious to seize on the
Chinese consumer’s rapid acceptance and adoption of mobile technology and
pervasive Internet connectivity services to deliver a new ecosystem for “mobile
connected car services”.
Automotive OEMs have the complex challenge of addressing
this potential for disruptive change, while simultaneously continuing to
deliver better and more cost efficient products in the hyper-competitive China
market. The ability to simultaneously
address these challenges will separate the ultimate winners and losers in the
next decade. The only thing that is
certain is that the formula that has worked until now is no guarantee for
future success.
-----------------------------------------------------------------------------------------------
End of Part 2
For further discussion, please contact the authors:
Bill Russo
Managing Director,
Gao Feng Advisory Company
bill.russo@gaofengadv.com
Dr. Edward TseManaging Director,
Gao Feng Advisory Company
bill.russo@gaofengadv.com
Founder and CEO,
Gao Feng Advisory Company
Chee-Kiang Lim
Principal,
Gao Feng Advisory Company
ck.lim@gaofengadv.com
Principal,
Gao Feng Advisory Company
ck.lim@gaofengadv.com
Note: The above authors wish to thank Ms. Emily
Wang for her efforts in researching and summarizing the findings of this
analysis.
No comments:
Post a Comment