The Evolution of Automotive Suppliers

Gao Feng Insights Paper, February 2015

Industry observers tend to overlook the changing role and structure of the automotive supply base. Of course, the story of success in the market is often viewed through the retail sales volume of branded OEM products. However, over the course of several decades, automakers have grown increasingly reliant on an ever smaller number of large tier 1 suppliers to deliver the core technology and innovation needed in the marketplace.

As a result, automakers face new challenges to maintain a balance of power with this new breed of supplier. In addition, suppliers at all tier levels must establish a position of relevance in a supply chain dominated by such power players. And finally, tier 1 suppliers must continue to anticipate the trends and development in the marketplace and upgrade their portfolio of capabilities in order to press their advantage.

In this analysis, we describe the trends, highlight several case examples, and discuss the implications of these developments along four strategic themes.

Thought leadership is core to what Gao Feng does.  We will, from time to time, share with you our latest thinking on business and management, especially as it relates to China and China’s role in the world.

Bill Russo
Managing Director, Gao Feng Advisory Company
bill.russo@gaofengadv.com

Chee-Kiang Lim
Principal, Gao Feng Advisory Company
ck.lim@gaofengadv.com

Tel: +86 10 8557 0676 (Beijing); +852 2588 3554 (Hong Kong); +86 21 5117 5853 (Shanghai)

Gao Feng website: www.gaofengadv.com

The Evolution of Automotive Suppliers from Synergistics Limited

Qoros Names Former Head of GM China Operations as CEO

The Wall Street Journal, February 3, 2015

Phil Murtaugh in Los Angeles on March 16, 2012. Photo: Reuters

By Colum Murphy

SHANGHAI—Chinese car maker Qoros Automotive Co. named the former head of General Motors Co. ’s China operations as its new chief executive in a bid to revive the startup’s fortunes in the world’s largest car market.

Phil Murtaugh ’s appointment is effective immediately, a statement on the company’s website dated Monday said. He succeeds Guo Qian, who resigned in December as chairman and chief executive to return to Qoros partner Chery Automobile Co., according to a Qoros spokesman. Mr. Guo couldn’t be reached for comment, and a Chery spokesman said he had no immediate comment.

Qoros produces cars in China and is a 50-50 joint venture between China-based Chery and Singapore-based Kenon Holdings , which was spun off from Israeli investment firm Israel Corp. last month. It had hoped to woo customers in China with a mix of quality and affordability. But the brand sold just under 7,000 cars in China last year, the company’s first full year of sales, according to data from consultancy Automotive Foresight.

In an October interview, Mr. Guo said that awareness of the new Chinese auto brand in China was falling below company expectations. Anning Chen, a Chery executive, has succeeded Mr. Guo as chairman.

Stefano Villanti, head of sales, marketing and product strategy, has also recently left the company. He told The Wall Street Journal last October the startup period for the company had been “tougher than expected.” Mr. Villanti couldn’t be reached for comment on Tuesday.

In November, Israel Corp.’s controlling shareholder, billionaire Idan Ofer, reaffirmed his support for Qoros following Chinese media reports that the firm was considering pulling out of the venture.

Mr. Murtaugh is credited in the automotive industry with being a pioneer of GM’s earlier successes in China and has spent almost 16 years in the country. Most recently, Mr. Murtaugh headed the now-defunct Chinese-invested electric-car manufacturer Coda Automotive Inc.

Bill Russo, managing director of consulting firm Gao Feng Advisory, who worked briefly with Mr. Murtaugh at Chrysler in China, said Mr. Murtaugh’s challenge will be to create a car that appeals to buyers, whether they are in China or elsewhere.

“The question is whether the world is waiting for a high-end Chinese car? So far the market is saying ’no,’ ” Mr. Russo said.

Write to Colum Murphy at colum.murphy@wsj.com

Corrections & Amplifications
Qoros is a joint venture between China-based Chery and Singapore-based Kenon Holdings, which was spun off from Israeli investment firm Israel Corp. last month. An earlier version of this article incorrectly said Qoros’s foreign partner was Israel Corp.

Click here to read the article at wsj.com 

Restructuring will set stage for new golden age of China's auto industry

South China Morning Post, January 21, 2015

The old automotive industry model - a way to provide mobility for middle-class consumers - no longer 

fits the Chinese context, creating opportunities for innovation.

After a decade of breathtaking growth, China surpassed the United States as the world's largest automotive market in 2009. Since then, in spite of a recovery in US sales, China has widened the gap, with sales of 23.5 million vehicles compared with 17 million in the US. 

However, the 7 per cent growth of last year was about half that achieved in 2013. In fact, China has witnessed single-digit growth in three of the past four years, prompting many market followers to label this the "new normal". Some say the best times for China's automotive industry are now in the past. 

Indeed, there are many reasons to worry. In addition to the overall slowdown of China's economy, a growing number of cities are implementing curbs on car sales, seeking to address concerns about congestion and emissions. Last month, Shenzhen joined a growing list of cities, including Beijing, Tianjin , Shanghai, Guangzhou, Hangzhou and Guiyang , in an effort to cut the growth of the car population by limiting purchases. 

Meanwhile, the rising inventory of unsold vehicles has prompted the China Automobile Dealers Association to openly challenge global brand-name manufacturers, including BMW and Toyota, to increase incentives to their dealers and lower sales targets for 2015. While there is certainly cause for concern in the near term, we believe China's auto market is moving into a new phase, one that still offers the most profitable growth opportunities in the world for both local and global carmakers. Indeed, China's auto industry is on the cusp of major change that will fundamentally reshape things, bringing both opportunities and challenges. 

The age of inefficient, asset-driven growth is over. Overall, there is a capacity bubble after some manufacturers over-estimated growth prospects.  The problem is worst at the middle and lower end of the market. An already hyper-competitive environment will become more cutthroat as manufacturers try to undercut competitors' prices to sell excess stock.

Restructuring China's auto industry is essential to ensure its stable and healthy development. Government policies were implemented over 30 years ago to allow China to acquire the capabilities and capital from foreign sources to build up its domestic industry. While this has helped spur overall growth, it has not yielded a strong base of domestic carmakers. Consolidation and the elimination of weaker brands is inevitable. 

China's automotive industry will continue to expand, but at a more sustainable rate, with a steady stream of first-time purchasers from lower-tier cities joining the repeat buyers and those upgrading in the more established regions.  

A more "binary" market will emerge, with consumers in upper-tier cities continuing to prefer global brands, while those in lower-tier cities will seek no-frills products.  

However, pockets of "new wealth" will emerge in lower-tier cities, too, and these people will begin to mimic the buying patterns of more affluent customers.  

This presents unique opportunities for both foreign and domestic manufacturers. For example, Ford and Great Wall anticipated the shift towards small SUVs and have been enjoying above-average growth. Likewise, European luxury carmakers, such as Audi, BMW, Mercedes-Benz and Land Rover, have seen sales rise exponentially in recent years as a result of the growth in the number of high-net-worth consumers. 

In future, new segments, such as crossover and multi-purpose vehicles, may emerge but they may not be as large or as profitable as the SUV/luxury sectors. Thus, we believe a new golden age is on the horizon for China's auto industry. China remains the largest and fastest-growing automotive market in the world. After years of advances in mobile connectivity, big data and social networks, "internet of vehicles" technology is now shaping the industry as "connected mobility" drives advances in navigation, analytics, driver safety and driver assistance. 

The old automotive industry model - a way to provide mobility for middle-class consumers - no longer fits the Chinese context, creating opportunities for innovation.  

A new solution to personal urban mobility is likely to emerge in China, given the scale of its urban transport challenges and increasing concerns over the environmental impact of conventional vehicles. Indeed, the traditional car-ownership model is being reshaped by urbanisation, the rising aspirations of young consumers, and the development of communications technology and "big data".  

A number of new concepts are emerging, bringing non-traditional players, many of whom are Chinese, into the ecosystem. Examples include taxi-hailing apps such as Alibaba's Kuaidi Dache and Tencent's Didi Dache, which each process over 5 million transactions a day. 

As the leading automotive market, China is poised to revolutionise the global car industry, ushering in the next age of smart vehicles and connected mobility.  

Edward Tse is founder and CEO, and Bill Russo is managing director, at Gao Feng Advisory Company, a global strategy and management consulting firm with roots in Greater China

Click here to read this article at SCMP.com 

Toyota Isn't in Tune With China's Needs: Russo

Bloomberg Television, January 22, 2015

Gao Feng's Managing Director Bill Russo discusses China's car market snd why the country is so important for automakers with Bloomberg's Rishat Salamat on "On The Move".

http://www.bloomberg.com/news/videos/2015-01-22/toyota-isn-t-in-tune-with-china-s-needs-russo

Toyota Poised to Lose Global Sales Lead to VW on China

Bloomberg News, January 22, 2015

Toyota Motor Corp., which fended off Volkswagen AG to remain the world’s top automaker in 2014, may lose the sales crown as early as this year as it falls behind in China, the world’s biggest auto market. 

Toyota is predicting its global deliveries will decline 1 percent in 2015 to 10.15 million vehicles, or just 10,000 units more than what Volkswagen sold worldwide last year. A new factory the German company is opening this year in Changsha, China, will add capacity for another 300,000 vehicles annually. 

As Volkswagen and General Motors Co. add factories to bolster their already-dominant position in China, Toyota President Akio Toyoda’s strategy of foregoing new car plants until at least next year could result in the first shakeup in auto-sales leadership since 2011. Toyota ranks sixth among global automakers in China and sells less than one-third as many vehicles as its two main competitors in China. 

“The difference is that Volkswagen has a jet engine strapped to its back called ’China’,” said Bill Russo, Shanghai-based managing director at Gao Feng Advisory Co. “Toyota, unfortunately, is in a position of weakness when it comes to the China market. It would be almost impossible to hold on to a number one position without being in the lead in China, and Toyota’s not even in that league.” 

Worldwide sales for Toyota, including at its Hino Motors Ltd. and Daihatsu Motor Co. units, climbed 3 percent to 10.23 million vehicles in 2014, according to a company statement. Volkswagen last week reported a 4.2 percent gain to 10.14 million vehicles, that included its two heavy-truck units. GM followed with sales of 9.92 million units, up 2.1 percent. Volkswagen and GM haven’t announced projections for this year. 

China Capacity 

Toyota, which hasn’t built an assembly plant in China since 2012 and faces a self-imposed moratorium on new factories until next year, will fall behind even further as Volkswagen and GM step up their expansion plans. 

GM has announced plans to add five new plants in China by 2018 even though President Dan Ammann said the market is “maturing rapidly.” 

Volkswagen expects to raise its China plant capacity to more than 4 million vehicles by 2018 from 3.1 million at end 2013, according to the company. Mainland China and Hong Kong accounted for a record 3.67 million deliveries at Volkswagen group last year, up 12.4 percent and extending the country’s lead as the German manufacturer’s largest single market. 

Sales Target 

By comparison, Toyota missed its sales projection for 1.1 million units in China in 2014, even as the Corolla and the Levin compact cars helped boost sales 13 percent to 1.03 million units. The company kept its China sales target unchanged for this year. 

Even though Toyota may cede the sales leadership, it still outearns Volkswagen. Analysts estimate Toyota earned a profit of 1.96 trillion yen ($16.7 billion) last calendar year, compared with 10.7 billion euros ($12.4 billion) at Volkswagen. 

“Their focus is not No. 1,” said Peggy Furusaka, a Tokyo-based auto-credit analyst at Moody’s Investors Service. “Toyota is more concerned about keeping profitability than chasing numbers. So for coming years, I wouldn’t be surprised to see Toyota selling fewer cars than Volkswagen.” 

Toyota’s also-ran status in China is compounded by threats by its dealers to drop out of its network, citing poor sales and a lack of profit. 

Dealer Threats 

As many as 10 percent of dealers for one of Toyota’s China ventures could abandon the brand, according to the China Automobile Dealers Association. Among the 523 distributors in the FAW-Toyota Motor Sales Co. group, 95 percent are losing money, with some dealers stopping sales or shutting down altogether because of the losses, the state-backed dealer’s group said. 

Vehicle sales growth slowed last year in China in tandem with the nation’s weakest economic growth since 1990. Deliveries are forecast to gain 8 percent to about 21.3 million passenger vehicles this year, according to the state-backed China Association of Automobile Manufacturers. 

“As long as China is growing rapidly, Toyota will need to build new factories there,” said Yoshiaki Kawano, an analyst with IHS Automotive in Tokyo. “They are probably reserving some energy for growth in the longer term, as they are trying to improve the efficiency at their existing plants.” 

To contact Bloomberg News staff for this story: Alexandra Ho in Shanghai at aho113@bloomberg.net; Ma Jie in Tokyo at jma124@bloomberg.net; Masatsugu Horie in Osaka at mhorie3@bloomberg.net

To contact the editors responsible for this story: Chua Kong Ho at kchua6@bloomberg.net Suresh Seshadri 

http://www.bloomberg.com/news/articles/2015-01-21/toyota-poised-to-lose-global-sales-lead-to-vw-on-china 

Chinese Car Buyers Embrace Online Sales, Dealers Still in the Loop

Car Scoops. January 11, 2015

E-commerce is nothing new, especially in what is probably the world’s most connected country: China. The thing is, Chinese are embracing online sales for new cars, too – and that’s good for business.

Local automaker Geely estimates that it has sold nearly 3,000 units in 2014 online five years after first launching its e-commerce website. “The impact of Internet firms has been a major success for the company”, company spokesman Ashley Sutcliffe said.

Paul Hu, Volkswagen Group China’s chief marketing officer for Greater China and ASEAN, is even more buoyant: “E-commerce in the automotive market is taking off”, he told Wards Auto. “In my personal opinion, online sales in the total car market in China will account for 10 percent in the near future.”

Still, traditional dealers are not left out of the game. One of VW’s joint ventures, Shanghai Volkswagen, is selling cars online through a number of websites; customers place the order in one of the sites but have to close the deal and pick up the vehicle from a dealership.

Kyle Dickie, CEO of dealership best-practices consultancy Sewells Group, thinks that “there is some disruption to come to the distribution model, but it is not imminent. In China, there is an unusually high level of trust still placed in the sales consultant. Consumers want to interact face to face.”

The “disruption” mentioned by Dickie are smartphones. Right now, China is estimated to have more than 500 million smartphone users who, naturally, use their devices buying stuff online. Beijing-based iResearch forecasts that 2014 online retail sales in the country increased by 45.8 percent to 2.76 trillion RMB (US$444 billion).

“Empowered with technology, consumers of mobility services are likely to make choices other than what the automakers and their dealers are offering today”, commented Bill Russo, the managing director of the Gao Feng consultancy firm.

In other words, e-commerce may bring customers to the dealerships – they just might not be interested in the same vehicles the dealer and the brand want to promote.

http://www.carscoops.com/2015/01/chinese-car-buyers-embrace-online-sales.html

China in 2025 and Implications for Automakers

Gao Feng Insights Report, January, 2015

Dear Friends of Gao Feng, 

  

We are pleased to share with you a report titled: China in 2025 and Implications for Automakers.  As we know, China’s economy has been growing dramatically for more than two decades.  China is now the second largest (and will inevitably soon become the largest) economy in the world.  Yet we are recently confronted with rising concern over the impact of a deceleration in overall economic growth, especially in the automotive sector.

Since 2011, we have seen single digit growth in 3 of the past 4 years, raising questions over the future prospects for the industry.  In this analysis, we seek to avoid the trap of “driving by looking in the rear-view mirror”, and instead look in front of us at the plausible scenarios which may unfold which will impact the auto industry over the next decade.

We believe that China’s economic growth is likely to continue over the next decade, driven by a mix of continued (albeit more selective) fixed-asset investment and growth in consumption.  A broad transformation is expected to continue and will present an environment that is characterized by a long-term and sustained shift towards a middle-income, consumption-based economy.  This trend would lead to a profoundly different economic landscape.

We also believe that discontinuities int eh political, social and economic landscape have the potential to reshape China dramatically by 2025.  While the outlook is positive, there will likely be discontinuities - both upward ad downward - along the way.  The key to sustainable success for businesses in such an environment depends on an ability to anticipate the trends and challenges that are in the “blind spots” today - but which can create disruptive threats or discontinuous opportunities for those who can respond rapidly.  In essence, and “early warning system” is needed which leverages unique insights which can be brought to bear on the question of how the market, the regulatory system, and business models may develop over the next decade in China.

  

We welcome your comments and feedback on our briefing paper or in general about our firm. We would be glad to meet you in person to share our data and perspectives in a fuller manner. Please let us know if you are interested in meeting and discussing directly how we can help you to operationalize these insights. 

  

Thought leadership is core to what Gao Feng does. We will, from time to time, share with you our latest thinking on business and management, especially as it relates to China and China’s role in the world.   

  

  

Best Regards, 

   

Dr. Edward Tse
CEO, Gao Feng Advisory Companyedward.tse@gaofengadv.com

Bill Russo
Managing Director, Gao Feng Advisory Companybill.russo@gaofengadv.com

Chee-Kiang Lim
Principal, Gao Feng Advisory Companyck.lim@gaofengadv.com

Tel: +86 10 8557 0676 (Beijing); +852 2588 3554 (Hong Kong); +86 21 5117 5853 (Shanghai)

Gao Feng website: www.gaofengadv.com

China in 2025 and Implications for Automakers from Synergistics Limited