China in 2025 and Implications for the Automotive Industry: Part 1

The rapid emergence of China’s economy is historically without parallel.  As a result of the past two decades of expansion, China now accounts for more than one-tenth of the global economy, and has become the world’s second largest economy.  While the Asia-Pacific region will contribute nearly one-third of the world’s GDP by 2015, the dominant contribution will come from China.  While concern has been raised over the slowing rate of economic growth, one fact will prevail:  China will remain the growth engine for the world economy for the foreseeable future.

As China attempts to rebalance its economy towards a more sustainable growth pattern that puts a greater emphasis on domestic consumption, we anticipate many cyclical and structural changes and volatility.  However, a hard landing is unlikely.  Analysts are expecting China to continue to grow between 7% and 8% annually through 2020 (see Figure 1), with continued strong growth anticipated in the industrial and service sectors.

Figure 1:  China Real GDP Forecast By Sectors

For 2015, and beyond: As the picture for the global environment becomes clearer, China will continue to struggle with the challenge of having to meet its pressing social and developmental objectives while experiencing GDP growth of ‘only’ around 8.0% through 2015, well below the rapid expansion seen in the recent past.  Maintaining this growth will require a plan to mitigate risks particularly with regard to inflation, trade protection, currency revaluation, labor supply/cost and rising geopolitical tensions in the Asia/Pacific region.

Despite these difficult challenges, China is likely to maintain strong growth driven by a mix of continued (albeit more selective) fixed-asset investment, and growth in consumption.  Continued investment in infrastructure to support a >60% urbanized population is anticipated.  Household consumption levels will rise as a result of the growth in the population of middle-class wage earners and rising incomes.  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 appears firmly entrenched, representing a profoundly different new economic landscape and a continued shift in the balance of global economic power.

Trends and discontinuities in the political, social and economic landscape will shape China radically by 2025. While the outlook is positive, the path could see some bumps along the way.  Companies need to anticipate these changes to build in flexibility and resilience as part of their horizon scanning.

End of Part 1

Next week:  Plausible Scenarios for the Automotive Industry in 2025

For further discussion, please contact the authors:

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

Dr. Edward Tse
Founder and CEO,
Gao Feng Advisory Company

edward.tse@gaofengadv.com

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

Bill Russo to Speak at the 2014 Global Automotive Forum

Wuhan, China, October 16-17, 2014

Hunting for deals on wheels in China's developing used car market

Nikkei Asian Review, September 11, 2014

Used cars fill this lot near a residential area in Hefei, in China's Anhui Province. © Reuters

SHANGHAI -- Zhu Xiaohong closely examines a 4-year-old Volkswagen Touran, using the flashlight on his mobile phone. The gray VW sits in what looks like a multistory parking lot but is in fact the Shanghai Used Car Trade Market, the largest of a cluster of secondhand dealers on the city's Zhongshan North Road.

Zhu's conclusion: "I want to buy this car."

Zhu, who has bought used cars twice before, said he cannot afford to buy new. But while used cars are significantly cheaper than new ones in China, prices are higher than in developed overseas markets, and there is often greater uncertainty about quality.

Yasuhiro Konta, a senior manager responsible for secondhand sales at Dongfeng Nissan Passenger Vehicle, explained that it is rare to see a standard going rate for a used car in China. "Each price is decided by negotiation," he said.

This informal system reduces the pressure on sellers to keep prices down, according to Cameron Macqueen, general manager of Southern Cross Warranty, the Chinese arm of Australian financial company Presidian.

"Pricing in China is a lot higher than in the U.S. or Australia -- maybe up to 30% or more for some makes and models," Macqueen said. He estimated average secondhand sale prices at 60,000 yuan ($9,770) nationally, but added that the figure rises to 200,000 yuan in big cities such as Shanghai, where top-end luxury cars are popular.

Trust issues

China's used car market has expanded alongside a dramatic rise in demand for new cars. Sales of new passenger vehicles hit 17.92 million in 2013, according to Deloitte's 2014 China Auto Finance Report, confirming China's status as the world's largest car market.

Bill Russo, managing director of consultancy Gao Feng Advisory, said the supply of used cars is increasing as owners sell into the market rather than handing on vehicles to other family members. Demand, Russo said, is picking up as younger drivers become more comfortable buying preowned.

On the other hand, Russo pointed out that the ratio of secondhand sales to new car sales is much lower in China than overseas, suggesting that there is a lot of room for growth. In the U.S., three used cars are sold for every new car purchased, whereas in China only one used vehicle is sold for every four new ones.

While those numbers could change, the used car market faces considerable challenges. For a start, growth in new car sales appears to be slowing, although it is still high by Western standards. Deloitte, which tracks the industry closely, says it expects annual growth in China's new passenger car sales to fall from 15% in 2013 to 7% over the next few years, with the expansion of the used car market slowing from around 20% a year to 15%.

Used car sales are also hampered by a lack of transparent vehicle records, which often makes buying a matter of chance. Sometimes, sellers cross the line into outright fraud.

"I would say the majority of cars have their odometer wound back, and therefore credibility issues are rife," Macqueen said. "Chinese are not yet up to speed with how to look after their cars, so it is normal for a customer not to trust the history, the quality, of the car they're looking at, or the dealer."

Turning pro

The hit-and-miss nature of the used car market reflects the dominance of independent dealers and brokers.

Wang Meimei's corner of the Shanghai Used Car Trade Market is taken up by a BMW, a Mercedes-Benz and a Volkswagen Passat. "Sometimes I sell a car a day, sometimes a car a week. It varies," said Wang, who is preparing to retire after 10 years on Zhongshan North Road.

The market is changing, however. Alibaba Group, China's largest e-commerce company, recently announced plans to launch a platform for selling used cars online. Conventional dealers are also beginning to offer warranties on preowned vehicles, prodded by companies such as Southern Cross.

New car dealers, known in China as 4S shops, are increasingly moving into the secondhand business, bringing more professional marketing and sales techniques.

Martin Kuehl, a spokesman for Audi China, said the company expects the preowned market to continue to grow and has set up 290 licensed used car dealerships -- including 60 that sell only Audis. Dongfeng Nissan began selling used cars at some of its 4S shops five years ago; last year it sold around 20,000 through more than 60 dealers.

New government regulations that take effect in October are likely to accelerate the trend toward greater professionalism. Authorized dealerships will be free to sell a range of brands, rather than being tied to a single marque. Industry experts say this will give a further boost to the better-run 4S shops, whose more transparent pricing and marketing practices are likely to put pressure on independents to raise their standards.

Potential buyers check out vehicles at the Shanghai Used Car Trade Market. Preowned cars tend to be pricier in China than in other major countries. © Photo by Mark Andrews

     "I see a trend toward businesses who want to build a brand name -- meaning the quality dealers are getting more and more business," Macqueen said.

Some problems will remain, though. Many cities, including Beijing and Shanghai, have implemented measures to try to limit car numbers, usually by restricting the supply of license plates. Many of the cars on sale at Zhongshan North Road carry suburban "Hu C" plates, which do not allow the vehicles to be driven into the city center.

Emission standards also vary between cities and provinces, hampering the creation of a national market, or even of large regional markets.

When a new Ford Fiesta was introduced to China in 2009, models sold in Beijing and Shanghai were compliant with the fourth-generation national emission standard, equivalent to the European Union's Euro IV standard. Models destined for other parts of the country met only the older China III standard.

Today, registering a China III car is difficult nationwide. As a result, those Fiestas are hard to sell.

Click here to read the article at Nikkei Asian Review

Zhongshan Broad-Ocean Motor aims for at least one acquisition in US or Europe by late 2015, exec says

Mergermarket, August 2014

Chinese motor manufacturer Zhongshan Broad-Ocean Motor (Da Yang Dian Ji) [SHE: 002249] aims to complete at least one acquisition in the US or Europe by the end of 2015, Director of Investment Zhonghua Liu said.

The CNY 10bn (USD 1.6bn) market cap company is searching for new energy vehicle drive motor makers; those with advanced technology in permanent magnet synchronous motors (PMSM) are the most ideal targets. Manufacturers of other types of new energy vehicle drive motors would also be considered.

Broad-Ocean could spend up to USD 100m on the deal. It has not hired financial advisors especially for potential buys and would welcome approaches, Liu said. China Galaxy Securities is the company’s current financial advisor with Shinewing CPA as auditor. 

Targets from Japan or other markets would also be considered, as long as the target owns the technology it needs, Liu added.

The company sees great potential in new energy vehicle business and is therefore looking to quickly boost its presence in the sector via acquisitions. If the potential target had a solid overseas customer base, it would add extra value, but this was not a must, Liu said.

A potential target could be Colorado, USA-based UQM Technologies, according to Bill Russo, founder of Shanghai-based advisory firm Synergistics. He noted that UQM has got both a commercialized PMSM solution with high-kilowatt power and high torque, as well as other systems that can serve the mid-market applications. UQM is more focused on higher payload and higher RPM speed type of applications compared to other companies such as Remy International [RMYI: US].

In order to narrow the technology gap, Chinese players need to make acquisitions; they have a market as the government is likely to build the needed infrastructure for new energy vehicles including refueling or recharging stations, Russo explained, adding that because UQM has received grants from the US government’s Department of Energy, a potential sale to a Chinese player could prove to be politically controversial.

A person familiar with UQM said if the terms and conditions were right, it could consider an outright takeover offer from companies like Broad-Ocean, adding that the company is always looking to build relationships with customers or suppliers.

Broad-Ocean’s revenue increased over 18% to CNY 3.27bn in 2013. Gross profit increased 25% to CNY 603m. The company provides a variety of motors, including those for air conditioners. Motors for air conditioning units are its current core business, accounting for over 65% of total sales.


by Wentao Wang in Sydney, Riccardo Ghia in Hong Kong and Sam Weisberg in New York

GM explores sales growth momentum tactics with China Cruze release

Automotive World, August 29, 2014



In a bid to redouble safety efforts and boost the Chevrolet brand in its biggest market, GM has decided to debut a redesigned Chevrolet Cruze sedan in Shenzhen, China.

The Cruze was Chevrolet’s best-selling model in China last year, and is one of the six new or refreshed models under the brand being brought to the nation this year by the OEM.

“The new Cruze is the first model based on GM’s new global platform for midsize compact cars,” said Shanghai GM President Wang Yongqing. “With GM’s global intelligent technology, it sets new benchmarks for styling, efficiency and user-friendliness in its segment.”

Developed to meet global five-star safety standards, the new Cruze comes with a range of active and passive safety features. It is the only vehicle in its class with active park assist, which takes the worry out of parking. The side blind zone alert system warns the driver of potential hazards when changing lanes. The model’s airbags are designed to protect pedestrians as well as occupants.

Automotive World spoke to Bill Russo, Managing Director at consultancy Gao Feng Advisory Company, Ltd, who explained that China has become the growth engine of the global automotive industry, and noted why the market has become such an important one for GM: “GM sold nearly 3.2 million units in China in 2013, and has so far this year seen growth of over 10% year-over-year.”

The new Chevrolet Cruze represents GM’s newest entry in the midsize compact car segment. The Cruze was developed for China on GM’s latest architecture and a choice of new 1.4 Turbo and 1.5-litre Ecotec engines. Russo noted that the compact car segment is the largest segment of the Chinese market, and explained that it is critical for GM’s overall market share performance: “In fact, several GM models including the Chevrolet Cruze, Buick LaCrosse and Buick Regal were launched in China before they were launched in the US. The Cruze is one of 19 new or refreshed models to be introduced by GM in China in 2014 – but given the size and importance of the product segment in China, this is a very crucial launch for GM to regain their sales growth momentum.”

Fuel efficient and safe

Despite GM’s recent recall frenzy, in which the OEM was forced to pay a US$35m settlement for failing to act on an ignition switch defect for ten years that led to the recall of approximately 2.6 million vehicles, Russo argues that the OEM has weathered the storm of the recent recalls and notes that its sales in China have certainly not lost momentum. To maintain this success in China, the OEM has noted the potential for further safety and efficiency improvements to fulfil customer needs. The Cruze offers a great deal of content for a product in this segment, priced between Yuan 109,900 and Yuan 169,900 (US$17,900 – US$27,700).

Although 72% of the new Cruze’s body consists of high-strength steel, the extensive use of aluminium and lightweight materials in key areas such as the engine, chassis and interior makes it 10% lighter than the current-generation Cruze, enhancing fuel economy without compromising safety.

The car also boasts an active park assist feature which is unique in this class of vehicle, mid-mounted injection engine technology and a wide range of fuel-saving features such as start/stop technology and ultra-low rolling resistance tyres, which make it 24% more fuel efficient than the current-generation Cruze. The engines offer peak fuel economy of only 5.9 litres per 100 km. In addition, they are up to 50% quieter than engines in competitive models.

Russo continued, “GM’s product offensive will only help generate more interest among consumers going forward. Getting the new Cruze into the market with differentiated features will help rebuild the image of GM as a manufacturer of safe and dependable cars.”

Rachel Boagey

Click here to read the full story at Automotive World