Revving Up: The expansion of the Chinese car market is good for domestic and foreign manufacturers alike

EuroBiz Magazine, August 2009

Cover Story

by Mark Andrews

It was only a decade ago private car ownership seemed like a dream for Chinese consumers, but today the dream has already been realized by much of the Chinese middle class. The explosive growth of car ownership in China led analysts to predict China would soon become the world's largest auto market, and in January they were proven right.

"China's growth has been well ahead of forecast for several years, but nobody expected China to take the lead until sometime in the middle of the next decade," says
William Russo, president of Synergistics, a business consultancy specialising in the auto sector. Even allowing for the impact of the downturn in the US, it is still amazing how quickly the Chinese market has grown, he says.

China's unofficial celebration of its new stature was marked by the 13th biennial Shanghai Auto Show held last April. More than 600,000 people attended the show, many of whom were actually shopping. Jason Shen, for example was a postgraduate student looking to buy his first car. "For me it's a family purchase," he said. "If I have a car it is very convenient for me to take my wife to work, my child to school, and look after my parents."

Solidly middle-class consumers like Shen are the future of the domestic car market. Sales in the first half of 2009 amounted to 6.1 million units, compared to 4.8 million in the US. "Since 2003 China's vehicle market has more than doubled in size from 4.56 million units to 9.67 million units [in 2008]. Of this total, 61 percent, or 5.91 million units, represent passenger vehicles," says Russo.

This is good news for foreign manufacturers; two-thirds of all passenger cars sold in China are produced by foreign brands or their joint ventures.

Around the end of last year the market faltered slightly, but the Chinese government stepped in with a plan to aid the industry. The plan aimed to boost the sales of more fuel-efficient vehicles, aid development of domestic brands through R&D and acquisitions, and promote electric cars.

Since January 20, taxes on vehicles with an engine displacement of 1.6 litres or less have been reduced, along with subsidies for purchase of those of less than 1.3 litres. January and February saw a nearly 19 percent increase in sales of such cars.

"The Chinese are natural savers and have liquid cash in troubled times, which coupled with government incentives has boosted the Chinese car market ahead of the US in sheer volume," argues Ash Sutcliffe, author of the popular China Car Times web site. "This cash behind them has given car buyers a great amount of room to manoeuvre at the negotiating table."

Foreign attention

In the past, many foreign manufacturers used the China market as a place to sell old designs. Sutcliffe points to the Volkswagen Santana, Daihatsu Charade and Austin Maestro as examples of models that were produced in China long after they had debuted in other markets. Nevertheless, some of these models - the Santana in particular - went on to set sales records.

However, today American, Japanese and Korean manufacturers' joint ventures are offering their latest designs on the mainland. Porsche's launched its new Panamera sports saloon at the Shanghai Auto Show, the first time Porsche had launched a new car at a non-European or American show.

Manufacturers are also now taking into account Chinese tastes and modifying their products to suit. Ford, for example, launched a saloon version of the popular Fiesta hatchback in China this year designed specifically to appeal to the "real men don't drive hatchbacks" market in China. Audi produced a specially lengthened version of the A4 for China. Lengthened cars, with their greater rear legroom, are popular here as they can accommodate larger family units or business partners.

Another leader has been General Motors. In 2006, GM introduced a Chinese version of the Buick LaCrosse. While based on the architecture of its American namesake, the Chinese model has a completely different body and interior designed in Shanghai. The domestic styling of the LaCrosse was so successful that GM's Shanghai subsidiary is now in charge of redesigning the interior and the exterior for its replacement, to be released later this year in both the US and China.

Volkswagen has also got in on the act, launching the VW Lavida and VW New Bora in China last year. With the recent rumours that VW will end production of the Jetta and Santana in China by 2012, Volkswagen's strategy seems to be targeting China with a mixture of its latest international designs and localised versions.

When it comes to the top end, the near-monopoly enjoyed by foreign brands shows no sign of ending. Government officials, leading purchasers of luxury vehicles, no longer exclusively purchase Audis, but are also buying Mercedes and BMWs.

But some foreign carmakers are looking to get in on the growing, low-price market as well. Italian carmaker Fiat created a joint venture this July with Guangzhou Automobile Group to produce economy cars for the Chinese market. Beginning in May 2011, the JV will produce 140,000 cars per year and may increase production up to 250,000 units.

Local pride
At a time when the names of Chinese manufacturers are being tossed around as potential purchasers for ailing American and European car brands, local brands made a confident showing at the Shanghai exhibition, demonstrating their latest models along with concepts and technology.

However, behind the scenes there has been a shift in perception. The original aim behind the joint ventures with foreign manufacturers was to help larger state-owned carmakers to create competitive brands of their own. With the exception of SAIC, with its Roewe and MG brands - which were acquired, not created - this has yet to happen.

The market leaders in sales by domestic companies, Chery, Geely and BYD, are all either private companies or were created by state-owned enterprises (SOEs) not previously involved in car production. Beijing has correspondingly started to bet on domestic leaders like Chery and Geely at the expense of the big SOEs, says John Russell, CEO of Manganese Bronze Holdings, which is currently in a JV with Geely to produce London-style taxis.

One tangible product of this government support is Geely's purchase in March of Australian transmission manufacturer DSI. This acquisition may help Geely overcome a significant technology challenge. According to an executive at Great Wall Motors, gearbox technology is one of the biggest bottleneck areas for Chinese producers.
Cutting edge?

Chinese battery manufacturer BYD last year took the motoring world by surprise with its launch of the F3DM, an electric car which also features a small petrol engine to generate electricity when the charge runs out. The F3DM will hit the showrooms two years before projected launch of the much vaunted electric Chevrolet Volt.

At the Shanghai Auto Show, most of the larger Chinese manufacturers also displayed advanced technology featuring hybrids and electric vehicles. Unlike the F3DM, these models are mostly "mild hybrids", which store power during the deceleration phase and then reuse it to help with acceleration.

Chinese government targets call for a production capacity of 500,000 electric and hybrid vehicles a year by the end of 2011.

However, market analysts Frost & Sullivan forecast that actual demand by 2015 will be only 100,000. Russo of Synergistics says that manufacturers are still cautious when it comes to hybrids. "There has not been any strong indication of a movement to produce such vehicles on a large scale."

Sales of hybrids have justified their caution. Chinese sales of the Prius amounted to 899 units during 2008 and so far BYD's F3DM has only been delivered in small numbers to fleet users.

Even with city and central government subsidies to reduce initial costs of purchase, electric vehicles are largely unsuitable for the Chinese market infrastructure. Most people live in apartments without private garages and therefore have nowhere to hook the car up to the electricity grid in the evenings. These target production levels also assume that the grid can generate enough electricity for them in the first place.

Sutcliffe and Russo agree that the technology on display at the auto show was more about creating publicity for the manufacturers. When it comes down to it, Chinese consumers care about price, says Russo. "The vast majority are looking for an overall cost-effective mode of transportation, and so what the consumer in China will look for is the total cost of ownership."


TREND #1: Policy-driven Consolidation of Chinese Vehicle Manufacturers

July 30, 2009

by Bill Russo

In my last post, I introduced the Eight Overarching China Automotive Trends That Are Revolutionizing the Auto Industry. I will describe in this and subsequent postings how each trend is manifested, and how they cumulatively result in a transformational force which is fundamentally changing the business model and competitive landscape of the global auto industry.

I had previously introduced the first trend in detail in the article The Coming Structural Realignment of China's Automotive Sector (posted on this blog on April 28, 2009). Since that time, there have been a flurry of announcements regarding potential mergers and alliances among the China domestic vehicle manufacturers, including Beijing Automotive Industry Corp (BAIC) and Fujian Daimler, Guangzhou Automobile Group Co. (GAC) and Zhejiang Gonow Auto, Chery Automotive and Jianghuai Automobile Co. (JAC), Dongfeng Motors investment in Yulon's LuxGen (Hangzhou) Motor Co., and First Auto Works (FAW) and Brilliance Auto.

The rationale for this major restructuring is clear: the current structure of the automotive industry reflects an industry in its nascent stage of development. There are more than 150 registered vehicle manufacturers in China. In 2008, only 10 of these manufacturers accounted for 83% of the vehicles sold. This highly fragmented structure cannot provide for a stable development of the current domestic players.

As a result, the Chinese government has pulled-ahead its plan to consolidate the vehicle manufacturer landscape in order to achieve economies of scale. Prompted by the economic crisis, the China government in January, 2009 published stimulus plans for 10 key industries including automotive. The most sweeping proposal in this plan is the intention to consolidate the industry into a “top 10” group organized into 2 distinct “tiers”: the Tier 1 group consisting of companies with an annual capacity of 2 million units that are encouraged to acquire smaller automotive companies throughout China, whereas Tier 2 consists of companies with an annual capacity of 1 million units that are encouraged to drive regional consolidation. The plan even names 4 tier 1 companies as well a 4 tier 2 companies:


· Shanghai Automotive Industrial Corp (SAIC)

· First Auto Works (FAW) Group

· Dongfeng Automobile

· Chang’An Automotive


· Beijing Automotive Industrial Corp (BAIC)

· Guangzhou Automotive Industrial Group (GAIG)

· Chery Automobile

· China Heavy Duty Truck Corp (CNHTC)

It is noteworthy that this is not a final list of surviving companies as it represents only 8 of the “top 10”, and by calling it “top” 10 there is obviously room for others below the “top”. One can anticipate that OEM consolidation and rationalization will surely be accompanied by a major restructuring of the Chinese auto supply base. It is also noteworthy that companies such as BYD, Geely and Great Wall are not included on the list. In spite of this, there is a clear indication of the rationale and urgency around the issue of consolidation, and why the time to act is now.

But, how does a restructuring of the domestic structure in a single auto market revolutionize the global auto industry? Taken as a stand-alone trend, it certainly is not sufficient enough to unleash a global transformational force. However, one must consider the fact that we are talking about the largest and still rapidly expanding China auto market. By seizing on the financial crisis as a triggering event to drive forward the necessary consolidation, the China government is ensuring that it can more efficiently develop the industry around the fewer, and stronger auto groups that remain. This is a necessary foundation-building step from which fewer, yet stronger China auto companies can emerge. While providing a base, it is the cumulative impact of this trend along with the remaining seven yet to be described that will revolutionize the business model of the global automotive industry.

In the next posting, I will describe the trend of "Global Redistribution of Assets to Capture China Market Growth".

Click here to view article published in GLG News

Click here to view article published in GlobalAutoIndustry.com
Click here to view article published in Gasgoo.com China Automotive News

Click below to view: