An Assessment Of The Development Of China’s Automotive Industry On The Tenth Anniversary Of WTO Accession

Auto.Sohu.Com, November 16, 2011

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in Chinese (中文) : 罗威:入世十年 中国汽车业未来任重道远

by Bill Russo

Since joining the World Trade Organization (WTO) at the end of 2001, the Chinese car market has grown from about 2 million vehicles to over 18 million vehicles sold in 2010, an increase of nearly nine times.  In fact, over the past decade from 2001-2010, the compound annual growth rate of the Chinese car market was an astonishing 34 percent.  As the largest market in the world, China has taken the center stage in the battle for dominance of the 21st century automotive industry. 

However, automotive companies in China today are finding themselves confronted with a different set of challenges from what they were facing just a few years ago.  From the demand side, Chinese consumers are becoming more selective and are making more diverse and personal choices: making their own individual choices, not just for their family.  Meanwhile, demand growth is increasingly driven by lower-tier (Tier 3 and below) cities more than large and mega cities.  The Chinese government has also released more restrictive regulatory requirements for safety, environmental care and foreign investment.  From the supply side, almost every international player has recognized China as their largest source of future profit and has thereby committed significant investment.  Additionally, Chinese local brands have never been so aggressive in fighting for market share than today.  All these challenges are pushing global as well as local vehicle manufacturers to alter their thinking and adopt new strategies to win in the China auto market.

In addition, there are numerous structural problems in the China automotive industry.  While light vehicle sales stand at historic highs, overcapacity and lack of scale remain major problems.  This is true largely because of the highly fragmented and scattered OEM landscape.  China’s auto industry today includes over 100 registered automotive manufacturers. This creates a significant challenge to the health of the many businesses that struggle to sustain operations in an environment where economic growth is by no means assured.  Additionally, approximately 70% of passenger vehicles sold carry a foreign brand, which makes it very difficult for Chinese domestic brands to generate sufficient volumes or profit margins to remain economically viable.

This fragmentation also makes it very difficult to focus and allocate resources to the development of critical technologies related to safety and fuel economy.  This is an area of particular weakness for Chinese OEMs who have relied on their foreign partners to lead the development of key component technologies. 

The remarkable growth of Chinese car market was created in partnership among international and domestic car manufacturers.  Foreign manufacturers provided funding, technology and managerial expertise to support the development of Chinese car manufacturers and suppliers.  However, Chinese car companies remain dependent on international sources for technology innovation and product development.

The determining factor in whether a car company can compete in the international markets is whether they have the capacity to meet local consumer as well as regulatory requirements.   While Chinese firms have learned very quickly how to assemble cars and develop supply chains, they are very inexperienced at the vehicle development and synthesis process.  An automobile is a complex engineered system requiring advanced technology and know-how in order to test and validate the achievement of benchmark targets in the areas of performance, fuel economy, safety and quality.  It is in this area that Chinese firms are weakest.  Chinese vehicles, while improving rapidly, are still not up to the world-class standards required to compete in the mature markets of the world.

Chinese automotive makers typically lack the knowledge and experience of developing core technologies of important vehicle components and doing sub-systems integration. Overseas car companies started by developing and integrating core component technologies internally and have only recently been seeking external outsourcing partners. World-class vehicle manufacturers retain the critical skills that define their brand identity in order to deliver a unique value proposition.

The capabilities of local Chinese OEMs have come a long way in a short time.  This is, after all, a relatively new industry for China and the Chinese firms will learn quickly as they grow their share of the domestic market.  However, much work needs to be done to gain acceptance of the Chinese consumer of Chinese manufactured goods.  This must be the first priority as it stands to reason that if it is difficult to convince a Chinese consumer, it will be even harder to convince a foreign consumer to accept a “Made in China” car.  The fact is that with the proper attention to quality management discipline and with the transfer of critical know-how in the area of vehicle synthesis and development, it is indeed possible for Chinese firms to compete globally.

Several Chinese companies are attempting to acquire these capabilities  “inorganically” by acquiring the assets of distressed but well-known international manufacturers. Geely’s acquisition of Volvo, and Pangda and Youngman’s bid to acquire Saab are recent examples.  It stands to reason that such an approach could significantly shorten the time frame for going global.  However, such acquisitions are difficult and often unsuccessful. For example, SAIC’s acquisition of Ssangyong ultimately failed because the interests of both parties were not aligned. Those who dare take on such acquisitions are also wise to learn the lessons from others who have tried – and often failed – to use an acquisition to accelerate the process.

It is clear that China’s auto companies aspire to become leading global auto companies.  However, for Chinese brands to successfully compete in the global auto industry they must:
1.    Strengthen their domestic base through consolidation
2.    Determine the Chinese brand value proposition
3.    Build critical vehicle development competencies required to achieve benchmark targets in line with their brand’s Unique Selling Proposition

And China’s policy makers must help by accelerating the consolidation of today’s fragmented auto industry and eliminating the weak brands in order to ensure the survival of the stronger brands.

China’s auto market remains buoyant

The Financial Times, November 15, 2011

Eric Zhou needs a car, and he plans to buy one – despite the global financial crisis.

Mr Zhou, a 36-year-old engineer working in Shanghai, is typical of millions of consumers who are keeping the Chinese auto market relatively buoyant as the Chinese economy is slowing and sectors from property to steel are suffering from tighter credit.

Mr Zhou says he and his wife “didn’t consider the financial crisis” when they decided to buy a car to take their son to school. “In fact, we don’t feel the financial crisis is causing any impact on our lives at all,” he said.

The same cannot be said of China’s total automotive market – the world’s largest – which is slowing, partly due to credit tightening moves by the central government. Sales of Mini commercial vehicle – small vans used largely for business – are down 5 per cent year-on-year in the first 10 months of 2011 and manufacturers are feeling the strain.

The story for passenger cars is very different. They remain resilient even after the withdrawal of tax incentives to buy small cars.

Car sales increased by 6 per cent year-on-year in the first 10 months of the year, and a recent consumer survey showed continuing strong demand for cars, especially at the higher end of the market.

Mercedes-Benz’s sales have risen 36 per cent this year, and General Motors’ sales last month increased 10 per cent year-on-year, although GM had to slash prices on its mini commercial vehicles.

This year’s 6 per cent increase in car sales, however, looks anaemic compared with the past couple of years: passenger car sales rose 53 per cent in 2009 and 33 per cent in 2010.

In the west, such a dramatic decline in sales would be seen as very bad news for the overall economy. But in China, auto market executives, industry analysts and ordinary consumers tell a different story.

“Last year’s market was on steroids, driven by subsidies, but this year the government is trying to wean the market off those drugs,” says Bill Russo, head of Synergistics auto consultancy in Beijing and former head of Chrysler in China.

Early in 2009, Beijing introduced tax incentives for small cars, as part of a broader economic stimulus package that inflated car sales in 2009 and 2010. The tax cuts were withdrawn this year. As a result, the China Association of Automobile Manufacturers (CAAM) recently forecast total vehicle sales would rise by less than 5 per cent this year.

Mr Russo says that is not bad news for the Chinese car market: “I don’t think car sales are signalling that the fundamentals are weak at all. If anything, it is the opposite: 4 or 5 per cent growth coming on top of a blowout year last year is pretty solid,” he says.

Passenger cars, one component of total vehicle sales, could grow even more strongly, by 10 or 11 per cent this year, says Klaus Paur of Synovate, a Shanghai auto consultancy. “The fact that we had two tremendous years of growth has blurred our view of reality. The reality is we still have a growing market, just at a higher level,” he says.

Chinese consumers are much less affected by the pessimism that has beset shoppers in other countries. According to the latest annual survey of Chinese consumers by McKinsey, they are more optimistic than last year: 58 per cent think their income will rise in the next year compared with 39 per cent in 2010.

Shaun Rein, whose firm China Market Research Group interviewed 300 consumers in eight cities recently about their car purchasing plans, says “the economy is not stopping them from buying”.

As Dan Akerson, GM chief executive, said in Shanghai earlier this month: “You can’t have totally unbridled growth in a country evolving as quickly as China.” He predicted 7-10 per cent market growth this year, adding: “I think that’s very healthy.”

China’s auto market remains buoyant - FT.com


Bill Russo to Conduct Analysts' Roadshow on Week of Nov. 21

Singapore, November 21-22, 2011
Hong Kong, November 23-24, 2011

Over 20 meetings and group discussions with leading institutional investors will occur over a 4-day period.  The briefing topic is:

An Assessment Of Trends And Opportunities In China’s Automotive Industry

Keeping Pace With Rapid Developments In The Battleground For Dominance Of The 21st Century Global Auto Industry