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 the Automotive Industry: Part 2

Plausible Scenarios for China in 2025

Click here to read Part 1

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 Tse
Founder and CEO,
Gao Feng Advisory Company

edward.tse@gaofengadv.com

Chee-Kiang Lim
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.

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