Peking University Business School, May 5, 2009
5.06.2009
GlobalAutoIndustry.com Publication of "The Coming Structural Realignment of China's Automotive Sector"
ASIAtalk and CHINAtalk eJournals, May 2009
We are fortunate to be living in historic times. While in the grip of the most severe economic contraction since the 1930s, it is in such times – and only in such times ‐ that truly transformational structural change is possible. While much has been said and written about the rapid emergence of China as the largest automotive market in the world, this obscures the reality of just how many structural problems remain unsolved in an industrial sector that China describes as a “pillar” of its economy. In this first article in a 3-part series on the China auto industry, Bill Russo describes how the global financial crisis will be the triggering event that precipitates a major restructuring of the Chinese automotive sector.
See the full article on GlobalAutoIndustry.com:
The Coming Structural Realignment Of China Auto ASIAtalk May 2009
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4.28.2009
The Coming Structural Realignment of China’s Automotive Sector
Bill Russo
President, Synergistics Limited
April 28, 2009
We are fortunate to be living in historic times. While in the grip of the most severe economic contraction since the 1930s, it is in such times – and only in such times - that truly transformational structural change is possible. While much has been said and written about the rapid emergence of China as the largest automotive market in the world, this obscures the reality of just how many structural problems remain unsolved in an industrial sector that China describes as a “pillar” of its economy. In this first article in a 3-part series on the China auto industry, I will describe how the global financial crisis is the triggering event that will precipitate a major restructuring of the Chinese automotive sector.
The global car industry has long suffered from overcapacity resulting from overly ambitious assumptions for market growth combined with optimism surrounding whatever product or technology was being offered. Ambition and optimism are the first victims of a recession as businesses struggle to realign to a new era of fiscal conservatism. This translates into a major reduction in capital spending and asset sales as businesses attempt to adjust their size in order to regain a profitable footing. The financial crisis, which worsened in the 3rd quarter of 2008, has dragged the world into its deepest economic downturn since the Great Depression. A unique attribute of this recession is how quickly the financial turmoil has spread across the world as a result of global interdependence along with a synchronization of business cycle among these interdependent markets. According to a recent forecast from Global Insight, 2009 will likely witness the first drop in global GDP since the 1930s.
In previous economic crises, the U.S. has always come to the rescue and restored hope to a troubled world. The $838 billion economic stimulus bill enacted in February is designed to create millions of new jobs and jump-start the economy. However, most experts do not foresee a recovery until 2010 at the earliest. As a result, the world is increasingly looking elsewhere for leadership and signs of recovery. China has for many years experienced the most explosive economic growth, and as such can be viewed as both an opportunity as well as a threat to the stability of the world’s economy. After many years of double-digit GDP growth, China has seen a dramatic slowdown in its GDP growth in 2008 to less than 6%. However, this stands in sharp contrast to the declines witnessed virtually everywhere else in the world. As a result, China is increasingly viewed as a bellwether market for signs of an economic turnaround.
Much has been said and written about China’s rapid rise to the top position in domestic market auto sales. In fact, China has surpassed the US in automotive sales for each of the first 3 months of 2009, most recently selling 1.11 million vehicles in March compared with 857,735 new vehicles in the US. In fact, 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%, or 5.91 million units, represent passenger vehicles (extract the buses, trucks and other commercial vehicles).
Given recent developments, and barring a sudden and unexpected recovery in US demand, China will likely surpass the US market in sales for the overall calendar year 2009. Given such startling developments, one might expect a bit of a “swagger” to emerge from the Middle Kingdom’s automotive policy makers. But this is definitely not the case, for they recognize that they must now seize upon the crisis to trigger the necessary structural changes required to build a healthy and sustainable auto sector.
Manifestations of the Global Financial Crisis in China
While auto sales indicate that things are simply humming along in China, one must look deeper into the facts before drawing quick conclusions. As noted earlier, overall GDP growth – while positive at 6% - was dramatically lower in 2008 and in fact well below the 8% target that Beijing views as “essential” in order to sustain the Chinese economic engine and maintain “harmony”. There has been a steady rise in inflation over 2 years to a nearly 6% level in 2008, coupled with a strengthening of the Chinese RMB vs. the US dollar. Additionally, there has been a significant reduction of Foreign Direct Investment (FDI) coming into China resulting from the stress placed on the balance sheets of companies investing globally. All of these factors create real challenges for sustaining the development of the Chinese economy. The impact of the crisis across the Chinese economy can be summarized as follows:
· Industrial production dropped 5.3%
· Money supply dropped 12%
· Vehicle exports saw first decline over past decade
· 9% reduction in year-over-year growth in exports
· 20 million migrant workers lost jobs
· 6.1 million new university graduates seeking jobs
China’s Commitment to Stimulus
Understanding the extent of the threat of the crisis to China’s economy, the government has undertaken a series of focused stimulus actions that are designed to help China achieve its 8% GDP growth target. These actions can be grouped into four areas:
Boost Domestic Demand
• Fiscal subsidy to farmers for electronics and vehicle replacement
• Car purchase tax rate reduction by 5%
• Tax and interest rate cut for housing transaction
• Relax consumer credit to promote individual and family buying
Stimulate Backbone Industries
• Published stimulus plans of 10 key industries in Jan.-Feb.,2009
• Encourage industry consolidation and technology upgrade
• Promote export and autonomous brand development
Increase Money Supply
•New bank loans soar to 1.6 trillion RMB in January
•Government spending allocated to infrastructure and public insurance system
•Lowered bank interest rates by 5 times in 2008
•Eased deposit reserve ratio requirement of commercial banks
Secure and Create Jobs
•Encourage development of medium/small enterprises and service industry
•Support SOEs to reduce job cuts
•Ease enterprise burden by suspension or exemption of social insurance fee
•Offer professional training to migrant workers and university graduates
Given the positive developments observed of the 1st quarter of 2009, it appears that these stimulus measures are having an impact: it is evident that Chinese consumers – especially first time car buyers - are in fact helping to boost domestic demand and are taking advantage of the tax and other incentives currently available.
Rising from the Ashes
While China pursues a plan to achieve 8% overall GDP growth, and continues to enjoy strong automotive sales growth, the global automotive industry faces a crisis of historic proportions. Global light vehicle production declined by 4.6% in 2008 to 67 million units and the Global Insight forecast for 2009 calls for a further double-digit decline to fewer than 60 million units in 2009, with the North American and Western European markets taking the largest reduction. As a consequence, the US, Canadian and other European governments have been asked to help companies like GM, Chrysler and others bridge the crisis. Lacking a blueprint or vision for transformation, there is a great risk that short-term government actions taken during a crisis either prolong the inevitable restructuring, or worse – generate unintended side-effects which weakens companies which would otherwise emerge stronger when the recovery does inevitably come.
However, this stands in sharp contrast to the situation in China. The volume declines in the global markets render China’s recent growth even more remarkable. The expectation going forward is that growth in the automotive industry will in large part be centered on the growth of the China, India and ASEAN markets, and over the next 10 years China will account for more than half of the growth of the Asia Pacific region.
In spite of this, 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 150 registered automotive manufacturers. The top 10 OEM’s account for 83% of vehicle sales and the top 20 OEM’s account for 95% of sales. 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 66% of 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 is mirrored in the automotive component supply base, where Jack Sayer of Sayer Partners LLC has recently estimated that 40% of auto suppliers face severe liquidity issues in 2009.
As a result, the Chinese government has pulled-ahead its plan to consolidate the OEM 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 plan clearly articulates the vision for industry consolidation, technological upgrade, export, and brand development. The main objectives of the policy can be summarized as follows:
To boost sales and production in 2009 to 10 million units and keeping growth at about 10 percent in the next 3 years
Ø Market share of passenger vehicles with domestic brands should rise up from 34% to 40%
To consolidate numerous small regional manufacturers into bigger national auto groups
Ø No. of OEMs account for 90% of total vehicle market to reduce from 14 to 10
To encouraging use of more fuel-efficient, lower-polluting vehicles
Ø Market share target of 1.5L and below passenger vehicles to increase to 40%, among which 1.0L and below will be 15%,
Ø Building up total 500K new energy vehicle (NEV) capacity, and increase market share of NEV to 5% of total PV sales.
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:
TIER 1:
· Shanghai Automotive Industrial Corp (SAIC)
· First Auto Works (FAW) Group
· Dongfeng Automobile
· Chang’An Automotive
TIER 2
· 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, Xiali, 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. Clearly, the China government has a playbook for the industry and intends to use the economic crisis as the triggering event to start calling the plays.
Please Note:
This is the first in a series about the developments occurring in the Chinese automotive industry. The next installment will address the role of M&A –in particular, how the acquisition of foreign assets can further the development of the Chinese automotive industry.
Link to article published in GLGNews: http://tinyurl.com/deauyn
4.25.2009
China Takes The Lead In The Automobile Industry
Newsweek International Edition COVER STORY, May 4, 2009
China is now the world's largest market for cars; Chinese leaders aim to own the biggest piece of it
by Melinda Liu, NEWSWEEK
American tastes dominated the world's automotive market for a century, but all that's changing now. Today it's the increasingly well-to-do Chinese car-buyer that industry wants to woo and win, thanks to this incredible fact— China has, over the last three months running, surpassed the U.S. in terms of volume sales of automobiles. Ever wonder why Ford's new Fiesta has an instrument panel that looks like a cell phone? Because that's what's familiar to its target audience of 20- and 30-something Chinese. It's also why Chinese versions of the Fiesta come in sedan size, with four doors, rather than as hatchbacks, which are anathema in the Middle Kingdom.
The future of auto design was on display last week at the Shanghai Auto Show, where, in 30 football fields worth of space, international and domestic carmakers vied for the attention of Chinese consumers. The timing of the biennial event, China's oldest international auto show, was fortuitous. No one expected the Middle Kingdom to nab first place in the global auto market from America for at least another decade, but the financial crisis has had a sharp dampening effect on U.S. sales. The Chinese, meanwhile, spurred on by their government's enormous stimulus package, have kept spending. Beijing's 2009 auto sales target is 10 million units, an increase of 10 percent from 2008, and a figure that would cement its position, with an estimated 1 million more unit sales than the U.S. "No one expected China to emerge as the leading volume market this fast," says William Russo, a Beijing-based business consultant who specializes in the automotive sector. "This will give China a huge say in setting the standards and architecture for the entire industry."
If Beijing gets its way, the future will be small, green and—of course—made in China. The shock of the global financial crisis, and the resulting need to stimulate the auto sector has persuaded Beijing to dig deep into government coffers with more than $733 million to promote the rural sales of small cars and trucks (which domestic makers specialize in) and $220 million to fund and upgrade new green automotive technologies that many consider to be the wave of the future for the industry. Ultimately, Chinese planners want to create a new Detroit—a leaner, meaner, cleaner global automotive hub.
Click here for the entire article...http://www.newsweek.com/id/195095/page/1
4.24.2009
Electric Cars: The Infrastructure Must Come First
Telegraph.Co.UK, April 22, 2009
Reposting from Malcolm Moore blog
Bill Powell, at Time Magazine, captured up the mood at the Shanghai Auto Show this week brilliantly when he described Western car executives as "like drowning men grasping the only piece of buoyant driftwood in sight".
Photo: Reuters
China is the only major car market still growing in the world, and it could mean the difference between life or death for some of these companies.
There's also been a lot of buzz that China is the place where electric cars will take off. Nick Reilly, the head of GM in Asia, said there was a "clear need" in Chinese cities for a small electrified car and that if the government handed out enough subsidies, "there could be very rapid sales growth".
Chinese companies are obviously keen on the idea, and there were eight different electric cars on display in Shanghai.
There's been a lot of hype about how companies such as BYD, which is 10pc-owned by Warren Buffett, has amazing battery technology that will help them lead the field. But the executives I spoke to were very skeptical.
Despite the non-stop news coverage, BYD has only managed to sell 80 of its electrified hybrid cars since they went on sale last December, and many of those were to the Shenzhen government.
Mr Reilly said that a closer look at the range and recharging abilities of the Chinese cars showed they weren't very different from technology elsewhere.
What will make China the leader in electric cars, however, is the infrastructure. Again according to GM, China is already able to absorb the impact of a huge switchover to electric vehicles without much new investment.
Kevin Wale, the former head of Vauxhall who now heads GM in China, said: "We are talking to the power grid, as are all car manufacturers who are interested in electric cars, and we don't think infrastructure is a major issue. The widespread distribution of electric cars can be more than covered by the existing power grid."
On top of that, China is pouring money into new nuclear power stations, wind farms and hydroelectric dams to increase the share of electricity it produces cleanly. As Greenpeace says, an electric car is only as green as the electricity it runs on.
Bill Russo, the president of Synergistics and the former head of Chrysler in Northeast Asia said China's strategy is straightforward: "1. China creates infrastructure first, 2. foreign brands bring electric vehicle technology to the largest market, 3. China "adapts" technology".
It's not a new strategy, but it's been working for the Chinese car industry so far...have a look at this blog or this one. And the UK government might do well to learn from China's example before splashing its cash on subsidising electric vehicles rather than on the grid and power stations supporting them.
4.21.2009
Why carmakers are speeding to China
Marketplace National Public Radio, April 20, 2009
Despite its struggles, General Motors is planning to increase its sales in China. Scott Tong reports from the Shanghai International Auto Show on why GM and other automakers are zooming to the Chinese market.
Ford is showing off a cleaner transmission technology called Ecoboost. GM and Toyota display plug-in hybrids. But Bill Russo of consultancy Synergistics is watching the Chinese competition. Most major Chinese brands at the show are displaying their own alternative energy vehicles. And they have the financial backing of Beijing.
Listen to this story...
4.17.2009
Shanghai Auto Show Preview: From the Panamera to the Riich
April 17, 2009 Reposted from Motortrend Wide-Open Throttle: With auto sales in China continuing to grow, venues like the upcoming Shanghai auto show are becoming more important to automakers -- and not just to the hometown players like Great Wall and Geely, which is showing its Lambo-doored Geely GT show car as its highlight. Read on... |
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