Dec. 24 (Bloomberg) -- Bill Russo, senior advisor at Booz and Company, talks with Bloomberg's Haslinda Amin about Geely Automobile Holdings Ltd.'s bid to buy Ford Motor Co.'s Volvo unit.
Ford and Zhejiang Geely Holding Group Co. agreed on most conditions for a sale of Sweden-based Volvo Car Corp. and plan to sign a definitive agreement by March 31, with a sale to be completed by June 30, the companies said in statements yesterday. No financial details were provided. (Source: Bloomberg)
What’s your opinion on the development status and patterns of SUV industry? What is the opportunity and challenge in SUV industry?
Bill Russo:
The overall SUV segment in China is experiencing healthy and steady growth, despite the impact of the global financial crisis and the increase in oil prices. Year-to-date September 2009 SUV sales have experienced a 32% year-over-year growth, totaling 441,600 units. Opportunities for SUV growth still come from fast-growing demand for compact SUVs. Chinese consumer preferences are developing in recent years, and Chinese drivers are beginning to seek the enjoyment of both on and off-road utility vehicles. Compact SUVs provide a good balance of capabilities and low fuel consumption for such consumers. This preference for compact SUVs is evident from the year-to-date sales volumes, where 4 out of the top 5 SUVs are compact, accounting for 50% of total SUV sales. Challenges mostly lie in those large displacement and medium to low-end SUVs. Many products above 3.0L lack brand and technology advantages, and concern over higher fuel cost make customers hesitant to choose them.
What are the brand characteristics of SUV industry？
Bill Russo:
In the Chinese SUV market, there are two groups of OEMs that enjoy high brand loyalty which contribute to success in the market. One group are Japanese products such as Toyota RAV4, Highlander, LandCruiser, Honda CR-V, Nissan Patrol, etc. They are volume leaders and dominating the compact and full-size SUV segments. Another group are the German makers, Mercedes, BMW and Audi. Their luxury SUVs are mainly leading the imported and premium segments. Hyundai is also growing very fast after localization of their Santa Fe in Shandong province.
Local brands such as Great Wall, Chery and Jianghuai are attempting to leverage their cost advantages by offering lower-priced models, but are confronting the challenge to establishing their brand value proposition in the SUV segment. Building their brand value proposition must be their first priority, or these manufacturers will not be able to compete in the middle and high end segments of the SUV market
What are your thoughts on the SUV development of the main local OEMs, such as Jiangling Motors Corporation, Chery and etc ? What is the gap between local OEMs and foreign brand?
Bill Russo:
International brands still lead the market in China with products like Honda CR-V, Toyota RAV4 and Toyota Highlander. Chinese brands are improving gradually, and occupy three seats among the top 10 best selling SUVs in the China market. Great Wall leads the domestic SUV market. They sold 5600 units SUVs in September. Great Wall sold over 43000 units from January to September and ranks the third overall in China.
As noted above, the gap between local and foreign brands is mainly in brand image and brand equity, but not limited to that. Chinese manufacturers must strive to close the gap of technology and quality with international OEMs, particularly in safety, emission and durability. Whether they can break through major technical barriers such as powertrain, active and passive safety will determine their competitiveness against foreign brands. Successful entry to developed markets (EU and US) by Chinese brands is also subject to closing these gaps.
For these reasons, the SUV market share of local OEMs has decreased from January to August from 46% 28%.
How does brand image influence on SUV segment?
Bill Russo:
The above mentioned two groups of International OEMs are good examples. One of major sources of profitability is their brand premium, which can be determined simply from price comparison. Honda CR-V is listed at double the price of a similarly-sized sized Great Wall Hover. Having brand equity and a clear value proposition is a key success factor for Chinese SUV makers to compete in the developed markets. It is also very critical to the long-term success in the domestic market. The growing SUV market in China also demonstrates the maturity of the market, as the taste of Chinese drivers grows beyond sedan cars. As consumer buying power increases, they will seek brands that fit their lifestyle and aspirations. Improving brand image is critical to local SUV makers such as Chery, Geely and Great Wall.
Compared with high-end SUV, is low-end SUV still attractive in China market?
Bill Russo:
We first need to clearly define of “high-end” and “low end” SUV. With regard to technology, low-end SUVs have been based on older truck platforms, which fail to meet stricter safety and emission standards. These should eventually phase out from the China market. If it is about price, competitively priced and good quality local brands can still maintain their growth momentum in broad Tier 2 and 3 markets. Great Wall Hover and Chery Tiggo are good examples. By this definition, it seems that the low-end SUV is still attractive but it will hard to predict market volume. But competition in the low-end is purely on price so profit margin is low which may not be attractive to manufacturers seeking to raise their brand equity and image.
Which kind of SUV will take more market share in China market in the future, low-end or high-end?
Bill Russo:
As described earlier, local brand economical SUVs, Japanese compact SUVs and European luxury SUVs are serving different customer groups and markets. It’ll be quite certain that local brands will capture more market share based on their aggressive product launches and pricing advantages.
Do you think there is decline in SUV market? Some of the companies are in poor performance, what are the main reasons ?
Bill Russo:
SUV market can maintain a two digit market growth over the next few years, given the robust demand and product offerings. Some knock-off products without technical and brand advantages will lose in the market very soon. Market share will be dominated by several leading brands that will broaden their product reach in regional market, including Tier 3 and 4 cities.
What is the trend of M&A in SUV industry?
Bill Russo:
The entire automotive industry is restructuring and consolidating, and SUV is no exception. GAIC acquired Changfeng Motor, a SUV producer of Liebao and MMC Pajero is one good example. Similar potential acquisitions also happened between other SUV and car manufacturers, such as BAIC and Fujian Motor, Chery and Jianghuai (ongoing). There are many medium and small SUV producers, like Zhongxing, Shuanghuan, Beijing Auto Works that are quite vulnerable and will face challenges to survival in a hyper-competitive market.
Another type of M&A trend is overseas acquisition and expansion. However, whether it is economically viable to acquire expensive but small volume SUV platforms is a question for almost every intended Chinese OEM. Tata’s experience with Land Rover is a good example of the financial burden and risk associated with such an acquisition.
What is your suggestion on the strategy and innovation of local SUV OEMs?
Bill Russo:
There are several alternatives for China local VMs to close the gap with international peers on technology and brand image, such as M&A, JV, strategic alliance, and license manufacturing. Independent of which alternative is chosen, it is imperative for Chinese OEMs to fully evaluate their core competency and desired value propositions. All local SUV OEMs must focus on improving brand value, quality and differentiation, and not purely rely on low cost. One good example is Huatai Motor, they built their own SUV capabilities from a license manufacturing relationship with Hyundai to produce the Santa Fe, and subsequently developed their own brand SUVs and sedans.
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Our readers are mainly targeted in the decision-making management, such as directors and supervisors of corporations, the EMBA schools of national well-known colleges, private entrepreneurs and other emerging social groups.
With an electronic version covering 27 countries, our magazine is published throughout the world. We have a circulation of 67,000 which is certificated by the international organization of BPA in November of 2008.
China is the noteworthy exception. In 2009, China will easily surpass the US in total car sales to become the world’s largest automotive market. China’s vehicle sales will surpass 13 million units – approximately 3 million units more than the second largest market, the United States. To highlight how fast things have changed, auto sales in 2009 will be about the mirror image of sales in these same markets in 2008, when the US sold a little over 13 million versus China’s 9.7 million units. While it may not be apparent to the rest of the world, these initiatives are accelerating not just China’s economic development – they are also accelerating the transformation of the automotive business model, as global auto makers shift their focus to the growth markets, led by China.
The astonishing growth in car demand is a direct result of many factors that are fueling China’s economy. This includes aggressive tax cuts as well as a significant investment made in the development of the infrastructure to support transportation. The China government views the automotive industry as a “pillar” of its economy since it brings technology, jobs and investment to the economy. As such, several agencies of the China government play an active role in sponsoring initiatives to further stimulate automotive development and growth.
Driven by the onset of the global financial crisis, the Automotive Industry Stimulus Plan published in early 2009 took specific measures designed to spark the growth of consumer demand. Measures including the reduction of sales tax for cars below 1.6L engine displacement, along with subsidies for new minibus or light truck sales for rural residents have accelerated the auto market expansion particularly in China’s lower-tier cities, helping to boost the performance of the manufacturers of these smaller vehicles.
While aggressive tax cuts and subsidies have been behind much of the demand growth in 2009, the question now turns to whether this robust demand growth can be sustained in 2010. While very few expect a repeat of the 45% growth experienced this year, most auto executives believe that the fundamentals are there for growth to push sales up at least 10 percent in 2010 even without the incentives.
A key reason for continued growth is the rapid development of China’s lower tier cities. While China’s explosive automotive growth has been most evident in the Tier 1 cities, it is important to note that the trends of urbanization and growth of per-capita GDP will continue into the foreseeable future. As these factors are directly linked to the growth in demand for automobiles, one can expect a continuation of growth next year and thereafter. Urban wealth accumulation is undoubtedly fueling the growth in automotive sales. The fact that 85% of all vehicles are sold to urban residents is a clear sign of the relationship.
There is no mistaking the trend of permanent migration of rural population to existing urban areas. Looking forward, it is expected that nearly two-thirds of China’s population will be in urban areas by 2020. This represents a whopping rise in urban population of nearly 200 million people in just over 10 years. Essentially, China creates the population-equivalent of a city of between 1.5 – 2 million people each month! It is no wonder why China’s cities are continually under construction.
Independent of whether stimulus measures are extended, it is likely that next year’s demand will likely shift to from an “exponential” to “stable” path. As income levels continue to rise, demand may begin to shift towards vehicles and segments offering more appealing content and features, which may create opportunities for manufacturers to improve their product mix.
While many Vehicle Manufacturers have reported robust sales in 2009, what may not be understood or appreciated among those who are observing the growth in sales is that this is a market where quantity of sales should not be confused with quality of sales. The China market is now experiencing what many companies doing business globally have come to understand call “hyper-competition”.
Early-movers in the China market such as Volkswagen and General Motors have enjoyed significant profit margins by occupying mid-size, full-size and MPV segments without a great deal of competition. In such a market environment, strong profits could be made on products such as the VW Santana and the Buick GL8 minivan – older technologies that dominated their segments with good margins. However, today’s China market no longer offers such an easy road to profitability. Virtually every major vehicle manufacturer is now present in the China market. A recent J.D. Power & Associates study has reported that many of the cars sold in 2009 were in low-end segments that are eligible for tax incentives and that many of these cars earn the manufacturers as little as $100 each.
However, hyper-competition actually began several years ago, with the onset of a phenomenon called “net negative pricing”. The future outlook is that local brands and international brands will install more capacity in China, placing even more pressure on pricing in order to increase capacity utilization. Weak brands and older models will become the first casualties as market and competitive forces squeeze them out. The competitive battle can only be won with strong brands and contemporary models that can be delivered profitably to savvy Chinese consumers with choices that demand a competitive price.
In 2010 we can expect to see even more intense competition among the foreign and domestic brand vehicle manufacturers as they attempt to capture growth opportunities in China. As this is happening, the local manufacturers will strive to upgrade their brands and product portfolios to meet the more upscale image aspirations of Chinese consumers.
The dramatic shifts that have occurred over the past year in the structure and brand portfolios of the vehicle manufacturers are simply the early stages of a process of asset reallocation and global realignment that will unfold over many years. These trends are reshaping the brands, products and global footprint of those who hope to prosper in the 21st century automotive industry. Indeed, China has taken center stage in the battle for global auto industry dominance.
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About the author: Bill Russo, Gasgoo's columnist, is a Senior Advisor with Booz & Company as well as the Founder and President of Synergistics Limited. He lives in Beijing and has more than 20 years of experience in the automotive industry, most recently serving as Vice President of Chrysler's business in North East Asia.
(Bloomberg) — Ai Li's Buick may help push China past the U.S. as the world's largest car market this year. That may be little consolation to General Motors Co. and Volkswagen AG as overcapacity in the country saps profits.
Ai, a 30-year-old Beijing book editor, stopped saving for an apartment and bought a Buick Excelle in September, lured by a tax cut of 6,000 yuan ($880) for the car.
"I wouldn't have bought the car if it wasn't for the tax breaks," Ai said.
Government support has helped cause a 42 percent jump in China vehicle sales this year. The country is set to surpass the U.S. as the world's largest auto market and is drawing investment from Ford Motor Co., Hyundai Motor Co. and GM. Next year, growth will slow to less than 15 percent, according to Volkswagen and SAIC Motor Corp., threatening profit margins in an industry that can already build more cars than it can sell.
"Automakers have been relying on surging sales growth to offset profit margins that are falling because of rising competition," said Jenny Tian, a Beijing-based partner at Springs Capital, which manages $160 million in assets. "That won't work next year."
China's full-year auto sales may be about 13 million, compared with industrywide capacity to build 15 million vehicles, according to Booz & Co., which advises carmakers and investors in China. By 2015, output may reach 15 million, while capacity may be 20 million, according to Koji Endo, managing director of Advanced Research Japan in Tokyo.
"Automakers need to make sure they have the right size and the right models in the China, otherwise they will be left with overcapacity and lower profits," he said.
China's 100-plus automakers are wrestling with low margins because of competition and a preference for low-priced models. Carmakers get an average profit per vehicle of between $1,000 and $3,000 in China, depending on model size, compared with about $10,000 in the U.S., according to Endo.
"There's a huge gap in profit between China and the U.S.," said Yale Zhang, a Shanghai-based director at CSM Asia, an auto consulting company. "It may take China three to five years to surpass the U.S. in terms of profit."
About 20 percent of China's auto sales are low-cost commercial vehicles that sell for as little as $5,000, Zhang said.
Automakers face possible overcapacity in China after expanding to offset sales slumps in the U.S., Europe and Japan. U.S. vehicle sales dropped 24 percent to 9.4 million in the first 11 months because of recession and rising unemployment, forcing General Motors Corp. and Chrysler LLC into bankruptcy. China vehicle sales rose to 12.2 million.
Chen Bin, who oversees regulation of China's auto industry, also said in September that automakers should "keep their heads cool" to prevent excess expansion.
China's auto subsidies and tax cuts, part of a 4 trillion yuan stimulus package that also includes measures for electronics, appliances and houses, were due to expire around the end of the year. That caused consumers to rush out to make purchases before the incentives ran out.
"It's safest to buy now," Ai said about her Buick.
The government today said it will extend vehicle subsidies and tax cuts until the end of 2010. Trade-in subsidies will be increased to as much as 18,000 yuan, Premier Wen Jiabao said instatement posted on the government Web site. Tax cuts will be reduced. Vehicles with engines of 1.6 liters or less will be taxed at 7.5 percent next year, compared with 5 percent this year and 10 percent before the stimulus measures were introduced.
"In the short term, because of the tax incentives, there is some cannibalization now of future sales" in China, said Yoichi Hojo, Honda Motor Co.'s chief financial officer.
Bayerische Motoren Werke AG, the world's largest maker of luxury cars, said last month it plans to build a new factory in China to meet rising demand for premium products.
The 5 billion yuan plant will have an initial capacity of 100,000 vehicles a year by 2012, eventually rising to 300,000.
Daimler AG Chief Executive Dieter Zetsche has said he aims to surpass BMW in the country and then supplant Volkswagen AG's Audi as the Chinese luxury-car leader.
Mercedes 10-month sales in China surged 48 percent to 53,300 vehicles. Audi delivered 123,400 cars to Chinese customers during the same period. BMW sold 72,000 cars in China in the first 10 months of the year.
In the U.S., auto sales fell 23 percent in September after the government's "cash for clunkers" incentive plan ended Aug. 24. The program boosted August sales 1 percent from a year earlier, the first monthly increase since 2007.
Honda hasn't made any decision about whether to add new plants in China, Hojo said. The Tokyo-based company is running at full capacity of 550,000 vehicles a year in China, he said.
"In the long term, car sales in China will grow faster than GDP growth," he said.
China, home to 1.37 billion people, may boost its economy 9 percent next year, according to the International Monetary Fund. The nation has 38 vehicles per 1,000 people, less than a third of the world average.
Other carmakers are pushing ahead with expansion plans. Ford and local partner Chongqing Changan Automobile Co. began work on a third car plant in September. GM, the biggest overseas automaker in China, said in August that it will form a commercial vehicle-making venture with China FAW Group Corp. Volkswagen, ranked second, plans to invest 4 billion euros ($5.9 billion) in the country by 2011.
"If you establish something now, the worst that can happen is you have to wait a year or two" before demand catches up to capacity, said Joerg Mull, Volkswagen's chief financial officer for China.
Seoul-based Hyundai is planning to build a third Chinese factory as it aims to boost local capacity by 50 percent to 900,000 vehicles a year by 2011. Toyota Motor Corp. has said it intends to raise production capacity in China to 970,000 vehicles a year from about 803,000.
"We are not going to see overcapacity in China," said John Zeng, a Shanghai-based analyst at IHS Global Insight. "They're anticipating the growth trend."
While growth may come, the surging investment in China may outpace sales, leaving automakers slashing prices to keep assembly lines moving, said Bill Russo, a Beijing-based senior adviser at Booz & Co.
"That's the risk in China," Russo said. "Supply seems to be going up in excess of demand."
Click here to view original article at BusinessWeek.com
Financial Times Deutschland, Hamburg
Wednesday 09 December 2009
(Translation from German)
The number of new vehicles will soon outstrip the USA
The claim is that China is therefore set to take over from the USA, even during this year, as the world’s biggest market for cars. For the past five months already, car sales in China have been climbing by over 50 per cent, while sales in the US, Japan and Europe have slumped. In India too, the increase in car sales in the past month is at a level not seen in the previous five years.
“For most car manufacturers worldwide, China is where business is going best,” said Bill Russo from the consultancy company Booz & Company. “The challenge that lies ahead for them is recognising how the trends can be exploited.”
