30 août 2007
China's Auto Industry: Roaring Ahead
China's Auto Industry: Roaring Ahead From Business Week
Since the mainland overtook Japan as the world's second largest car market, local automakers are increasingly competitive and cutthroat
The word Longbridge was once synonymous with all that was great about British motoring. This southern suburb of Birmingham in the English midlands gave a home and a name to what was, at its peak, the world's largest car plant, producing Austin, Morris and MG Rover cars.
As the UK auto industry slipped into 20th century oblivion, the plant saw nationalization, privatization, mergers, takeovers and, ultimately, financial meltdown. In April 2005, with owner MG Rover in receivership, Longbridge closed its doors after 100 years of continuous operation, putting 6,500 people out of work.
If all goes according to plan, the lights will officially be switched back on at the end of May. This won't just bring new life - and 250 jobs - to a corner of the English midlands steeped in auto making history; it also represents a big step for the new Chinese masters of Longbridge.
Nanjing Auto plans to launch the MG-TF roadster convertible this month and the cars will go on sale later in 2007, initially in Europe. But as well as serving as a staging post for exports, it is hoped that Longbridge, and the intellectual property that came with it, will help this domestic carmaker go toe-to-toe with foreign brands in the Chinese market.
"April 8, 2005 was one of the worst days of my life," said Adrian Ross, formerly convener for the Transport & General Workers Union at the plant. "At the end of the day, as long as Nanjing Auto honors what it has said about Longbridge then I am 110% behind them. Everything is there, geared up and ready to go."
TAKEOVER BATTLE
Nanjing Auto's involvement came after a fierce battle with rival Shanghai Automotive Industry Corp (SAIC) over the assets of the insolvent MG Rover. Nanjing Auto was the small-scale upstart, SAIC the established player running joint ventures with GM and Volkswagen that build around 700,000 vehicles per year.
In the end, SAIC paid US$130 million for the rights to two Rover models and one engine series. Nanjing Auto got the rights to the MG portfolio, as well as MG Rover's production lines and other assets, for US$97 million.
SAIC released the 2.5-liter Roewe 750, based on the Rover 75. In March, Nanjing Auto announced plans to start production of the 1.8-liter MG-TF roadster and the MG 7295 and MG 7275 sedans at its new plant in Nanjing, which is partly modeled on Longbridge.
The vigour with which Nanjing Auto and SAIC competed for MG Rover speaks volumes for both the ambitions and limitations of China's auto industry.
Last year, China overtook Japan to become the world's second-largest auto market as total vehicle sales came to 7.2 million units, up 25.1% year-on-year. Passenger vehicle sales rocketed 30% to reach 5.14 million units. Having put total light vehicle sales - the bulk of which is cars - at 5.7 million units in 2006, auto consultancy CSM Worldwide expects it to nearly double over the next seven years to more than 10.3 million units.
Needless to say, the top global automakers have all positioned themselves in joint ventures with domestic firms so as to take advantage of this boom.
"If you want to have any growth in the auto industry, you have to be focused on China," said Joseph Liu, executive director of vehicle sales, service and marketing for General Motors (GM) China, which works in partnership with SAIC.
"We expect to see double digit growth every year until 2010-11."
FOREIGN DOMINANCE
GM is the market leader, selling 876,747 vehicles in China last year, up from 665,390 in 2005. Volkswagen, which runs a joint venture with Changchun-based First Auto Works (FAW) as well as SAIC, occupies second spot with 711,000 sales in 2006, a year-on-year increase of 24%. Meanwhile, Ford, partnered by Changan Auto, saw sales jump 87% to 166,722.
The Japanese carmakers are the ones that are set to see the largest near-term growth, though. CSM expects Toyota, Honda and Nissan - all relative latecomers to the market - to more or less double their China sales within five years.
It is in this cutthroat environment that local Chinese automakers are looking to step up a level in product development.
Most domestic firms entered the market by producing vehicles that were basically low cost, low quality versions of existing models. For example, the Chery QQ, one of the best selling economy cars in China, prompted legal action from GM over the vehicle's similarity to the Daewoo Matiz, produced by the US carmaker's Korean joint venture.
"It all comes down to re-engineering," said Charles Cheung, head of regional autos at Citigroup. "Most carmakers start out by replicating existing models and that is fine. To really move up the value chain, they need to reinvent themselves."
STANDING OUT
Domestic firms account for 27% of the Chinese market but it is split amongst 20 or so manufacturers. With consolidation inevitable, the race is on to develop better designs and technology and wider product ranges under respected brands.
It is a strategy that will see them gradually move up the value chain, first challenging the lower-end Korean producers, Hyundai and Kia, before taking on GM and Toyota in the higher segments.
"There is no room for a firm that only focuses on small cars - you can't get the volume and profitability," said Lawrence Ang, executive director of Hong Kong-listed Geely Automobile Holdings. "You have to be a full range car manufacturer."
Geely, based in Zhejiang province, is moving fast to expand its product range. It is expanding from one to 1.8-liter models this year, will enter the two-liter bracket in 2008 and hopes to be offering 3.5-liter cars by 2010. Geely is also sinking 6-8% of annual revenues into research and development efforts.
"When you invest in developing engines and gear boxes, it gets expensive but our long-term competitiveness depends on technology. We are catching up with international car companies," Ang said.
The advantage that SAIC and Nanjing Auto have is that they have their hands on a Western-standard design ready made. The Roewe 750 has gone straight in at mid-market level and hopes to challenge some of the established foreign players. Backed by a proven track record in producing cars through its GM and Volkswagen joint ventures, SAIC will move from own-brand sales of 23,400 this year to an annual output of nearly 180,000 by 2013, according CSM.
The projections for the smaller Nanjing Auto aren't as high but, from an export angle at least, it can call upon the strength of the MG brand. (The Rover name is owned by Ford.) "Rover didn't sell in the North American market but, in the MG, Nanjing Auto has a brand that is recognized," said Ross.
The company also has the chance to develop the car designs it acquired at a research facility set up in the UK with the assistance of MG Rover.
"In the US, it takes decades for car companies to come into their own," said Michael Dunne, vice president for Asia-Pacific at auto consultancy JD Power & Associates. "Nanjing Auto and SAIC can say: here is a car with our brand on it and it's not the result of a partnership with a foreign car company."
SITTING PRETTY
If the likes of GM and Volkswagen are concerned about being challenged in the domestic market by the parent companies of their own joint venture partners, then they aren't showing it.
"There is a degree of natural substitution but, based on our product resources, we don't really see them as a director competitor," Liu said of SAIC's Roewe 750.
In his view, GM remains innovative enough to be more than a match for its competition. He cited the launch of the Buick GL-8 - which found success as a high-end minivan when everyone else said budget vehicles were the only option - as evidence that GM has what it takes to set the standards in China.
And getting your first car on the road is the easy part. Any manufacturer that really wants to make an impression has to back this up with effective after sales services and a string of successful follow-up models that make the line sustainable.
"Brand, future technology and distribution networks are very important," said Liu. "A car is not like a commodity - you have to build up trust."
11 mai 2007
Domestic auto market presents new trends
Along with the booming of China's auto industry and the quick expansion of market scale, auto market in China is taking on six trends: internationalized development pattern, sustainable market growth, intensified competition, individualized consumption demand, private cars dominant, and second hand vehicle market expanding. At present, the 11 biggest multinational automakers have had access to China, and the majority of top 50 parts and components producers have set up manufacturing plants in China. Domestic competition in auto market has turned into international competition, especially in the fastest-growing saloon car industry, where the competition of cars above intermediate level basically exists among multinational giants. According to statistics from China Association of Automobile Manufacturers, the production and sales volume of commercial vehicle in 2006 was 2.0466 million and 2.04 million respectively, most were self-owned brands. The production and sales volume of passenger vehicle was 5.2331 million and 5.176 million, in which self-owned brands took up 41 percent. The number of saloon cars distributed in 2006 was 3.8289 million, accounting for 53 percent of total vehicle sales of the country. Sales volume of self-owned brand saloon cars was 982800 last year; with 25.67 percent market share, it wasn't the first rank any more. The Japanese-brand saloon cars achieved a sales volume of 983600 last year, taking account 25.69 percent of total made-in-China cars; it occupied the biggest market share.
The brands that ranked from third to seventh were German-brand, American-brand, Korean-brand, French-brand, and Italian-brand. Cheng Meiwei, chairman and CEO of Ford Motor (China) Ltd., said that as multinational vehicle giants continuously increase investment in China, and set up R&D centers in succession, the internationalization characteristic of China's auto market is getting clear. China is an important part of global auto market, as well as the fastest-growing emerging market. In the future 20 years, 50 percent increments of world auto industry will be created in China. At the end of 2001, China entered into World Trade Organization. Then in 2002 and 2003, China auto market increased explosively, and part of potential demand was released ahead of schedule. During 2004 and 2005, the market fell into a slump, which however, was still growing above global average level. In the year of 2006, both the production and sales of vehicle were increased by more than 25 percent, indicating that China's auto market has stepped into a sustained development period. Jiang Lei, Executive Vice Chairman of China Association of Automobile Manufacturing, said that guided by huge market demand, the vehicle consumption in 2007 will maintain a double-digit growth. It is predicted that the year-on-year increase of production and marketing shall be 15 percent, with a total volume reaching or surpassing 8.5 million. The saloon car increase shall be higher than the overall growth still. The third trend is intensified competition. Because of reasons like excessive vehicle manufacturers and surplus production capacity, the market competition in recent years has been pretty fierce, and price war is rising one after another. As insiders estimated, price war shall not come to a stop in a few years. But consumers now concern more and more about quality and after-sales service, so pure price competition shall have less and less appeal. The fourth trend is individualized consumption demand. In order to satisfy consumers' diversified demands, domestic vehicle manufacturers continuously push ahead new models, with more than 100 per year in the past two years, including entirely new models and modified models. Experts reckon that too many new models may lead to disappointed sales of a single model, which therefore doesn't make good for improving the scale benefit of enterprises. The fifth is that private consuming is turning into the mainstream. Since China entered into WTO, auto market was opened to foreign countries, pulling the rapid development of domestic auto industry. The government then issued a series of policies encouraging cars' entering into family. The saloon car market, which had been focused on institution consumers, has turned to be dominated by personal consumers. Private ownership has been the mainstream of saloon car consuming. A report from China Automotive Technology & Research Center pointed out that private consuming has increased from 58 percent in 2001 to 77 percent in 2006. The latest figure released by National Bureau of Statistics shows that, with the increasingly growth of saloon cars entering into family, the number of civil cars in China was 15.45 million up to the end of 2006, in which private cars were 11.49 million, up by 33.5 percent than 8.6067 million of late 2005. Private cars have accounted for more than 74 percent of the total of the country. The sixth trend is the rapidly expanding second hand vehicle market, which may become the new hot spot of auto market. According to the latest statistics from China Automobile Dealers Association, the volume of second hand vehicle transaction of 2006 reached 1,905,900, up by 31.5 percent compared with previous year. This was the third year that the increase rate of second-hand vehicle sales higher than that of new vehicles. Though the growth of second hand vehicle sales was 6.27 percent above new vehicles in 2006, the quantity was only 26.4 percent of new vehicle sales. Second hand market is an important part of auto market, and it has been the domination of vehicles sales in developed countries, where the sales volume of second hand vehicle is times of the new ones. The sources of second hand vehicle are enlarging, and more car owners want to replace their cars. Some experts think that China's auto market will march into a "replacement era" this year, and domestic second-hand vehicle market will show blowout in the future two years. |
| Source:CE.cn |
04 mai 2007
GM, Ford & Set Record Sales In China
By Amy Radishofski, Staff Reporter
General Motors Corp. said Sunday that it had record sales in China in 2006. With 876,747 vehicles, 2006 was 31.8 percent higher than the 208,000 vehicles in 2005.
The 2006 sales also beat industry estimates of a 24 percent increase and raised GM’s market share in China to 11.8 percent.
“Vehicle sales continued to outpace most projections as a result of unprecedented consumer demand for passenger cars,” said GM China Group President and Managing Director Kevin Wale. “While demand was particularly strong in the small car segment, nearly all passenger car segments experienced growth.”
Wale also noted that to keep up with continued market growth in China, GM will be investing an average of $1 billion annually through 2010.
At 162,722 vehicles, Ford Motor Co.'s sales, which include Ford, Lincoln, Jaguar, Land Rover and Volvo Car, for 2006 in China rose 86.6 percent, its highest year to date in China. Sales of the Ford Brand rose 89.3 percent over 2005 with 155,404 vehicles.
"China's market is a critical part in our plans in building a stronger Ford Motor Co. By working closely with our partners, we laid out robust strategy to become one of the key auto players in the Chinese market. The outstanding 2006 results clearly indicated that we are on the right track to achieve that goal." said Mei-Wei Cheng, Chairman and CEO of Ford Motor (China) Ltd.
Ford's joint venture in China, Changan Ford Mazda Automobile Co., Ltd., also saw record sales. With 2006 sales of 129,790 vehicles, it is 112.7 percent above 2005, making it one of the fastest growing automakers in the country.
"The company's $1 billion plus expansion plan, announced by Mr. Bill Ford in 2003, is about to be completed. Construction of Changan Ford Mazda Automobile's Nanjing plant and Changan Ford Mazda Engine Co. are both coming along very well, and will start production in 2007. Overall, our core strategic operations are now in place to deliver a successful implementation of our China strategy." Cheng added.
The $1 billion investment Chang mentioned was to cover expansion of production capacity, the building of a new engine plant, the introduction of new products and increasing the national dealer network.
03 mai 2007
China car exports booming
Exports of Chinese cars in 2006 mor than doubled compared with the previous year, to 340 000 units. Exprots linked to the automotive sector will account within the next ten years for 10% of the country's total export volume, or $120 bilion, compared with 1% currently. in 2006, foreign sales jumped by 120% wihile domestic sales grew by 25%, representing a total of 6,45 milion vehicles. Despite this strong performance, local auto plants are still not operating at full capacity.
16 avril 2007
12 facts about China's Auto Market
12 facts about China's auto market.
1. Car production was up 27% to 7.28 million vehicles.
2. Car sales were up 25% to 7.22 million vehicles
3. Passenger car production reached 5.23 million cars.
4. Passenger car sales reached 5.18 million cars.
5. Sedan sales were 3.83 million units.
6. Cars with 1 litre- to 1.6 litre-sized engines made up half the market
7. Commercial vehicle production was up 13.45%
8. Comercial vehicle sales also climbed 13.29%
9. 110 new models were introduced in 2006.
10. Prices of Chinese cars dropped.
11. Exports of auto goods was valued at more then $25.5 billion
12. More than 83% of the cars sold in China were sold by the top ten auto enterprises.
The auto market will play a large role in urging on the Chinese economy. Not, however, like it drives the
Japanese economy.
If Japan were not able to sell cars worldwide, the company could be in a very hurting state.
China has its 'factory of the world' base to rely on.
08 avril 2007
Chinese auto market to expect 15% rise in production, sales this year
According to the forecast in the latest report by the price-monitoring center of the State Development and Reform Commission, the auto-price in the market will still see a relatively big drop this year after experiencing a steady price reduction last year and it will go through the whole year.
According to the estimation of the report, the auto production and sales is expected to see a growth of some 15 percent this year and the growth of auto supply is likely to be 10 percent over the demand.
The report holds, the macro-controlled economic environment will continue to get better in China this year with the auto-production and sales in the market expected to realize a growth of around 15 percent.
Though we can't exclude the price increase factor of steel and rubber to incite a short-time auto-price fluctuation, yet the price rise won't be able to exert a big influence on the domestically manufactured auto-price on the whole. However, the price reduction still constitutes the main trend in the auto market this year.
Ever since last year, it has witnessed a "big drop" of the prices for many types of autos and this was followed with the increase of wait-and-see buyers with money in hand.
The report reminds consumers, the Chinese auto industry tells a high unit auto-profit with a big space for price reduction. According to the statistics, the international transnational auto-groups tell a gross profit rate of 10 ¨C 15 percent in general. But in the first half of last year though the Chinese auto-price witnessed a big reduction with the ceaseless lowering of the profit for manufacturers the gross profit rate for enterprises still remained at a high level of 22.6 percent.
The report pointed out, the Chinese auto-market after a blowout demand increase of two years the spot consumption has already obtained a full release and the Chinese auto-market is now in a transition from higher growth to a steady growth. According to the estimation the auto-supply growth this year is likely to be 10 percent over the demand and it will see an obvious tendency of the supply over the demand. With the market competition becoming serious it will see a continuous drop of the auto-price.
By People's Daily Online
13 mars 2007
Year Of The Car? Passenger Car Sales In China Up 33 Percent In First Two Months Of 2007
Beijing (AP)- Passenger car sales in China's booming vehicle market soared by 33 percent in the first two months of this year compared with the same period of 2006, an industry association said Friday.
Total vehicle sales, which also counts trucks and buses, rose 25 percent, the China Association of Automobile Manufacturers said.
China surpassed Japan last year to become the world's No. 2 vehicle market after the United States based on strong truck and bus sales, but is still in third place for sedans.
Sedan sales in January and February totaled 712,200 units, while total vehicle sales were 1.3 million units, said the CAAM, the main government-authorized industry group.
China's vehicle sales, including trucks and buses, rose 25.1 percent last year to 7.2 million units, according to the CAAM. Passenger car sales rose to 3.8 million.
In January and February, the top-selling auto model in China was the Santana sedan made by Shanghai Volkswagen Automotive Co., a joint venture involving German's Volkswagen AG, with 30,500 units sold, according to the CAAM.
The top-selling automaker was General Motors Corp.'s Shanghai General Motors joint venture at 67,500 units, according to the CAAM.
The top Chinese automaker was Chery Automobile Co., with 51,600 units sold, the group said.
06 mars 2007
China’s auto industry takes off
By Eric Baculinao
Beijing Bureau Chief
NBC News
BEIJING - Sha Heping was a proud husband on New Year’s Eve as he put down the deposit for a $15,000 subcompact with the optional sunroof, a gift for his wife who used to commute to work by bicycle every day, even in biting winter cold.
With savings from over 20 years of service as a Beijing government functionary, Sha is the latest statistic underpinning the world’s hottest market.
China sold an estimated 7 million vehicles last year, extending its lead over Japan as the world’s second-biggest auto market after the United States, and like Sha, most of the buyers were first-time car owners.
Leaps and bounds
China’s auto market has grown by leaps and bounds since it passed 1 million units a year in 2002. By 2004, it surpassed Germany as the third-biggest auto market with over 2.6 million units. It roared past Japan in 2005 in terms of domestic sales and could also displace Japan as the No. 2 volume producer by 2011, according to Global Insight, a strategic consulting company. (Japan exports nearly half its output.)
According to Chinese policy researcher Zheng Xinli, by 2020 China could well topple the United States as the world’s biggest auto market with annual output of 15 million units. By then, experts predict, China’s total car ownership could even begin to exceed that of the U.S.
Behind all this are first-time car owners like Sha, who represent a tantalizing 80 percent of China’s car buyers. That is virtually the opposite of more mature markets like the United States, Europe and Japan, where first-time car buyers have stagnated below 15 percent, according to J.D. Power.
With the rapid expansion of China’s urban middle class, analysts predict that first-time car buyers will continue to fire up China’s red-hot market, setting the stage for more massive investments and intense competition among local and foreign car manufacturers alike.
Reversal of fortunes
For America’s auto giants, struggling to reverse declining fortunes at home, China’s market has become the focus of global expansion. Led by chief executive Rick Wagoner, who predicted two years back a “great gold rush” in China, General Motors is pouring in $3 billion over three years to expand capacity, on the calculation that some 74 million Chinese families can now afford to buy cars.
GM holds the No. 1 position, with 665,390 units sold in 2005 for 11.8 percent market share, and sales grew further in 2006 to 876,747, led by its fast-selling Buick Excelle passenger car. Germany’s Volkswagen, with a decade-long head start in China, is closely catching up as market leader.
In a bold shift in strategy that will pit it head-on against upstart local manufacturers, GM has announced that more resources will be channeled to small car production, which represents China’s fastest-growing market.
“We are laying a plan to compete better at the bottom end,” declared GM’s president for Asia-Pacific operations at the November auto show in Beijing, citing GM’s spectacular success with a joint venture that has racked up six-fold growth in sales with its bare-bones minivans costing less than $6,000.
DaimlerChrysler and Ford are not yet following the rush to the low-margin segment, but nonetheless have ambitions to expand in subcompact and upmarket production. Late-comer Ford has more than doubled its sales with 129,790 units sold in 2006, sixty percent of which was accounted by its hugely popular Focus model line.
“The demand has been so strong for all our models that we have emptied our vehicle storage compounds,” said David G. Thomas, general manager of Changan Ford Mazda Automobile.
What has intrigued analysts, however, is the recent deal announced by Chrysler Group chief executive Tom LaSorda, which 75 American dealers have signed up for, to bring Chinese-made cars to the U.S. market for the first time.
Taking advantage of cheap Chinese labor and manufacturing costs, Chrysler has contracted China’s Chery Automobile Co. to build subcompact cars in China for Chrysler’s Dodge brand.
“Chery won’t create any American manufacturing sites. This time, Chrysler will serve as mere distributor. ... This looks remarkably like the Wal-Mart-ization of the U.S. auto industry,” said Tom Adkins in his column for the conservative Web site CommonConservative.com.
Chinese export potential
For some analysts, however, the Chrysler-Chery deal may well be a signal that the manufacturing of vehicles, especially for the entry-level market, is starting to shift to China, in much the same way that production of garments, shoes and TV sets did.
Chinese manufacturers, which now control some 27 percent of the domestic market, have become masters at controlling costs and holding prices down, with a typical Chinese auto worker earning $1.95 an hour against a German counterpart’s $49.50 an hour.
Government-owned Chery itself, which started with $25 million in second-hand Ford production equipment, turned out only 2,000 vehicles six year ago. Last year, it sold 305,236, a surge of 118 percent over the previous year, with plans to double that again by 2008.
Privately owned Geely Group, founded by legendary engineer Li Shufu, a poor farmer’s son, has caused some sensation lately with a deal to build London’s iconic black taxicabs.
Li obtained his license only six year ago and began with crudely built copycat hatchbacks powered by Toyota-designed engines. With initial output of 5,000 in 2001, Geely today turns out 180,000 a year, with various models of sedans and sports cars, including own-engineered six-cylinder engines.
China is now a net exporter of vehicles and parts, with 340,000 units —a third of them sedans — sold last year mostly to the Middle East, Russia, Latin America, Africa and Southeast Asia. Exports have doubled every year since 2004, with Chery and Geely taking the lead.
China’s top economic planning commission recently said ongoing massive investments could boost vehicle production capacity to 20 million units by 2010, against projected sales of $9 million to $10 million.
While the government unveiled steps last month to rein in overcapacity, it is also providing incentives to open up export markets. China’s official goal is to export $120 billion or 10 percent of the world’s total in 10 years, a grand ambition given that its automotive export earnings were only $10.9 billion last year.
Pitfalls of motorization
Yet for all of China’s big ideas for the auto industry, there are obvious pitfalls — namely the insatiable appetite for oil and in turn, the resulting pollution.
“In the medium- and long-term, fuel consumption and its availability, together with environmental and infrastructure concerns, represent the major constraint to growth,” said analyst Ashvin Chotai of Global Insight.
Chinese experts have calculated that domestic cars, which accounted for 10 percent of oil consumption in the mid-'90s, could burn 40 percent by 2010. That could translate into China depending on imports for 70 percent of its oil needs, a dangerous prospect given the tight and expensive global oil supply.
“We are not ready for massive motorization because we have to take into account our huge population and energy supply,” said Dr. Chen Jian, director of the Contemporary China Research Center at Tsinghua University
Vehicle emissions have also become the largest source of urban pollution, with the state Environment Protection Administration warning that motor exhausts could account for 79 percent of total air pollution in China.
Beijing, which is struggling to hold a "green" Olympics in 2008, has the worst air pollution of any major city, registering 145 micrograms of dust particles per cubic meters in 2005, seven times the WHO-recommended limit of 20, according to one Asian Development Bank report.
The U.S. now accounts for nearly a quarter of the global emission of carbon dioxide, the primary culprit for global warming. China’s rapid industrialization and motorization could make it an even bigger emitter of carbon dioxide than the U.S. by 2010, environmental campaigners warn.
“The Chinese government has been focusing too much on growth, and it is already a little late in making the growth more sustainable, with pollution already getting to irreversible levels,” warned Chotai of Global Insight.
Biggest problem: parking
Congested roads are now most evident in Beijing, with its vehicles approaching 3 million this year, and 3.5 million by the time of the Olympics, even as 2.5 million bicycles also vie for limited road space.
But the city has only about 1 million certified parking spots, said Liu Xiaoming, deputy director of Beijing Communications Bureau. Infrastructure planning for the 208 Olympics only prepared for 2 million vehicles.
“My greatest headache is parking,” confessed Sha, the first-time car buyer. “My wife will probably have to park on the sidewalk as all parking spaces in our housing compound are full."
Big cities may have problems, but most of China can still accommodate more cars, arguedYale Zhang, director of Greater China Vehicle Forecasts, citing inland second- and third-tier cities.
“Notice the speed with which China built more highways, every year,” he said, projecting that China’s local governments will build subway system and mass transit even as more private cars take to the streets.
01 mars 2007
Chinese Automotive Market 2010
From Mercer Management Consulting http://www.altassets.com/casefor/countries/2005/nz6592.php
Private equity practioners will discover that brand management and customer retention, not production strategies, will decide who wins the battle for the Chinese automotive market. These are the principal findings of the latest study from Mercer Management Consulting, which concludes that only producers with strong and distinctive brands will survive the impending consolidation of the industry.
Ultimately, the battle for China will be won in the minds of consumers. That is why auto manufacturers should focus their China strategies on building up a solid brand image based on a tailored model policy and bolstered with improvements and expansions in the sales and service networks. These networks lend local support to the brand image and redeem the brand's claim at point-of-sale by projecting the dealer's image and safeguarding the quality of service. In China, too, customer satisfaction, customer retention, and brand loyalty will be critical for success on the market.
The Chinese market is one of a kind, and not only in its high growth rate. More than fifty brands are vying for the buyers' attention. In recent years Japanese, Korean, American, European, and domestic OEMs have built up sizable surplus capacity. Nearly six million cars may be turned out every year, while sales figures for 2004 will probably amount to 2.3 million. Not until 2009 will the Chinese market grow to reach or exceed the six million mark. By then, manufacturers will probably have expanded their capacities to almost eight million cars per year – and that's not even counting imports. Prices dropped 9 percent last year, despite a huge 50-percent growth in unit sales, and unsold stock ballooned to 200,000 cars.
Thanks to political steps to cool the market – and hesitation on the part of buyers, who are disconcerted by the plunge in prices – this year's growth will probably reach a "mere" 15 percent, which is less than manufacturers had hoped for. Mercer's extensive study "Chinese Automotive Market 2010" paints a realistic picture of further developments in this market. Interviews with experts, a consumer poll, and secondary research supply the requisite data for large-scale industry-wide scenarios. "Our study explodes a few myths about the Chinese automotive market that have been around for years," claims Dr. August Joas, the Mercer Director in charge of the study. "One of them is China's purported 1.3 billion potential buyers. Another is the belief that Chinese customers primarily look for cheap means of transportation."
Mainstream cars are the number-one growth market
The Mercer study reveals that the need for low-price cars in particular has been vastly overrated. Although the segment will grow at a healthy rate of 14 percent over the next few years, the manufacturing capacity already in place – nearly 3.5 million cars – will still far outstrip demand in 2010. This miscalculation applies in particular to cheap domestic brands: the three leading domestic producers - Changan, Changhe, and Hafei – are positioned very low on the price scale and will also find it hard to satisfy the government's impending environmental strictures. Others, such as Juanhuai, Red Flag, and Zonghua, do not have sufficient volume of production to survive in the long run. These brands will either bite the dust or be forced to enter cooperative ventures.
The best-positioned companies are volume manufacturers of mainstream cars. Here, too, the current annual production capacity of 2 million exceeds demand by a factor of 2. But Mercer forecasts that even when production expands to 3 million in 2009, it will no longer be sufficient to meet demand. Mainstream cars are the segment with the highest growth rate on the Chinese market: the current market share of 53 percent will rise to 63 percent by 2010 – an annual growth rate of 21 percent. Yet the mainstream segment will also witness the fiercest competition. Eight foreign and four domestic manufacturers already have good starting positions to jump to the front of the mainstream pack: Buick, Citroën, Honda, Hyundai, Mazda, Nissan, Toyota, and Volkswagen, as well as Chery, Suzuki, Wuling, and Xiali. Many other brands will try to capitalize on the growth in the mainstream segment.
The premium segment, currently growing at 13 percent, has largely been parceled out. According to the Mercer study, Audi in particular has a head start in local production among premium mass producers, followed by even higher-positioned imports from BMW and Mercedes-Benz. To date, Lexus and Volvo lag well behind these three "brand champions."
Enhancing productivity is a major homework assignment
China is currently the most profitable market in the world for auto manufacturers. This is mainly due to its high price levels: despite the current drop in prices, Chinese prices for new cars are still 10 to 15 percent higher than the international norm. But the ongoing battle for market shares is causing prices to plunge further, and by 2005 they may already have reached German levels.
This is bad news for OEMs, for it is not only retail prices that are high in China. Production, too, is 10 to 20 percent more expensive than at other locations. In the case of low-volume models, the difference in costs can even amount to 40 percent. The main reasons for these high production costs are substandard plants, high costs for raw materials and subcontracted parts and components, and low job productivity. Further problems arise from cumbersome joint ventures, low quality in locally supplied parts and components, and a nonexistent infrastructure of specialist equipment suppliers and service providers for this demanding high-tech industry.
Other problems that beset the Chinese automotive industry are lack of protection for intellectual property and widespread industrial espionage. Chinese authorities do not recognize international patents or trademarks. Imitation is not considered intellectual piracy. The consequences are dire: Toyota lost a lawsuit against the Chinese manufacturer Geely for copying the Toyota brand logo. Honda and GM are conducting similar battles against such domestic producers as Chery regarding trademark violations and product imitation. More than half of the entire spare-parts market belongs to gray and counterfeit parts. OEMs reach a 20-percent market share at best – a fact that makes the current decline in new car prices to world market levels particularly painful.
"All manufacturers are currently working at full throttle to get these quintessentially Chinese problems under wraps," says Joas. "But our study reveals that this is only a necessary homework assignment. The market shares of the future will be won in the minds of consumers. This means that the only way to achieve a sufficient brand image, and thus long-term customer retention, is through the magnetism of precisely positioned brands."
Brand awareness is still low
The Mercer study shows that foreign brands, thanks to their image, have a head start in the competition for buyers, despite government support for domestic brands. Foreign brands also have a clear lead in customer satisfaction. But given the confusing and rapidly expanding range of products on the market, brand awareness and brand loyalty are naturally still low: only 25 percent of the customers choose the same brand when they buy their next car, compared to almost 80 percent in western industrial countries. Long-term brand images and positions will only emerge over the next few years.
"This is where manufacturers have to buckle down," Joas continues. "The brand is the only way to escape direct competition. Image is the best sales pitch, even in China." Still, the study points out that 46 percent of mainstream buyers, and 34 percent in the case of premium cars, would again buy a car of the same brand. Image weakness and lack of differentiation are especially noticeable in the low-price segment: only 7 percent of current car owners maintained that they would buy a car of the same brand.
The Chinese customer: poised to become king
Mercer's "Chinese Automotive Market 2010" study reveals vast changes in the minds of Chinese consumers. Currently 80 percent of all car owners indicate that they bought their last car primarily for business reasons. Yet 70 percent will buy their next car for its greater convenience and status. Business reasons, once so important, lie where convenience used to be: at 10 percent.
Nevertheless, the prototypical Chinese customer for automobiles is a first-time buyer – and the car is usually the largest investment he's ever made. The need for advice and information is correspondingly high. Given fifty competing brands, many of which have only been on the market for one or two years, the customers' brand awareness is extremely low. The Mercer study shows that Chinese car buyers are especially concerned about maintaining the value of their large investment. Yet the current drop in prices kindles a strong feeling of uncertainty among buyers regarding the lasting value of their purchase and leads to restrained purchasing behavior rather than a rise in unit sales.
Safety, reliability, low maintenance costs: all three are high on the wish-lists of car buyers and are much more important to customers than list prices or rebates. The Mercer study reveals that Chinese buyers are willing to skip so-called "starter models" and aim directly at the mainstream bracket. 29 percent maintain that they want to buy a premium model in the future, and 55 percent tend toward the mainstream category, which will therefore become the number-one growth segment in the Chinese automotive market. "In many sectors China works like a mature market," Joas explains. "From the very beginning, people who can afford a car usually want more than just a means of transportation. Status, comfort, and safety are already major customer preferences today."
Brands in the joint venture jungle
With its myriad joint ventures, the complex structure of the Chinese automotive industry considerably lowers brand visibility as well as the feasibility of brand strategies. VW is working concurrently with two partners: FAW and SAIC. Thus, the market has an FAW-VW and an SAIC-VW – not to mention a VW import. Additional confusion arises from the fact that both VW partners also have their own purely Chinese brands and operate joint ventures with other foreign manufacturers – FW with Mazda and also Toyota (via a subsidiary), SAIC in two joint ventures with General Motors.
"To implement a clear brand strategy," Joas explains, "the key factor initially is a rigorous product policy emphasizing the core values of the brand. The current mare's-nest of brands and models is counterproductive: the number of brands skyrocketed to over fifty in a matter of years, and the number of locally produced models jumped from less than ten to more than sixty. There will have to be consolidation over the next few years: fewer overlaps and more clearly positioned brands give consumers greater confidence and security."
The Mercer study sees especially good opportunities for producers firmly positioned in the mainstream segment, which promises the greatest growth both proportionately and in absolute terms. Pure imports will decline significantly due to regulatory restrictions. This will have an especially strong impact on the premium segment, which has depended almost exclusively on imports. Local Chinese suppliers have opportunities most of all in the low-price segment since the international magnetism and development expertise of the world's leading brands will win out in the higher brackets of the market.
Car sales will take place in growth regions
To date, China has only had 1.2 cars per 100 inhabitants. The corresponding figure for western industrial countries is over fifty. The growth anticipated in the automotive industry by all observers will result from the sharp rise in per capita income in the booming Chinese economy: if a mere 3.7 percent of all Chinese earned enough money to buy a car in 2002, the figure will reach 13 percent in 2010. In absolute terms, this implies a growth of today's 50 million potential buyers to more than 170 million. This stratum of the upwardly mobile is expected to lead to an increase in new car sales in China to 7 million vehicles by 2010, making China the second largest market for automobiles in the world and almost half as large as the US market.
Yet new customers will not be found everywhere in China, for the Chinese economy is not booming at the same pace throughout the country. The coastal regions already have incomes far above the national average and are ripe for auto sales. "63 percent of the total gross domestic product is earned in the provinces of Guangzhou, Beijing, and Shanghai," says Joas. "These developing regions will also witness the bulk of auto growth in the coming years. That's why it is crucial for manufacturers to set up a comprehensive sales and service network right here."
To date, car owners have been concentrated in metropolises such as Beijing, Shanghai, and Guangzhou. In the future, more cars will be bought in China's many other major cities, which will spearhead further growth. The Mercer study reckons with an average increase in car sales over the next few years amounting to 13 percent in the metropolises, but 17 and 25 percent in the second- and third-tier major cities.
Sales and service underdeveloped
The current predicament in sales and service is highly unsatisfactory for OEMs: there are not enough dealers and workshops, and most of those that exist lack sufficient skills. On average, a Chinese car dealer buys only 70 vehicles per year, and repair standards are extremely low. Given this situation, it is no wonder that lackluster consultation and customer care by dealers, and poor service at workshops are the main criticisms of Chinese customers. Another frequent cause for complaint are the long paths to the workshop, which amount to more than half an hour for some 40 percent of all customers.
By 2010, according to the Mercer study, licensed dealers - mostly large outlets handling one or more brands – will grab roughly half of the workshop business and 70 percent of new car sales to end customers. Moreover, especially in rural areas, there will also be small traditional shops that handle some 15 percent of new car sales and 20 percent of repairs. Workshop revenue missing in the large dealers will mainly be captured by "fast fit" chains, which will conquer roughly a quarter of the service sector by 2010. Here international chains are already highly active, especially Japanese chains such as Yello Hat and AUTOBACS, though European suppliers such as Bosch are also hard at work on expanding their networks in China.
All automobile brands are currently trying harder to attract skilled sales and service partners. However, many who invested in the training of their dealers and mechanics in the last few years have seen them headhunted by other brands. Many OEMs are willing to concede large margins to good dealers - even at the cost of their own profit.
The currently underdeveloped used car sector is estimated to grow to 21 percent annually over the next few years. It is severely regulated at present and will probably be dominated at first by specialist used car dealers. Thanks to their close proximity to customers and their brand affinities, the impending deregulation of the used car market will provide good opportunities for licensed dealers and workshops to increase their shares of the market. It is thought that four million used cars will already be traded in China by 2010.
Consequences for auto manufacturers
Competition & Brand: The brand models outlined in the Mercer study foresee a clear split among segments in the automotive market. The top segment will offer solid business for premium niche brands such as Jaguar or Porsche. Mass-produced premium brands such as Audi, BMW, and Mercedes will have it even better: they can expect to achieve attractive growth rates of 13 percent on average. Their China strategies should focus on sterling quality and image projection, techniques that have already proved their worth in the classical industrial countries.
The mainstream segment is the actual "sweet spot" of the Chinese car market. Due to the large number of players, however, market shares will be hotly contested. There is no telling who will win out. The crucial question for the future will be whether Chinese customers will remain open to foreign brands or will tend to choose national Chinese brands and manufacturers, as happens, say, in Korea and Japan.
To prevent such an outcome, foreign manufacturers in the mainstream sector must continue to expand their already strong position. The high percentage of first-time buyers lends great importance to marketing strategy and the design of the "first impression." Complex and confusing brand images must be streamlined so that products and messages are congruent. Unlike premium brands, which can afford to support their positioning with lavish image campaigns and exclusive dealer networks, image in the mainstream and low-price market segments is mainly formed by the appearance of the products themselves.
Sales & Service: A functioning and image-enhancing network of dealers and workshops will be a key factor in establishing car brands. Up to now, most manufacturers have limited the presence of their dealers mainly to major cities. It is now time to tap the smaller cities in China's growth regions. But a lot also remains to be done in the metropolises, where large car malls offering customers an integrated multi-brand assortment are being established. Manufacturers must try to control and positively influence the critical interface to the customer in all their sales channels. Brand-specific dealer organization will be especially suitable for mass-produced premium brands and high-quality mainstream cars.
As yet, there is no money to be made in the Chinese aftermarket. The market for spare parts is dominated by gray and illegal producers. The used car market is still underdeveloped, and auto financing is subject to strict regulation. However, the first automobile financing licenses were already granted to such suppliers as Volkswagen and BMW in 2004. As in the European and American markets, automobile financing will be crucially important for the future evolution of the Chinese market.
Mercer's Joas sums up the situation: "The highly dynamic Chinese market harbors great opportunities, but we already face huge surplus capacities and a sharp drop in prices. Besides clean winners, a few manufacturers are bound to lose a lot of money in China. It's important to set up efficient assembly lines, but brand image and customer loyalty are even more important. In the future they will spell the difference between success and failure."
The Five Major Challenges Facing Auto Manufacturers in the Chinese Market
Strengthening the brand profile: the cornerstone for the future It is now that the long-term brand images in China will be established. Many automobile brands that are stretched in their home markets will have to focus on their core values to obtain a sharply differentiated profile in the Chinese market.
Rethinking the model policy: less is often more
The brand message must primarily be communicated via the products. At present, the range of vehicles on offer in China is vague and generally confusing. An excessively broad range of brands and models within a brand is harmful.
Expanding dealer presence: greater coverage, higher quality
Dealer networks must be expanded and improved to redeem the brand claim at the point-of-sale. Experiences with dealers and their services are crucial "moments of truth" for the brand and the customer.
Developing downstream services: capturing sales revenue and potential earnings
Services are increasingly serving as a means of brand differentiation. As in mature markets, profitable exploitation of after-sales potential is becoming a key success factor.
Loyalty is critical: customer satisfaction and customer retention are the ultimate test
Only those companies that manage to bind customers to their brand have a chance of achieving sustained profits in China. Customer satisfaction across the entire life cycle and activities to attract the loyalty of specific target groups are the keys to success.
Some Defunct Myths About China
Mercer's study "Chinese Automotive Market 2010" explodes several widespread stereotypes about the growth of the Chinese automotive industry.
Myth No. 1: China has 1.3 billion potential automobile customers
Wrong: To date only about 50 million Chinese earn enough money to afford a car. By 2010 this figure is expected to grow to more than 170 million.
Myth No. 2: The Chinese are mainly interested in cars that function
Wrong: The car is at least as important as a prestige object in China as in Germany. Thus, in China as everywhere else, long-term sales volumes will result from the power of the brand.
Myth No. 3: The Chinese are looking for simple compacts
Wrong: Their priorities center on comfort and safety, not on transportation. Thus, most Chinese aspire to own a mainstream car.
Background of the Study
Mercer's study "Chinese Automotive Market 2010" was prepared jointly at the end of 2004 by Mercer's office in Beijing and a Chinese market research institute. It draws on more than forty directed interviews with executives in the Chinese car industry and on a poll of more than 2,200 current and potential automobile customers from seven selected regions of China. All kinds of automobile customers were polled: consumers, small-size entrepreneurs, purchasing agents from large firms, and taxi companies.
A secondary research project conducted at the same time analyzed and evaluated ten industry-wide databases, thirty market reports, many studies of the industry, and published opinions on the future evolution of the Chinese automotive market. The result was a large pool of market data and trends that attaches equal weight to opinions from experts and to current viewpoints of customers.
"Chinese Automotive Market 2010" points out market trends and outlines a number of scenarios for probable developments in the industry. In a follow-up stage, this fact base will make it possible to develop strategic options for auto manufacturers and equipment suppliers interested in exploiting the opportunities in the Chinese market.
11 février 2007
The Rising Chinese Car Market
Asked which automaker will win China, more than one analyst or accountant says simply, "China will win."
Yes, the world's fastest-growing auto market tantalizes automakers with its potential for growth and profits. American automakers see China as a growth market that could help make up for falling profits at home. They aren't alone. Japanese and European carmakers also have high hopes for China. Volkswagen (otc: VLKAY - news - people ), Europe's largest car company, now sells more cars in China than it does in its home market of Germany.
But the real beneficiary of the automotive investment will be China itself, which is building its own car business with the help of foreign investors, who, according to a law stipulating that an individual foreign investor may not own more than 50% of a Chinese manufacturer, must partner with Chinese companies to enter the market.
Thanks to advantageous laws like this one and the financial and regulatory backing of the government, as well as China's growing economy, low labor costs and enormous population, the Chinese automotive landscape could ultimately resemble that of Japan or South Korea: developed with the help of the West, with Western investors gradually reduced to minor players. Today there are more than a dozen state-run automakers in China.
Still, even if they have not been able to set up standalone shops there, foreign automakers salivate over the potential in China--even if the Chinese economy is still in many ways underdeveloped. General Motors (nyse: GM - news - people ) estimates that 74 million Chinese families (about 20% of the population) can afford to buy cars, even if per-capita annual income in China is only $930 in the cities and $299 in the country. This 20% of the population that can buy cars holds about 80% of the savings deposits in China. Cars are not more affordable in China, but the Chinese are great savers, and credit has become easily available in the last couple of years.
The auto business is growing in China at a considerably higher rate than the GDP there. According to the China Association of Automobile Manufacturers, production for the first eight months of 2003 has been 2,781,800 units, up 36% from the same eight months in 2002. For passenger cars alone, output accelerated almost 92% to 1,223,400 units through the start of this month.
The highway infrastructure also continues to expand, even if the quality of the roads is improving at a disproportionately slower rate. The U.S. Department of State assesses road conditions and maintenance in China as good in urban settings and only fair in rural areas; it also points out that the availability of roadside assistance is only fair in or near large cities and nonexistent in rural areas. Despite this, the total length of highways in China ranked second among nations at the end of 2002. In 1997, China was 39th.
All of this growth might seem to suggest that the auto business in China will be crowded with more foreign investors as time goes on, but China believes there are a fixed number of leadership positions to be had there.
The tenth Five-Year Development Plan for the Automotive Industry, issued by China's State Economic and Trade Commission and covering 2001 through 2005, says that "there will be two to three large automotive groups that have considerable strength in international competition by 2005. Auto marketing and after-sales service systems that conform to international standards will take shape, and the domestic-market shares of products will exceed 70%, with some for export. Five to ten large auto-parts enterprise groups with competitiveness on the international market will be formed. The top three key parts producers will occupy 70% of the home market, and the value of exports of parts and accessories will make up 20% of the total sales volume."
Who will these two or three large automotive groups be? More important, what does this mean for foreign automakers? The biggest Chinese automaker right now, First Auto Works, has partnerships with Volkswagen and Toyota (nyse: TM - news - people ). Of the foreign players, Volkswagen is still the leader in China, although its market share has slipped to under one-third. This is in spite of the fact that, in the first nine months of 2003, Volkswagen's Chinese sales rate increased by 33% over the same period in 2002.
General Motors, with a market share of less than 10%, is the second-biggest foreign automaker in China right now. Its sales increased by about 38% in the first nine months of 2003, owing largely to a strategy that calls for introducing new products in China and then revising them quickly.
Ford Motor (nyse: F - news - people ) has been late in entering China and is struggling to get off the ground there. Toyota is selling cars, although it is not nearly as well entrenched in China as Honda (nyse: HMC - news - people ). Nissan (nasdaq: NSANY - news - people ) is making new investments of about $2 billion in its Chinese enterprises, and Hyundai is investing about $1 billion.
Companies like Volkswagen, GM and Honda (arguably the three with the most momentum in China) are finding that their capacity cannot keep up with demand in the country. Honda's vehicles take from a week to a month for delivery there (China does not have an established delivery infrastructure, or the hordes of delivery trucks available in America). To help ease the backlog, the big three American automakers are planning to feed the market with thousands of imported cars, built in America, before 2006. These will complement the extensive efforts they are already making to build cars on Chinese soil, with Chinese partners.
"Everybody's number one priority is just making sure they have a toehold and they are increasing capacity," says Brian Lund, equity analyst for Morningstar. "The numbers for announced capacity in the coming years are huge."
Right now, success in China can be considered more a matter of market share than profitability, according to an Asia-based automotive industry analyst who insisted on speaking anonymously. The analyst says that this strategy--occupy a position and wear down your opponent--stems from Sun Tzu's The Art of War; that the Asian automakers tend to have more patience for this sort of thing; and that Western automakers, who are under pressure to report quarterly profits, may have a hard time turning the focus to market share.
But some have speculated that the rapid growth of China's auto business is a bubble that will eventually burst, and flooding the Chinese market with cars could be more problematic than automakers expect. "There isn't too much capacity right now," says Lund, "but the announced increases in the next three to five years are going to outpace demand. That's the big concern." Specifically, the concern involves the potential for cheap Chinese cars to be exported overseas, and the possibility that there won't be enough people able to afford the cars to sustain production levels in five years.
One goal of the planned increases in capacity is to give automakers a chance to round out their lineups, and to sell more modern products. China's entry into the World Trade Organization in 2001 curbed its tendency to sell dated cars, and Chinese consumers with increasing amounts of discretionary income now demand the latest and greatest products. As part of its acceptance into the WTO, China had to lift restrictions on imported cars, making its own inferior, older cars no longer salable. For a long time, the Chinese protected their local industry by prohibiting or outrageously taxing products (a strategy employed by Malaysia and Vietnam). The WTO has changed this strategy, and China now invites foreigners to import their cars--provided that they also make cars on Chinese soil.
Foreign automakers may be migrating to China, but they are finding the trends are different there. The sport-utility craze in America has not caught on in China. SUVs have a market share of 2% or less in China, where they are regarded as work vehicles with peasant connotations (even if Honda's CR-V and Toyota's RAV4 are winning hearts). Instead, more upscale Chinese buyers have tended to gravitate more toward high-margin, affordable sedans like the Buick Regal, Honda Accord and Volkswagen Passat. Maintaining the market share of sedans is the key to short-term profitability for automakers; in the first ten months of 2003, sedans accounted for 19% of Chinese vehicle sales--the largest market share. Analysis of the Chinese industry has not yet evolved to the point at which we can study residual values, or other indications of how the quality of Chinese cars compares with those made in other countries.
Analysts do agree that Chinese-built cars are getting better. More important, they are being produced at rates that exceed the already-blistering growth rates of the Chinese economy in general. General Motors, Volkswagen and Honda may be the companies to watch right now, but they cannot be considered valid answers to the question of who will win the automotive race in China.
Comparatively speaking, China will be the only winner. After China begins to export cars en masse to Japan and Korea, expect it to head to America. You can walk into an appliance store today and walk out with a Haier refrigerator or a Lenovo PDA--both Chinese brands. Ten years ago you couldn't have found either. Within another decade or so--it may be only five years--Americans may be seeing Chinese cars in their auto showrooms too.