What`s Driving China? A glance at China`s Automotive market in 2012.
The automotive market in the People’s Republic of China has been the largest in the world since 2008, as measured by single unit production. Propelled by government incentives, the China Association of Automobile Manufacturers reported that, in 2009, vehicle sales in China reached a record 13.6 million sales. Of these roughly 44% were produced by local brands (BYD, Lifan, Chang’An etc.), while the rest were produced by JVs with foreign carmakers, such as Volkswagen, General Motors and Suzuki. Like most joint ventures in China, foreign ownership in the auto industry is capped at 50%. Although most of the cars manufactured in China are sold domestically, automobile exports still topped 800,000 units in 2011.
If you briefly consider the history of Chinese auto manufacturing, one thing is certainly clear: growth has been breathtakingly rapid in recent years. Between the years of the Cultural Revolution (1966) and Mao Zedong’s death (1976), China’s self-imposed 10-year isolation from the world ensured that little to no technological advancement was made in the stagnating auto industry. As such, it was not until 1986, when a combination of Deng Xiaoping-initiated reforms and a shortage of foreign currency prompted the Ministry of Machine Building to authorize the creation of six JVs with foreign carmakers, that the Chinese auto industry took off. This progress was officially cemented in February 1994, when the Party enumerated a set of key objectives in the Implementation Policy of the Motor Industry (IPMI).
Although initial goals were ambitious – 1.2m annual passenger car production by 2000 and 6m target for 2010 – production targets have not just been met, they have been completely outstripped. China’s entry into the WTO in 2001 marks the point at which development acceleration reached critical levels: between 2002 and 2007 China’s automotive market grew by an annual average of 21%; in 2010, China both sold and produced the largest number of cars by any country in history (18m). Of these, 13.76m were passenger vehicles – over twice the 1994 target. The number of registered Chinese vehicles (ranging from cars to buses and trucks) on the road reached 62 million in 2009, and projections estimate almost 200 million by 2020.
The majority of China’s automobile production takes place along the Eastern coast, notably in factories in or around Shanghai, Tianjin, Beijing and Changchun, as well as Shenzhen and Guangzhou in the South. Two other regions of significant concentration are Hubei Province in central China and Chongqing in the West. Although greater regional consolidation in the market through the creation of automotive ‘hubs’ could reduce operating costs, demand in recent years has been so great that the disappearance of any one of the existing production centers seems unlikely. According to China Automotive Market Review in 2010 (Mark Bursa; just – auto), the six major regions are as follows:
- The Shanghai / Nanjing region on the East coast (300 suppliers; SAIC & local carmakers)
- Wuhan Province (over 300 suppliers; home of Dongfeng Motor)
- Beijing / Tianjin (~130 suppliers; Beijing Auto Industry Corporation & Tianjin Automotive)
- Guangdong Province and Shenzhen (Gangzhou Automotive)
- Jilin Province, specifically the capital Changchun (220 suppliers centered around First Automotive Works)
- Chongqing (home of ChangAn Motor)
As elucidated above, the Eastern coast remains the single biggest center for automobile and component manufacturing, accounting for nearly 45% of national production in 2010. Growth in Shanghai, home to SAIC and its notable JVs with Volkswagen and GM, as well as in neighboring provinces (Zhejiang and Jiangsu) has been particularly rapid. For its part, Shanghai proper has announced GDP growth surpassing 10% a year for roughly 15 years now; its GDP per capita is now 50% higher than Beijing’s, and double that of Tianjin. After Shanghai, Changchun is the second largest production center, accounting for roughly 20% of national output yearly. It is home to First Automobile Works, one of China’s biggest car producers and a JV-partner of Volkswagen and Toyota. Guangdong Province (notably its capital, Guangzhou) is China’s third-largest automotive production hub. The region’s largest vehicle producer is Guangzhou Automotive, which has partnered with Honda and Toyota.
China’s largest domestic manufacturers, in order, are Shanghai Automotive Industry Corp (SAIC), First Automobile Works (FAW), Dongfeng Motor Group, Guangzhou Automobile Industry Group (GAIG) and Beijing Automobile Industries Holding Corp (BAIHC). All of these firms, specifically the “Big Three” (SAIC, FAW and Dongfeng), have been aggressive in forming partnerships with foreign automakers. Although they are essentially regional powerhouses in China, attempts to grow internationally have so far been only moderately successful. Nevertheless, overseas investment plans are constantly being announced: Dongfeng Motor most recently announced plans to invest $250m US in a Turkish plant with an annual production capacity of 52,000 units.
In contrast with its largest, foreign-aligned carmakers, China has additionally seen a ‘second wave’ of industry growth over the last ten years, which is composed primarily of non-aligned, independent Chinese manufacturers. Of these, the two most high profile firms are Chery Automobile (founded in 1997 by Yin Tongyao and with operation bases in Anhui) and Geely (formed late 1990s; based in the Eastern province of Zhejiang). Despite their initial lack of major foreign partners, Chery and Geely aren’t doing too badly – Chery has been busy setting up overseas plants in Iran, Russia, Indonesia, Ukraine, Uruguay and Egypt, while Geely signed an agreement in December of 2009 to purchase Volvo Car Corporation from Ford. The deal was expected to cost around $2 billion US.
With billions of domestic and foreign capital flowing in, the real question now is when will the market reach peak growth? Well the answer is that it’s hard to tell. Emerging fears of overcapacity led the Chinese government to choke credit after sales doubled in 2003, leading to much slower growth in 2004. But concerns are being raised again by the fact that, despite expected downturns as a result of 2008, demand seems to be picking up once more. Emerging 2nd and 3rd tier cities in the Western interior have yet to fully develop as automotive markets, and will likely continue to stimulate growth over the next 10-15 years. Additional factors contributing to sustained growth are the emergence of a middle class in smaller cities as wealth spreads throughout the country, as well as sales boosts powered by global economic recovery. As reported by businessGreen in 2009, the consultancy McKinsey estimates that China’s car market will expand tenfold between 2005 and 2030, driving up diesel and petrol demand from 110 to 550m tonnes. Barring serious advancements in green technology (a hope that actually appears to have substance based on recent trends in Chinese investment), this would mean a sharp rise in carbon emissions from a country that is already the world’s biggest polluter (in terms of annual CO2).
Faced with a building surge by foreign companies like Volkswagen, GM, Ford, Toyota and the group composed of Hyundai and Kia, many experts warn that Beijing’s attempts to mitigate overcapacity will not be completely successful. And this renewed, expected demand will have some big implications. Established automakers will continue to come to China to capitalize on what seems like market growth with no end in sight – General Motors’ China sales overtook its US sales for the first time last year. As the market continues to take into account the rising demand of new cities in the interior, production will likely begin to focus more on smaller, cheaper units. This will benefit local independents Chery and Geely, who specialize in making smaller cars. At the same time, the big foreign firms should focus on their own niche: luxury vehicles. Although they are tiny vs. the SAIC’s of the world, wealthy Chinese consumers are likely to pay huge premiums for established luxury brands. Sustained demand in China will, for the most part, keep domestic producers occupied with their own country in the near future. As such, seriously ambitious expansion plans into foreign markets are likely to be shelved for the time being.
Exports will additionally remain affected by the fact that Chinese crash testing and emission levels still do not hold up to developed world standards (this is not to say that Chinese exports are enjoying more success in less sophisticated markets, however, where their brands are both unappealing and confusingly unpronounceable). Chinese manufacturers will not see success in Western markets until they take an active interest in making their brands and products appealing to Western customers: at overseas motor shows vehicles are often still given mistranslated names (e.g. Geely PU Rural Nanny), but owners seem hesitant to hire experts who could help them breach the culture gap.
In the interim, increases in local demand promise to drain already scarce global resources – both in terms of physical manufacturing materials and in terms of fossil fuel resources. In addition, overcapacity threatens to strangle attempts by local expertise to initiate a shift to electric power, which might be a necessary game changer in the auto industry. Of interest is local Chinese manufacturer BYD, or Build Your Dreams, which may become one of the first victims of a glut of small commercial vehicles (despite its funding from high-profile investor, Warren Buffet). “The company took off like an eagle, but is now flapping like a chicken”, said Ferdinand Dudenhoeffer, director of the US-based Center for Automotive Research, in reference to the struggling automaker. Unfortunately, problems of overcapacity may not go away anytime soon. Although the Chinese government wants to build an industry around SAIC, Dongfeng and FAW, we are now in an age where entrepreneurial spirit can trump central planning: despite the Party’s intent, local and provincial governments are more than willing to bankroll their own, smaller firms.
As of now, the unstable market position of manufacturers, low prices caused by increased competition, restrictions on car ownership, overcapacity and continued dependency on depleting oil reserves continue to pose major challenges for the Chinese automotive market in the years ahead. At the same time, several important obstacles to the industry that were prevalent a few years ago (such as lookalike models) have become less of an issue currently. Market growth expectations should be sizable enough for all of the players involved (both domestic and foreign) to prosper, and it should be remembered that the Chinese market has yet to fully form. But if Chinese automakers continue to believe that they can follow the business model of the Japanese in the ‘70s (i.e. breaching the market with cheaper cars and building brand value over time), then they are sorely mistaken. The same opportunities do not exist today – there are no weak firms in the market, and to enter by virtue of low-cost alone would make Chinese operations intrinsically unprofitable. There is big room in the market for expansion, but the big boys are also well established. Anyone considering entering the market will need to carve out a niche position and a strong brand to compete. Ultimately, more significant corporate consolidation and stronger brand-building policy are two initiatives that will eventually become necessary for future growth.