Changing Gears: China’s Automobile Industry Revs Up Read PDF
China is now the No. 2 automobile market in the world, and perhaps No. 1 in terms of competitive ferocity. More than 130 car-makers now crowd China’s showrooms with their latest models, each vying bitterly for the attention of buyers. Which ones will succeed? CEIBS asked 20 leading industry experts this and other burning questions at the 5th Annual China Automotive Industry Forum.
By Audrey Wu
China is now home to the world’s largest automobile market after the United States, and the largest consumer population on the planet. These two facts have sent global carmakers swarming into the Middle Kingdom in recent years. Simply put: Winning the China market is now critical for the global success of international automakers.
But succeeding in this market is not easy, even for the world’s best known car brands. More than 130 international and domestic automobile manufacturers now operate in China. Each of these makers is competing against the world’s top international players as well as fast-improving domestic players.
Adding to the competitive fire is China’s increasingly attractive and fast-growing auto-buying population. Since China’s accession to WTO in 2001, national civilian auto purchases have grown significantly every year. According to NBS statistics, Chinese citizens purchased 50 million civilian cars in 2006, a 15 percent increase over the previous year. China now boasts a large population of sophisticated and wealthy car buyers, proving its arrival as an “Auto Nation.”
Maneuvering through this new Auto Nation was the topic of CEIBS’ 5th Annual China Automotive Industry Forum, held from October 29 to 30 at the school’s Shanghai campus. Entitled “China’s Auto Industry: From Joint Ventures to Global Alliances,” the event attracted more than 20 top executives from global automakers, high-level Chinese government officials, and industry experts to speak on the challenges and opportunities of the country’s auto industry. More than 300 professionals and 70 local and international media members attended. To follow are the primary findings gleaned from the conference.
China’s Coming Economic Challenges
During the past five years, China has witnessed rapid economic growth with an impressive GDP rate of over 10 percent annually. This growth has helped give a modest boost to general consumer demand, which had stagnated during the past decade. Conference speakers began by delivering rosy predictions for China’s auto industry, but noting a raft of emerging problems related to the nation’s economy.
Special Advisor & Professor of Chinese Academy of Social Sciences Wang Luolin kicked off the forum by warning of key challenges that have accompanied the rapid development of the Chinese economy. These include: the risk of an overheated economy, increasing inflationary pressure, surging asset prices, internal and external imbalances, and the need to reform China’s economic growth model.
Wang believes China’s inflation in 2007 was triggered by a combination of reasons including excess liquidity of bank capital, rising raw material prices, and increasing domestic real income. “All these factors have added to the inflationary pressure. And this pressure must be released in some way,” he said, predicting that as long as the economy maintains this current high-speed growth, inflation will continue. Wang also warned that the “wealth effect” brought on by the considerable increase of China’s stock and property prices “may even accelerate” the purchase of real estate and stocks. China’s asset-price inflation is now “not limited to stock and real estate,” he said, but includes a wide spectrum of products from tea to orchids. Wang called this shift “a very dangerous signal,” adding: “the potential bursting of the bubble will lead to severe financial risks.”
Wang also warned of the co-existence of internal and external imbalances which he identified as the top challenge now facing the Chinese economy. He suggested solving the external imbalance by adjusting the country’s export-oriented strategy, reducing the foreign trade surplus, and speeding up exchange rate reform. However, Wang also named fundamental problems in China’s imbalance between savings and consumption. Addressing this issue, he said, will naturally help solve the external imbalance. It is essential to correct the disproportionate distribution of national income - China’s increase in government and corporate savings greatly exceeds its increase in personal savings accounts. Therefore, the government must reshape the country’s investment structure and leverage financial policy to adjust wealth distribution. Such a restructuring, Wang said, would increase residents’ income and encourage greater consumption. In the near future, he expects China’s economic growth-rate to decrease “mildly” in response to government efforts to chill growth.
The Role Of China’s Auto Industry in Economic Development
Turning from the general economic outlook, conference speakers next addressed the future of China’s auto industry, specifically. Since China’s entry into WTO in 2001, the nation’s auto sector has grown at an average rate of 22 percent, two times faster than that of the country’s annual GDP. In 2006, China’s NBS for the first time added "automotives” to its list of key consumer categories, showing the increasingly significant role of this industry in the development of the national economy.
Automobile consumption in China has surged in the past few years. According to NBS statistics, private Chinese citizens bought 30 million cars in 2006 - a jump of 23.7 percent over 2005. This surge has convinced global manufacturers that China is on a fast-track to becoming the world’s largest car market.
Even before that happens, Chen Qingtai, Research Fellow of the Development Research Center of the State Council of PRC, believes China’s automobile industry will play a leading role in the nation’s economic development. Chen explains that the car sector "involves the widest range of industries; incorporates the maximum number of new technologies, materials, processes and equipment; and enjoys the largest scale of production and market.”
Given the importance of this industry, Chen recommends that the government “move away from micro-managing and towards automobile production and operation” and "focus on external rather than internal factors.” He points out that obstacles to sustainable consumption mostly originate outside the auto industry - such as high energy costs, environmental concerns, congestion, and traffic safety.
Chen also suggested that government redirect its focus from economic and investment control of the auto industry and toward social regulation and consumer guidance. In this way, the government would influence consumer behavior by implementing industry policies on issues including energy saving, pollution reduction, traffic efficiency and road safety. These steps would, in turn, enhance manufacturers’ R&D efforts as they meet changing consumer demands.
Spirit of “Co-petition”
The marketshare of China’s local automakers has increased to 29 percent, up from 17 percent five years ago - a move that has caught the attention of the global industry. International manufacturers face growing competition from local rivals as they vie for increasingly demanding and well-informed Chinese consumers.
Despite the remarkable achievements of local players in recent years, forum speakers stressed that most still benefit from cooperating with overseas automakers to boost domestic growth and explore overseas markets. Meanwhile, most foreign manufacturers still benefit from the local expertise of a domestic partner. Thus, domestic-foreign cooperative ventures remain the rule of thumb for many car-making ventures in China.
On this point, three conference speakers agreed - Volkswagen Group Executive Vice President Winfried Vahland, PSA Peugeot-Citroën CEO Christian Streiff, and Lifan Holding Co. Chairman Yin Mingshan. These industry leaders stated that foreign-local cooperative agreements must be built on the basis of mutual understanding and trust; that it is critical to listen to partners’ opinions; and that a win-win strategy can only be achieved if partners share common long-term goals.
Strategic cooperation requires more than capital investment, stressed Streiff, adding that PSA Peugeot-Citroën’s experiences show that both sides must provide complementary technology and skills, and must collaborate in covering costs and conducting R&D. In addition, Streiff urged JVs to reduce risk in two ways: by defining clearly the liabilities of both parties, and by sharing responsibility for ensuring quality. PSA Peugeot-Citroën has coined the term ‘co-petition’ to refer to the combination of competition and cooperation which characterizes the industry. Says Streiff: “We believe that ‘co-petition’ is the best word to define the auto industry. Compete, fight hard on one side; and at the same time, co-operate to develop the market to make it better.”
Lifang Holding’s Yin put it another way: “Co-operation is not limited to a union of two titans. Leading companies should also forge alliances with fast-developing companies. The former is more like buying a blue chip while the latter is like buying a potential stock. I think that the Chinese auto makers are like potential stocks.”
Localization is now a key goal of many international players in China’s auto industry, pointed out Vahland. The increasingly competitive market in China will force industry players to offer competitive prices, which Vahland stressed means localizing production. Currently, China supplies 80 percent of auto parts for made-in-China automobiles, up from 3 percent in the mid 1980s. Thus, he said, both international automakers and auto parts suppliers must now be rooted in China in order to succeed.
China’s Changing Consumers
There are 81 local brands in China (as compared to 47 in the U.S.) releasing an astounding average of one new car model every three days. In such a revved up environment, conference speakers said players are often forced to compete bitterly for consumer attention by launching dazzling sales promotions and even taking price plunges. But the long-term key to survival, speakers agreed, is establishing a strong brand.
The first step toward winning the fickle hearts of Chinese car buyers is to understand them. According to research by London-based TNS market research firm, domestic car buyers are mainly young (aged around 35) and male (75 percent of buyers are men) and first-time buyers, however the number of women buyers and repeat buyers is now rising.
TNS classifies China purchasers into three types: status-oriented, those who buy large cars as a status symbol (35%); care-oriented, those who buy practical and safe vehicles (37%); adventure-oriented, those who buy trendy cars emulating a “Western” lifestyle (28%). Over the last two years, China’s “adventurers” are growing while “status seekers” are decreasing.
Regional Director of TNS Automotive, North Asia-Greater China and Korea, Klaus Paur says winning consumer loyalty is the biggest challenge for China’s automakers. The best strategy, he says, is to provide a comprehensive product mix that can quickly be updated. Paur also says brand loyalty among Chinese purchasers is improving: 38 percent of domestic consumers now exhibit brand loyalty when purchasing cars. In mature markets, the ratio is 60 percent, showing room for improvement in China.
Sharing his strategy for successful branding at Ford Motor Co., company Vice President for China Keith A. Davey had this advice: “Brand building must be undertaken in every corner of the company.” Davey explained that branding is “the art of connecting with consumers” by providing them with a product that consistently lives up to its promise. “The promise highlights the features of that product versus a commodity... The most important thing in establishing a brand is ‘product, product, product,” he said. A strong brand, he added, can generate large sales volumes while commanding a higher price than competitors.
To win consumer loyalty and gain a competitive edge, companies must “drive” client demand, Davey said. “We define ourselves as a consumer company that tries to understand and respond to - and create - demand within our consumers. We do that by translating consumer needs into a competitive advantage within our brand, then building sustained relationships,” he said.
Challenges and Solutions in Auto Parts Production
The localization of auto parts production has now reached 80 percent and climbing. “Chinese suppliers are becoming more reliable, by manufacturing higher quality products. So not surprisingly, China is starting to become an export hub to the world,” said Pierre E. Cohade, President of Asia Pacific Region, Goodyear Tire Management Co. (Shanghai). At present, China’s auto parts makers not only supply 80 percent of demand from China-based auto makers, but exports also rose 33 percent in 2007.
Despite fast growth, the industry still faces challenges, however. 3M China Managing Director Kenneth Yu said the key difficulties lie in providing innovative, environmentally friendly, energy efficient products, instantaneously and at a low cost. Yu shared the following advice for thriving in the China market, based on 3M experiences as a supplier of 1,000 auto parts: enhance R&D, understand your customer, and react fast to customer requirements.
Goodyear’s Cohade suggested that Chinese suppliers continually improve their products, techniques and supply chain processes. He advised against focusing on price at the expense of maintaining customer relationships and improving product quality to meet international standards. “Cheaper is not always better,” he said. Finally, he urged buyers to gain a solid understanding of the strengths and weaknesses of China-based suppliers and urged foreign manufacturers to invest in training and monitoring those suppliers.
Commercial Vehicles: The Rise of Local Brands
In contrast to China’s passenger car market, where JV-produced brands dominate, Chinese brands enjoy a large slice of profits in the commercial vehicle market. Although most international commercial vehicle makers are already established in China, nearly all remain small-scale and some have already exited the market.
Why? The low price of domestic suppliers presents a barrier that international suppliers cannot overcome, explained Xu Changming, director of the Information Resources Department of the State Information Center, PRC. Xu explains that 60 to 70 percent of Chinese buyers of medium- to heavy trucks hail from rural areas, where demand is low for high priced international vehicles. Most buyers are looking for low-value vehicles for use on China’s rough backroads, and few buyers are willing to pay extra for features such as energy saving or emissions controls.
With the further development of the Chinese economy however, Xu predicts that demand for high-end vehicles will increase in the future, but says the jury is still out on whether domestic or foreign players will win in this brand new market. Said Xu: "Local brands will improve product quality and performance through updating their products, while JV brands may lower their standards to meet local needs. So the question is open.”
For Chinese auto makers struggling to clear a path to international markets, the biggest challenges lie in ensuring quality, after-sales service, sales networks and marketing. Xu recommended that Chinese companies target developing countries first, because "technology standards and purchasing power are similar with China.” He warned Chinese companies “not to continue the current low-end, low-price strategy, but seek a balance between acceptable quality and attractive price. “Our prices are so competitive that even if increased by 10 percent, they still enjoy advantages,” he said. Finally, he urged Chinese companies to not only export completed cars, but also technologies.
