Chinese automotive industry, which is considered as the most happening region for the auto majors worldwide, is evolving on to the next plane. Consider the following:
“The Lifan Group, a major chinese car maker aims to buy a car engine plant in Brazil from Daimler Chysler and BMW.”
“US-based GXS, and China Entercom have launched China e-Auto Hub that provides a global trading platform to the buyers and sellers in the automotive industry in China.”
While the former typifies the global ambitions of domestic auto players in China being translated into action, the latter, which is essentially the platform for exchange of information on design, specifications, materials management and related matters heralds the emergence of B2B landscape in the cyber arena. These are just two instances that portray the myriad of changes occuring in the chinese automotive industry and serve to highlight the growing prowess of the land of dragon in the emerging global scenario.
Circa 2001; China debuts into the WTO fold. The seeds of automotive evolution are sown.
The following two years were marked by transition during which the auto industry was benefited by the policy measures taken by the government to improve its competitiveness. Both manufactured output and sales nearly doubled in 2003 to 4.4 million vehicles. A centralised industry was formed dominated by 10 main automakers . Around 80 new sedan models were introduced in the said period. The industry saw the arrival of transnational corporations, other new auto makers as also reforms of the state owned auto enterprises.
The opportunity in the Chinese market beckoned auto big-wigs like GM and Ford on account of the unlocking of the new customer class as well as the attractiveness of a low-cost supply base. MNCs flew in with Joint Ventures with a view to forge productive business relationships. However, there has been a conflict of interests among the JV partners, with the foreign partners prefering domestic sales vs. the domestic partners preference to exports.
Initially auto makers were flooding the market with the models they had to offer. Factoring in cutomers choices and preferences began later as the market evolved over the years. Foreign partners brought their strength in IPR and know-how while the local partners imbibed them to make inroads into the nascent market. There were gaps between foreign and domestic partners in terms of technology and production structures.
Despite these hurdles, the auto sector sales peaked in March 2004, with consumers willing to coughup upto US$ 40, 000 for a Buick Regal sedan . However, there was a steady decline over the rest of the year compared to around 76% growth in 2003. Analysts felt that the boom was partly aided by liberal credit facilities that translated into lower sales on tightening of loan policies by the Chinese Government. Another factor was the appreciation of the Euro that resulted in huge import costs for the joint ventures, that imported primarily from Europe. The likes of GM and Volkswagen did attempt to improve market share by reducing prices, but without making significant impact.
The China Association of Automobile Manufacturers (CAAM) figures had reflected a decrease in auto industry’s profits by 11.74% in the first 10 months of 2004. However, the industry experts suggested that these figures should be viewed in a larger perspective. The argument was that profitability of Chinese auto industry had actually gone up, considering that they began making profits in liberalised environment as opposed to earlier protective environment.
Foreign investment gained ground with players like Ford setting up a manufacturing facility in East China in addition to its existing plant at Chongqing, south west China. Other major players like BMW, Toyota, Land Rover and GM planned to introduce new models in 2005.
With decrease in tariffs and abolition of non-tariff barriers, the domestic auto industry in China needed to improve its competitiveness. The initial market structure confined foreign companies’ exports to a single location. However, they could distribute their products to various regions through a freight forwarder. Subsequent decontrols resulted in foreign companies setting up their own distribution networks increasing their reach.
ABS systems were installed to medium buses and heavy duty trucks as a step towards technological upgrade. The chinese government also plans to allow new technologies including lean combustion, variable valve phases and direct injection. Diesel engines had to integrate with super-charged inter-cooling and common rail technology. Euro II standards for medium buses and heavy-duty cars and Euro III standards for Mid- to high-level cars, luxury large and medium coaches were to be made mandatory.
A number of industry events in 2005 including 2005 China (Zhengzhou) Automobile Products and The 3rd China (Guangzhou) International Automobile Exhibition sought to attract investments into China.
The reform efforts of China are reflecting in the export figures in 2005 that stand at approximately 135,000 units in the first 10 months. The exports exceeded imports by 7,000 units. Domestic companies including Geely, Chery and Jiangling are following aggressive export strategies to improve their global competitiveness. However, the Chinese companies need to improve quality in line with stringent global auto industry standards.
According to a survey by KPMG, the audit, tax and advisory firm, non-Asian Chinese car makers will benefit maximum by targeting the Asian customers, especially Chinese whose disposable incomes are increasing on account of the prosperity unleashed by economic growth. This is evident in the sales trends, which have picked up primarily because of higher sales of small cars.
China has been an attractive investment avenue owing to its low cost components. While this being the mainstream aspect, the Chinese market did present a tough scenario for many who did not rise to the challenges of the market place. A study by the Original Equipment Suppliers Association and PRTM Management Consultants showed that many companies had not derived any costs savings by sourcing from China. The study reflected that long-term players, who had built relations with the suppliers, were able to realise value added gains.
For the auto industry to sustain on a long-term basis, China needs to reduce its dependence on imported oil and develop alternative fuels. In line with global trend, the industry should move towards hybrid vehicles. With improving technology, realisation of better service centres, improvement in infrastructure and mergers & acquisitions, China’s automotive industry is all set on the growth path.
