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Press reports on the entry of China into the WTO in 2001 focused on the fact that tariffs on imported cars were going to be lowered from the current rate of 100% to 25% in 2006. The generally accepted view was that imports would increase, thus driving inefficient producers out of the market. To counter this threat China was trying to create three super domestically owned automakers to compete in the market. While everyone’s focus was on the winners and losers in the domestic marketplace, almost no attention was given to China as a source of product for the export market. Looking at recent events in the China, I believe that China will become a major producer of automobiles as well as a major exporter. In just the last six months alone the following non-Chinese automakers have announced that they are building new or expanding existing plants in China: Toyota, Honda, Nissan, Hyundai, Ford, and Volkswagen. These investments could add up to 1.2 million vehicles in production capacity. It is highly likely that other new plants or expansions will be announced this year. For example, Renault is in talks with a Chinese automaker to build a light van. At the same time the Chinese automakers are also expanding their assembly operations and expanding and improving their product mix. According to CSM Worldwide, China produced 1.9 million cars and light trucks in 2001. This made them the 8th largest light vehicle producing country in the world. In 1997, just five years ago, they were the 10th largest producer. CSM estimates that by 2007 light vehicle production in China will be 3.6 million vehicles making them the 4th largest vehicle producer in the world. This is a dramatic shift by any accounting method. During the six years that China will see its production almost doubled Japan is expected to decrease production. The other major producers US, Germany, and France will see little change. CSM estimates that world production will increase by 7.4 million units between 2001 and 2007. China’s increased production will account for 23% of that increase while at the same time only account for 3.5% of world production. There is no doubt that light vehicle sales in China will also grow at a very rapid pace. However, I believe that an increasing percentage of Chinese production will be exported. First, imports will take up an increasing share of the domestic market at least for the next ten years. Second, the vehicles being built at the assembly plants with foreign ownership will utilize the latest designs and technology available for the price points of the vehicles being assembled. This combined with the fact that China is eliminating its local content requirements will help insure that the quality of the vehicles are up to developed market standards. Finally, China has become the low cost manufacturing base for a number of industries. Given the resources that the U.S., Japanese, and European automakers and auto parts companies (Part II will look at the auto parts industry) are pouring into China there can be little doubt that the same will not happen in the auto sector. The likely scenario is for Chinese made vehicles to first be exported to other Asian and developing countries. This follows the path made by the Japanese and Korean automakers. Given that the U.S. automakers are not strong in these markets they along with the premium automakers from Europe will be least affected. The greatest impact will fall on the Japanese and Korean automakers. This may help explain why they are now becoming very aggressive investors in China. At the same time the foreign automakers are expanding in China the Chinese automakers are also expanding and undergoing a transformation. China’s latest five year plan for 2001 through 2005 published in June of 2001 calls for the formation of two to three Chinese owned automakers. This will take place through mergers and acquisitions as well as government policies that will favor this development. Already there has been an effort on the part of the major Chinese vehicle manufacturers to acquire or partner with their smaller brethren. Even though there are more than 125 companies assembly cars in China, the top thirteen producers assemble more than 90% of the light vehicles made in China and the top three accounted for 44%, including 70% of the cars. The Chinese government believes that in order to compete in the marketplace the auto companies need to have their own R&D capabilities, modern assembly facilities, and an engineering infrastucture that only come with economies of scale. The likely candidates for survival are thought to be First Auto Works (FAW), Shanghai Automotive Industry Corp (SAIC), and Dongfeng. All of these companies are state owned companies. FAW is thought to be in talks with Tianjin Automotive Industry. Dongfeng has a joint venture with Guangzhou Jingan and is rumored to be a likely suitor to Beijing Automotive Industry. Dongfeng officials are on record saying they will try to acquire two or three local producers by 2005. SAIC has formed a joint venture with Wuling auto and is in merger talks with Yuejin Motor Group. Whether or not the Chinese government is able to orchestrate such a scenerio is open to question. First of all the fact that foreign owned companies now have tie ups with several Chinese automakers may make both the foreign and local partner less willing to be acquired. They may not need the government’s financial support. The R&D capability and economies of scale can be derived from the foreign partner. Then there is the question of whether the government can or should pick the “winners”. As the Japan experience shows, the government is not always right. Just as Honda has succeeded in spite of the government so might a company like Geely Group. Here is a company that was not on the radar screen last year and this year may be in the top ten. Their success is vehicle driven which shows that even in China the product drives the market. Finally, the foreign partners have access to the global market through their dealer network. I believe that in the end China will have more than two or three locally owned automakers. Some of the companies will be full line producers like Toyota and GM and others will be niche manufacturers like BMW or Suzuki. Most of them will continue to have tie-ups with the foreign automakers for the foreseeable future. When looking for clues to the future of the Chinese auto industry it is instructive if you look at the history of the U.S. auto industry. In the early days when the U.S. market experienced exponential growth as is now taking place in China there were scores of manufacturers. As the industry matured the number of players decreased and size was a competitive advantage. The same thing is likely to happen in China except size not only means size of the Chinese automaker, but also size of its foreign partner. If Toyota, Volkswagen, GM and other large automakers want to be a player in China, and I believe they all do, then they will devote the necessary resources to play. I do not believe that they will all have partnerships with the same two or three Chinese auto manufacturers. Therefore, it is highly likely that there will be between five and ten significant light vehicle producers in China for the next ten to fifteen years, at least. It is likely that only two or three Chinese automakers will have the full infrastucture to develop their own vehicle. In that sense the current “Big Three”, FAW, Dongfeng, and SAIC are likely to fall into that category. Thus as an auto parts company looking at China as a potential market focus your marketing on these three and then put your attention on the foreign partners of the other Chinese producers as you work to market your products in China. In part II we will look at the changes taking place in the OE auto parts industry in China. |
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Related Information Add a link Chinese Production Statistics Chinese Government Report McKinsey Report Comments Add your comments I think that the number of automakers will shrink but only down to 10 or 15. The Chinese government is too protective and will not let all their automakers go out of business. - PhilCard |
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