Chinese auto industry looks to reinvent itself

There is some serious brainstorming taking place in the boardrooms of Chinese OEMs to survive and sustain in the rapidly changing business world. Sumantra B Barooah on the change that is China is working for, and if there’s any message for others.

After emerging as the world’s largest automotive market, China is now driving towards a new phase that could change the landscape forever.  In the next few years, China, the world’s largest automotive industry, is set to see some major changes. A key change among them will be consolidation in the industry. “By 2020, at least more than 20 percent of Chinese auto makers will be gone,” says Xu Heyi, chairman of the BAIC Group, one of the top automobile makers in China. There are over 100 automobile manufacturers in China.

Senior industry executives shared candidly about the change China is going to witness soon, at the annual Global Automotive Forum in Chongqing held in early June. China is currently entering a new phase of industrialisation called Industry 4.0. The previous phase of evolution was from 1970 to 2014. “Industry 4.0 will have a profound impact in the competition in the market,” says Zhao Ying, professor of Industrial Economics, Chinese Academy of Social Sciences. “The powerful will become more powerful and the weaker ones will become even weaker,” he adds. Sensing this, some OEMs are taking necessary measures to be among the more powerful lot.

Changan Auto is one such company. One of China’s top five automakers, Changan Auto is reorienting its business approach to grow in a market which is no longer witnessing high growth rates, and is unlikely to see them again. Companies are working out new strategies to be competitive in the ‘new normal’ business scenario.

Changan is transforming manufacturing processes into smart manufacturing, according to Hu Zhaohui, assistant to the vice-president, Changan Auto. “We will transform from a product-centered model to a product + service model,” she says. Changan’s annual R&D spend is “at least” 5 percent of its total revenue.

CHALLENGES IN A SLOWING MARKET

Chinese OEMs are also facing the challenge of building independent car brands, many of which compete with products from joint ventures with global OEMs. Many Chinese carmakers have one or multiple joint ventures with global OEMs. The models from the JVs more often fare better than the models from the Chinese partner.

Pricing the independent brand cheaper to succeed adds pressure on sustainability. There are around 20 indigenous car brands in China. Many OEMs in China are state owned, which has helped at least to some extent. But even that may not guarantee business security. “Consolidation is inevitable. The government is likely to reduce its participation in some companies in the coming years,” says Wayne Xing, CEO, CBU Analytics, China.

According to another expert on the Chinese automotive market, around 80 percent of the industry volumes comes from around 10 OEMs. In such a scenario, the smaller players will have to find out ways to sustain before it is too late. There is also some speculation that there could be merger of some large companies too. It’s not only business consolidation that is the change Chinese automotive industry is going to see. The automotive industry is set to become a ‘sunrise industry’ again in China with the growth of electric and hybrid vehicles. To be in tune with a landscape that is changing for good, Heyi and others like him, are preparing to take the change in their stride. And that change includes the birth of a new industry of ‘new energy’ vehicles. “This generation of automakers will witness a historic change,” he says. What Heyi and others shared at the Global Automotive Forum 2015 is in line with the conference’s theme – ‘Mega Change: Reshaping an Industry.

a fillip for new energy vehicles

Sales of new energy vehicles (hybrids and pure EVs) in China are witnessing a rise. Under Industry 4.0, these technologies are set to get a stronger push from the government and OEMs.

Connected cars is another lot that will see a big development in China over the next few years, like in Europe and USA. China has 35 cities with a car parc of over 1 million in each. As the car parcs grow connected, car technology would aid in better traffic management and road safety. As an executive puts it, during the “next 5 years, the automobile will see more changes than in the last 50 years.”

Electric vehicles are not new to China. This mobility technology has found support from the government for around 18 years now, according to a senior industry official. Now there will be more concerted efforts. One of the reasons is to lower China’s dependence on oil, 60 percent of which is imported. Daimler’s joint venture with Chinese OEM BYD for EVs will be one of the gainers. The JV’s Denza brand saw the first model last year, which offers a driving range of 300 kilometres.

Phil Murtaugh, a veteran in the Chinese and North American auto industry, who joined Chinese OEM Qoros as its CEO in February this year, believes that building an EV industry is a “huge challenge”. The Chinese government is the only government, he says, which is putting serious focus on the EV industry. He also points out that it has many other things to take care of. Murtaugh would know the challenges quite well, as his previous role was CEO of American electric car maker Coda Automotive.

Restructuring and reorientation

The global automotive industry is gradually, swiftly in some cases, moving away from the conventional ways of doing business. The Chinese industry is trying to find ways to change with the times. Due to the shorter history of the industry compared to the West, it is obvious that it is struggling on some fronts.

Technology and design are areas where many are lagging behind. Inorganic moves are seen as good bets. Geely’s acquisition of Volvo and Dongfeng’s investment in PSA Peugeot Citroën are key examples. Li Shufu, chairman of the Geely Group, says that his company started studying for possible changes in 2001 and that led to a shift in strategy in 2007. Volvo’s acquisition gave the Chinese OEM an exposure that it may not have got otherwise. Volvo brought along with it over 10,000 patents, three manufacturing plants, and two large scale testing grounds to list a few. But capital infusion alone is not good enough. Shufu says Chinese companies should move beyond practicing a regional culture and adopt a global corporate culture. With added strength and even bigger aspirations, Shufu says “Volvo will come back to its leadership position.”

Some are also looking at tapping resources in various geographies according to the available strengths. Changan, for example, has R&D centres in the UK (for powertrain), Italy (for styling), Japan (for interior and exterior trims) and USA (for chassis and intelligent technologies) in addition to three centres in China.

There is the odd example of Qoros which believes in the “dare to be different” approach. It wants to lead a shift in the Chinese auto sector from ‘Made in China’ to ‘Created in China’. Comments and views during the brand’s initial phase are positive. For example, it has scored the second highest points with a 5-star rating in a
crash test by Euro NCAP. That is in line with the company’s vision of building a China- headquartered international brand.

On the other hand, there are also instances which put Chinese OEMs in a poor light. Instances of cars from local brands ‘inspired’ by models of global OEMs have been prevalent in China. “A lot of enterprises are still in the practice of copying others,” says Chery Automobile’s president and CEO Yin Tongyue at the closing plenary of the Global Automotive Forum. It is to be noted that Chery has a joint venture with Jaguar Land Rover, whose Evoque SUV has been nearly cloned by a local OEM.

During the 1985-2014 period, the Chinese market grew by 52 times. But competencies of local companies have not grown fast enough. The scorching growth rates are also a thing of the past. Companies are learning to be competitive in the “new normal”. “We should try to find out new cooperation modes,” says Zeng Qinghong, general manager, GAC Group. He feels that the market should be opened up. “Sooner or later, China will relax its holding restriction,” he says. China currently has a policy which makes it mandatory for foreign OEMs to strike a JV with a local company with a maximum stake of 50 percent to enter China.

With the Chinese automotive industry striving to climb up the curve of technology and reinvent itself to be of international standards, industry chiefs feel that for Chinese companies “to integrate with the world, we (companies) need to change first”. Chery Automobile's Tongyue, who feels many Chinese companies are being shortsighted to make money rather than build sustainable brands, says: “We want to leave behind brands”. That, perhaps, is the key requirement of Chinese companies. And a message to many others outside China too.