Chinese carmakers on reality check drive

After a decade of high-speed growth, China’s passenger vehicle segment is at a crossroads. It faces a domestic slowdown and the challenge of going global. Sumantra Barooah reports from the Global Automotive Forum in Chengdu, China.

The Chinese car market, the world’s largest since 2009, is now increasingly posing a growing challenge to automotive companies, both big and small. The challenge is to achieve sustainable growth in a market which is expected to see an average growth of 10 percent at the most, in the next decade. Add to it the challenge of overcapacity. By 2015, China's passenger vehicle industry is expected to have a cumulative annual production capacity of over 40 million units while the sales forecast is just 26 million units. According to Deloitte Touche Tohmatsu, the average capacity utilisation is expected to be 66 percent in 2012, down from 78.5 percent in 2011.

One new cause for concern is a new regulation that has put a cap on new-car registration. Beijing, Shanghai and Guangzhou are some markets where the cap has been imposed.

China’s slowing GDP growth is an area of concern too. While the Bank of America-Merrill Lynch has cut China’s 2012 annual GDP growth estimate from 8 percent to 7.7 percent, GDP growth expectation for 2013 has also been cut from 8 percent to 7.6 percent. It says, however, that a growth pace of above seven percent is still quite good given the ‘colossal size’ of the Chinese economy.

Changing winds

Speaking at the 3rd Global Automotive Forum in Chengdu, China, Huang Yong, senior VP, Great Wall Motor Company, says, “In the past 30 years, China has been a seller’s market. We were not concerned. But now the economic rules have changed.”

Yong’s remark reflects the shift in the business philosophy of the Chinese carmakers. “In the next 3-5 years, the (Chinese) auto industry will see lot of voluntary consolidation, including cooperation. People will seek cooperation. We have to do in five years, what other countries do in 10 years,” says Zhu Huarong, party secretary and VP of state-owned Changan Automobile Company, another Chinese player. “Small players will have to act fast,” says Zhu Fushou, GM, Dongfeng Motor Corporation.

Their concerns are serious as local brands in China are struggling for growth. Some of them may even be struggling for survival. “Chinese OEMs are highly fragmented. The ones who will develop their own DNA will survive,” says Jay Kunkel, president, Continental China.

Quality and brand building are topmost in the minds of Chinese OEMs. Achieving a healthy level in these departments is crucial for Chinese auto brands which have been trying to make a mark in Europe. In addition, they are crucial for the OEMs to achieve success with their independent brands even at home.

“We must improve the quality of our products so that it matches the quality of our JV products,” says a Chery spokesperson. Volkswagen and General Motors are leading the industry in terms of sales through their respective JVs. “In the future, Chinese-owned brands will not survive only on low cost. We must have foothold in the global market immediately,” says Changan'sHuarong.

Opportunities amidst challenges

The changed business environment has made many OEMs consider realigning their business. “A moderate growth rate is conducive for sustainable development and quality improvement. It can help improve investment quality,” says Fushou. Beijing Automotive Industry Holding Company’s (BAIC) vice-president Mao Hai feels striking a “balance between quality in quantity” is important. Also on the agenda are focus on Tier 2 and Tier 3 cities and even market penetration. Approximately 80 percent of China’s cars are in Central and Western regions,” says Fushou. According to him, some cities have even overtaken the world car ownership average. China’s overall car penetration level at 63 per 1,000 population is still much below than the second largest car market, the USA, where 741 people out of 1,000 own a car.

Global drive

Given the 'limited growth opportunity' in the domestic market, Chinese OEMs are looking for ways to expand business overseas. About a million units are expected to be exported from China this year. That translates to only five percent of the industry’s estimated sales.

Compared to the Indian passenger vehicle industry, China’s export volume will be double than what was exported by OEMs in India during 2011-12. But in terms of share of exports in the overall sales volume, India is ahead at 16 percent. For the first four months of 2012-13, India's export figure has risen to 18 percent.



Many Chinese OEMs candidly admit that they need to equip themselves better to enjoy a proper foothold in overseas markets. “We don’t have self-innovation, which is a bottleneck,” says an official from Chery. Acquisitions are a route that Chinese OEMs are considering to take to reach key global markets. Chinese companies such as Nanjing Automobile Group and Zhejiang Geely Holding Group Company have led the way by acquiring MG Rover and Volvo Cars respectively. BAIC also acquired Saab technologies. “We can acquire companies to enter Europe and American markets,” says Fushou. Some feel that developing markets offer opportunities that are big enough for good growth.

“We need to readjust our ambitions but ultimately make our product, brand international. We will need another 20 years to do so,” feels Huang Yong. According to Thompson Reuters’ deputy editor-in-chief Paul Ingrassia, “Twenty years may be too conservative.” He feels that the goal can be achieved in a decade.

Also, given the Chinese government’s focus on new energy vehicles, Chinese OEMs and suppliers have the opportunity to climb up the technology curve and also establish China as a key base for sourcing by foreign OEMs. The proposed acquisition of A123 Systems – a US based maker of advanced batteries for electric vehicles – by Wanxiang Group, one of China’s biggest parts makers, is one such example.

The Chinese auto industry is in an interesting stage. It is on the verge of graduating from an emerging market to a matured market. With the transition comes the challenges and opportunities. The car market saw a 'unique' phenomenon of growth from below 100,000 units in 1990 to over 14 million in 2011. However, the new moderate growth phase could be more challenging. But as a Chinese OEM’s spokesperson said at the Global Automotive Forum, the industry should face the challenges, not avoid them.

The India opportunity

Though the US and Europe are seen as key markets to tap, India, tipped to be the world’s third largest auto market by J D Power and Associates, in 2020, also holds good opportunity for Chinese carmakers. Some of them already do business in India, though indirectly. There are instances of OEMs in India entering certain segments with a strong Chinese connection. Force Motors, Premier Automobiles and Asia Motor Works are key examples.



Force Motors entered the SUV space with the Force One, which has the body of the Guangdong Foday Explorer III with a Mercedes-Benz-licensed engine. Premier re-entered the passenger segment with the compact SUV Rio, which is none other than the Zotye Nomad. AMW entered the medium and heavy trucks with cabins sourced from China.

This festive season will see the quasi-direct entry of Chinese OEM Shanghai Automotive Industry Corporation (SAIC) into the Indian market. GM India, co-owned by SAIC will launch the Sail hatchback in October, followed by the Enjoy MPV. These and other products from China will be badged as Chevrolet. “GM India is partially a “Trojan horse” for (SAIC) Shanghai Automotive’s presence in India because GM India operates under the umbrella of the Hong Kong-based Shanghai-GM International organisation (50:50 SAIC and GM ownership),” says AshvinChotai, MD, Intelligence Automotive Asia.

China’s largest CV maker BeiqiFoton Motor earlier announced its plan to invest over Rs 1,600 crore to set up its Indian business. Its plant near Pune, is expected to start operations in the second half of 2013. Another automobile major, Jianghuai Automobile Company is also learnt to be exploring the entry into the Indian commercial vehicle segment which could be followed by an entry into the passenger vehicle market also.

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INTERVIEW WITH ASHVIN CHOTAI, MD — INTELLIGENCE AUTOMOTIVE ASIA



What is your assessment of the growth dynamics for auto demand and auto production in China?

In 2000, vehicle production in China stood at just 2.1 million units. By 2011, production level had reached 18.42 million units. This is equivalent to compound annual growth rate of 21.8 percent during the last 11 years. China’s entry into the WTO was the major catalyst for the boom during the early years of the last decade. The next major catalyst came in early 2009 when developments in global and Chinese macroeconomic environment and outlook for car demand were extremely worrying.

Against this backdrop, China’s macroeconomic stimulus package and specific measures to stimulate auto consumption triggered an incredible boom (much more powerful than policy makers may have intended). Attractive incentives and a higher level of confidence pulled forward car purchasing decisions but after strong sales in 2009 and 2010 there was much less pent-up demand and hence growth in 2011 and 2012 has been sluggish by China’s standards.

How much more growth potential is there in China? What can you say about provincial and city level trends?

Despite the impressive boom in vehicle sales since 2002, vehicle ownership levels at national level are still very low and hence there is still huge potential for growth, especially outside the mega-cities and in the inner provinces. However, there are clear signs that the market has reached at least the first stage of maturity. Growth from high base levels also becomes more challenging and there is now also much greater focus on traffic, infrastructure and environmental issues, especially in the large cities on the East coast. There is also impressive progress in the development of public transport infrastructure while the development of the used car market will also complement but check the growth in new car sales.

While demand growth in many of the major cities will be constrained by congestion and infrastructure bottlenecks plus more stringent controls on vehicle registrations, there is still significant scope for growth in inner, Northern and some Southern provinces as well in the smaller cities in the more developed provinces such as Zhejiang, Guangdong and Jiangsu. However, controls on car registrations in Beijing and Guangzhou and negative developments in cities such as Wenzhou are a warning that car demand in many cities across China are in 'bubble' and could see a sharp correction from the high levels of 2010.

Overall, however, I expect demand growth is expected to moderate but still remain healthy.

In terms of provinces, automakers are establishing a broader-based presence across China to serve the existing core markets and future growth provinces. Purchasing power, segment profiles and hence product requirements do vary quite bit across provinces. Overall, I expect Shandong, Jiangsu, Guangdong, Zhejiang, Hebei, Sichuan and Henan to be the 7 most important provinces.

Several big cities in China have imposed restriction on the purchase of cars. Will this affect the role of the auto industry in China?

This is a major uncertainty when making demand assessment and of course has huge impact at local level, especially at dealer level.

Beijing demand in 2011 was less than half of the demand in 2010. In the next 12 months we can expect a similar slump in Guangzhou while Xi’an is also considering moves to impose some controls.

The impact of controls in Beijing, Shanghai and Guangzhou has already been factored into most manufacturers' plans. As other cities are smaller markets, the impact of controls will not be as severe as Beijing. My own estimates indicate that we could see a negative impact of around 1 million units in 2015, if say 15 significant cities impose similar controls between 2013 and 2015. Of course, this will put further pressure on national level growth but I don’t believe it will change the role of auto industry in China’s industrial economy or its role in the global context.

Is there any area that Indian OEMs need to be concerned about if Chinese OEMs enter India?

In the short term, the main threat to OEMs operating in India is likely to come via GM India as it boosts sales of its China-designed products and gains market share.

In particular, in the LCV segment, Wuling-based products will pose a threat to companies like Tata Motors although it will take time for GM India to build up the sales network and credibility in this segment.

Tata, Ashok Leyalnd and Mahindra will need to keep a close eye on Foton’s progress in India.

The threat from other 'pure' Chinese OEMs is expected to be limited in the short and medium term.