Where does the Chinese Car Industry really stand? Given the astonishing growth in the Chinese car market and the staggering displays of new models, hybrids and electric cars at the last Auto Shows in both Beijing and Shanghai, not to mention the other smaller Chinese shows as well as the record-breaking volume statistics, it would be easy to form a view that the Chinese car industry is going gangbusters. Well it is and it isn’t.
The global OEMs and their Chinese JVs are selling pretty much everything that they can build or ship in. For example, Porsche expects to be up 62% this year primarily as a result of removing a supply constraint for the Cayenne. But some of the domestic Chinese OEMs are seeing absolute volume falls and their share of the market has declined materially over the past decade. What has gone, or is, wrong? How can this have happened in a control economy that is so regulated?
It is instructive to look back at how the Chinese car market has developed and how it has influenced the global OEMs. It’s very much a case of a number of highly-distinct phases although in this review I will be deliberately vague about the timing of each phase, since the line is blurred by different companies developing at different speeds.
1. The lost years;
It wasn’t so very long ago, up to the mid 80s, that the Chinese car market was less than 10,000 units and unless you were a very senior government official or a foreigner, the chances of securing a car were very thin indeed. China had, to all intents and purposes, lost touch with the skills of mass manufacture, never mind about how to develop modern cars. The demand simply wasn’t there or more pertinently, wasn’t allowed. The products were stuck in the 50s. The market was at least consolidated with FAW making the Hongqi, Shanghai Auto the eponymous Shanghai and then a few truck makers such as Dong Feng, Chang’An, Chongqing etc.
2. The early years;
In 1986, the auto industry was chosen as a pillar industry and accorded special status. Multi year plans were published, known as the 5 year plans. Foreign OEMs were allowed, and encouraged, to form 50 50 JV with domestic OEMs although they were slow to get going. Initially, the only significant ones were Jeep, FIAT and VW. At the same time, globally, the dominant trend was offshoring. While entire vehicle manufacture didn’t move to China, many of the component makers started offshoring to China, India, Thailand etc to take advantage of materially lower labour rates and this in turn led to globalization of components, platforms etc. In one of those wonderful unplanned consequences, it made the international OEMs more competitive and kicked off an era of cost downs.
3. Early growth;
As the Chinese market took off, in the early 90s, so did the JVs. Capacity expansion was promoted and domestic brand development encouraged. Everybody both Chinese and global OEMs, wanted to join in: GM, Nissan, Ford, Audi, BMW, Toyota, Honda etc all came to China and formed JVs. This drove further consolidation in the West to an extent although more within OEMs than between them. In the meantime, a plethora of private manufacturers had appeared and, without wishing to be indelicate, some of them simply copied foreign cars.
4. The WTO years;
At the end of the decade, China applied to join the WTO introduced a range of more liberal policies and growth exploded. As the next 5 year plan came out, regulations tightened a little bit, the pressure to share technology grew, China moved towards owning intellectual property and the extent of the JVs deepened. The million car platform became the order of the day and if you didn’t have significant Chinese volume, life was tough. Towards the end of this phase, there were Chinese OEMs that were very significant in scale; extremely competent at making cars but and it’s a big but, making other OEMs products.
5. Premiumisation;
Revolting word, but it captures the theme. All of a sudden, China was a 10m unit market and went from wanting mobility to wanting brands. BMW, Mercedes, Audi, Jaguar Land Rover simply took off in China. Premium sales today are 30 times what they were in 2000. The Chinese consumer got premium and wanted it now. China became a material profits driver for some for the German premium OEMs perhaps as much as 50% of profits and for GM, China has probably exceeded 100% of its profits and before its insolvency was probably the only profitable part of the business. We are even seeing the beginnings of an IP legislation that has some teeth and so in a 600-word version of a much more complex tale we have arrived at the current day.
So what does the Chinese Auto industry look like today? There are many counts but 77 domestic OEMs is the best estimate I’ve seen with revenue of USD 287 billion spread over 13.9 million units, 682 models and about 500 platforms. The average Chinese OEM offers nine models and produces 20,000 units per model. Critically, this all includes JV output. Take that away and it looks even worse. Chinese OEM revenue per platform is around USD 0.5 billion compared with, say, VW around USD 12 billion. Chinese policy is worsening this situation by forcing JVs to add JV owned brand product to the line up. Just what China needs more models and more brands!
The overall market by value is 25% Chinese OEMs; 70% JV OEMs and 5% imports. The domestic share has shrunk from 40% a decade ago. The majority of the Chinese OEM vehicles are in the A & B segments and they compete almost entirely on price. Meanwhile premium has grown to 17% of the market.
(Sourced from www.chinacartimes.com)
