Zhou Yongjiang: the Operating Mechanism in

　　A summit in Lhasa has some deep meanings. First, Lhasa is the highest city in the world and center of Tibetan Buddhism. Considering that most of us came here for the first time, we have to get accustomed to the environment here. The same as Chinese car market for nobody predicted China would become the largest auto country of car sales. Under such circumstance China also need to adapt to new opportunities and challenges from global auto industry.

　　Second, I think the theme of this summit is very good, that is purifying your heart and nature while enjoyment in the peak. Today my speech will focus on discussion of management system under China's market environment I want to divide my speech into three parts:

　　First, development trend of China's passenger vehicle market, which I think will continue to be in high growth.

　　Second, there are some reforms and challenges towards marketing and management system in the market.

　　Third is management system of Chinese car market as well as development direction in the future. I think market prediction is not the main topic to be discussed today, it is just an introduction. As far as I am concerned, I believe Chinese car market could grow by 23.5%. My prediction is based on sales in the second half of 2010 will be equal to that in the last year. I think in the second half of 2010 Chinese car market will be in a zero growth.

　　Now let's have a look at the trend. From 2002 to 2010, the compound growth rate is close to 30%, which indicates that China's growth rate is in accordance with the early development of automobile markets in other countries. The development of auto industry in any country is related to its economy. In 1920s, the auto market in North America embraced a booming period when the economy developed rapidly. The auto industry in Germany, Italy and France developed rapidly in 1940s. Japan entered the high-speed development period after 1970s. After becoming a member of WTO, China began to fully exploit the resources of cheap workforce and Chinese auto market entered the fast development period. In the early period, since the basis was relatively low and the demand was great, the speed was quite fast. There was no giant gap between two different specific segments. The mainstream products were mid-size cars. In the later period, SUV began to develop rapidly.

　　As to the long-term forecasts, I think we can consider the issue from the following aspects. First of all, the factors which influence the development of auto industry are quite complicated. The first factor is GDP. In the past ten years, the growth rate of GDP was close to 10%. In the first half of 2010, the growth rate exceeded 11%. Therefore we believe that GDP is the main factor which supports the development of auto market. Second factor is per capita income. When people's income reaches a certain level, cars will become popular. Third factor is price. At present, the prices of nearly all the goods are rising, but the prices of cars are in decline. In the past we may find a satisfactory model whose price was too high. Nowadays the prices of cars are gradually closer to people's expectations.

　　Besides the top three factors, there are also some secondary factors. First is product. Now consumers' demands are becoming more personalized and different groups of consumers have a wider demand. We can see that in each segment there are a number of new products every month. Second, we are faced with the other problems including high oil prices, stability of oil prices and tax reform. We have to consider the issue of oil prices when forecasting the development of auto market. Third is financial market. Financial companies can provide high-quality products to support the purchase of vehicles. Currently we have to know how to use these financial institutions to expand our demands. Fourth factor is used car. Second-hand car market has great potentials. I believe in the near future the used car market will develop very rapidly.

　　I would like to talk about the after-sales market. The development of after-sales market is related to logistics, which is of great importance to the entire sectors of automotive industry. Actually, there are other factors which may influence the development of Chinese auto market.

　　Though different institutions have different objectives, the overall forecast is China's auto industry will maintain a high-speed growth. I think by 2018, the sales of passenger cars will reach 18.8 million units. As to specific segments, there will be fierce competitions in A0, A and B markets. However, by 2018 the overall capacity in China's auto industry will exceed the demand. Therefore we have to make adjustment according to the change of market. There are a number of ways.

　　First way is mergers and acquisitions among enterprises. Chinese government promotes such a kind of measure. We can optimize the investment and enhance the competitiveness of domestic products. Second, joint ventures and domestic brands have different views about expanding capacity. For Korean and Japanese automakers, when production capacity is lower than demand, they will optimize structure of products and ask employees to work overtime. Then their interest will be maximized with the lowest cost. When demand declines, Korean and Japanese automakers will run their plants according to the normal agenda. Though the expansion of capacity is important, we should pay more attention to the efficiency, management and adjustment of capacity.

　　Secondly, I would like to talk about the issue of inventory. It is difficult for us to forecast the development of market. Though we can make forecasts, the reality is more complicated than we think. At present there is a kind of competition in China's auto market which results from the inventory. When inventory is bigger, there will be a price war. When the channel is expanded, they will accommodate more inventories. The real demand is covered. The expansion of capacity is related to the development of market, business strategy and future demands. When the relationship between sales and production is closer, an automaker will find it easier to adapt to the market. The last question is about push and pull. Which one is more suitable for the development of China's auto market? In terms of middle and high-end models, there are greater potentials in China compared with international market. As to the low end models, there is hardly any space for the reduction of prices. Since 2004, the prices of vehicles have been lowered by nearly 30%. However, as to high-end brands, there are only some slight changes.

　　I would like to use a case to illustrate the development of the operating mechanism of China's auto market in the future. The fundamental reason for the recession of American top three automakers is that GM, Chrysler and Ford stick to Push system for quite a long time. After the financial crisis, the system was near the edge of collapsing. Therefore American auto industry suffered from a terrible downturn in the past two years. In 2013, if China's economy suffers from larger fluctuations and production capacity reaches a higher level, what kinds of conditions will Chinese automakers embrace? I think it is a question worth discussing.

　　We can see that since last year GM, Chrysler and Ford have taken an important measure-cutting production and closing plants. Their second measure is to reduce the fixed costs. Those giant automakers transferred unemployment compensation to unions of workers. As to the issue of dealerships, though the dealerships got a lower commission and the sales went down, their inventory, capital and cost decreased at the same time. Then the profits did not decline.

　　In China, the competition in auto market is inadequate. Competitions still stays in the surface with a low concentration rate. Now there are more and more automakers with the annual capacity of more than one million units. They can obtain satisfactory profits. The competition will become fiercer. In addition, we have to think about the issue of capacity. Every automaker is faced with the challenge that it may be difficult for the capacity to fit in the market. How to fit in the market is an issue which is related to the business strategy and operating mechanism. Moreover, Chinese automakers have to consider the choice of operating mechanism. In accordance with the orientation of market, the relationship between production and sales should be closer. (Translator: Qinghua/Hanxin&Wade)

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