Impact, integration and breakout—reformation of China's auto industry 10 years after accession to WTO

　　Ashvin Chotai, Managing Director of Intelligence Automotive Asia reviews some of the significant developments in the China’s auto industry in the last decade and assesses the medium term outlook

　　The last decade has seen a remarkable transformation of China’s auto industry. Demand growth has been spectacular while there have been amazing changes in areas such as industry structure, consumer choice, competitive dynamics, engineering and development capabilities, quality levels and the rise of Chinese companies and brands.

　　China’s entry into the WTO was the major catalyst for this transformation. A combination of favourable factors, including, new models, increased capacity (owing to the government’s more liberal attitude towards approving new projects), intense price competition, improved affordability and greater consumer choice released pent-up demand and came at the time when “consumerism” was taking off in China.

　　Ten years after China’s entry into the WTO, China auto market and industry is at an interesting juncture. Some of the major issues being debated include the following:

　　• Will demand continue to rise at a blistering pace or is it set for period of moderate growth or worse set for a significant correction as the outlook for the Chinese and global economies and financial system deteriorate?

　　• How will the industry structure and competitive dynamics develop in the medium and long term? What are some of challenges facing foreign and Chinese companies?

　　• Will China become a major exporter of vehicles? What are some of the key opportunities and challenges?

　　• Will China lead the world in the adoption and production of New Energy Vehicles?

　　There are of course many other topical issues but in this article I will try to briefly address some of the above themes.

　　China’s share of global vehicle production rose from 3.5% in 2000 to 24% to 2010

　　Vehicle demand surged from around 2.2 million in 2002 to a whopping 18.3 million units level in 2010. In 2011, even after a relatively sluggish year in terms of growth, China’s vehicle demand will be over 40% higher than USA, which is the second largest market. This stellar growth has meant that China’s share of global sales surged from 3.7% in 2000 to 24.7% in 2010. China’s share of global vehicle production, which stood at just 3.5% in 2000, surged to nearly 24% in 2010. These are just a couple of illustrations of the extent of shift in “ the centre of gravity” of the global auto industry towards China. It is therefore not surprising to see that China’s contribution to the global performance and profits of global companies is now very significant.

　　How much more growth potential is there in China?

　　Despite the impressive boom in vehicle sales since 2002, vehicle ownership levels are still very low and hence there is a huge potential for growth, especially from the inner provinces. However, there are 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.

　　Whilst 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 provinces as well in the smaller cities in the more developed provinces such as Zhejiang, Guangdong and Jiangsu. However, Beijing’s controls on car registrations in 2010 and recent negative developments in cities such as Wenzhou are a warning that car demand in many cities across China may be in “bubble” and could see a sharp correction from the high levels of 2010. Overall, however, I expect China to avoid a hard landing and demand growth is expected to moderate but still remain healthy.

　　I expect total vehicle demand in China to rise from around 18.3 million units in 2011 to around 25 million units in 2016. Light vehicles (passenger cars and light commercial vehicles) should make up over 23 million units of this total. This would be consistent with passenger car ownership levels rising from around 40 cars per 000 persons in 2011 to around 85 cars per thousand persons in 2016.

　　Major Changes in Industry Structure …and Huge Improvements in Capabilities

　　In 2001, China’s passenger car industry consisted of just 7 joint ventures (Shanghai-VW, FAW-VW, Shanghai-GM, Tianjin-Daihatsu, Changan-Suzuki, Dongfeng-Citroen and Guangzhou-Honda). In addition there were ventures focussing on mini commercial vehicles, light and heavy commercial vehicles. There were very strict controls on new entries, capacity expansion, new product launches and even prices. Consumer choice was very limited and China’s development and engineering capabilities were rudimentary.

　　The last decade has seen virtually every foreign automaker establish a production presence in China, thanks to relaxation of controls following China’s entry into WTO. This has meant major changes in the structure and capability of China’s auto industry. A raft of new joint ventures came on stream while Chinese independent brands started to emerge. Booming demand and production allowed most of the major ventures to rapidly build up of scale economies and local content levels have also risen impressively, thanks to massive investments in the component supply sector. There has also been remarkable progress in terms of the local industry’s engineering and development capabilities. State owned companies have become stronger, both financially and technically and also more market orientated while new mainly private companies have emerged.

　　There have also been interesting developments in areas such as consumer choice, competitive dynamics and segmentation. While branding, product portfolio and competitiveness, distribution reach and effectiveness, and responsiveness to the market have all become vital to success, pricing is still the main competitive weapon in the fight to boost performance.

　　How will the competitive dynamics Between JVs and Independent Brands Evolve ?

　　Restrictions on foreign ownership of vehicle assembly ventures still remain, even a decade after China’s entry into WTO and this has created a complicated industry structure dominated by Sino-Foreign joint ventures.

　　In 2010, 13 major Chinese Groups plus their JV partners accounted for over 90% of the vehicle production; while it is common to talk about the China’s 120 plus assemblers and large number of brands, really the main focus should be on this much smaller set of companies and their JVs.

　　JV production (meaning local production but primarily with foreign technology) stood at 8.1 million units in 2010, out of total vehicle production of 18.3 million units. So at total industry level, JVs accounted for around 45% of vehicle production in 2010.

　　Chinese brands are dominant in the commercial vehicle market but in the car sector (excluding minibus), around two third of the production is accounted for by JVs.

　　Will JVs continue this type of dominance? In summary yes, mainly because of JVs continue to improve their competitiveness and will continue to be the main mechanism for bringing in the latest products and technologies into China and also for producing and marketing vehicles that modern Chinese customers want.

　　Initially, independent Chinese brands enjoyed success with low price strategies and focus on smaller cities but in recent years, most JVs have made very impressive progress in terms of having a broad product portfolio, becoming very price competitive and expanding their distribution to inner provinces and smaller cities. Meanwhile, operating performance of individual Chinese companies has also been erratic. In 2011, virtually Chinese independent brand have been underperforming the market.

　　The most recent development is introduction of joint venture brands such as Baojun, Linian, Kaili etc. The product strategy is based on the use of old/outgoing platform from the foreign partner, carrying out some restyling and upgrades and then repositioning the model to appeal to price sensitive buyers, especially in smaller cities. This development will be putting even more pressure on Chinese independent brands.

　　So overall, the outlook for independent brands is becoming very challenging. I expect JVs to continue their dominance and account for at least 60% of China’s car production in the medium term.