Will China become a major exporter? Chinese companies more active

　　The rise of Chinese brands and the outlook for exports from China are still among the major discussion points in the global auto industry.

　　For foreign players, who can only hold a maximum of 50% equity in their Chinese joint ventures, it is less attractive to use China as a base of exports and also much more complex to integrate China into their global supply network. This puts China at a significant disadvantage compared to countries such as India, Thailand, Mexico or Brazil in the ranking of competitive production locations for exports.

　　Exports from joint ventures will become significant only when global OEMs make China the global production hub for selected models. This is unlikely to happen in the current policy environment. In the near term, I would expect the main thrust of automotive exports by foreign JVs to be in the area of components, engines, and transmissions. Exports of built-up vehicles will grow more gradually. I would be more optimistic about the export outlook from joint ventures such Shanghai-GM. Relation between the SAIC and GM is positive and the two companies are already cooperating outside China through a Hong-Kong based joint venture.

　　Chinese Brands More Active On the Export Front

　　Of course the situation is very different for Chinese brands. So far, Chinese penetration of export markets has been low and restricted to emerging markets such as Russia, South/Central America and Africa/Middle East. Moving up to the next level would require success in the major developed regions of North America and Europe. In this respect, it appears very unlikely that Chinese brands will emulate he success of Japanese brands in the 1970s and 1980s. Chinese cars are still lagging far behind international levels in areas such as styling, safety, emissions, and general performance. In addition, durability is untested. Chinese companies also face challenges in areas such as branding, distribution, and after-sales.

　　Overall, while China will continue to benefit from very high levels of investments from Chinese as well as foreign players, bulk of the production will continue to be earmarked for domestic demand. Although Chinese exports will rise, they will continue to form a relatively small part of China’s domestic vehicle production. Acquisitions, such as Geely’s purchase of Volvo and partnerships such the one between GM and Shanghai Automotive provides the Chinese company with the opportunity to work with experienced international partners who can guide and help them to penetrate the more sophisticated markets more rapidly.

　　Can JVs extend Cooperation outside China?

　　As JVs will most likely continue to dominate the domestic market, an interesting question is whether some of these joint ventures can extend their cooperation outside China.

　　At present JVs are not big exporters and with the one exception of Shanghai-GM, there is virtually no cooperation between the JV partners outside China. Of course, for the JV to extend beyond China, the relationship between the Chinese and foreign partners needs to be on a very solid footing. At present, when we have a situation where many of the foreign companies have more than one Chinese JV partner and where the Chinese partner has multiple foreign partners not to mention their own independent brands, there are too many conflicts of interest for such a development to take place. But it is an issue that policy makers and the industry could explore more constructively.

　　Consolidation: What about private Chinese companies and foreign companies?

　　In recent years, the government has been trying to consolidate the highly fragmented, industry structure. The roadmap for consolidation has been in place for a number of years and there has been some progress. One of the limitations of this roadmap is that it only addresses consolidation of smaller state owned Chinese companies into larger state owned conglomerates. It does not really address the role of private Chinese companies such as BYD, Great Wall, Geely, Lifan. The consolidation policy roadmap also does not formally recognize the existence of foreign assemblers; so it cannot address the nature of complexity and fragmentation due to multiple joint ventures between Chinese and foreign companies, proliferation of models and brands. Indeed, the need to have joint venture brands will further complicates the market and industry structure.

　　This is an issue which policy makers need to reconsider in the next version of the industry consolidation roadmap. However, government’s other goals such the need to support development of independent brands and indigenous technology plus with provincial interests will continue to remain as significant obstacles.

　　Over capacity or shortage of capacity ?

　　The issue of overcapacity in the China’s auto industry has been much debated. Booming sales in 2009 and 2010 encouraged virtually every company to accelerate capacity expansion plans. In high growth markets, capacity expansion in anticipation of expected growth makes a great deal commercial sense. There is of course the risk of overcapacity if demand growth then disappoints.

　　In 2010, China produced 18.24 million units and accounted for 23.5% of global production in 2010. Passenger car production in 2010 was 11.4 million. By 2016, even with fairly conservative forecasts, I expect China’s production level to have reached around 26 million including nearly 18 million units of passenger cars.

　　This means expected growth in production of nearly 8 million units from the 2010 level. So the industry and individual companies have to plan their expansion to accommodate this growth, unless they believe in doom and gloom scenario for China or want to lose market share.

　　Virtually every venture still needs to make bold investment plans but also have the flexibility to bring on new capacity in phases and fine tune the exact timing of investments depending on actual development of demand.

　　My current assessment of current plans implies that plans of most of the established JVs appear reasonable especially as they have the flexibility to scale back these plans in case of significant negative developments. However, it appears that some of the expansion plans of some of the newer JVs and independent brands are on the aggressive side and will most likely need to be scaled back.

　　Will China lead the world in the adoption and production of New Energy Vehicles (NEVs)?

　　A key element of government policy in the coming years will be to support the adoption and development of New Energy Vehicles (NEVs). The broad rationale is obvious

　　1. NEVs will eventually reduce China’s dependence on oil and reduce its carbon footprint.

　　2. Developing the capability to develop and produce competitive NEVs (particularly Battery Electric Vehicles (BEVs) is a huge opportunity for China and Chinese companies to leap-frog global automakers and hence build up a significant global competitive advantage

　　There is very strong government commitment and financial resources to support developments in this sector including generous grants to the local industry and aggressive subsidies from national and municipal governments for buyers of NEVs. China also has a huge pool of engineering resources to support development of battery, motor and other related technologies and the financial resources and ability to rapidly establish of EV charging infrastructure. Compared to most developed countries, Chinese consumers also appear to be more “open” to buying EVs.

　　Key obstacles for more rapid adoption include high purchase price, the limited driving range of NEVs (particularly for BEVs) and inadequate charging infrastructure. Issues such as shortage of electric power, lack of common technical standards for EV charging interface and infrastructure and safety will also hinder progress. It is also highly debatable whether the carbon footprint will really drop as a large portion of China’s electricity is generated using coal.

　　Government targets to have 500,000 NEVs on the road by 2015 and 5 million NEVs on the road by 2020 are very modest in relation to the overall vehicle population but ambitious in relation to the current population of NEVs and the nature of challenges ahead.

　　Based on an assessment of progress in areas such as cost of lithium-ion batteries, more widespread product availability, driving range and establishment of adequate charging infrastructure, I do not expect demand, especially from private buyers, to accelerate until after 2015.

　　Even if government’s current goal of 5 million NEVs by 2020 is met, this will hardly make dent in demand for oil as total vehicle population in 2020 is set to rise to over 200 million.

　　How rapidly can Chinese auto assemblers close the competitive gap?

　　In the past decade, growth and transformation of China’s auto industry has been spectacular. Growth will continue, albeit at a much more moderate pace. Whilst current joint venture structure is expected to continue to dominate, it will be interesting to see if China does come under significant international pressure to relax the 50% ownership restrictions for foreign automakers. At present this does not appear to be on the cards.

　　Foreign technology and brands continue to dominate the passenger car sector, although are operating via joint ventures. Progress made by larger automotive SOEs in areas such as building their engineering and development capabilities, launching competitive models, building brands and eventually gaining market share has been disappointing. Newer private Chinese companies have made more impressive progress.

　　The government is expected to continue to persist with its support and encouragement to local players to enhance their capabilities and become more competitive. However, it has been acknowledging that the gap between Chinese companies and major global OEMs is still significant. How rapidly this gap can close during the coming years will determine the type of progress that Chinese companies can make both in China and globally.