How rapidly can Chinese auto assemblers close the competitive gap? Is there scope for cooperation between different players?

　　The global auto industry is highly competitive. Barriers to entry in areas such as sophistication of technology, capital intensity and production scale, brand development and distribution presence are very high and it is rare to see new players emerge and succeed. So in this global context it has been amazing to see so many domestic brands emerge in China in the last decade.

　　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 slow. But, a small number of newer private Chinese companies have made more impressive progress.

　　Of course, we have to again mention China has a unique industry structure, shaped and tightly controlled by government policy. Without such controls, it is almost certain that China’s industry structure could have become similar to India or Brazil where foreign automakers dominate and only a very few globally competitive domestic automakers emerge and succeed over a longer period. In India, we have just Tata and Mahindra who can compete with global brands and even they face a lot of challenges.

　　In China’s unique situation, although there has been a fair bit of consolidation already, there are still too many players and the industry structure is too fragmented. While demand was growing strongly, the fragmented industry structure was not an issue but a prolonged period of slow growth will put pressure on several of smaller automakers to exit, consolidate or seek other ways of operating.

　　In an environment of slow growth and intense competition, it becomes even more important to have highly competitive products and strong branding. So, the main challenge is to continue to focus on product quality and technology and continue to improve brand image and customer acceptance.

　　There are currently no examples of meaningful cooperation between domestic players and the culture of deep cooperation in areas such as engineering, product development, joint purchasing and production, re-badging and sharing distribution channels will take time to evolve.

　　The government is expected to continue to persist with its support and encouragement to local players to enhance their capabilities and become more competitive. It has been acknowledging that the gap between Chinese companies and major global OEMs is still significant and it will soon have to decide how many companies it is viable to support. 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.

　　We know you have done a lot of research on the development of South Korea’s auto industry. The auto industry of China and South Korea both started basically in the 1980s, but now Korean-brands have been well recognized by the global market, especially in China. What is the weakness associated with China’s auto industry by comparing the two countries, and what do you think China should learn from South Korea?

　　The situation in China is very different from Korea and so we have to be careful when making direct comparisons. But of course, these are some lessons China can learn from the experiences of the Korean automakers.

　　In 2011, Korean domestic vehicle sales were only 1.5 million units while vehicle production was 4.66 million units. So both sales and production levels are a lot lower than in China. There are also major differences in industry structure, number of players, export orientation and government policy. In 2011, South Korea exported 3.15m vehicles of exports accounted for over two thirds of the production.

　　Historically, high tariffs and tight control over foreign participation in the industry were crucial factors in the nurturing and development of strong national champion companies in the form of companies such as Hyundai, Kia and Daewoo. During the 1970s and 1980s the Korean automotive industry entered into numerous joint ventures and technology agreements with overseas manufacturers. Daewoo co-operated with GM through to 1992, Hyundai with Mitsubishi, and Kia with Mazda.

　　From the mid-1980s, the Korean industry started to transform itself from CKD assembly of foreign designed vehicles to fully fledged manufacture with a high level of domestic design, engineering and component production.

　　Initially, Korean brands also suffered from low quality image and they did not enjoy success immediately, Indeed, the industry went through a difficult period in the late 1990s, immediately after the Asian crisis and the collapse in the domestic market. Kia and Daewoo went into bankruptcy and were bought by Hyundai and GM respectively while Renault acquired Samsung. At Hyundai/Kia, there was a realization that without a significant presence outside Korea, the company could not survive. Strong leadership and a single-minded focus on quality and technology was crucial in turning around Hyundai’s performance in key export markets such as the USA. In the last decade, Hyundai and Kia have developed into sophisticated global companies with a broad and competitive product portfolio plus an extensive global sales and production footprint. While Daewoo and Samsung were acquired by GM and Renault respectively, they continue to play a critical role in the Korean auto industry and the economy.

　　The situation in China is a lot more complex with so many players, a large domestic market and low dependency on exports.

　　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 can emulate he success of Japanese brands in the 1970s and 1980s or the success of Koran brand in the last decade.

　　The main lessons individual Chinese companies can learn from Hyundai/Kia are:

　　• A strategy based on low prices and to other emerging markets should be regarded as only the first stage of international expansion focused on emerging markets.

　　• Significant volumes can only be built up by achieving presence in developed markets such as North America and Europe. Customers in these regions are brand loyal and winning them over requires a major leap in quality and technology level. New brands also need to make significant investment in marketing, brand building and distribution network.

　　• It will be much more challenging for new brands to build up sales momentum in the current environment than it was for Japanese and Korean brands when they first entered USA and Europe.

　　Chinese government has introduced the “Energy-saving and new energy vehicle development plan” formally in July, and put forward the goal of sales in 2015 as 500 000 units. How do you see this? In last year’s car forum you highlighted some of the major obstacles in the way of more rapid development of new energy vehicles in China. What is your latest assessment of the future development of new energy vehicles in China? What are the key obstacles?

　　It is true that a key element of government policy has been 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.

　　Government targets to have 500,000 NEVs on the road by 2015 (this is not an annual sales goal) 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.

　　Actual progress and sales performance so far has been very disappointing. 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.

　　Based on an assessment of progress in all the above areas, 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.

　　In the near term, Chinese policy makers and the industry need to acknowledge the significant technical and infrastructure obstacles before battery vehicles become more competitive and acceptable to consumers. China’s policy roadmap has so far not been pragmatic and in 2011, even Prime Minister Hu Jintao has questioned the philosophy of putting so much emphasis on Battery Electric Vehicles.

　　There are currently more reasons to be optimistic about the outlook for hybrid cars, especially plug-in hybrids but the internal combustion engine is likely to remain as the dominant propulsion mode at least for the next decade and most likely a lot longer. There is still plenty of scope to make improvements through measures such as direct injection, turbo charging etc.

　　The Toyota PRIUS is selling well in Japan and the U.S. but sales in China are very low. Sales of other hybrid vehicles are also low. How do you explain this? If relatively developed technologies such as hybrid are not accepted in China can we conclude that the outlook for pure electric vehicles is even more pessimistic?

　　It is very true that the success of the Prius in USA and Japan is so far not being replicated in China. Government policy currently does not provide any special benefit to hybrids relative to conventional gasoline powered cars. In fact, conventional hybrids are not even regarded as New Energy Vehicles in the national government policy. The subsidy level for hybrids is just 3000 yuan compared to maximum of 120,000 yuan (60,000 yuan from central government and upto 60,000 yuan from selected municipal governments) available for battery electric vehicles.

　　Until now, lack of broad policy support means high price premium over gasoline cars while the absence of some of the benefits (such as special lanes on expressways, easier parking and tax breaks) that are available in other countries does not make hybrids an attractive proposition at present.

　　Recently, however, there has been some news that the Guangzhou will offer subsidy of 10,000 yuan for conventional hybrids. This is sure to energize sales of the Toyota Prius and other hybrid models in Guangzhou. It is quite likely that the policy environment in other cities could become also become more favourable and it will not be surprising if hybrids also receive more support at national level in the future.

　　Plug In hybrids (PHEVs) and Battery Electric Vehicles (BEVs) are classified as NEVs and come with many incentives and benefits for consumers. The aim of government policy has been to encourage Chinese companies to develop BEVs and PHEVs as it believes that Chinese companies can have the potential to leapfrog foreign automakers in this technology. Such policy support is available for hybrids. Hence, the performance of Prius hybrid should not be regarded as an indication of sales of BEVs and PHEVs.

　　My comments on the previous question summarize the key obstacles in the way of more rapid acceptance of PHEVs and BEVs.

　　Toyota is believed to be considering sale of imported version of Prius Plug In version in China. It will be interesting to see if Toyota eventually produces the Prius PHEV in China and whether this model can qualify for the same level of incentives and policy support as PHEVs developed and produced by Chinese automakers.