At what stage of development is the Chinese auto market? What are some of the special characteristics and in what senses is it similar to and different from auto market in Europe and the U.S.?

　　Not long ago, it was common to compare China with other emerging markets such as Brazil and India and in many ways China is still an emerging market. For example, car ownership per thousand persons is still very low at national level, a large percentage of buyers are first time buyers and growth rates are high. New players are still entering the market, expanding their production scale and distribution presence and new customer and product segments are still forming. So in this respect, China is very different from Europe or North America where car ownership rates are very high while demand, segmentation and competitive dynamics are more stable. Of course, the financial crisis has created some instability and interesting changes in both regions.

　　After the incredible growth during the last decade, it can said that many of China’s provinces (especially on the East coast) and cities now have more similarities with developed countries than with emerging markets. But many provinces and cities are still in “emerging market” phase.

　　Similarities with USA include the large land area, large number of cities and rapid construction of road network, in the same way that occured in the US in the 1950s. Medium and large sedans have traditionally dominated, helped by high level of institutional demand relatively low fuel prices. Diesel cars have not become popular. However, unlike the US, long distance car driving is not as common, demand is quickly shifting to smaller, fuel efficient cars. With the exception of Buick models, American design models, especially pick-up trucks have not gained significant market share.

　　Europe is not a single or homogenous market but generally speaking, smaller hatchbacks tend to dominate, especially in Southern European countries. European influence has in China has been strong, especially as European models from brands such as Volkswagen play a prominent role in China. Smaller car models and hatch back body styles have been becoming more popular, especially among younger buyers in big cities.

　　And we should not forget Japanese and Korean influence as well. There are some interesting parallels between Japanese/Korean presence in North America and in China.

　　In terms of structure of the market and industry, China is much more fragmented and complicated with presence of Chinese, US, European, Japanese and Korean brands with no one enjoying significant “home turf” advantage.

　　Overall, China has its own characteristics with mix of developed world, developing or emerging market features and strong influence from all the key brands which as know are from everywhere in the world. The government’s role and the JV structure is also very unique to China and this has a massive influence on industry structure.

　　Since 2009, China has been the top ranked country, both in terms of domestic auto sales and auto production but demand growth has been moderating in the last two years. What is your assessment of the growth dynamics for auto demand and auto production in China?

　　In order to assess how demand will evolve in the future it is useful to briefly review the major demand drivers during the last decade, how they are now changing and how they will change during the next decade.

　　In 2000, vehicle production in China stood at just 2.1 million units. By 2011, production level had reached 18.42 million units. This is equivalent to compound annual growth rate of 21.8% during the last 11 years.

　　China’s entry into the WTO was the major catalyst for the boom during the early years of the last decade. A combination of very favorable 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. Major cities in the East Coast were the main growth engines but from 2005-2006, healthy support has also been coming from the spread of motorization in other provincial capitals and medium size cities.

　　The next major catalyst came in early 2009 when developments in global and Chinese macroeconomic environment and outlook for car demand were extremely worrying. Against this backdrop, China’s macroeconomic stimulus package and specific measures to stimulate auto consumption triggered an incredible boom, (much more powerful than policy makers may have intended). Attractive incentives and higher level of confidence pulled forward car purchasing decisions but after strong sales in 2009 and 2010 there was much less pent-up demand and hence growth in 2011 and 2012 has been sluggish by China’s standards.

　　How much more growth potential is there in China? What can you say about provincial and city level trends?

　　Despite the impressive boom in vehicle sales since 2002, vehicle ownership levels at national level are still very low and hence there is still huge potential for growth, especially outside the mega-cities and in the inner provinces. However, there are clear 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, Northern and some Southern provinces as well in the smaller cities in the more developed provinces such as Zhejiang, Guangdong and Jiangsu. However, controls on car registrations in Beijing and Guangzhou and negative developments in cities such as Wenzhou are a warning that car demand in many cities across China are in “bubble” and could see a sharp correction from the high levels of 2010.

　　Overall, however, I expect demand growth is expected to moderate but still remain healthy.

　　If we just focus on passenger cars, SUVs and MPV (no minibus or commercial vehicles), it can be said than in 2011 there were four provinces (Shandong, Jiangsu, Guangdong and Zhejiang) with sales of around 1 million units. If minibus and commercial vehicles are included demand was well over 1 million units in these provinces. So the auto market in many of China’s provinces is much bigger than many country markets. For example, the size of Thailand’s auto market in 2011 was less than 800,000 units in 2011. I estimate that there were five provinces in China with a bigger market than Thailand. Global companies need to recognize this in their planning and resource allocation processes.

　　It is now well accepted that growth in developed provinces and large cities is slowing down. In cities where there are controls on ownership, sales are of course falling. But demand in smaller cities (in China even smaller cities have very large population by international comparisons) still remains healthy.

　　Although growth rates in developed East Coast provinces are now moderating, the base is very large and these provinces will still remain very important for all automakers, even with low levels of growth. Demand in inner and less developed provinces is growing rapidly but from much lower base levels. Even at city level, we have a similar contrasting situation with high growth rates in smaller cities but from low base level and lower or negative growth in some of very large cities.

　　Overall, I expect around 80% of the growth in the next decade to come from outside the top 10 cities (as measured by current size of the car market). The role of Beijing, Shanghai and Guangzhou is declining because of congestion and other ownership controls and also relatively high car ownership levels. Other large cities including several provincial capitals will have similar situation.

　　In terms of provinces, automakers are establishing a broader based presence across China to serve the existing core markets and future growth provinces. Purchasing power, segment profiles and hence product requirements do vary quite bit across provinces. Overall, I expect Shandong, Jiangsu, Guangdong, Zhejiang, Hebei, Sichuan and Henan to be the Top 7 most important provinces, as measured by current size of the market and future growth potential.

　　Several big cities in China have imposed restriction on the purchase of cars. Will this affect the role of auto industry in China’s industry?

　　This is a major uncertainty when making demand assessment and of course has huge impact at local level, especially at dealer level.

　　Beijing demand in 2011 was less than half of the demand in 2010. In the next 12 months we can expect a similar slump in Guangzhou while Xi’an is also considering moves to impose some controls.

　　The impact of controls in Beijing, Shanghai and Guangzhou has already been factored into most manufacturers plans. As other cities are smaller markets, the impact of controls will not be as severe as Beijing. My own estimates indicate that we could see a negative impact of around 1 million units in 2015, if say 15 significant cities impose similar controls between 2013 and 2015.

　　Of course, this will put further pressure on national level growth but I don’t believe it will change the role of auto industry in China’s industrial economy or its role in the global context.