China's New Auto Landscape

Guest writer, LILY, writes about the effects of rapid growth and foreign partnerships in China's auto industry. China took ...

Guest writer, LILY, writes about the effects of rapid growth and foreign partnerships in China's auto industry.

China took over as the world number 1 vehicle manufacturer in 2011, with a production of 14 485,326 cars which equals to 24% of world production; this statistic was recorded by the International Organisation of Motor Vehicle Manufacturers (OICA). Other reports put this number at 27%. My point is that this behemoth of China has been growing too fast and too big, and I can foresee many challenges ahead, or rather they are actually facing it now.

In managing any project, there is the Project Management Triangle telling us not to be greedy; you can’t expect to expend minimal ‘time’ and ‘cost’ with a wide ‘scope’ yet achieve good ‘quality’. China started its ascension to become the biggest car market since 2008. According to reports from RIA Novosti, MSNBC and The Economist, in merely 2 to 3 years (time), they had exceeded (scope) the European Union, and even US and Japan, in capacity. In terms of funding (cost), China had managed to rally foreign investments and tapped into their wide variety of resources that is beyond monetary funding.

What is the ‘quality’ of this project's outcome that happened in a ‘short time’ and has a ‘wide scope’ using ‘leveraged funds’? What is the fine print that comes with the leveraged funds that could potentially cause challenges to arise and affect the quality of the auto industry?

The landscape of the industry has changed. We can notice 2 very obvious groups of automakers: they are the state owned automakers (the FAW Group, Changan Automobile Co, SAIC Motor Corp and Dongfeng Motor Group, to name a few) and the private Chinese automakers (including Geely, BYD and Great Wall). State owned automakers are the main players that enter into JV with foreign automakers (for example, BMW-Brilliance, FAW-VW, Beijing-Hyundai, etc) Will these gigantic state owned automakers flourish, as they generate fat profits, while the private automakers slowly wither away? Is the only way to survive is to merge with bigger automakers?

Mac, Automology's columnist, wrote an article on car complaints increasing by 50% since Singapore’s lemon law was implemented. A lemon law is now enforced in China as well. With the influence of foreign partners, vehicle warranty in China has been beefed up with a new lemon law. Consumers in China receive the same protection as American consumers, in terms of defective vehicle replacement and free repairs. State owned automakers are equipped to deal with this, as they have the global manufacturers to support them; the smaller and weaker auto manufacturers will have a hard time sustaining their businesses over the long term. Should they stay on their own or amalgamate themselves with the bigger forces to arrive to an industry consolidation? 

There are more than 70 registered car manufacturers in China. Time will unveil whether consolidation will happen in a big way. Policymakers in Beijing are already in the process of encouraging other manufacturing industries, such as steel production and shipbuilding, to merge and form bigger firms to achieve competitiveness. In the auto industry, there are some organisations which have already started the merger process. For example, in 2009, the Habin Hafei Automobile Industry Group was absorbed by the Changan Automobile Group.
Another change in the automotive landscape is that there are more JV brands available in the market now, like Everus (GAC-Honda) and Ciimo (Dongfeng-Honda). One of the main objectives of China in agreeing to these JVs is technology transfer. It is time consuming and requires high investment to design-build-manufacture a new model from scratch.

According to a Bloomberg report, only 8% of personnel in China’s automotive industry are in technical positions as compared to 30% in developed markets. In 2011, 95% of the profit from passenger vehicles in China was from JV companies involving foreign carmakers. That shows the extent of dependency on such JVs.

Foreign automakers in China are well aware that they need to share technology with their partners; to them, it is worth doing so, considering the state of regression of the auto industry back in their home countries versus the extraordinary growth in this emerging country.

One of the ways to cut down ‘time’ to achieve the ‘scope’ for China is by offering older and discontinued vehicle platforms by the foreign partners to the Chinese state owned automakers. Meanwhile, these JVs are also developing the electric vehicle market, since it is already in these foreign partners’ agendas and, at the same time, EVs are a priority of China’s policymakers. Ranz is one such example of an electric car, and is produced by FAW-Toyota based on the Corolla platform.

The already complicated auto industry is now becoming more fragmented with the variety of new models, brands and distribution channels. These JV brands are competing not only with local brands, such as Chery, Geely and Great Wall, but they are also competing with the local brands of the state owned automakers. JV brands tend to be targeted at the budget market, which mitigates conflict with their core brands. However, the state owned automakers are already struggling with resources for product development and engineering. With these additional JV models, will they lose ‘quality’ because considering the ‘time’, ‘scope’ and ‘cost’, something’s got to give?

The next episode of China’s automotive industry will be very interesting. I am anticipating that the smaller and weaker automakers will be eliminated from the industry unless they are absorbed by the bigger automakers or they carve out a niche for themselves. When the industry becomes so complicated and fragmented, policymakers will need to do something about it. There is a threshold of how much China can exploit the foreign partners and how much the foreign partners have to offer to sustain the relationship. Certainly, China’s policymakers are clever enough not to stay contented with outdated platforms; they intend to own intellectual property as a result of these JVs. Moving forward, we can anticipate more interesting stories to come out of China.



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