A Pragmatic Analysis of the Chinese Auto Industry

April 23, 2008

The automotive market conditions in China still appear to be strong and the record growth continues. The automobile market in January through March grew 20.4 percent to 1.85 million units, according to the China Association of Automobile Manufacturers. The 2008 Beijing Auto Show is currently under way and the Chinese automotive industry is showing off its latest product and making announcements as to the state of the industry.

Sales at Shanghai GM, one of the company’s joint ventures in China, were 128,649 units in January through March. This represents a 13.6 percent increase compared with the same period in 2007. However GM lags behind the rest of the industry in growth. Much of that can be attributed to increased competition by other transplants in China as well as the lack of significant new product in the sales portfolio this year. At the auto show this year, GM released a concept version of the Buick Invicta which will replace the current Lacrosse sold in China. A version of the vehicle will also be manufactured in the US and sold throughout North America. (Above photo)

Chrysler LLC is now more cautious with regard to talks on a possible joint venture with China's Chery. A China made car being produced by the alliance is not ready for the US market, Chrysler executives have said. An executive for Chrysler at the Beijing auto show cited safety as being a hurdle.It appears the lack of technical ability continues to be an issue with the homegrown Chinese industry.

Reiterating many of the concerns I recently discussed in Chinese Car Invasion – Probably Not, Chery’s Chairman Yin Tongyao, stated he was cautious about his aspirations to begin U.S. sales after years of pledging to break into the North American market. North America and Europe are "very mature markets," Yin said. "We can't get into those markets too quickly, so we should explore those markets in a gradual manner and do it step-by-step. We should not aim too high."

Geely (pictured)is also being a little more pragmatic about exporting to the US. Frank Zhao, vice president of Zhejiang Geely Holding Group Ltd., says Chinese domestic automakers must craft compelling brands, retain talent and develop their own technology. In 2006, Geely Chairman Li Shufu said his company aimed to sell cars in the United States by 2008.Geely is reevaluating it intentions for exporting to the US. Zhao said Geely still had plans to export to the United States, but he declined to reveal any details. At the Automotive News China Conference here last week, Zhao said Chinese automakers have made impressive strides in recent years.

"We are still an ant, just a large ant," Zhao.

In China, most passenger vehicles are produced by joint-venture companies of global and domestic automakers. The brands of the domestics have about one-quarter of the market. Chinese brands are continuing to grow and expanding the number of products. Their design and manufacturing have improved accordingly.

However Zhao continued with his assessment of the Chinese auto industry with caveats:

- Chinese automakers' growth strategies are confusing. They do not pay enough attention to r&d, concentrating only on getting bigger.

- Instead of developing their own technology, Chinese companies are buying it.

- A cost advantage over foreign brands, though it is shrinking.

In 2007, Geely sold 184,176 units, up 4.5 percent compared with 2006.

Honda Motor Co. on the other hand has begun shipping China built cars to Europe. Honda officials are confident, the quality of its Chinese made vehicles are on par with it’s mature operations. Honda stated it could easily begin to export the vehicle to other mature markets such as the US through its joint venture with Guangzhou Automobile Industry Group Co., and Dongfeng Motor Group Co. At this time a Honda has no plans to export to the US given the potential hostile political climate in the US toward Chinese made products. However, given market conditions, export to the US could be considered.

Great Wall Motor Co. plans to start exporting a new SUV to the European markets by 2009 says the company president Wang Fengying. The company’s president assures, the USV will be compliant with European regulations. Great Wall exported a small number of Hover SUVs (pictured) to Italy and Romania in 2006 and 2007. Looking forward, by 2010, Great Wall wants to be able to launch its products at the same time in both the Chinese and European markets. Great Wall has no immediate plans to enter the US market but was recently approached by several U.S. companies, including Continental Motor Co., about exporting to the US.

The company’s statements indicate they have not made sufficient preparations to enter the US including a full understanding of the market conditions. It appears quality, brand awareness, and technological improvements are needed prior to moving forward. Price alone will not guarantee success for Chinese exports to the US.

According to the latest statistics released by the China Association of Automobile Manufacturers , China's top 10 car manufacturers in 2007 were: FAW-Volkswagen, Shanghai Volkswagen, Shanghai GM, Chery, FAW Toyota, Dongfeng Nissan, Guangzhou Honda, Geely, Changan Ford and Dongfeng Peugeot Citroen.

FAW-Volkswagen replaces Shanghai GM to become the car sales leader in 2007; and Shanghai GM ranks third. Beijing-Hyundai, which ranked the fifth in 2006, was kicked out of the top 10 in 2007. Changan Ford Mazda enters the top 10 for the first time, ranking ninth. The 10 leading car brands sold were: Santana, Jetta, Excelle, Camry, Xiali, Chery QQ, Fox, Elantra, Accord and Family.

What I am observing in the Chinese market is sharp growth primarily by the traditional automanufacturers and their respective joint ventures with Chinese partners. As I have previously discussed, the independent Chinese manufacturers do not have the level of sophistication to compete in the mature western markets and now they are being squeezed in their home market as well. By the level of talk from the Chinese companies at Beijing this past week, they appear to be backing down from earlier statments about overseas export growth and coming to the realities about the technical challenges they face in light of competition from the global auto companies. Personally, even with over a billion people in China, the country still is relatively poor and many of the independent Chinese companies cannot survive over the long run. One must remember, the automotive industry is highly competitive and still a slave to economics of scale. I expect over the coming years, the global manufacturers will continue to joint venture with Chinese companies and the ones that do not will face extinction. Very quickly, the top 10 manufacturers in China, look like the top 10 in the rest of the world.

For a complete breakdown of the Chinese industry see the table below.

Source: 2008 Guide to China's Auto Market - Automotive News

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