Automotive Industry in China

Introduction

The automotive industry in China is now facing enormous development opportunity.

As is known, China has surpassed US in 2009 and become the No.1 automotive

manufacturer in the world. Compared to other automotive countries like US, Japan

and Germany with a sharp declination, Chinese automotive industry has attracted the

global investment recently. Meantime, questions about the challenge and

opportunities that the automotive industry faces have been aroused by manufacturer

and many economists. How will Chinese automotive industries’ strategies develop

and how to avoid the misunderstandings? This paper is organized to answer the

questions above. It will analyze the industry together with other factors.

Content

Chapter 1 Automotive Industry in China (Development History)……...3

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Chapter 2 The sustainability of the automotive Industry……………….5

Chapter 3 The bargaining power of automotive supplier……………….6

Chapter 4 The bargaining power of consumers…………………………7

Chapter 5 Threat from the new entry……………………………………..8

Chapter 6 Threat from the substitute in the industry…………………….9

Chapter 7 The competitors inside the industry………………………….10

Chapter 8 Other Factors…………………………………………………...12

Chapter 9 Summary………………………………………………………..14

Reference List………………………………………………………………….15

1. Automotive Industry in China (Development History)

Chinese automotive industry started in 1951. Seven years later, the first car “Red

Flag” is manufactured in northeastern Province Jilin where is regarded as the “Cradle

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of Chinese automotive industry”. As the most famous domestic car, “Red Flag” has

been served the President of China for nearly half a century. For political reasons,

there is no joint venture automotive company until 1983. In this year, Beijing JEEP

Co., Ltd, and Shanghai Volkswagen Co., Ltd were established. Volkswagen has

become the most successful foreign automotive company in Chinese now. In 1988,

Audi was first introduced to China and it has become the best selling luxury cars in

China since then. In 1992, China FAW Group exported a truck manufacturing line to

Tanzania, which was the first exporting line in Chinese automotive history.

In 1992, the number of manufacturing vehicles in china reached 1 million, it became 2

million in 2000, 5 million in 2005 and in 2009 the number has surpassed 10 million.

The development of automotive industry in China in recent years is impressive. Now,

the first 15 international automotive manufacturing companies all have their

subsidiaries in China. Most of the first 50 international automotive parts

manufacturing have their investment in China too. Automotive industry has become

an important engine to the Chinese economic development.

In the year 2009, Chinese automotive industry became the largest in the world.

However, there are some characteristics to notice. First, the increasing areas in the

automotive market changed from main cities like Beijing into smaller cities and rural

areas; the low-emission vehicles become more and more popular. Second, the export

of automobile declined sharply; just the opposite, the investment and merging cases

into foreign countries raised significantly. Third, the automobile-based industries grew

quickly in 2009, including automotive financing, second-hand automotive and car-

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leasing etc. Forth, the international brands tend to enlarge their purchase of

automotive parts in China rather than import. The automotive parts industry grows

significantly.

In China, automobile is no longer a luxury symbol. In cities like Beijing and

Shanghai, traffic jams have already become one of the most annoying things for local

government and citizens. Nevertheless, every 100 Chinese people possess only 4

automobiles, which is extremely low compared to most European countries.

According to the forecast of China Automotive Association, by 2020, the automotive

inventory will reach 200 million in China, which will lead to a sustainable increase in

the next few years.

Generally speaking, the automobiles in China is separated into 4 groups, including

domestic automobile, Japanese automobile, German automobile and American

automobile. The competition among these four groups is intensive. German

automobile used to be the best selling vehicles in china. In 2008 of Chinese

automotive market, Japanese vehicles held 30%, domestic 26%. While in 2009, the

ranking changes to domestic 30%, Japanese 24%, German 19% and American 13%.

Nearly every automotive company had a high margin in 2009. The forecast in 2010 is

also very optimistic.

2. The sustainability of the automotive Industry

The highly increasing demand contribute to the over investment into automotive

industry. Recently, Ministry of Industry and Information Technology of the People's

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Republic of China (MIIT) has warned that the automotive industry is now facing an

over-production risk. In Beijing and Shanghai, the distributor has so much storage that

they could not find enough places to park the cars.

The MIIT has issued discipline to maintain the sustainability of automotive industry.

The factors to maintaining sustainability includes 3 parts. First, the automotive center

market should generally move from big cities into small cities. The rural population of

China now is 0.7 billion. This huge market share is now attracting all of the

automotive companies. The domestic company, because of local information

advantage and correct judgment, has already set up its own distribution channels in

most of the rural area. However, more and more automotive companies are now

developing new type vehicles with low emission and cheaper price; trying to cope

with the need in most rural area.

Second, the new energy vehicles are developed fast to replace the traditional vehicles.

New energy vehicles comprise hydride, electrical and solar vehicles. Different

companies have different advantages of type of new energy. The new energy has

become a priority direction for each company. In Shenzhen, domestic automotive

manufacturer BYD has produced its electrical vehicles which have been use as local

taxi. The international brand like GM, BMW, has also introduced their Hydride and

petrol mixed vehicles which could highly reduce the emission.

The last is the merging of the existing small automotive companies. The merging

cases in China in recent years increase dramatically. Especially in 2009, the domestic

manufacturer Geely has successfully merged the Volvo Car Company. Meantime the

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domestic automotive companies wish to be more competitive and strong by merging

with other companies. The integration of the small domestic companies will help to

design new modes vehicles to compete with Japanese and Germen brandings.

3. The bargaining power of automotive supplier

The automotive industry in China has a great opportunity to develop. Nevertheless,

despite the blossom in China, the whole automotive industry worldwide is now facing

a sharp declination. Chinese automotive industry must exam itself and tries to avoid

such declination in the future.

Each automotive manufacturer’s concern is trying to obtain the maximize margin in

the market. To achieve this, each manufacturer has to implement its own action to

raise the bargaining ability. The additional commitment into Chinese market is an

obvious sign. In 2009, the Volkswagen decided to set another finished automobile

factory in Guangdong, South of China, to consolidate its number one position in

Chinese joint-venture automotive company. Toyota, opens its new factory recently in

Changchun, the northeast of China, to produce its best-selling Corolla. Toyota and

Volkswagen, both with 3 joint-ventures in China, have produced their best-selling

modes in China. Domestic manufacturing other than import vehicles has greatly

reduced the cost for these two companies. The consequence is that every time

Volkswagen has introduced a new mode into the market, consumers have to pay

additional fees to have the car as soon as possible.

The strategy of domestic manufacturing of Japan and German manufacturer reduce

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the labor, parts and transportation fees. The competitive price with world class quality

decreases a lot bargaining power of consumers. Meanwhile, the profit and competition

of domestic manufacturer are strongly affected or even occupied by the foreign

companies. The domestic companies have different good qualities. They have

thorough understanding of its position, the low cost vehicles and embedded

distribution channel have contribute its success in many undeveloped areas.

4. The bargaining power of consumers

The consumers in China have gradually become rational in buying the vehicle. In

2000, about 65% of the vehicle buyers are the first time of buying a vehicle. While in

2009, about 90% of the consumer on middle class passenger vehicles is the second

time buying a car. The consumers’ demand on excellent vehicles and completed after

services is increasing and the dealers is now facing more censorious consumers.

The consumers of automobile now have more choices when buying a car. Price and

quality of the car become the two important factors to bargain with dealers.

Meantime, each price level has gathered more choices for consumer. The comparison

of cars and after-sale services enables consumer to bargain. The increase of this ability

contributes to the decrease of car price.

Both imported and domestic manufactured cars’ price is reduced to win the customer.

The increasing of Yuan has shortened the price between imported and domestic cars.

Therefore, the domestic companies still have much room to reduce its price. The

increase of margin power of consumer has enables the joint-venture companies to

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commit more in Chinese market and reducing its cost to cater the Chinese consumers.

The margin of the joint-venture is highly increasing while its production is more

popular than domestic cars.

5. Threat from the new entry

Automotive companies introduced their new modes vehicles to Chinese customers.

Their investment on development is huge, therefore, the new entries as new care

modes into the automotive industry are increasing fast.

Ford, as a world leading automotive manufacturing company, entered China relatively

later than Volkswagen and Toyota. However, by introducing its low price Focus, Ford

has successfully won a market share in the Chinese automotive market. Ford being a

new entry company chose to enter the insignificant small vehicles market which is not

competitive. After Focus, Ford introduced similar modes Fiesta and Mondeo to

Chinese consumer and won great success.

Ford’s entry threatens the place of Toyota, who’s VIOS and Corolla used to be

dominant in the small car market. When Ford brought new modes and choices to the

Chinese market, the new manufacturing ability and new competition was also brought

in. In the end, the profit of the market will be reduced. After studying its competitor

and the reaction of Chinese consumer, Ford concluded its entry would be of great

opportunity. They reached their goal. However, the competence will be much

stronger. The profit rate in the automotive industry will decline because of the

potential entry.

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6. Threat from the substitute in the industry

For the moment, the automobile does not have many substitutes. However,

environmental friendly vehicles are gradually attracting the world attention. It’s

believed the future belongs to these new modes.

BYD is one of the advanced companies which were in the environmental friendly

field. As a company originated in producing battery, BYD has huge advantage of

developing electrical automobile. The technology of BYD attracts even Warren

Buffet, who had purchased 10% of the BYD’s share. The fact proved his right

decision that the Return on Invest (ROI) on BYD has been more than 600%.

Mercedes announced its cooperation with BYD early 2010 to develop new electrical

vehicles and a joint-venture would be set up to create new vehicles.

With the oil price goes up, electrical cars would be adapted by more Chinese

consumer. Especially in rural area, a low-cost electrical vehicle called SHIFENG is

now spreading fast. When in full battery, each vehicle could run for 100 kilometers. In

many aspects, SHIFENG is not a real automobile rather a car-like motorcycle.

However, this indicates the potential consuming demand for low cost electrical

vehicles. In Beijing and Shenzhen, electrical charger has been set up in several petrol

stations. In the near future, the electrical vehicles would be become more and more

popular.

Besides the electrical automobile, hydride and solar power vehicles have also made

impressing progress. The lower cost the substitute is, the sooner it would be put into

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use.

7. The competitors inside the industry

The rivalry among the automotive competitors may be the strongest compared to

other industries. The four different types of automotive company do their best to win

the market share and compete with each other. This phenomenon brings conflicts

among each manufactures. The conflicts include product prices, human labor,

advertisements, after-sale services and automobile finance.

Each company wishes to share more on the Chinese market. However, the over-

production of vehicles has become a fact in China market, which means one or more

company has risk of being knock-off in the competence. Compared to foreign brand

and joint-venture companies, domestic companies are in a relatively weak position.

Nevertheless, some domestic companies have achieved a good grade in 2009.

Chery, number one domestic brand, sold 500,000 vehicles in 2009. It is also the

number one exporting brand of domestic companies. The advantages of Chery include

innovation, self-designed engine, first automotive financial company and low price.

The disadvantage include low brand awareness, core technique relied on other

company and low assembling process. The opportunity for Chery is the potential

increase of Chinese market, expansion market share of domestic brands. The threats

for Chery include the over-production, international brands’ impact on Chinese

market, price battle and reduced overseas demands.

Another company Dong Feng Automobile (DFAC) is a government owned old brand

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company. Ranked number 3 of the Chinese Automobile Companies and originated in

heavy truck vehicles, DFAC won a large market shares in different level of vehicles.

The advantage of DFAC comprises scale merit, complete production line for each

level vehicle, multiple joint-ventures with NISSAN and HONDA and thorough supply

chain including engine. The disadvantages of DFAC include lower innovation of

technology, distribution channels and networks, low competence and an abundant of

subsidiaries with inefficient management. The opportunities for DFAC include

increasing local demands, favorable policies to automotive industry and the increasing

demands for heavy trucks. The threats are the over-production, competitive

environment in heavy truck vehicles and decreased overseas demands because of the

financial crisis.

The cooperation between domestic companies and world branding companies

contributes to the fast development of local company. However, local companies need

more core competent technologies to fix its position.

8. Other Factors

The automotive industry in China faces more factors other than the manufacturing

itself. It includes road conditions, government policies and automotive taxes and etc.

China is now under fast developing both in urban and rural areas. The traffic problems

in cities like Beijing and Shanghai has become a social concern. The total number of

vehicles now in Beijing has reached 4.5 million, and it would reach 7 million by 2015

approximately. Now, the government regulated the traffic restrictions which based on

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the last digit of the license plate, meant that two digits could not run on weekdays.

That is to say, every weekday maximum 80% of the automobile are supposed to run

on Beijing. This regulation appeared to work well on the first couple weeks. But now,

as the vehicle stock rising, more families are able to have two cars to cope with the

restrictions. Traffic jam is still a severe problem happens every day on Chinese

metropolises.

The government policies play an important role in Chinese automotive market. At the

moment, two main policies are triggering a large increase in vehicle selling. One was

issued in 2009 named “Car to the Countryside and Rural Area”, which means

providing subsidiaries to rural area residents to purchase home appliances and motor

vehicles, including motorbikes. There are four lists which have been introduced by

MIIT and the name within the lists could be used under this policy. All automotive

companies hope to be listed which means great opportunities into rural area where 0.7

billion people live. Nevertheless, at the moment, only government owned companies

like DFAC was named on it.

The second policy which was also issued in 2009 named “Auto Replacement”. This

policy means that if the car is old enough to be discarded and the owner wishes to buy

a new one, he could apply for a discount when buying a new car. This policy,

according to the data from MIIT, has successfully accounted for more than 22 billion

RMB’s automotive selling in 2009.

Automotive taxes are also a key factor in buying a new car. The existing Auto

Consumption Duty was issued in 2006 and changed a little in 2008. The duty

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indicates five different levels of vehicles according to the displacement. The lowest

tax is 1% when the car displacement is under 1.0L and the highest is 25% when the

car displacement is more than 3.0L. From the data, we could find the government

encourage consumer to purchase more small displacement vehicles. The high

emission and luxury cars are taxed so high that their prices is generally twice the price

as it is sold in Europe and America.

9. Summary

Automotive Industry, a leading industry in modern China, is focused by the entire

world. The world branding companies invest in China firmly which intended to earn

more share from this booming country. The domestic brandings did their best to

integrate and develop key technology to shorten the distance with world brandings.

On the other hand, over-production and other factors is a potential risk for those

companies. But as the leading industry, Chinese government paid much attention on it

and tried to maintain its growing speed. It is believed the fast growing Chinese

automotive market will lead to the recovery of the whole automotive industry in the

world.

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10. Reference List

Eric Harwit (1995) China’s Automobile Industry.

M.E Sharpe, Inc

Rongxiang Chen (2004) Global and Chinese Automotive Industry Analysis

Bearing Point, Inc

(2007) Managing Strategic Risk in China’s Unpredictable Automotive Market

Deloitte

(2009) Report of Chinese Automotive Industry 2009

XGO.COM.CN & ZDC

(2009) China Auto History

Sep 6th, 2009 from http://dg.pcauto.com.cn/csh/0909/963417.html

(2010) Analysis of Chinese Automotive Industry

Deloitte

(2010) Automotive Industry Analysis

BYD Auto

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