Automotive Industry in China-Weijia LIU
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Transcript of Automotive Industry in China-Weijia LIU
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.
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Content
Chapter 1 Automotive Industry in China (Development History)
……...3
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
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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 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
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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-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
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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 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.
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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.
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Especially in 2009, the domestic manufacturer Geely has
successfully merged the Volvo Car Company. Meantime the
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
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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 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
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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 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.
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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.
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
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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 use.
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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
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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 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.
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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 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
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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 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.
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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.
10. Reference List
Eric Harwit (1995) China’s Automobile Industry.
M.E Sharpe, Inc
Rongxiang Chen (2004) Global and Chinese Automotive Industry Analysis
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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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