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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