china in 2025 and implications for automakers jan 2015

China in 2025 and Implications for Automakers

Bill Russo Edward Tse Chee-Kiang Lim

Preface

As we know, China’s economy has been growing dramatically for

more than two decades. China is now the world’s second largest

economy. Recently, we see rising concerns over the impact of a

deceleration in overall economic growth, especially on the

automotive sector.

China’s economic growth is likely to continue over the next decade,

driven by a mix of continued (albeit more selective) fixed-asset

investment and growth in consumption. Continued investment in

infrastructure to support a more than 60% urbanized population is

anticipated. Household consumption levels will rise as a result of

the growth in the population of middle-class wage earners and

overall rising incomes. A broad transformation is expected to

continue and will present an environment that is characterized by a

long term and sustained shift towards a middle-income,

consumption-based economy. This trend would lead to a

profoundly different economic landscape.

We believe discontinuities in the political, social and economic

landscape have the potential to reshape China dramatically in the

next decade. While the outlook is positive, there will likely be

discontinuities – some upward and some downward – along the

way. We believe that the key to sustainable success for businesses

in China will depend on their ability to anticipate those trends and

challenges that are in the “blind spots” today - but which can create

disruptive threats or discontinuous opportunities for those who are

able to respond rapidly. In essence, an “early warning system” is

needed which leverages unique insights that can be brought to bear

on the question of how the market, the regulatory system, and

business models may develop over the next decade in China.

In this analysis, we will apply such a thought process to anticipate

plausible scenarios for the China auto industry in 2025.

Gao Feng Advisory Company


China has gone through rapid

urbanization over the past few decades,

with urban population share rising from

17.9% in 1978 to 53.7% in 2013. City

clusters such as Beijing-Tianjin,

Shanghai-Yangtze River Delta and

Guangzhou-Pearl River Delta are home

to 18% of China’s population and

generate 36% of the nation’s GDP. Cities

are the main engines of China’s rapid

economic growth in the past few

decades. Nonetheless, the development

is highly unbalanced with urbanization

rates of 62% in the coastal regions, but

only 44%-48% further inland.

The urbanization momentum will

continue, on a size and scale never

before experienced in history. By 2025,

65% of Chinese citizens will live in urban

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Urbanized world population centers. This will no doubt

place significant stress on the

environment as well as the urban

transportation infrastructure, which is

already struggling to keep up with the

current urban population. While

restrictions placed on car registrations

have limited growth rates in the more

mature coastal tier 1 and tier 2 cities,

China’s automotive industry will continue

to expand, albeit at a more sustainable

rate, with a steady stream of first time

purchasers from lower-tier cities joining

the repeat buyers and upgraders of the

more mature regions. Emergence of the

less developed lower-tier regions will be

the key driver to incremental demand for

personal mobility.

On one hand, a more “binary” market will

emerge with consumers in the more

mature upper-tier cities continuing to

prefer globally recognized car brands,

while those from lower-tier cities will seek

Exhibit 1

China 2025 Scenarios: Urbanized World

Possible 2025 scenarios Implication to automakers Emerging from China’s lower-tier region, a

Chinese automaker has become the first to sell 1M cars in overseas markets, and they are commonly called ‘the Chinese Hyundai”. Chinese OEMs are now competing in the EU and North America

To secure long-term growth, automakers must strengthen offerings in the entry-level segment, in addition to offering newer products that cater to the emerging middle class

Leverage China as the base to develop entry-level models for export to other developing markets

Having successfully penetrated China’s lower-tier markets with cars engineered in China, automakers are selling “Engineered in China” cars in the global markets

To expand the market, auto loan penetration reaches 50% in China and financing becomes a critical lever for growth, particularly with younger, budget-conscious buyers

Deployment of an innovative business model for selling a full range of mobility and after-sales services


Today, China has 14 cities with more than

10 million residents. This number will

likely double by 2025. As the home to

many densely populated urban areas,

China will require unique solutions for

traffic congestion, energy consumption

and pollution. The privately owned,

energy-intensive and people-driven cars

on the road today are not viable and

sustainable solutions for future urban

mobility.

By 2025, new urban mobility solutions will

be comprised of a mixture of public

transportation, non-motorized alternatives

and energy-efficient personal

transportation solutions. Innovations in

technology, business models and

regulation will come together to disrupt

the automotive industry. We anticipate a

number of discontinuities:

Innovative car use model

In an effort to rebalance supply of

transportation solutions with demand for

mobility, we believe a car ownership

model will gradually shift towards a “pay-

per-use” service model, especially in the

higher tier cities. The pace of this shift

can be significantly accelerated with

regulatory intervention forcing higher

usage charges on those who choose to

own vehicles.

New mobility solutions no-frills products and solutions from

brands that deliver “the greatest bang for

their RMB”. On the other hand, pockets

of “new wealth” will also emerge in the

lower tier cities, which will begin to mimic

the buying patterns of more affluent

consumers in the higher tier cities. This

presents unique opportunities for both

foreign and domestic manufacturers.

Domestic brands will remain more

popular among lower-tier cities’

consumers as they penetrate the market

with lower-priced cars that are “good

enough” to meet their mobility needs.

Chinese automakers could continue to

serve this base by leveraging their lower-

cost advantage and improving their

product safety and quality performance.

International OEMs must also seize the

opportunity to develop competitive entry-

level models and no-frills platforms

tailored for the Chinese market, while

subsequently leveraging such

“Engineered in China” offerings to

penetrate other developing markets.

China in 2025 and Implications for Automakers 4


By 2025, a pay-per-use model will

emerge as a viable alternative for

providing personal mobility in populous

urban areas. On the one hand, the China

government will continue to regulate new

car registrations through tax or quota to

limit the growth of private car ownership

in large urban areas. On the other hand,

escalating parking and traffic congestion

charges will make private vehicle

ownership less economical and therefore

less attractive.

A technology-enabled intelligent model

will supplant traditional car leasing and

rental companies’ asset-heavy offline

model. This will confer advantages and

pave the way for internet-powered

“mobility services” companies to emerge

in the market. Moreover, peer-to-peer

(P2P) car sharing will position platform

companies at the center of the eco-

system, connecting online and offline

activities through advanced mobile

technology. As the ownership-usage

model evolves, OEMs will need to partner

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with digital players and service providers

to offer innovative products in order to

maintain their market shares.

Connected “smart” cars

In large cities, driving is becoming an

increasingly frustrating, time-consuming

chore. At the same time, traffic accidents

and congestion are by-products of human

driving behavior and inadequate traffic

and urban infrastructure planning. Smart,

connected cars will rely on

telecommunication and sensor

technologies to respond to vehicles,

objects and people while navigating, and

communicating with its passengers

through their on-board telematics system.

A smart transportation system has the

potential to eliminate accidents, increase

the capacity of existing road

infrastructure, collect and disseminate

useful real-time traffic data, and at the

same time facilitate new models of

vehicle ownership, increase travel time

predictability, and improve productivity

and energy efficiency.

Exhibit 2

China 2025 Scenarios: New Mobility Solutions

Possible 2025 scenarios Implication to automakers Chinese internet companies vertically integrate

car leasing services into their internet portals Partner with innovators and

internet companies to deliver

“urban mobility services” for

different markets

Alibaba successfully builds alliances with leading

OEMs to develop synergies with the “Internet of

Mobility”

Tencent successfully acquires a recognized

automotive brand



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Exhibit 3

China 2025 Scenarios: Connected “Smart” Cars

Possible 2025 scenarios Implication to automakers Driven by policy in tier 1 and some tier 2 cities,

China has invested in building a smart

transportation infrastructure and 300M “Smart

Vehicles” are on the road

Consider leveraging China as a

base platform for smart car

technology development for the

global markets

Just 17 years of age, Jasmine Wang summons

her Xiaomi car via her mobile device, which

arrives at her door step within minutes and

delivers her to school, while allowing her to do

her last minute revision for her college

examination, Gaokao (高考), en-route

Invest in disruptive technologies at

the intersection of automotive and

internet - leveraging both organic

and in-organic business

development “TencentCar” competes with “Apple Car Play”

and “Android Auto” on user experience, network

connectivity and localized content – and enjoys

strong user acceptance

(EV) subsidies and qualify a wider range

of fuel-efficient and environmental friendly

technologies. These and other similar

forthcoming policies are critical for China

to fulfill its commitment to slow and then

stop its emissions growth by 2030 under

the recently concluded climate change

agreement with the US.

City cars will adopt fuel-efficient and

environmentally friendly technologies,

such as lightweight composite

components and electric powertrains.

New generations of ultra-light weight

personal urban mobility (PUM) devices

will become popular – designed

specifically for city-use to transport 1-2

persons and light cargo over short

distances. OEMs will partner with non-

traditional suppliers and utility companies

to complete the eco-system.

According to China’s Ministry of Industry

& Information Technology, as a strategic

focus of the national development plan,

the Chinese Government will provide up

to 10B RMB in subsidies to catalyze the

development of “smart mobility”.

Energy Saving & New Energy Vehicles

China has become the world’s largest

carbon emitter. Big cities suffer from

pollution, often exceeding “hazardous”

levels. By 2025, China will become the

world’s largest oil importer, spending

USD500B a year on crude oil imports,

66% of which will likely be from OPEC

nations. Worsening pollution and energy

security has compelled China to seriously

invest in New Energy Vehicles (NEV) and

related infrastructure development. The

Government will continue electric vehicle



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Exhibit 4

China 2025 Scenarios: Energy Saving & New Energy Vehicles

Possible 2025 scenarios Implication to automakers China’s investment in EV charging stations and

smart grid construction has created the complete

eco-system for “Made in China” New Energy

Vehicles, which are now being exported to the US

and Europe Engage with Chinese partners

(auto, government and

infrastructure) to build the

supporting ecosystem in order

to make the EV technology

value proposition accessible in

the China market

New generation of ultra-light weight personal urban

mobility (PUM) devices are popular – designed

specifically for city-use to transport 1-2 persons

and light cargo over short distances

All taxi and bus fleets in China are fully electrified,

with foreign brands excluded from the approved

vendor list

Energy Saving and New Energy Vehicles achieve

25% share of a 40M unit market as traditional

gasoline-powered cars are banned from densely

populated cities

positional advantages, i.e., those which

have been bestowed upon them by the

government.

Starting in 2015, a new round of SOE

reform will be led by the State-owned

Assets Supervision and Administration

Commission of the State Council

(SASAC). These reforms will focus on

diversifying ownership, adopting modern

corporate governance, and establishing a

state-owned asset management

company. This will greatly impact the

auto sector. As a result, state-owned

automotive OEMs and suppliers will have

the mandate to become more efficient

and market-driven. Ultimately,

consolidation should eliminate the weaker

players. Several of the remaining local

Over the last several decades, China’s

policies and industrial developments have

typically been implemented via

investments made with government-

backed State-Owned Enterprises (SOEs).

While many SOEs have shown good to

strong profitability (at least on paper),

their capabilities and entrepreneurial

capacities vary a great deal. Many,

especially those in government-protected

sectors, derive their competitive

advantages through mostly structural

Emergence of “reformed”

SOEs alongside innovative

new entrants



OEMs and suppliers will play an even

more important role in the global

automotive industry.

Meanwhile, we expect to see new

entrants into the automotive ecosystem,

especially innovative companies armed

with disruptive technologies. It is entirely

plausible that an Internet mobility

services provider becomes a major player

the automotive industry by initially

offering a portal to provide “mobility

services”.

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Exhibit 5

China 2025 Scenarios: Emergence of “Reformed” SOEs

Alongside Innovative New Entrants

MNC players will need to adjust their

strategies to address a competitive

landscape that includes a new breed of

new players and new suppliers who will

be “mixed-equity enterprises” rather than

wholly-state-owned companies, as well

as nimble Internet mobility services

suppliers who aim to create a new

ecosystem of personal transportation

services. Many of these services may be

first incubated in China before being

rolled-out to the rest of the world.

Possible 2025 scenarios Implication to automakers Reformed, more efficient, SOEs who have

become “mixed equity enterprises” and

innovative new entrants with preferred access to

the 40M unit China market provide a platform for

rapidly scaling up new transportation solutions

for global deployment

Re-define relationships with the

reformed SOEs based on a deep

understanding of who they are and

what you would like to achieve,

e.g. become strategic partners to

jointly exploit overseas market

leveraging China as a base

飞马 (Fei Ma, or Flying Horse) is the top selling

luxury sedan globally for the past 5 years; fully

designed and crafted by skilled artisans in

China, it offers unparalleled but understated

luxury with strong oriental themes and

innovative technologies that have become the

rage of the globally mobile elite around the world



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Conclusion

The discontinuities we have described

are all very plausible and in fact, we

believe many of them will emerge well

before 2025 – the key question is

whether traditional auto OEMs will first

recognize the potential disruptive threats,

and are then willing to seize the

discontinuous opportunities that may

ensue. Like Nokia and Motorola 10 years

ago, auto OEMs may be facing an

existential threat from new entrants from

outside their traditional competitive

sphere. Such competitors are anxious to

seize on the Chinese consumer’s rapid

acceptance and adoption of mobile

technology and pervasive Internet

connectivity services to deliver a new

ecosystem for “mobile connected car

services”.

Automotive OEMs have the complex

challenge of addressing this potential for

disruptive change, while simultaneously

continuing to deliver better and more cost

efficient products in the hyper-competitive

China market. In addition, for many

international OEMs, their joint venture

partners who are today SOEs will most

likely morph into something different over

the next decade. Understanding the new

agenda of these partners in their new

form will be a critical factor in sustaining

the business relationship going forward.

Furthermore, there is a high probability

that the current joint venture policy for

OEMs could be re-defined or even

abolished. To what extent the

international (and for that matter, the

local) OEMs are ready to deal with such a

change is a big question mark.

In summary, the ability to simultaneously

address these challenges will separate

the ultimate winners and losers in the

next decade. The only thing that is

certain is that the formula that has

worked until now is no guarantee for

future success.



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About the authors

Edward Tse is founder and CEO of Gao

Feng Advisory Company. He built and

ran the Greater China operations of two

leading international management

consulting firms for a period of 20 years.

He has consulted to hundreds of

companies – both headquartered in and

outside of China – on all critical aspects

of business in China and China for the

world. He also consulted to the Chinese

government on regional strategies, state-

owned enterprise reform and Chinese

companies going overseas. He is the

author of over 150 articles and three

books including the award-winning The

China Strategy. His fourth book, China’s

Disruptors, is coming out in mid-2015.

Bill Russo is Managing Director and the

Automotive Practice leader at Gao Feng

Advisory Company. His over 30 years of

experience includes 15 years as an

automotive executive, including 11 years

of experience in China and Asia. He has

worked with numerous multinational and

local Chinese firms in the formulation and

implementation of their global market and

product strategies. While the Vice

President of Chrysler North East Asia, he

successfully negotiated agreements with

partners and obtained required approvals

from the China government to bring six

new vehicle programs to the market in a

three-year period, while concurrently

establishing an infrastructure for local

sourcing and sales distribution. Mr.

Russo is a highly sought after opinion

leader on the development of China’s

automotive industry.

Chee-Kiang Lim is a Principal at Gao

Feng Advisory Company. He has over

18 years of experience, including 10

years of consulting experience in strategy

development and operational

improvement for large multinational

corporations. In addition to the

automotive sector, he also has deep

expertise in the oil & gas, mining and

high-tech industries in China, Southeast

Asia and Australia. He has previously

worked in telecoms and high-tech start-

ups in the Boston area and the

Administrative Service of the Singapore

Government.


Gao Feng Advisory Company (www.gaofengadv.com) is a pre-eminent strategy and management consulting firm with roots in China coupled with global vision, capabilities, and a broad resources network. We help our clients address and solve their toughest business and management issues -- issues that arise in the current fast-changing, complicated and ambiguous operating environment. We commit to putting our clients’ interest first and foremost. We are objective and we view our client engagements as long-term relationships rather than one-off projects. We not only help our clients “formulate” the solutions but also assist in implementation, often hand-in-hand. We believe in teaming and working together to add value and contribute to problem solving for our clients, from the most junior to the most senior. Our senior team is made up of seasoned consultants previously at leading management consulting firms and/or ex-top executives at large corporations. We believe this combination of management theory and operational experience would deliver the most benefit to our clients. Our name Gao Feng is taken from the Song Dynasty Chinese proverb Gao Feng Liang Jie. Gao Feng denotes noble character while Liang Jie refers to a sharp sense of integrity. We believe that this principle lies at the core of management consulting – a truly trustworthy partner who will help clients tackle their toughest issues.

For More Information:

Edward Tse

Founder and CEO

Gao Feng Advisory Company, Ltd.

Email: [email protected]

Bill Russo

Managing Director



Chee-Kiang Lim

Principal



Note: The above authors wish to thank

Ms. Emily Wang for her efforts in

researching and summarizing the

findings of this analysis.