China's Automotive Industry (Automotive Industry in Emerging Markets S.)

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The Automotive Industry in Emerging Markets

CHINA’S AUTOMOTIVE INDUSTRY

Mark Norcliffe Series editor: Jonathan Reuvid

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Publisher’s note Every possible effort has been made to ensure that the information contained in this publication is accurate at the time of going to press and neither the publishers nor any of the authors, editors, contributors or sponsors can accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editors, authors, the publisher or any of the contributors or sponsors. Users and readers of this publication may copy or download portions of the material herein for personal use, and may include portions of this material in internal reports and/or reports to customers, and on an occasional and infrequent basis individual articles from the material, provided that such articles (or portions of articles) are attributed to this publication by name, the individual contributor of the portion used and GMB Publishing Ltd. Users and readers of this publication shall not reproduce, distribute, display, sell, publish, broadcast, repurpose, or circulate the material to any third party, or create new collective works for resale or for redistribution to servers or lists, or reuse any copyrighted component of this work in other works, without the prior written permission of GMB Publishing Ltd. GMB Publishing Ltd. 120 Pentonville Road London N1 9JN United Kingdom www.globalmarketbriefings.com This edition first published 2006 by GMB Publishing Ltd. © Mark Norcliffe Hardcopy ISBN 1-84673-016-3 E-report ISBN 1-84673-017-1 British Library Cataloguing in Publication Data A CIP record for this book is available from the British Library.

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Contents About the author

vi

List of acronyms

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Part 1 MARKET OVERVIEW

1

Background

1

Key economic factors and trends

1

Market segmentation

3

Central government policy and regulation

3

Provincial and geographical factors

4

Chinese consumers

5

International trade

5

The new challenges

6

Part 2 PASSENGER CARS

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The Chinese passenger car market today

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The key players: their Chinese operations and strategies:

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„ The Europeans

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„ The Americans

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„ The Japanese

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„ The Koreans

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„ The Chinese

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„ Other potential newcomers

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Future trends

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Part 3 COMMERCIAL VEHICLES Market trends

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Location/ownership of commercial vehicle builders

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The Chinese bus market:

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„ Classifications and market segmentation

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„ Key players

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The Chinese truck market:

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„ Classifications and market segmentation

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„ Key players

34

Emission standards and alternative fuels

35

Future developments:

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„ The Chinese domestic market

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„ China as an exporter of commercial vehicles

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Part 4 COMPONENTS

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29

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Background

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The Evolution of the Automotive Component Industry in China

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„ Origins and Growth

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„ The Component Sector Today

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„ Key Statistics and Trends

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The Major International Players:

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„ The Europeans

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„ The Americans

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„ The Japanese

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„ The Koreans

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„ Others

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„ The Major Chinese Players

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Future developments

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Part 5 BUSINESS CLIMATE

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The Structure of Automotive Businesses

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„ The Traditional Partnership Approach

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„ The New Deals

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Chinese Business Leaders

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„ The Traditional Manager

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„ The New Executive

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„ Key Chinese Business Attitudes

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The Role of Government

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Part 6 CHINA’S INFLUENCE ON THE GLOBAL AUTOMOTIVE INDUSTRY

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The Great Awakening

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Key Automotive Trade Statistics

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The Global Industry’s Perspective on China

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China’s Perspective on the Global Industry

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„ “Make it and Sell it”

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„ “Buying the Assets”

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„ “Prosperity through Partnership”

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„ The MG Rover Story

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China’s Future Position in the Global Automotive Industry

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OTHER REPORTS IN THE SERIES

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About the author After graduating from the University of Oxford, Mark Norcliffe spent the first twenty years of his working life in the transportation and trading industries. In 1996, he joined the Society of Motor Manufacturers and Traders (SMMT) – the trade association that represents all sectors of the automotive industry in the United Kingdom. From 2001 to 2005, Mark was the head of the SMMT’s International Department, helping global companies to identify and exploit new opportunities in emerging automotive markets. He is now an independent advisor, working with both UK Trade & Investment and with independent commercial clients. He is a regular writer and speaker on automotive issues, both in the UK and overseas. Series Editor, Jonathan Reuvid was an economist at the French national oil company, Total before moving into investment banking, financial consultancy and marketing strategy. After working for a US multinational engineering group, he engaged in the development of joint ventures and technology transfers in northern China, where he remains involved. Jonathan is a consultant and the author of several business books including Doing Business with China (published by GMB Publishing Ltd).

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List of Acronyms BAIC CAIP CBU CKD CNHDTG CNG DC DFM DMC EU FAW FAWER FDI GAIC GM GW JAC JCBL MGR OE OEM PATAC SAC SAIC SARS SUV TAIC TMCI VW WFOE WTO

(Beijing Automotive Industry Corporation) (Changsu Automotive Interior Parts) (Completely Built Up) (Completely Knocked Down) (China National Heavy Duty Truck Group) (Compressed Natural Gas) (DaimlerChrysler) (Dongfeng Motor Industry Investment Co) (Dongfeng Motor Corporation) (European Union) (First Auto Works) (Division of FAW : Not an acronym) (Foreign Direct Investment) (Guangzhou Auto Industry Corporation) (General Motors) (Gross weight) (Anhui Jianghui Auto Co) (Not sure what this stands for) (MG Rover) (Original equipment) (Original Equipment Manufacturer) (Pan Asia Technical Automotive centre) (Shanghai Auto Company, part of SAIC?) (Shanghai Automotive Industry Corporation) (Severe Acute Respiratory Syndrome) (Sports Utility Vehicle) (Tianjin Auto Industry Corporation) (Toyota Motor China Investment (Volkswagen) (Wholly Owned Foreign Enterprises) (World Trade Organization)

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1. Market overview Background

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n 2004, China became the third country to put a man into space. The following year vehicle production totalling 5.73 million units pushed China into third position in this field too, ahead of Germany but behind Japan and the USA. While both these events demonstrate China’s increasing industrial and technological power, in the long term it seems certain that the rapid growth of the Chinese automotive industry will have the greater significance, both for the global economy and Chinese consumers. With China already leading the world in the production of toys, televisions and cement, growth in the local motor industry was to be expected. But, after slow progress throughout the 1990s, few accurately predicted the automotive explosion that occurred in the early years of the 21st century. Driven by demand for passenger cars, the real boom years were 2002–2003, when total vehicle production rose 37 per cent and 34 per cent. (In 2003, passenger car sales alone increased by a staggering 83 per cent.) The rate of growth has since slowed to 14 per cent in 2004 and 13 per cent in 2005. But that last figure masks an actual fall in sales during the first quarter of 2005, and suggests that overall growth is again accelerating. In the medium term, the domestic Chinese market seems capable of sustaining steady growth in excess of 10 per cent, with exponential

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surges taking the overall figure closer to 20 per cent. Set against declining or stagnant auto sales elsewhere in the world, China, which has already soaked up over $20 billion worth of automotive foreign investment in the last 10 years, will continue to be a key focus for automotive companies of all sizes. Alongside domestic growth, Chinese automotive exports have continued to expand. Here, the component sector has a considerable lead over the vehicle manufacturing companies. In the first half of 2005, China’s automotive exports were worth $4.9 billion, but included only 10,000 passenger vehicles. Meanwhile, the value of automotive imports fell by 36 per cent.

Key economic factors and trends Predicting firm figures for China’s automotive growth is a risky science. Currently, the country offers a unique combination of centralized economic control and rampant capitalism, together with a vehicle market that is young, vigorous and volatile. Even the Chinese Government (who originally set targets that overestimated vehicle production for 2000 by 630,000 but only five years later underestimated by 2.5 million) has largely abandoned the numbers game. The only prediction on which all commentators agree is that the industry will continue to grow. However, that growth will not

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be uniform across all sectors of the industry and it will not bring continued prosperity to all the current players. Against this uncertain background, however, there are a number of key economic trends that will shape the industry over the next decade. These include the following: „ Rising incomes and industrial expansion will fuel the continuing growth in vehicle demand. Vehicle production can be expected to grow steadily from the 2005 figure of 5.7 million to 9 million units by 2010. Passenger cars will continue to make up an increasing percentage of the total production figure. Although congestion and pollution are growing problems in major cities, the Chinese Government has, as yet, shown no interest in seeking to restrict vehicle ownership or usage. „ Increasing competition and the continuing rise of the private buyer will concentrate market growth in the small vehicle segment. Rising fuel prices and new taxation policies will further encourage this trend. „ The new emphasis on smaller vehicles and the need for frequent model updates will substantially depress profitability for the vehicle manufacturers. „ The erosion of profits (as opposed to pressure from central government) is likely to stem the flow of new entrants into the industry and induce a gradual process of rationalization and amalgamation. Currently just 10 manufacturers account for 83 per cent of the market. In the passenger car segment there is a significant gap between the top 13 companies that have achieved annual sales in excess

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of 100,000 units and the rest of the field. „ Against this background, a number of global auto-makers will have to decide, over the next five years, whether the cost of continued investment in unprofitable Chinese enterprises outweighs the loss of prestige incurred by withdrawing from the market, as well as the risks inherent in leaving behind an expartner who could become an international competitor. In the commercial vehicle sector, growth and modernization will be slower, although certain key projects, for example the Beijing Olympics in 2008 and the World Expo in Shanghai two years later, will stimulate shortterm demand for energy-efficient public transport vehicles. The leading Chinese manufacturers will maintain their dominant position. China-based component manufacturers will be squeezed between downward price pressure from their customers and escalating raw material costs. Accordingly, continued success will depend increasingly on companies’ ability to eliminate waste from their manufacturing and logistics processes, to break out of existing supply chains that tie them to a single local customer and to develop the modular and research expertise that international auto-makers increasingly demand of their suppliers. Chinese companies will certainly take an increasing percentage of the global market for basic and aftermarket components, but intense competition among themselves will severely limit profit margins. In international trade, the gap between China’s growing automotive exports and its declining imports will continue to widen, particularly if a significant trade in passenger cars is added to existing flows of components

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and commercial vehicles. This may ultimately become an area of tension between China and the mature automotive economies of North America and Western Europe.

Market segmentation The sheer scale of China, in both geographical mass and population numbers, combined with huge inequalities in wealth means that the Chinese market will continue to fragment and a number of distinct purchasing groups, with different objectives, will continue to coexist. In this respect, China’s development will not mirror that of Japan or Korea, whose much smaller populations quickly attained a ‘plateau of affluence’ in living standards. Geographically, the market can be roughly divided into three segments: 1. The eastern seaboard provinces

and the major municipalities. 2. The central provincial belt and

the second tier cities. 3. Rural and western China.

The products of the automotive industry are still largely irrelevant to rural China, but the other two zones present distinct markets for modern, sophisticated models and cheap utility vehicles. And within each region, despite disapproval from central government, the forces of local protectionism still influences purchasing decisions. Economically, Chinese car buyers can be categorised as: „ senior government or corporate officials, whose purchases are funded by their employer; „ upwardly mobile, professional buyers, purchasing for their private leisure use;

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„ first-time ‘bargain basement’ buyers, whose main requirements are utility and low price. In the commercial vehicle sector, there is a marked difference between purchasing trends for passenger- and goods-carrying vehicles. The operators of buses and coaches increasingly have to meet the comfort expectations of their customers, and therefore have a reason to purchase more sophisticated and costly vehicles. Truck operators face no such demands, focusing strictly on cost.

Central government policy and regulation The Auto Industry Development Policy, published in June 2004, confirmed the status of the automotive sector as a ‘pillar industry’, i.e. an industry regarded as one of the key instruments of national economic growth and one in which the central government would pursue policies specifically designed to achieve that target. The document also spelled out the government’s desire to see consolidation of and a significant reduction in the number of vehicle manufacturers, a halt to new entrants from outside the sector and a marked increase in local research and development to achieve these objectives (the cap of 50 per cent on foreign ownership of a vehicle manufacturing joint venture remains). Non-automotive companies are banned from purchasing the business licenses of bankrupt vehicle manufacturers and newcomers to the industry must provide an initial investment of 2 billion yuan, backed up by extra expenditure on local engine production and research facilities. New regulations introduced in April 2005 demonstrated the government’s determination that local

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vehicle manufacturing companies should not be simple ‘screwdriver’ assembly plants. From that date, any vehicle in which imported components make up more than 60 per cent in value, will be deemed to be a CBU (Completely Built Up) import and those components will be liable to the whole-vehicle import tariff (currently 30 per cent), double the normal rate for components. A clearer central line has also appeared on environmental issues. At a time when many Chinese cities still routinely ban small-engine vehicles from their major thoroughfares, Premier Wen Jiabao has publicly demanded the removal of such restrictions. The government plans a revised tax structure that would see large vehicles (over three litres) taxed at 20 per cent, rather than the existing 8 per cent. They would also like to introduce a fuel tax, but are currently meeting strong opposition from municipal authorities (who would lose some of the revenue that they derive from existing road taxes) and from consumers, who complain that fuel (at 4.26 yuan per litre) is already 80 per cent more expensive than two years ago. Central intervention in the development of the auto industry is set to continue but increasingly, the tools used (taxation on the end-user and manipulation of credit rates) resemble those employed by Western governments, rather than what the old policy dictates. Indeed, where market forces have worked against their stated objectives, eg the influx of newcomers into the industry, the government has shown flexibility and given tacit support to successful new arrivals. It is interesting that at a recent symposium to consider the contents of the next Five-Year Plan for the Development of the Automotive Industry, government officials were talking in terms of ‘offering forward-looking

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and strategic guidance’ rather than setting numerical targets for production, sales, and total industry participants.

Provincial and geographical factors As with much of the nation’s manufacturing capacity, the original locations of China’s auto industry were determined by 1950s and 1960s central political planning processes, in which fear of American military action and the personal views of Chairman Mao played a part. FAW (First Auto Works) was centred on the northern city of Changchun in Jilin Province; Second Auto Works, which subsequently became Dongfeng Motor Corporation, was based in Hebei Province, with the headquarters in the remote city of Shiyan. Only SAIC (Shanghai Automotive Industry Corporation) had a base close to its potential customers. As the industry has modernized and evolved, its geographical footprint has been changed by a number of factors. Today there are 28 vehicle manufacturing joint ventures spread across 16 provinces and municipalities. One key agent of change has been the desire of various provincial governments to use investment in the automotive sector as a growth engine for their local economies. In the south, Guangzhou has attracted substantial Japanese investment, central Anhui Province provided the political and financial support to sustain the early growth of Chery and Liaoning Province is seeking to use investments from Toyota, BMW and GM to revive its failing industrial base. Logistical considerations have come into play, in particular, proximity to the more affluent private consumers in eastern China’s major cities and access to export routes. Tianjin,

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Qingdao, Ningbo and Guangzhou have all attracted automotive companies because they can offer international port facilities. Financial and social factors have also assumed an increasing importance. Many component manufacturers, deterred by high property and labour costs, have moved away from Shanghai into neighbouring Jiangsu and Zhejiang Provinces. Companies located in pleasant coastal cities like Dalian have found it easier to engage and retain expatriate employees.

Chinese consumers Private buyers are the principal force behind China’s automotive growth. The demands of this powerful and expanding purchasing group have been added to the traditional Chinese automotive customers – government and state-owned enterprises – to create a complex and more fragmented market. The private buyers are predominantly urban professionals from the major municipalities of China’s eastern provinces, whose annual incomes exceed 100,000 yuan ($12,000). They will normally be well educated, and career-orientated. In the case of married couples, both husband and wife will be in full-time employment. Cost and fashion considerations underpin purchasing decisions. However, more than 80 per cent of this group are still first-time vehicle buyers and, as such, they do not have established brand loyalties and are quite happy to defer purchasing decisions in the expectation of future price reductions. These characteristics combine to create a clientele seeking modern, well-equipped cars, which are competitively priced and economical to run. Vehicle and engine size are no longer key considerations. At the same time, a more volatile market is created,

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where the most successful manufacturers are those who can offer regular model updates and ‘facelifts’. Alongside these affluent urbanites, another vehicle–purchasing group is growing steadily in the central provinces and second-tier cities. These buyers have smaller budgets and lower expectations; their targets are simple, basic models at rock-bottom prices. It is their purchasing preferences that explain the continuing appearance in the best-seller list of aging models like the Xiali. These are also the main customers of the new indigenous Chinese vehicle manufacturers. In the upper layers of the purchasing pyramid there are still the senior officials whose conservative taste and indifference to price ensure that a strong market remains for the highvalue models of Audi, BMW and DaimlerChrysler. And, at the very top, there are now a growing number of super-rich individuals amongst whom luxury car-makers like Rolls Royce, Aston Martin and Ferrari are finding customers who do not hesitate to spend their wealth on the ultimate automotive status symbols. The market influence of rising consumer expectations is also clearly demonstrated in the commercial vehicle sector. Stylish, air-conditioned buses and coaches now share China’s burgeoning network of trunk roads with basic trucks, whose technology dates back to the 1950s and whose operators are concerned only with price.

International trade The wider implications of China’s evolving role in the global automotive industry are considered in more detail in Chapter 6 of this report. However, the simple trade statistics indicate that over the 2004–2005 period, China began to build a trade surplus in automotive products. This is despite the

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ongoing reduction in whole vehicle and component tariffs (currently at 30 and 15 per cent respectively, and due for a final five-point drop in 2006), which formed part of China’s WTO (World Trade Organization) membership deal. The total value of automotive imports fell 17 per cent in the first nine months of 2005, principally through a decline in whole vehicle imports, which, despite a sudden spike in October, are likely to be 10,000 units down over the full year. In the component sector, inward shipments of engines and engine parts, which, in 2004, accounted for almost onequarter of the total import bill, are likely to be substantially reduced as manufacturers move to localize production. Total automotive exports in 2004 were valued at $8.2 billion – a year-onyear increase of 73 per cent. A further significant rise can be expected when the 2005 figures are available. Exports of passenger cars, whilst still modest, will treble the 2004 total of 10,100 and the appearance of new markets such as Belgium and Italy in the list of export destinations is an indication that Chinese vehicles are no longer shipped to only under-developed countries. Chinese-built coaches are also beginning to appear in Western markets.

The new challenges China’s automotive industry is still in transition from a planned economy to a fully open market. Its current ‘halfopen’ stage is a period of dynamic growth, characterized by increasing competition, new entrants, new products and declining prices. One local commentator has likened the current situation to the warring feudal states that existed in Chinese history 2000 years ago, remarking that during

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that turbulent period, many new kingdoms and princes came to prominence but many also perished. For all those involved in the Chinese automotive sector today, the challenge is to build strategies that ensure continued prosperity when supply and demand are in equilibrium and the market matures, because maturity will bring with it the familiar industry problems of over-capacity and low levels of profitability. For the Chinese Government, there are two significant challenges. Firstly, they must ensure that China remains an attractive investment target for international automotive companies and that their natural desire to develop an independent indigenous industry does not drive away foreign investors. The government’s recognition of investors’ concerns was recently demonstrated by the removal from the final version of the Auto Industry Development Policy of a draft clause that required half of all vehicles produced by 2010 to be built by local companies with full technology ownership. Secondly, the government has to manage the impact of rapidly growing vehicle numbers on China’s economy, infrastructure and environment. An extensive road-building programme and regulations to bring engine emissions up to Euro III and IV standards are already in hand, but there is serious official concern over the escalation in fuel imports, much of which is driven by automotive demand. Against that background, it is surprising that the government has not taken a more coordinated approach to research and development into alternative-fuelled vehicles. China is relatively free from the long-standing consumer familiarity with the internal combustion engine and concern at the resale values that have inhibited the introduction of new propulsion technologies in more mature markets. But

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the government seems reluctant to throw its weight behind a single alternative fuel research programme; currently, China’s research into electric vehicles is scattered across no less than 13 uncoordinated research centres. The international vehicle manufacturers also face some daunting challenges. In their determination not to miss out on China’s booming market, they have committed to major investments and substantial increases in capacity. They now have to earn sufficient return to justify those investments in an increasingly competitive and cost-conscious market. Withdrawal from China would be an unpalatable option. Not only would it represent a very public loss of face but it would also mean leaving behind a local partner at least partially equipped to become a future competitor. The 50/50 joint venture partnership rules effectively prevent global vehicle manufacturers from simply mothballing unwanted Chinese plants as they have done, for example, in Brazil. To sustain market share, many vehicle manufacturers have traditionally been content to reduce their comfortable profit-per-unit margins by heavy discounting (the cost of some models has fallen by 40 per cent in just two years). However, as Chinese prices converge with the global norms, that tactic is no longer available. Increasingly, the international manufacturers will have to ensure that they have vehicles in their product range that appeal to Chinese customers and are available at competitive prices. For the indigenous Chinese manufacturers, the key challenges are to win sufficient domestic market share to ensure their continued viability

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and to develop models of sufficient quality to gain acceptance in international markets. Competing on price alone is unlikely to bring long-term success. There are probably only five independent Chinese companies, across the full spectrum of vehicle manufacturing that have, to date, achieved sufficient scale to guarantee a long-term future. Others could most easily move forward by amalgamating or merging with competitors. However, the innate desire of successful Chinese entrepreneurs to head their own companies and the strong rivalries between the provincial authorities who back their local manufacturers, will continue to impede industry consolidation. In the component sector, both Chinese companies and foreign investors face downward price pressures from domestic and international customers who are seeing their own margins eroded. Whilst China can offer manufacturers a ready supply of cheap labour, it cannot provide protection from globally escalating raw material costs. Additionally, inefficiencies in the local manufacturing processes and the logistics chain combine to drive up the cost of Chinese-made vehicle parts. The significant challenge for component makers is to eliminate these problems and thereby derive real profitability from their China operations. They also need to rationalize and re-organize existing ventures so that within China, multiple customers can be supplied from a single source. This requires a break with the traditional vertically integrated supply chains into which many early entrants found themselves tied by joint venture partners.

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2. Passenger cars The Chinese passenger car market today

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he dramatic growth of China’s automotive industry has been principally fuelled by domestic passenger car sales. Less than 10 years ago, cars accounted for less than 15 per cent of total vehicle production; today they represent the ‘lion’s share’. The majority of those sales are now made to private buyers, whose tastes (particularly for well-equipped, economical and competitively priced three-box saloon models) are driving some significant changes, both in the market’s overall structure and in the performance of individual brands. After the dramatic expansion of 2002–2003, sales growth slowed the following year. With 2005 also starting slowly, many commentators were predicting that China’s automotive boom was already waning. However, fuelled by aggressive price-cutting and new model launches, the market has recovered strongly in the latter part of the year. November and December sales set new monthly records and the end-of-year total of 3,117,500 units represented a rise of 27 per cent. It seems plausible to predict that the Chinese passenger car market will continue to grow at an underlying rate of between 10–15 per cent, with regular ‘spikes’ in sales lifting the overall figure still higher. Within this expanding market, a number of trends are becoming apparent. Firstly, the fastest growth is for

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models costing less than 100,000 yuan ($12,000). In 2003 these accounted for just 24 per cent of the market; by the end of 2005, the figure was approaching 45 per cent. This in turn means that the car manufacturers profit margin per vehicle is much reduced. Only two years ago, GM’s (General Motors) best-seller, the Buick Regal, was delivering a profit in excess of $3,000. Margins on the topselling micro-cars of 2005, such as GM’s Spark or the rival Chery QQ, are very slim. Japanese and Korean vehicle manufacturers, who can offer a ready-made range of economical, well-equipped saloons, have been the main beneficiaries of this market trend. It is likely that they will continue to grow their market share at the expense of European and American rivals, and that China will ultimately follow the pattern of other markets in the region where Asian models already dominate. Price pressure also means that there is a continuing demand for old, basic models like the Xiali, Santana and Jetta, particularly among new buyers from outside the main metropolitan centres. The expansion of vehicle ownership in China’s central provinces and second-tier cities, where consumer tastes and environmental regulations are less demanding, means that manufacturers will continue to produce and develop these older vehicles alongside the newer models that they are ‘scrambling’ to introduce. The range of models available in China has risen from

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14 in 1998, to over 120 by 2005. Firsttime Chinese buyers show none of the ‘brand loyalty’ typical of more mature vehicle markets, and their liking for the latest designs and fashions will fuel further growth in the number of available models. It will also benefit those manufacturers whose production cycles are geared to frequent facelifts and model changes. The number of imported cars declined by 11.6 per cent in the first nine months of 2005, to 94,000 units. Increasingly, these are top-of-the-range vehicles, like the BMW 7-series or the Mercedes S-class, targeted at wealthy private buyers for whom the cachet of a luxury-imported car is more important than the price tag. As the Chinese car market grows, the challenges that it presents to manufacturers multiply. However, there are no international players who wish to risk finding themselves excluded from the market. As a result, these companies continue to vie with one another by pouring in new investment and launching new products, despite the twin familiar threats of overcapacity and declining profitability and a continuing unease about the long-term relationships with their local joint venture partners. At the same time, new Chinese entrants, who see car manufacturing as a more profitable business than, for example, white goods or motorcycles, continue to attack the market. It is not credible that all these competitors can indefinitely prosper in China. Clear winners and losers will emerge over the next five years.

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The key players: their Chinese operations and strategies The Europeans European vehicle manufacturers were among the early entrants to the Chinese automotive market. VW (Volkswagen), in particular, derived a substantial financial return from their early investment. But with the major Japanese, American and Korean corporations all now pursuing aggressive and ambitious plans in China, much of the ‘early mover’ advantage appears to have been squandered. In 2000, European models accounted for 63 per cent of the Chinese passenger car market, with the Americans claiming 5 per cent and the Asian manufacturers 14 per cent. By mid-2005, the Japanese/Korean share of the market had risen to 39 per cent, whilst the European proportion had declined to 24 per cent. Both American and local Chinese manufacturers had also grown their market share at Europe’s expense. Currently it is questionable whether the European vehicle manufacturers have the range of models or the financial resources to turn back the Asian tide in a market which they recently used to dominate, other than in certain niche areas. Volkswagen Group For almost 20 years, VW reaped a rich reward from its early investment in China. Its original (1985) joint venture with SAIC (Shanghai Automotive Industry Corporation) was complemented in a second 40/60 alliance with FAW (First Auto Works), and, in the early 1990s, the products (elderly VW models like the Santana and Jetta) of the two joint ventures accounted for 80 per cent of the passenger car

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market and sold for premium prices. That comfortable situation changed around the turn of the century with the arrival of new global rivals who rapidly eroded VW’s market share. By 2004 it had fallen to less than 30 per cent. However, in the booming passenger car market of 2002–2003, VW was able to take comfort in seeing total unit sales actually rise (to 697,000), even as their overall share of the market declined. ‘You cannot eat market share,’ one VW executive remarked. VW initially sought to meet the challenge to their erstwhile supremacy by investing in substantial new capacity at their existing bases in Changchun and Shanghai. Overall, the company’s Chinese manufacturing capacity will rise to 1.36 million units by 2007. Additionally, new engine factories will be built in Shanghai (with SAIC) and Dalian (with FAW). Simultaneously, in a change of marketing strategy, VW moved away from relying exclusively on old brands. By 2005, the Chinese motorist had a choice of no less than 10 VW models, including the latest Polo, Audi A6, and Touran. An aggressive price-cutting campaign, especially on the aging Santana and Jetta models, was instigated, no doubt with the intention of slowing the rate at which competitors could recoup the costs of their initial investments. However, for VW, 2005 was truly an annus horribilis. In the early months, their market share tumbled to just 11 per cent, and, for the first time, year-on-year sales were down. Worryingly, whilst the Santana and Jetta have continued to sell steadily, it is the more recently introduced models that have failed to sustain their appeal to Chinese customers; the Bora, Golf, Passat and Polo have all seen substantial falls in sales. The economy-range Gol, introduced from Brazil, has not proved successful, and the Audi A4 model has failed to match the popularity of its larger A6 stablemate.

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China is a market that VW cannot afford to lose, and they have clearly indicated their intention to fight hard to retain leadership. Firstly, an aggressive round of price cuts has stabilized market share at 15 per cent and in October 2005 they announced a three-year rescue plan entitled the ‘Olympic Programme’. Winfried Vahland, VW’s new head of China Operations, will be permanently based in Beijing where there will also be a new testing laboratory to carry out work previously handled in Germany. A new Santana 4000 will be developed locally and VW will work with Tonji University in Shanghai to produce a special hybrid version of the Touran for use at the 2008 Olympic Games. These measures belatedly recognise that China’s fastmoving auto market now demands both local management and local product development. VW will also press ahead with further new model launches, including the Golf A5 and Audi A3 models, and the Skoda brand is scheduled to enter China in 2007. At the same time, they will seek substantial cost savings through a closer alignment of the purchasing functions within their two joint venture partners, FAW and SAIC. Although their existing relationship with the two largest Chinese vehicle manufacturers, coupled with powerful political ties, is one of VW’s key strengths, the clear rivalry between the Chinese companies (and the fact that they both now have other international partners) makes this an ambitious goal. The major challenge for VW is to introduce modern, economical models that will appeal consistently to Chinese consumers, whilst restoring the profitability of their China operations. Although VW cannot realistically expect to recover its former pre-eminent market share, it does need to demonstrate that it can check

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the continuing advance of its Asian rivals. PSA Peugeot Citroen PSA Peugeot Citroen was one of the first foreign auto manufacturers to enter China, However, their original 1985 venture (a minority shareholding with Guangzhou Auto Group Corporation) never prospered and was abandoned in 1997. In the meantime, they formed a second partnership with Dongfeng Motor Industry Investment Co to build cars under the Citroen brand in Wuhan. Initial production capacity was 150,000, but by 2002 sales of the Fukang model (based on the Citroen ZX) and its locally designed derivative, the 988, had only reached 85,000. The introduction of the Elysee, Picasso, and Xsara models boosted the following year’s sales over 100,000, and, on the back of a price-cutting campaign, sales volumes have continued to climb steeply, pushing market share above 5 per cent. But profitability has not followed the same curve and the joint venture recorded an overall loss in 2004, which it is still seeking to redress through cost and labour reductions. The Peugeot 307, including a sedan version unique to China, was introduced in 2004 and is likely to be followed by the Peugeot 206 and two Citroen models (probably the C4 and C5). However, it is uncertain how strongly the existing model range, with its emphasis on European-style hatchbacks, will appeal to Chinese consumers and it remains a key challenge for PSA to adapt their models to Chinese tastes. At the same time, DMC’s new alliance with Nissan, and the considerable success of newly introduced Japanese models, demands that PSA maintains a proactive approach if they are to sustain a viable presence in China.

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DaimlerChrysler When Daimler Benz, as a result of their merger with Chrysler, ‘inherited’ the American company’s joint venture in Beijing, there must have been a strong temptation to close the enterprise. Relations with the Chinese partner were strained, sales had declined to less than 10 per cent of their peak, and the Jeep-based product range had long been overtaken by the more sophisticated and stylish offerings of competitors. However, with Chinese auto sales just beginning to blossom, DC (DaimlerChrysler) understood that they could not walk away from the market and after protracted negotiations they committed themselves to a 30-year extension to the partnership with BAIC (Beijing Automotive Industry Corporation). The initial short-term revival plan was based upon the introduction of modern SUVs (Sports Utility Vehicles) – a type of vehicle gaining popularity in China and in which Mitsubishi (then 37 per cent owned by DC) had particular expertise. At first, the strategy proved successful; in the first quarter of 2004, sales rose threefold, with the Outlander model accounting for 52 per cent of the total and achieving the top SUV ranking in China. However, long-term prospects have been clouded by the termination of the DaimlerChrysler/Mitsubishi global partnership and consequent doubts about their future use of the Japanese company’s models in China. At the same time, local Chinese competitors have shown a strong appetite to offer cheap copies of Western-style SUVs; in early 2005, DC cut the price of their basic jeep Cherokee to just $13,500 and still found themselves undercut by local rivals. In the luxury saloon segment, China remains a key international market for DC, second only to the USA. And DC

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demonstrated their commitment by concluding a parallel agreement with BAIC to commence assembly of their C- and E-class saloons at a new Beijing plant by 2005. The initial sales target was 25,000 per annum. However, a change in Customs regulations in early 2005, which re-defined CKD kits as whole vehicles and therefore liable for 30 per cent rather than 15 per cent import duty, severely disrupted the production plan. Without an established local supplier base, DC was compelled to delay operations until February 2006. In the meantime, the imported top-of-the-range S-class continues to be a best seller in China. DC took the bold decision to launch the latest version of the S-class in China only one month after its debut at the Frankfurt Motor Show. Although DaimlerChrysler enjoys a strong brand image in China, the German auto manufacturer has still not found a solution to its continuing losses with its original joint venture with BAIC. Meanwhile, the new partnership that BAIC has forged with Hyundai continues to prosper. In the first six months of 2005, DC also lost out to BMW as the top-selling luxury car maker. Fiat Auto Fiat has a well-established relationship with Nanjing-based Yuejin Automobile Group Corporation, dating back to the mid-1990s. Early activity focused on the light commercial vehicle sector, where the Iveco Daily enjoyed strong initial sales. However, the partnership was slow to develop a presence in the passenger car market. Despite agreeing to a 50/50 joint venture (Nanjing Fiat) in 1999, it was not until 2002 that the Palio and, later, the Siena models, were brought into production. The Palio, Fiat’s ‘world car’, is a hatchback design, not well suited to

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Chinese tastes, whilst the Siena is perceived as smaller than its main competitors. As a result, sales have never matched expectations; the predicted 2005 figure of 36,000 is less than 50 per cent of current plant capacity and represents less than 1.5 per cent market share. Fiat hopes that the newly launched Soyat, with an economical 1.3 litre engine, will win over private Chinese buyers, but with a price range of 40,000–54,000 yuan ($4,800–6,600) profit margins are slim. The arrival of Paulo Massi as the new CEO of the joint venture perhaps reflects not only Fiat’s determination to take firmer control of their Chinese operations, but also their nervousness about partner Nanjing Auto’s independent acquisition of the assets of the failed MG Rover. BMW The BMW brand is well respected in China, with around 10,000 vehicles being imported as the market boomed in 2002 and 2003. A large proportion of these were the top-of-the-range 7-series, mirroring the trend noted with Daimler Benz, ie affluent Chinese consumers prefer the top model. In 2004, BMW commenced local production of the 3- and 5-series models, through a 50/50 joint venture with Brilliance China Automotive Holdings and a new, purpose-built facility in Shenyang. The choice of both model and partner represented something of a gamble. Brilliance was a relative newcomer to the Chinese auto industry, had achieved only limited sales of its own Zhonghua saloon and had been disrupted by the financial scandal surrounding its erstwhile chairman. There appears to have been some initial consumer scepticism about the quality of locally built models, with sales falling 11 per cent in the first

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quarter of 2005. However, by midyear, BMW had recovered to overtake DC as the top-selling luxury brand (9,400 units compared with just over 7,000). Seeking to take further advantage of its German rival’s local production difficulties, BMW has announced the introduction of a new 3series model, with a 15 per cent price saving over its predecessor. At the same time, they are expanding their dealer network by 50 per cent, with 60 national sales points. Renault Renault is the only major international car manufacturer whose brand is largely absent from the Chinese market. It had been widely expected that China would be a key target for the low-cost Logan model, which the French manufacturer has specifically developed for production in emerging markets. However, recent indications are that, for passenger cars, Renault will concentrate on the development of the Nissan brand through the three-way joint venture with Dongfeng.

The Americans The ‘Big Three’ American vehicle manufacturers have experienced contrasting fortunes in China. Whilst Chrysler, who entered early, and Ford, who arrived late, have found progress difficult, GM (General Motors) are starting to reap a rich return from their substantial initial investment. Chrysler Chrysler Corporation was the first foreign vehicle manufacturer to establish a joint venture in China, when, in 1984, it entered into a 42/58 agreement with BAIC. However, a misunderstanding of the demands of the

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Chinese market and a poor choice of vehicles (the Jeep Cherokee and the military-style BJ2020) undermined the partnership and production slumped from 100,000 in 1995 to little more than 9,000 units in 2002. Following the amalgamation between Chrysler and Daimler Benz of Germany, the Beijing-based operation became part of DaimlerChrysler. General Motors GM won a hard-fought battle with Ford for the right to partner SAIC in a 50/50 venture – the so-called fifth and final automotive joint venture to win government backing. When production commenced in 1999, some commentators opined that the cost had been too high and that the launch model (the Buick Regal) was the wrong car. However, GM had substantial plans for China, and has driven ahead with a rapid expansion of the model range, a series of deals with SAIC and other provincial manufacturers, and continued investment. Their reward has been a rapid rise in market share (to around 11 per cent) and a close second place in the league table behind long-time market leader VW. During 2005, total sales rose to 665,400 units. Alongside the original Buick Regal, GM quickly introduced further models from their own range and from Daewoo, the bankrupt Korean automaker whom they absorbed in 2001. These included the compact Sail (based on the Opel Corsa), the GL8 people-carrier, the Buick Excelle and the Chevrolet Spark (based on the Daewoo Lacetti and Matiz respectively). In 2005, there followed the Aveo (a ‘world car’ given its international debut at the Shanghai Auto Show) the Epica, and, at the luxury end of the market, the Cadillac CTS and Royaum. As sales of the earlier models have gradually slowed, the

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new entrants have performed strongly, particularly the Excelle, which is now firmly established as a top-five best seller. GM will continue to roll out new models at an aggressive pace as they enshrine the old company slogan: ‘a car for every purse and every purpose’ in their China marketing strategy. The Chevrolet brand will be used for all small- and medium-size models. They have also added significant production capacity; with partners SAIC, they now control two plants in Shanghai (300,000 units), the former Daewoo facility in Yantai, Shandong Province (100,000), plus plants in Liaoning (50,000) and Wuling (270,000, and due to be expanded by a further 150,000). GM have skilfully leveraged their relationship with cash-rich SAIC to finance investments in other automakers, both inside China and abroad. In southern China, GM and SAIC have taken a combined 84 per cent stake in Wuling Automobile Co, thus gaining access to the enormous mini-vehicle market. Production from Wuling now accounts for around 50 per cent of GM’s total sales in China. In Shenyang (Liaoning Province), where production of the Chevrolet Blazer SUV had only reached a disappointing 3,000 units per annum, the existing joint venture with Jinbei has been restructured so that GM/SAIC will again have a controlling interest. And SAIC took a minority shareholding in the deal that gave GM control of Korea’s Daewoo. A further investment of $250 million has also been pumped into the joint venture’s research centre PATAC, where up to 900 local engineers will be employed. Ultimately, Shanghaibased PATAC may take over from Korea as GM’s Asian design centre. However, potential problems do lie ahead. Firstly, Phil Murtagh, the charismatic head of China operations

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since GM first entered the market, resigned early in 2005, for reasons that have never been fully explained. He played a key role in cementing the strong business relationship between GM and SAIC, and his presence will certainly be missed during a period when SAIC is displaying increasingly independent ambitions. Ford Motor Co Having lost out to GM in the battle to forge a high-profile partnership with SAIC, Ford Motor Co was obliged to seek an alternative partner through whom they could gain access to the Chinese market. Their choice was ChangAn Automobile Co, the Chongqing-based mini-vehicle manufacturer already in partnership with Suzuki. Investment in the new plant of $98 million was modest compared with other late entrants to the market. Production commenced in early 2003, with an initial capacity of 50,000 units and the potential to increase to 150,000. However, the chosen launch model, the Ikon (a Fiesta derivative), has performed poorly. Only 17,000 units were sold in 2004, and that modest total has declined by 35 per cent in 2005. The Mondeo (introduced in 2004) has proved more popular (around 40,000 units in 2005), but only after heavy discounting. The current price is almost 35 per cent down on the launch figure. The introduction of the Focus, in late 2005, was a crucial moment. Firstmonth sales reached an encouraging 4,600 units, but Ford will need this initial success to be translated into regular best-seller status. Some commentators believe that Ford will, in any case, ramp up Focus production levels in China, exporting the surplus back to Europe if local sales prove disappointing.

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Currently, Ford is lagging behind its rivals in China (sales of 61,000 cars in 2005). Although figures show a yearon-year increase of 41 per cent, this amounts to barely one-tenth of the figure achieved by GM. Ford have been hampered by a location away from the booming provinces on China’s eastern seaboard and by the limitations of the local supply chain. Significantly, it was recently announced that the next new model – the Volvo S40 – will be built in Nanjing. The Ford-owned Japanese auto-maker named Ford, ChangAn and Mazda, will open a joint engine plant in the same location in 2007. Adroit use of the relationship with Mazda and the progressive introduction of products from the Premier Auto Group (Volvo, Jaguar, Land Rover, Aston Martin) will be needed if Ford is to make up for a faltering start in China.

The Japanese Historical antipathy, the lack of a ready consumer market and poor manufacturing standards all contributed to the caution that Japanese vehicle manufacturers initially displayed to the Chinese market. Early links were built on licensing agreements and basic technology transfer (Honda’s move into Guangzhou was very much the exception). Nevertheless, by 2001 this ‘softly-softly’ approach had given Japanese manufacturers 28 per cent of the passenger car market in China. Chinese consumers liked Japanese models, with their well-equipped interiors and thrifty engines, and Japanese producers liked to sell their cars in a highmargin market. The sales boom of 2002 brought a dramatic change. The Japanese ‘Big Three’ (Toyota, Nissan and Honda) concluded that they should wait no longer and all embarked on

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ambitious, but differing expansion strategies. Their reward has been an ever-increasing market share, estimated at 39 per cent by mid-2005, although escalating price wars have depressed profit margins. Toyota Toyota’s early forays into the Chinese market were confined to licensing agreements with TAIC (Tianjin Auto Industry Corporation) to produce a derivative of the humble Daihatsu Charade (locally christened the Xiali) and with company Shenyang Jinbei, to produce the Hiace van. In June 2002, they concluded a 50/50 joint venture with FAW, at an investment cost of $1.3 billion. Political pressure may have swayed Toyota’s choice of partner, and the joint management structure is in stark contrast to Toyota’s normal global policy of taking 100 per cent control. As part of the deal, FAW effectively took over Toyota’s existing partner TAIC, a move that reflected the government’s wish to see consolidation within the auto industry. Although Toyota may have privately regarded the partnership as less than ideal, they have committed heavily to achieving success. From their Tianjin base, the modern Vios and Corolla models were successfully launched in 2004. They were joined in 2005 by the luxury vehicle, Crown, and the Reiz, and Toyota’s market share grew to 5 per cent. Further expansion is planned with a new engine factory in Changchun and a new assembly plant due to open in Tianjin in 2007. Toyota also followed the increasingly common pattern in the Chinese auto industry by forming a second joint venture with a different partner, Guangzhou Automobile Group. Production of the Camry model commenced in 2005, with a target of 300,000 units by 2007. Another new

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engine plant is also under construction in Guangzhou. Despite a late arrival in China and apparent unease about the restrictions on foreign investors, Toyota has signalled a clear intention to offer Chinese consumers the latest models and technology. Alongside the existing model range, a locally built version of the hybrid Prius was launched with much fanfare in late 2005 (though the power unit is still imported from Japan), and there is talk of luxury Lexus models being built in China from 2007. Local research and development centres have been opened in Guangzhou and Shanghai, and TMCI (Toyota Motor China Investment) has been established to ensure the quality of the local sales and distribution network. With total manufacturing capacity scheduled to reach 500,000 by 2007, Toyota is now taking China very seriously. Honda Honda’s early involvement in China was as a motorcycle maker. That experience may have given the Japanese auto-maker the local knowledge and the confidence to take the bold strategic steps that have characterized its approach to the Chinese vehicle market. In 1998 they made a dramatic entry into passenger cars with the takeover of the failed Peugeot joint venture in Guangzhou. As a ‘white knight’ they were effectively able to sideline the local partner, GAIC (Guangzhou Auto Industry Corporation) and exercise a controlling influence from the outset. As a result, their Accord model achieved, and has consistently maintained, a high reputation and strong sales with affluent Chinese buyers. Honda has grown the business carefully, raising capacity to 240,000 in 2004 and expanding the model range with the Odyssey minivan and the compact Fit. With

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the Accord continuing to lead the fullsize saloon market, sales in the first half of 2005 grew 35 per cent to 130,000 units. A modified version of the Civic is expected in 2006 and, perhaps to counter Toyota’s introduction of the Prius, Honda have hinted that they may introduce their own hybrid vehicle. Like Toyota, Honda also established a second partnership, developing a long-standing technical agreement with Dongfeng Motor Corporation into a full 50/50 joint venture. The new Dongfeng Honda Auto Co produces the CR-V, a compact SUV, in Wuhan. Although challenged by cheaper Chinese look-alike models, the CR-V has proved popular with local consumers, and will come close to achieving its initial sales target of 30,000 units per annum. Honda made another bold move in 2004, with the announcement of a new plant in Guangzhou that will build the compact Fit/Jazz model wholly for export. This is the first time that an international vehicle manufacturer has committed to using China as a major export base and Honda’s reward was government approval for an unprecedented 65 per cent majority shareholding in the new venture. The other partners are GAIC with 25 per cent and Dongfeng Motor with 10 per cent. The initial shipment of 146 cars was dispatched to Belgium in June and it is expected that annual exports will grow to 10,000 units, all destined for left-hand drive markets. Honda continues to thrive in China, and they expect substantial growth from the new partnership with Dongfeng. However, price wars have eroded profit margins and a preferential local tax rate, which they enjoyed in Guangzhou, has ended. The success of their export venture is also uncertain and in that context the recent comment by company president Takeo Fukui, that India offered a

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better investment environment than China, was intriguing. Nissan The Nissan name was originally established in China through a series of technology agreements and a steady stream of imported models from Japan that proved popular with Chinese consumers. Early manufacturing ventures were modest; a joint venture with Aeolus Automotive to build the Bluebird saloon and a minority shareholding in Zhengzhou Nissan Automobile Co, which concentrated on SUV production. However, the market boom of 2002 propelled Nissan (along with their new European partner, Renault) into a new venture with DMC. In an unprecedented deal, Nissan/Renault were permitted to acquire 50 per cent of the state-owned DMC, for a payment of $1 billion, whilst at the same time the partners created a new joint venture, under the title Dongfeng Motor Co, into which Aeolus Automotive was also integrated. This agreement theoretically gives Nissan/ Renault management control of the new venture, although the arrangement still has to be practically tested. The new Dongfeng Motor Co has set up an ambitious and successful programme to capture market share. Existing models like the Bluebird and Sunny saloons, which are now perceived as dated by Chinese customers, have been heavily discounted. The modern and well-equipped Tiida and Teana models were quickly introduced from Japan and have sold well. The imported luxury Fuga and the Quest MPV were launched in late 2005. Production is split between DMC’s existing production facilities in Hubei province and new assembly plants under construction in Guangzhou, where there will also be a new research and development centre.

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Mitsubishi Mitsubishi technology was first utilized in China by FAW back in the 1980s, but it was not until 1996 that the Japanese vehicle manufacturers agreed to two minority joint ventures with regional Chinese partners. South East Fujian Motor Corporation (itself half-owned by Taiwan-based China Motor Co, of which Mitsubishi held a 20 per cent stake) commenced production of the Delica minivan and Freeca SUV, and latterly the Lioncel saloon, whilst the Pajero SUV was built in partnership with Hunan Changfeng Motor Co. Mitsubishi’s image among Chinese customers was severely tarnished by a number of ‘scandals’ over vehicle recalls. Nevertheless, by 2003 total sales had grown to 151,000, and the company announced that China would be a key market in their plans for global revival. Eleven new models would be introduced with targeted sales figures in excess of 300,000 by 2008. However, these projections were heavily dependent on the successful exploitation of Mitsubishi’s expertise in SUVs delivered through DaimlerChrysler’s joint venture with BAIC. This plan was dealt a significant blow by DaimlerChrysler’s decision to terminate their global partnership with Mitsubishi. Coupled with Mitsubishi’s own lack of investment capital and their damaged reputation with consumers, there must now be considerable doubt about the company’s long-term prospects in the Chinese market. Although the Lioncel has continued to perform well, total sales for 2005 may have fallen below 80,000. Suzuki Throughout the 1980s and 1990s, Suzuki entered into a tangled web of licensing agreements with local Chinese partners, which has resulted

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in Suzuki technology appearing in a large range of basic mini-vehicles currently produced in China. In 1994 they opted for Chongqing-based ChangAn Automotive Corporation as their principal partner, and took a 35 per cent stake in a joint venture to build the Alto and Swift minicars. A second, minority venture was later concluded with Changhe Aircraft Group, again focusing on the production of mini-vehicles. Although sales have risen above 100,000, Suzuki’s position in the Chinese market is weakened by the lack of larger, up-market vehicles, which offer greater profit margins. At the same time, the arrival of domestic Chinese competitors (such as Geely) in the mini-car sector threatens a protracted price war. Suzuki was further unsettled by the arrival of Ford Motor Co as a second partner for ChangAn – a feeling reflected in the sale of part of their shareholding in the original joint venture. To counteract their overdependence on mini-vehicles, Suzuki will open a new engine production line in 2006, building 1.6 and 1.8 litre power units. They have also committed, in partnership with ChangAn, to introduce at least one new model annually. However, in the medium term, Suzuki may concentrate more on India than China; their sales in India are currently double the level achieved in China. Mazda Although controlled by Ford Motor Co, Mazda has pursued an independent policy in China, in partnership with FAW-owned Hainan Motor Co. The joint venture’s products have proved popular with private Chinese buyers and sales (principally of the Premacy and 323 models, assembled from imported kits) have doubled since 2001. The Mazda 6, added to the model range in 2003, has also sold

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well. In the first half of 2005, total sales rose 54 per cent to 70,300. Future plans include the introduction of RX8 sports car and new variants of the Mazda 6, with a total production target of 150,000 units. It also seems likely that Ford will use the Mazda name in an attempt to raise its own market share in China; the decision to build the Mazda 3 model at the new three-way joint venture in Nanjing is the first demonstration of this policy.

The Koreans The Asian financial crisis of 1996– 1997 precipitated a significant consolidation in the Korean automotive industry. Hyundai emerged as a clear winner, gaining control of one-time rival Kia and securing a dominant share of the domestic Korean market. Meanwhile, bankrupt Daewoo was taken over by GM and Renault purchased the fledgling Samsung automotive division. From this strong domestic base, Hyundai embarked on a strategy to break into the top echelon of global vehicle manufacturers, with China marked as a key growth market. Hyundai Group The pace of Hyundai’s advance into the Chinese market took everyone by surprise, as did their original decision to locate operations in Beijing, which had never previously been regarded as a successful automotive centre. In October 2002 Hyundai concluded a $1.1 billion deal to create a 50/50 joint venture with BAIC. Just two months later, with the new factory still under construction, the first Sonata saloon was produced. By the end of 2003, sales of this single model had exceeded 50,000 and Hyundai was targeting a total of 110,000 units for 2004, aided by the introduction of a

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high-specification version of the Elantra saloon. The Elantra proved to be another winner with both private buyers and the capital’s taxi fleets, and throughout 2005 it occupied one of the top three best-seller spots. Hyundai regard China as a key location in their plans for global growth and whilst expectations for their latest introductions, the Tucson SUV and the luxury Equus sedan are modest, they are also planning to open a new Beijing plant in 2008 to produce the Click (a Getz derivative) and the Verna compact models. Meanwhile, the wholly owned Kia brand is being developed separately. At Kia’s existing plant near Nanjing (a 50/25/25 partnership with Jiangsu Yueda Motors and DMC), there are plans to raise capacity from 50,000 to 250,000, as the Qianlima (a derivative of the Accent model specially developed for China) replaces the original Kia Pride. In its first full year of sales (2004), the Qianlima racked up an impressive 101,000 units. The Carnival minivan and the Optima sedan will be added to the Kia range. A new plant will be built at Yancheng, in Jiangsu Province, to take total capacity to 430,000. However, disagreement among the partners about the location of that factory is just one example of how Hyundai’s aggressive approach to the Chinese market has caused friction. In Beijing, Hyundai came into conflict with DC, the existing partners of BAIC. As a result, DC disposed of their 10 per cent shareholding in Hyundai and scaled back a number of joint development programmes. It is also reported that Hyundai has been discussing potential partnerships with Guangzhou Auto and the privately owned Huatai Automobile Co. Such approaches are likely to strain relations with existing partners, and may conflict with the government’s wish to restrict foreign auto-makers to a

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maximum of two local partners. Although Hyundai is currently riding a wave of success in China, it must be careful that headlong expansion does not create intractable problems for the future.

The Chinese Even at the very end of the 20th century, few commentators expected indigenous Chinese vehicle manufacturers to make a significant impression on the global automotive industry. Although there were more than 120 registered auto-makers in China, they were generally regarded as too small, too fragmented and too lacking in technology to produce vehicles that might challenge the established industry leaders, not only in China but also in overseas markets. Today, the expectation is very different; industry journals are full of reports and speculation on China’s march on to the international stage. The question is no longer ‘Will China become a global player?’ It is now merely ‘When?’ The central government has long championed the growth of the domestic auto sector. The Auto Industry Development Policy (published in June 2004) defines automotive as a ‘pillar industry’, whilst clearly demonstrating the government’s desire to concentrate growth on a small number of major industrial groups, and to boost China’s indigenous research and development capabilities. The policy foresees three leading auto companies – ‘the Big Three’ – and a second tier of vehicle manufacturers, ‘the Smaller Five’ who would progressively absorb smaller competitors and develop their own vehicles technologically independent of their existing foreign partners. At the same time, restrictions on the purchase of vehicle manufacturing licences from bankrupt companies and a high initial

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threshold for research and development investment were intended to deter new entrants from outside the motor industry. In reality, much of the impetus for China’s automotive growth has come from new arrivals (like Chery and Geely) and the government has given discreet support to those newcomers who are clearly gaining international reputations. Nevertheless, the official classification of ‘Big Three’, ‘Smaller Five’ and ‘New Entrants’ makes a convenient framework for reviewing the differing strategies and progress among China’s passenger car manufacturers. The Big Three China’s ‘Big Three’ – FAW (First Auto Works), DMC (Dongfeng Motor Corporation) and SAIC (Shanghai Automotive Industry Corporation) – accounted for over 50 per cent of all vehicles produced in 2005. But, for passenger cars, they are still almost wholly dependent upon models provided by their joint venture partners. Each has at least two alliances with major international vehicle manufacturers; all have substantial financial resources and government backing. They are, therefore, well placed to gain the major share of new automotive investments, and to manipulate the joint ventures relationships to their maximum advantage. Headquartered in the northern city of Changchun, FAW also has manufacturing facilities in Tianjin, Chengdu, Hainan, and most recently, Qingdao. Its international partners are VW, Toyota and Mazda. As part of the deal with Toyota, FAW took over TAIC; so far this is the only substantial success in the government’s quest to encourage industry consolidation. FAW is the only member of the Big Three who can so far claim to have developed their own vehicles. The

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Hongqi (Red Flag) saloon (based on an old Audi model) has long been overtaken by more modern luxury saloons, but they are now reported to be working on a Hongqi 3, derived from the Toyota Crown. At the opposite end of the market, the Daihatsuderived Xiali (manufactured in Tianjin) has proved to be an unexpected best seller throughout 2005, as its rockbottom price (38,000–60,000 yuan: $4,600–7,800) continues to appeal to new Chinese buyers. FAW has publicly stated its twin intentions of developing independent models whilst continuing to work with its international partners. Their target, set for 2010, is to win 50 per cent of sales from ownbrand models. DMC, based in Hubei Province, is partnered with PSA Peugeot Citroen and, latterly, Nissan/Renault. The arrival of Nissan/Renault and the introduction of top-selling models from the Japanese manufacturer was timely for DMC, which, in 2004, had seen their sales overtaken by rivals ChangAn and BAIC. However, the group’s traditional strength remains in the commercial vehicle sector. It is perhaps significant that it has chosen an SUV, the Tuyi, as its first independently developed model. SAIC, whose international partners are VW and GM, is the most overtly ambitious of the Big Three, with the stated intention of ultimately breaking into the ranks of the top six global auto-makers. Unlike its main Chinese rivals, it does not have an established commercial vehicle operation and, therefore, although it is now exploring truck and bus production, most growth will come from passenger cars. Within China, it has built up a portfolio of production bases away from Shanghai, including locations in Liaoning, Shandong, Sichuan and Guangxi Provinces, with an ambitious capacity target of 1.5 million units. By

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2007, at least 50,000 domestic sales are scheduled to come from own-brand models. Internationally, SAIC has flexed its muscles with the purchase of Korea’s Ssangyong Motors, and the acquisition of model and engine rights from MG Rover (though it declined to offer the failing UK company the lifeline of a joint venture). A deal has also been concluded with Thailand’s Yontrakit and ECI Groups that will see CKD kits from China assembled locally for the Thai market. The Smaller Five The Chinese automotive companies usually grouped together as the ‘Smaller Five’ are BAIC (Beijing Automotive Industry Corporation), ChangAn Automobile Co, GAIC (Guangzhou Automobile Industry Corporation), Souest (Fujian) Motor Corporation and TAIC (Tianjin Automotive Industry Corporation). As with the ‘Big Three’, they rely heavily on their foreign partners for technology, new models and investment. To date, they have generally been content to play a secondary role within their existing joint venture partnerships, to which their principal contributions have been land and local contacts. Nor have they yet demonstrated the ambition to develop their own models. BAIC gained a double boost with DaimlerChrysler’s commitment to a 30-year extension of the joint venture originally set up by the American corporation, and the arrival of an aggressive new partner in the form of Korea’s Hyundai. Perhaps for the first time, the Chinese capital is now regarded as a significant automotive centre. ChangAn Automobile Co is based in the sprawling central city of Chongqing, a major centre of Chinese motorcycle production. Together with long-time partner Suzuki, ChangAn has captured a significant

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share of the mini car and minivan markets. However, a limited model range, increasing competition (for example from GM Wuling) and relative remoteness from the main automotive markets have contributed to its slow growth. The formation of a second joint venture with Ford has recently provided a route to the production of larger models and the opportunity to invest in a new location (Nanjing). ChangAn are also seeking to develop a new generation of hi-tech minivans, incorporating hybrid and lightweight material technologies. To the south, GAIC was very much the sleeping partner of Honda when the Japanese vehicle manufacturer took over the failing Peugeot plant in Guangdong. It is a role that GAIC has continued to play as other Japanese manufacturers, such as Toyota, Nissan and many leading component suppliers, poured substantial new investment into the region. Souest (Fujian) Motor Corporation, based in Fujian Province (and owned partly by Taiwan-based China Motor Co) is partnered with Mitsubishi, whose financial problems have restricted the growth of the partnership. However, Souest is strongly backed by the provincial government and may find a new partner in DC, building minivans. TAIC, producer of the Xiali model based on old Daihatsu technology, became the first ‘victim’ of the government’s drive for industry rationalization when it was absorbed into the larger FAW/Toyota partnership. With backing from the new owners, updated versions of the Xiali have scored a surprising success and may well top the best-seller lists for 2005. It is also appropriate to include, within this category, Nanjing Auto. Previously the little-regarded partner of Fiat, the company hit the headlines with their purchase of the remaining assets of bankrupt MG Rover from

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under the noses of larger rivals SAIC. This bold move probably indicates not only the ambition of the Jiangsu provincial government to maintain an independent local auto-maker, but also their concern that the partnership with Fiat, which sells barely 30,000 cars per annum, is waning. It remains to be seen whether Nanjing Auto has the resources and skills to translate its purchase of Rover’s equipment and IPR into cars that will sell in China. A larger partner will probably be required. Whilst SAIC would appear the logical choice (since they already own some of the rights to Rover models), local rivalry may prevent such an alliance. Significantly, Nanjing Auto has been in talks with FAW. The New Entrants The new arrivals on the Chinese automotive scene come from a variety of backgrounds. Some are privately owned enterprises, whose founders have made their fortunes in other industrial sectors. Some are offshoots of state-owned enterprises, seeking to diversify out of previously unprofitable businesses. Others rely heavily on provincial governments, who are keen to expand their local industrial bases, for funding and political support. All have been attracted to the automotive sector by the traditionally high levels of profit. Typically, these newcomers have initially concentrated on producing low-priced vehicles aimed at provincial customers. They have minimised production costs by locating their plants in low cost areas, using existing components, conducting little research and development and copying models, sometimes rather too closely for the liking of the major vehicle manufacturers. Among these companies two stand out, because of the market share that they have won, their growing interna-

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tional ambitions, for attracting top automotive executives away from their better-known rivals and for the fact that they now have the tacit backing of central government. Chery Automobile Co, based in Wuhu and strongly backed by the Anhui provincial government, produced its first vehicle (a saloon car closely resembling the VW Jetta) less than 6 years ago. Next came the QQ minicar, whose similarity to the Chevrolet Spark was sufficient to provoke a legal challenge from GM. Whilst that dispute rumbles on, the competitively-priced QQ continues to outsell the Spark by a ratio of 4:1. In total, Chery will sell around 170,000 units in 2005 (almost double the figure of two years ago) to claim a 6 per cent share of the market. A range of new models, including the Tiggo SUV, the A21 mid-range saloon and the Oriental Sun will sustain this growth. These vehicles have been developed in cooperation with top European design engineering companies, as has Chery’s new family of Euro IV compliant engines. Chery also has strong international ambitions in both the European and US markets. Chery models were displayed at the 2005 Frankfurt Motor Show and talks have been held with several potential European distributors. The first target may be the costconscious consumers of the new EU Member States. Across the Atlantic, Chery’s ambitions in the US market may have been simultaneously hyped and delayed by their partnership with the flamboyant Malcolm Bricklin’s Visionary Vehicles; talk of 250,000 imports by 2007 now seems highly speculative. Interestingly, the Chinese company themselves appears more restrained about their international growth than either their potential partners or the automotive press. Chery may see their plans to set up a small (30,000 capacity) manufacturing

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facility in Iran and a distribution chain in Malaysia as low-risk opportunities to test their international ambitions. In March 2005, Chery was extended a 5 billion yuan credit support from the China Import & Export Bank for overseas projects; a clear sign that the central government has given its tacit blessing to their global expansion plans. Geely Automotive Holdings (a private company based in Zhejiang Province owned by four brothers, who previously built successful businesses in construction and motorcycles) started making cars in 2001. Although early models were crude, cheaply priced Daihatsu derivatives, sales reached 80,000 within two years and by 2005 were nearing 140,000 units per annum (5 per cent market share). A new small–medium-sized saloon, the CK-1, the Maple hatchback and the Beauty Leopard sports car have all been added to the original basic range. The company’s international ambitions are encapsulated in the marketing slogan ‘Bring Geely to the World’. Geely models have been displayed at auto shows in both Europe and America and the company is lining up potential distributors in both markets. However, commentators believe that Geely vehicles still have some way to go to meet European safety regulations and customer expectations. In the short term, a deal to export 90,000 units (part CBU, part CKD) to Malaysia seems a more likely source of export earnings. Significantly, the signing of that agreement was witnessed by Wu Bangguo, Chairman of the People’s National Congress – an indication that Geely’s international plans have central government approval. Other new arrivals have, as yet, failed to match Chery or Geely’s level of domestic sales and their domestic market share hovers around 1–2 per

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cent. However, they have ambitious plans, both inside and outside China. The most prominent members of this group are: „ Anhui Jianghuai – already a successful commercial vehicle maker, Anhui Jianghuai have added a 150,000 car plant to their Hefei facilities. A Hyundaiderived SUV is the first production model with plans for three passenger cars to follow in 2006. The company has taken the unusual decision to develop its own vehicle platforms and styles from the outset, working with a number of European design engineers. They have also opened a small styling office in Turin. „ Brilliance China – Brilliance’s early reputation as a good partner for foreign investors was tarnished by alleged financial irregularities, disappointing sales of its Zhonghua saloon and falling profitability in its Jinbei light commercial vehicle operation. However, the company has strong backing from the Liaoning provincial government, remains a leading van producer and is now BMW’s joint venture partner for local production of the 3- and 5-series saloons. Brilliance’s decision to market the Zhonghua in Europe at a rock-bottom price, is perhaps more an indication of poor domestic sales than viable international ambitions. „ BYD Auto – originally a battery manufacturer, BYD has developed a range of passenger cars, including the Flyer minicar and F3/F6 saloons. However, automotive plans may be curtailed by falling profitability in the parent company’s core business. „ Great Wall Motors – the Hebeibased pick-up manufacturer

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used finance from a stock flotation in Hong Kong to finance the development of the Safe and Hover SUVs, which superficially resemble (and significantly undercut) well-known Japanese models. They are reportedly discussing local assembly of these SUVs with Russia’s SOK and Avtotor Groups. In the meantime, they have plans to develop a family of up to eight passenger cars. „ Harbin Hafei Motor Co – wholly owned by Harbin Aircraft Industry Group, the northernmost of China’s vehicle producers has achieved annual sales of around 50,000 for its budget Sai Ma and Lobo models. With the introduction in 2005 of the Saibao, featuring European styling and engineering, Harbin Hafei are targeting a new market segment and greater product sophistication. „ Jiangling Motors – the Nanchangbased manufacturer created a stir when its Landwind SUV became the first Chinese vehicle to be sold in the European market. However, the vehicle does not have full EU type approval and is only imported under a scheme designed for low volume producers. With unresolved questions about safety performance and emissions the Landwind is unlikely to sell heavily and may merely reinforce the perception that Chinese vehicles cannot currently meet international standards.

Other potential newcomers China’s explosive automotive growth has also attracted the attention of some unlikely foreign investors. The Iranian manufacturer, Iran Khodro,

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exhibited at the 2005 Auto Show in Shanghai and has announced a joint venture with the Youngman Automobile Group to produce the Samand saloon in 2006. Malaysia’s national carmaker, Proton, is reportedly in discussions with potential Chinese partners and Taiwan-based Yulon Motor Co, who, along with Nissan and Dongfeng, took a stake in Aeolus Motors, is seeking to introduce Taiwan-developed utility models to China. However, as all the major international vehicle manufacturers battle for market share in China and the ambitious indigenous manufacturers continue to expand their model ranges and sales, it seems unlikely that that there will also be room for these minor players to carve out a successful business niche.

A tangled web of alliances The cross-relationships between Chinese and foreign passenger car auto-makers are, to say the least, complicated and Figure 2.1 A tangled web of alliances and Figure 2 Shareholdings of foreign vehicle manufacturers in Chinese vehicle manufacturers attempt to summarize and clarify the multiple investments and alliances described in this chapter.

Future trends The further expansion of China’s domestic car market will be largely fuelled by a continuing influx of new buyers. As yet, there are no indications that the government is seeking to restrain private vehicle use and ownership. (Indeed, they have recently sought to terminate Shanghai’s scheme restrictively to auction local licence plates.) With the major manufacturers ready to redress any indications of falling demand through

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EUROPEANS Volkswagen

CHINESE First Auto Works (FAW)

JAPANESE Toyota

PSA Peugeot Citroen

Dongfeng Motor Corp (DMC)

Honda

Daimler Crysler

Shanghai Auto Industry Corp (SAIC)

Nissan

First Auto

Beijing Auto Industry Corp (BAIC)

Mitsubishi

BMW

ChangAn Automobile Co

Suzuki

Renault (see Nissan)

Guangzhou Auto Industry Corp (GAIC)

Mazda

Souest (Fujian) Motor Corp AMERICANS GM Ford

Tianjin Auto Industry Corp (TAIC)

KOREANS Hyundai

Nanjing Auto Brilliance China Chery Automobile Co Geely Automotive Holding

price-cutting campaigns and with automotive credit finance schemes still in their infancy, it seems probable that the market will continue to grow at between 10–20 per cent over the next five years. However, growth will be concentrated in the small and economy car sectors and, as a result, profits will not follow that same upward curve. At the same time, the continuing fragmentation of the market and rising consumer expectations will reduce the production volumes and cycles for individual models. This will present an advantage to those players who can manufacture profitably at lower model volumes (around 40,000 units per annum) and who can offer regular additions and facelifts to their model ranges. Car manufacturers will have to decide whether they seek to serve all segments of China’s increasingly diverse market, or whether they will concentrate on chosen niches. If they

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opt for the latter course, they will need to carefully differentiate underlying long-term growth trends from the volatile fluctuations in monthly figures that currently characterize Chinese automotive statistics. The penetration of Chinese-built cars into international markets may prove to be a slower process than currently predicted. The leading Chinese manufacturers themselves appear to be in less of a hurry to tackle the major targets of Europe and the United States than their potential agents in those territories and they are certainly aware of the adverse affect of introducing low-quality vehicles into mature markets. Nor are the global vehicle manufacturers likely to rush into exporting finished vehicles from China (despite the example of Honda), unless they are driven in that direction by severe problems of overcapacity. The nature of their joint venture agreements means that they would have to hand a half-share in the

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A tangled web of alliances Japan Honda

Germany Guangzhou Honda Auto Co

VW

Dongfeng Honda Motor Co

Mazda

FAW Volkswagen Auto Co Shanghai Volkswagen Auto Co

Honda Automobile (China)

BMW

BMW Brilliance Auto Co

FAW Car Co

DCX

Beijing Benz Daimler Chrysler Auto Co

FAW Hainan Automobile Co

Beijing Jeep Corp Nissan/Renault

Dongfeng Motor Co

Zherngzhou Nissan Auto Co Suzuki Toyota

Chongqing ChangAn Suzuki

USA

Changhe Suzuki Auto Co

GM

Shanghai GM Automotive Co

Tianjin FAW Toyota Auto Co

SAIC-GM-Wuling Auto Co

Sichuan Toyota Motor Corp

Jinbei GM Auto Co

FAW Hulai Motor Co

SGM Dongyue Auto Co

FAW Fengyue Auto Co

Ford

ChangAn Automobile

Guangzhou Toyota Motor Co France PSA

South Korea Dongfeng Peugeot Citroen Auto

Hyundai/Kia Beijing Hyundai Motor Co Dongfeng Yueda Kia Auto Co

Italy Fiat

Nanjing Fiat Co

profit on any exported vehicle to their joint venture partner – a situation unique in the auto industry’s

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worldwide manufacturing and distribution patterns.

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3. Commercial vehicles Market trends

I

n the early 1990s, trucks accounted for 60 per cent of total vehicle production in China, buses represented a further 25 per cent and passenger cars struggled to reach 15 per cent. By 2002 the market had moved into equilibrium, with each sector accounting for approximately 33 per cent of the production total. Thereafter, car production has raced ahead to become the largest single sector. Whilst the growth trend in commercial vehicle manufacturing has been less spectacular, China nevertheless turned out more than 2.75 million commercial vehicle units in 2004. This was made up of 1.25 million buses (a rise of 6 per cent over the previous year, confirming China’s position as the top global bus market) and 1.51 million trucks, up almost 23 per cent on 2003. Figures for 2005 have been confused by the government’s decision to reclassify minivans from commercial vehicles to passenger cars, but over the first six months of the year, growth across the sector approached 10 per cent. The demand for commercial vehicles is solidly underpinned by economic expansion, including greater mobility of goods and human resources, and a rapidly growing transport infrastructure. There is also the ongoing opportunity for significant pockets of exponential growth, inspired, for example, by the need to upgrade public transport services in readiness for the Beijing Olympics.

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Price remains the major consideration for Chinese commercial vehicle purchasers and, as a result, profits per unit are much lower than for passenger cars. Consequently, the major international auto-makers have been much slower to invest in China’s commercial vehicle sector, and the majority of the industry and the models produced remain in domestic ownership. Cost considerations have also inhibited local development of the large power-units required by modern commercial vehicles. Although the 12-litre diesel engine appears on the list of ‘national key high-tech products’, domestic producers are largely absent from this segment of the market. The commercial vehicle sector has also attracted less attention and regulation from central government. This has encouraged a number of new Chinese entrants, from differing industrial backgrounds, to enter the market. Cost is also the reason why imports of commercial vehicles remain very low. For example, in 2004 around 15,000 units were imported, representing less than 1 per cent of the total Chinese market. This contrasts markedly with the car sector, where imports (mostly high value luxury saloons) took 5 per cent of total sales. The commercial vehicle figure is split approximately 2:1 between Japanese and European producers. American brands are largely absent from the Chinese market. The whole commercial vehicle industry has benefited from greatly

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increased mobility of both people and goods, and from the rapid expansion of China’s transport network. However, a clear distinction can be seen between the development of the bus/ coach and truck sectors. Customer demand for greater comfort and sophistication has driven an upgrading of products in the bus and coach sector, prompting a growth in foreign investment and joint venture partnerships. Trucks (a truck driver can be hired for a few dollars a day) remain mostly cheap and basic, and the market continues to be dominated by the two big domestic manufacturers – FAW (First Auto Works) and DMC (Dongfeng Motor Corporation).

Location/ownership of commercial vehicle builders Official statistics that do not draw a clear differentiation between companies producing complete vehicles, and those who build bodywork on to another manufacturer’s chassis, complicate the mapping of China’s commercial vehicle builders. Although there are a relatively small number of chassis makers, it is estimated that there may be up to 130 companies building bus bodies, and an astonishing 640 enterprises are recorded as constructors of ‘special purpose goods vehicles’ (of these, only 47 make in excess of 1,000 units per annum). Geographically, the industry is widely scattered. The provinces of Jilin, Liaoning, Hubei, Shannxi, Shandong, Hubei, Sichuan, Jiangsu, Anhui and Guizhou all host commercial vehicle manufacturing plants. Ownership patterns are also diverse, ranging from state-owned giants like FAW and DMC, through to provincially supported enterprises (Shenyang Jinbei, Anhui Jianghuai Auto Co) and private consortia and

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companies. Part ownership by provincial or municipal government can be a substantial benefit to a commercial vehicle builder as the local authorities can offer not only advantageous manufacturing conditions but also an endcustomer, through their control of local bus and truck fleets. Central government has traditionally paid less attention to the regulation of commercial vehicle production and sales than it has to passenger cars. Consequently, companies from outside the auto industry have found it comparatively easy to move into commercial vehicle building, usually by taking over an existing small manufacturer. Two examples of this trend are Chunlun, a leading domestic appliance maker, which has started producing light trucks in Jiangsu province, and its competitor Midea, which has announced plans to develop a new bus plant in Kunming, in Yunnan province. Foreign investment in China’s commercial vehicle industry has lagged behind the levels committed to passenger car joint ventures. There have been some notably lengthy negotiations; Volvo, for example, talked with China National Heavy Duty Truck Group for nine years before striking a deal. The traditional low cost of commercial vehicles in China, the reluctance of purchasers to pay for greater sophistication and the consequent small profit margins have all discouraged would-be investors. However, this pattern is now changing, driven principally by stricter emissions standards, improving infrastructure, greater mobility and a consumer demand for greater comfort. The major international players (Volvo, Mercedes Benz, MAN, Renault/Nissan, Mitsubishi, Hyundai, Hino and Iveco) are all pursuing closer relationships with Chinese partners. General Motors are also thought to be examining the possibility of

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forming a joint venture with a second Chinese partner (they make passenger cars with SAIC) to build commercial and agricultural vehicles.

The Chinese bus market Classifications and market segmentation The Chinese bus market is officially divided into four categories, whose specifications were changed in July 2002: 1. Large buses – over 9 m in length

(previously over 10 m). 2. Medium buses – 6–9 m in length

(previously 7–10 m). 3. Light buses – 3.5–6 m in length

(previously 3.5–7 m). 4. Minibuses – less than 3.5 m (un-

changed). Overall, the Chinese bus market grew by 7 per cent in 2005, with growth at the top end stimulated by substantial fleet orders from companies such as Beijing Bus Co and Shanghai Bashi. However, minibuses have traditionally held the largest market segment. Typically, they are simple, single-box vehicles, owned by private individuals or business groups, that are used for commercial hire. Their small (less than 1 litre) engines are often based on old Japanese technology and do not meet modern emission standards. As a result, they are increasingly confined to mediumand small-sized towns and to the countryside. In 2003, mini-vehicles still accounted for 57 per cent of Chinese bus production, but the market is no longer expanding. The fastest growing market sector is light buses. Production reached 443,000 in 2003 and continues to

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grow. The most successful models are based on long-established Japanese designs (European-derived models have generally been less successful, perhaps because of the Chinese reluctance to embrace diesel technology). Light buses are bought in large numbers by taxi firms, and also by individual companies who have a statutory duty to transport their employees to and from the workplace. Medium buses have traditionally been used both for inner city public transportation and for movement between urban centres. This sector is dominated by basic-quality products, that are often poorly maintained. In 2003 sales dropped sharply, partially because the SARS (severe acute respiratory syndrome) crisis caused a sharp fall in the demand for public transport. After a partial recovery the following year, sales fell again (by 7 per cent) in 2005 to a total of 67,000 units. Increasingly, longer journeys are becoming the preserve of larger and more sophisticated buses, which offer their passengers a greater degree of comfort. Large buses still only account for around 3 per cent of the total Chinese market, but sales are growing at over 15 per cent. It is in this sector that international activity is most evident, with a number of manufacturing joint ventures now in operation. Improved body styling and levels of equipment have boosted domestic sales and opened up the route to potential export sales.

Key players The production of minibuses is dominated by three companies: ChangAn Automotive (28 per cent market share), Harbin Hafei Automotive Co (23 per cent) and SAIC-GM Wuling Automotive (19 per cent). The location of these enterprises, in the mid-west, far north and far south of

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China, mirrors the popularity of these products in rural areas, where the demand will remain for cheap, basic vehicles. The three market leaders (who all have access to more modern technology) may eventually decide to concentrate increased efforts on higher value products, which offer better profit returns. But other companies who are undeterred by prices below $5,000 are prepared to enter the minivehicle market. Dongfeng Motors, who have launched their new Xiaoking model in partnership with motorcycle maker Yu’an Group, aim to sell 20,000 units per annum. In the light bus sector, Jinbei Auto Holdings, based in Shenyang and manufacturing a derivative of the Toyota Hiace model, have maintained their market leadership, with a share of around 17 per cent. However, their sales are declining and the company has resorted to an aggressive price-cutting campaign, which has markedly reduced overall profitability. Increasing competition comes from at least eight domestic companies whose products are mostly based on Japanese technology. It is notable that European-based models have struggled in this market segment. The Iveco Daily, manufactured in a longstanding joint venture with Nanjing Yuejin Auto Group, has continued to lose ground, local production of the Renault Trafic has been terminated and the Transit was temporarily withdrawn from the market whilst Ford brought in ChangAn Automobile (its passenger car partner) to take over commercial vehicle operations from Jiangling. It is in the medium and heavy bus sectors that the Chinese industry statistics are most confusing. Thus, Xiamen King Long United Automotive Industry Co is classified as a vehicle assembler rather than as a manufacturer and therefore does not appear in the official listings. In fact,

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the company, a four-way domestic partnership, is reckoned to be China’s largest producer, turning out 15,700 vehicles in 2003. This represents a ten-fold increase since 1999 and even if the projected growth in capacity to 150,000 can be regarded as optimistic, there is no doubting the company’s ambition. Already active in a number of overseas markets, they have announced short-term plans to export coaches to the United Kingdom. Their international technology partners include Cummins, MAN, ZF, Hino and Mitsubishi. Zhengzhou Yutong Coach Manufacturing Co reported production of 18,000 units in 2004. This private company has ambitious expansion plans, targeting a 25 per cent share of the domestic market and the acquisition of manufacturing sites throughout China. In 2003 a new joint venture was formed with MAN, called the Lion’s Bus Co, to manufacture up to 6,000 bus chassis a year. These units will be sold under three separate brands (MAN, Lion and Yutong) to different sectors of the market. Changzhou Bus Company claims a place among the top five medium/ heavy manufacturers with a basic product range targeted at smaller cities. Unusually, it also manufactures most of its own chassis. The company gained useful ‘free’ technology when its American joint venture partner, Flxible, went into liquidation. However, the recently-signed joint venture with Iveco, which was intended to produce a range of vehicles under the CBC-Iveco brand, ended in acrimony and law suits. A potentially powerful newcomer is Sunwin Bus, a 50/50 joint venture between Volvo Bus Corporation and SAIC (Shanghai Automotive Industry Corporation). Volvo already has another bus joint venture in Xian and SAIC has no previous experience in heavy commercial vehicles.

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However, the new venture does possess the significant advantage of a guaranteed major customer – the city of Shanghai, which has an immediate need for at least 1,000 new units a year. From this basis, the new partnership will be able to pursue sales in other municipalities, and determine whether the concept of combining a European chassis with Chinese bodywork will offer greater reliability and wider market appeal. GM has also become involved in the partnership, supplying hybrid drive systems through its Allison subsidiary. This partnership is just one of the steps taken by SAIC to develop a presence in the commercial vehicle sector. They have also concluded a new joint venture with Iveco, which has, in turn, taken a 67 per cent stake in Chongqing Hongyan Automobile Group, with ambitious plans to build up to 40,000 vehicles and 30,000 engines by the end of 2008. In contrast, the bus-making activities of FAW are less certain. It seems likely that their underutilized and loss-making plant in Wuhu will be taken over by local carmaker Chery, with backing from the Anhui provincial government. However, in Wuxi, FAW have produced prototype hybrid buses and are planning for annual production of 2,200 units. They have also invested in a new 50/50 joint venture in Chengdu with domestic partner Sichuan Chengdu Anda Special Purpose Vehicle Co. Another new partnership to enter the market is the three-way venture between Hunan Changfeng Industrial Group, Brazilian company Marcopolo and Japan’s Sojitz Corporation. The new enterprise will focus on medium and large buses, with a production target of 5,000 units by 2010. Joint ventures with foreign partners have not always succeeded in the heavy/medium segment of the market. Yaxing-Benz, formed in 1996

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between Yangzhou Motor Coach Manufacturing and Mercedes Benz, saw sales decline by 46 per cent from 1999 to 2003, at which point the provincial government sold the majority of its share-holding to the private GreenCool Group, an electronics manufacturer. In 2005, Changzhou Bus Co and Iveco very publicly split, with the Italian company alleging financial improprieties.

The Chinese truck market Classifications and market segmentation Around 80 per cent of China’s trucks are powered by diesel engines. This contrasts markedly with the bus sector, where 85 per cent of vehicles have gasoline engines, and is a further indication that diesel is regarded in China as a second-rate fuel. Trucks are also categorised under four headings, but based on vehicle weight rather than length : 1. Heavy trucks – over 14 t GW

(gross weight). 2. Medium trucks – 6–14 t GW. 3. Light trucks – 1.8–6 t GW. 4. Mini trucks – less than 1.8 t GW.

Across the four market segments bus and truck sales have followed roughly similar patterns. The majority of truck production is still in the mini- and light vehicle sectors, which together accounted for 81 per cent of the market in 2005. Sales of mini-trucks have been in gradual decline, although the rate has been slower than commentators had predicted, demonstrating the continuing importance of these vehicles in more rural areas. Meanwhile, the light truck sector, which includes the 5 tonne workhorse popular with

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Chinese businesses, continues to grow and now accounts for around 60 per cent of new registrations. Medium trucks have seen a continuation in the pattern of decline, which has been apparent (with only brief interruptions) since 1998. Their market share now hovers around 11 per cent. In contrast, heavy trucks have shown strong growth (up 74 per cent in the first part of 2005) and account for 24 per cent of the market. Further growth in the heavy truck sector is likely to be stimulated by the growth of China’s road network and more demanding emission standards. The upward trend has already increased activity by foreign investors.

Key players Production of heavy and medium trucks continues to be dominated by the two state-owned giants – FAW and DMC – who between them accounted for 55 per cent of new vehicles. However, this figure disguises a steady loss of market share in recent years. In contrast to their passenger car operations, the commercial vehicle divisions of both FAW and DMC have been slow to find foreign partners and to introduce new technologies. FAW, who plan new truck plants in Changchun and Hohhot, Inner Mongolia (the latter perhaps targeting the Russian market), have been in lengthy but unproductive negotiations with Japanese Mitsubishi and German Mercedes Benz and MAN. However, DMC’s new alliance with Renault/Nissan offers the Wuhan-based company excellent access to modern technology and commercial vehicles are a key part of the joint venture’s ambitious growth plans. Heavy vehicle producers who are already reaping the benefits of new foreign partnerships are CNHDTG (China National Heavy Duty Truck Group) and BAIC (Beijing Auto

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Industry Corporation). CNHDTG increased sales by 48 per cent in 2003, to almost 20,000 units. Most of these were sold under the ‘Huanghe Wangzi’ brand, based on MAN technology and fitted with Euro-2 compliant engines. The Jinan-based company has also struck a deal with Volvo Trucks after lengthy discussions and foresees the additional production of 20,000 Volvo units each year. Meanwhile, BAIC (through its Beiqi Futian subsidiary) has developed the new ‘Auman’ brand of heavy vehicle and stands to acquire more modern technology through its expanding partnership with DC. A new entrant into the Chinese market for large commercial vehicles is Hyundai. In partnership with JAC (Anhui Jianghuai Auto Co), the Korean auto-maker has declared an intention to introduce its full range of commercial vehicles to China, and is targeting combined truck and bus sales of 150,000 per annum. In mid-2005 Hyundai announced a second commercial vehicle joint venture, with Guangzhou Auto, which is due to start production during the course of 2007. Another recent arrival with ambitious plans is Renault/Nissan. Current sales levels are low (around 200 units per annum), but, in partnership with Dongfeng, the Franco-Japanese manufacturer will develop both Renault and the domestic Chenglong brands through a new plant in Guangxi Province and a nation-wide network of 30 new dealerships. Separately, Nissan has upped its holding in the joint venture with Dongfeng (from 25 per cent to 50 per cent). One recent failure in the heavy truck sector has been Jinan Volvo Company. With production down to only 10 per cent of the target figure, the Swedish truck maker is reportedly seeking a new alliance, possibly with Shaanxi Automotive.

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The booming light truck sector continues to be dominated by domestic Chinese manufacturers. BAIC has a 32 per cent share of the market and light trucks accounted for the majority of its total sales figure (531,000 units) in 2004. There are a further six companies (DMC, FAW, JAC, Jiangling Motors Group, Yuejin Motor Group and Qingling Motor Co) each producing around 30,000 units per annum. Predominantly, their models are based upon Japanese technology, although, in this sector too, Korean-based products are starting to appear. Great Wall Motors from Hebei Province is a recent arrival that continues to make steady inroads. However, within the light truck sector, increasing sales have not been matched by higher profits. Qingling Motor Co, for example, recorded a 50 per cent profit fall in 2004. In mini-trucks, the clear leaders are ChangAn Automotive and SAIC-GM Wuling Automotive, whose combined market share is close to 60 per cent. Both companies have access to modern technology and new engines through their partnerships with GM and Suzuki, and therefore seem likely to maintain their lead over established domestic rivals, who are struggling to achieve improved emissions standards. However, new competition may emerge from both DC’s alliance with Fujian Motors, (who will build the Sprinter and Viano models in Fuzhou) and from the domestic partnership, Anhui Changfeng Yangzi Motor Manufacturing (part of Anhui Province’s growing automotive cluster).

Emissions standards and alternatives Escalating levels of fuel consumption and increased pollution from vehicle emissions are key concerns for the

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central government. China’s passenger car sector is rapidly attaining international standards, and increasing government attention is now being paid to commercial vehicles. Euro 2 emission standards for all newly registered commercial vehicles over 3.5 tonnes gross weight were originally introduced in Beijing, Shanghai and other selected major cities during 2003 and were applied nationwide the following year. The major cities moved to Euro 3 during 2005, with the rest of the country due to follow by 2008. However, with limited vehicle testing facilities, enforcement is likely to be patchy. As a result, environmental legislation may be only partially effective in stimulating the modernization of China’s commercial vehicle fleet. In particular, in rural and remote parts of the country, cheap and unsophisticated vehicles will continue to take the major market share. The government also must seriously address the quality of fuel, particularly diesel. Currently, local diesel contains over 350 ppm (parts per million) of sulphur and although proposals are in place to reduce this to 50 ppm by 2010, that figure will still be five times the current European norm. Consequently, even modern power-units will struggle to meet the required emissions levels. Both government and industry are investigating a range of alternative fuels. CNG (compressed natural gas) is gaining popularity, particularly for the urban bus and taxi fleets in major cities. This trend is likely to accelerate once a new pipeline is completed connecting the eastern cities to the gas fields in the west of the country. In Beijing, electric buses (driven by both lead-acid and lithium batteries) are now operating as part of the city’s transport fleet. Additionally, three Mercedes Benz units, powered by Ballard hydrogen fuel cells, are

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going through a two-year evaluation programme.

Future developments The Chinese domestic market Countries with expanding economies normally require increasing numbers of commercial vehicles. China will be no exception, whilst growth in the passenger car market will fluctuate in response to private buyers’ priorities and purchasing power, Chinese commercial vehicle production and sales can be expected to forge ahead at a steady rate. The bus and coach market will receive additional impetus from municipal authorities upgrading their transport fleets ahead of major events like the Olympic Games and World Expo. Economic growth in China will continue to be unevenly distributed and the richer provinces will continue to move further ahead of the more rural and remote regions. The supply of commercial vehicles will need to cater for both ends of the wealth spectrum and it therefore seems likely that the fragmentation within in the industry will persist and indeed widen. In the medium term, the Chinese market will continue to support a large number of commercial vehicle builders supplying a diverse range of products. Central government’s policies will have some effect on the development of the commercial vehicle sector. In particular, legislation controlling emissions will drive up the level of engine technology. And, if China is to improve its poor road safety record, the government will also have to tackle to issues of badly maintained and loaded vehicles. The recent decision to reduce road tolls for heavy trucks by up to 30 per cent demonstrated the government’s preference for fewer, but

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larger, vehicles on China’s burgeoning motorway network. Currently, commercial vehicles in China have a legal life span of only eight years. Paradoxically, this regulation has impeded the improvement of production standards, making it difficult for manufacturers to justify higher prices on the grounds of greater reliability and a longer working life. Cost will remain the key factor for Chinese commercial vehicle buyers. It therefore seems probable that the most successful commercial vehicle makers will be those who can offer products specifically tailored to the demands of the local market whilst incorporating an appropriate element of global technology. A marketing strategy based on the introduction of the latest Western models (successfully pursued by the international carmakers) will be less likely to succeed in the commercial vehicle sector.

China as an exporter of commercial vehicles Commercial vehicles still make up the vast majority of China’s current auto exports. Most exports are cheap and unsophisticated models destined for markets in Africa, Asia and the Middle East. Technology limitations, particularly in meeting emission standards, have barred Chinese manufacturers from the more lucrative Western markets. However, that pattern is set to change. Chinese truck makers with access to Euro 2-compliant engines are now starting to target export markets in Europe and even North America. One example is Fushian Engineering Corporation (a minor player within China) who is currently testing a truck designed specifically for export. Chinese bus-makers are further advanced. Xiamen King Long, a company wholly owned by Chinese

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partners, has recently added Malta to its list of global export markets and has signed a joint venture agreement with JCBL of Chandrigarh to manufacture luxury coaches in India. Countries who find American and European commercial vehicles either too expensive or politically undesirable are turning to China as a neutral and economic supplier, whose products can still incorporate modern tech-

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nology. Thus, Zhengzhou Yutong Co and Anhui Ankal Automobile have won a contract from the Philippines to supply CNG-powered buses whose power unit is based upon American engine technology from Cummins/ Westport. Yutong has also secured long-term contracts to supply up to 5,000 buses (both complete vehicles and CKD kits) to Saipa Diesel in Iran, and a further 2,000 units to Cuba.

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4. Components Background

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he old automotive industry adage – ‘The cars are the stars; the components are just the bitpart players’ – neatly encapsulates the differing levels of recognition commonly afforded to components and to finished vehicles. Although components account for over 70 per cent of the cost and all of the functionality of a passenger car, they receive disproportionately little attention from drivers, media and government. Similarly data and analysis on the global component industry is distorted by the sheer diversity of vehicle parts and the fact that, for many manufacturers, automotive components form only one part of their total production output. The Chinese market is no exception to this rule. In any review of the component sector, it is also necessary to differentiate between parts which are supplied as OE (original equipment), ie form part of the vehicle when it is first built and parts destined for the ‘aftermarket’, ie for the repair and maintenance of the vehicle once it is on the road. Chinese manufacturers feed both these supply chains, but the patterns within the domestic and the export markets are somewhat different. It must also be recognized that globally the automotive component industry is experiencing major structural changes and challenges. Severe downward price pressure exerted by major customers, coupled with rising raw material costs has severely eroded

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profitability. At the same time, vehicle manufacturers are seeking to drastically reduce their supplier base, and are consolidating their purchasing with a limited number of ‘Tier 1’ suppliers, who have the resources to develop and manufacture complete vehicle systems (eg powertrains, cockpit units etc). Generally, the component sector has not yet devised a successful strategy to meet these challenges. The trend towards creating large, multi-product conglomerates, which emerged in the 1990s, has faltered with several large groupings (particularly in the United States) teetering on the brink of insolvency. It is against this uncertain background that the world’s component makers must develop their strategies for the Chinese market and face the new challenges which China presents.

The evolution of the automotive component industry in China Origins and Growth The central planning policies which created China’s original automotive state-owned enterprises – FAW (First Auto Works), DMC (Dongfeng Motor Corporation), SAIC (Shanghai Automobile Industry Corporation) – also laid down that each enterprise should have a vertically-integrated supply chain of smaller companies producing

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the complete range of required components. This perception of vehicle manufacturing as a hub for a whole network of factories encouraged provincial authorities to create and support local auto-making facilities, each backed by a network of subsidiary parts makers. However, for suppliers that were subsidised by local government and reliant upon guaranteed but small scale orders from their parent vehicle manufacturer there was little incentive to expand either their customer base and product range, or to produce efficiently and profitably. As a result, the early development of China’s component sector did not lay the foundations for the industry to quickly achieve worldquality standards. When the international vehicle manufacturers first came to China, they found that the vertically integrated supply chains of their joint venture partners were wholly unable to produce the components that they required. However, they were obliged by the central government to source a percentage (generally, at the outset, 40 per cent) of components locally. They addressed this problem by encouraging or coercing existing suppliers to set up manufacturing facilities in China. Generally, the component makers judged it prudent to comply with the wishes of their existing customers. Additionally, they saw the opportunity to gain a ‘first-mover’ advantage ahead of the expected development of the Chinese market and the potential to benefit from a low-cost manufacturing base. However, there were also significant problems. Firstly, the volumes were low by global standards, and the actual vehicle production levels often fell well short of the vehicle manufacturers predictions. Secondly, they were obliged to form joint ventures with existing suppliers of similar products to the Chinese partner. These

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often came with outdated facilities, bloated workforces and the risk of losing control of key technologies. The difficulties of achieving economies of scale in their manufacturing processes were compounded by the isolationist nature of the existing supply chains; to supply two-vehicle manufacturer joint ventures it was necessary to have separate partnerships with local companies within both supplier groups. Faced with these challenges, some early arrivals opted to minimise their investment in their Chinese operations. Others, perhaps more farsightedly, sought from the outset to build international-class operations, which could be integrated into their global production patterns and serve as an export base to overseas markets.

The component sector today The period 2001–2003 has been described as a ‘golden age’ for component manufacturers in China. The vast growth in vehicle sales stimulated a tremendous upsurge in demand, with substantial year-on-year growth. Coupled with a relaxation on the rules governing 100 per cent ownership by foreign companies (a requirement under the terms of Chinese accession to the WTO) the expanding market attracted a new wave of foreign investment, particularly from Japan and Korea. Companies already established in China were able to take advantage of the more relaxed regime to rationalize and upgrade existing operations. The level of technology incorporated in the range of components produced in China also rose significantly. Major systems, such as engines, automatic transmissions and climate control systems, began to be manufactured locally in substantial volumes. Many companies opened research and development centres alongside their manufacturing facilities.

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Just as the component sector was gearing up for a period of sustained growth, the comparative slow-down of 2004 starkly demonstrated the volatility of the Chinese market. Once again, parts makers found that their key vehicle manufacturer customers were not reaching their projected production targets in China. At the same time as their production and raw material costs were rising, they were required to service a more diverse model range with smaller production runs. For both overseas and domestic companies, increasing exports was one strategy to counteract a local shortfall – a key reason why the big international players have begun to integrate their Chinese operations more fully into their global supply systems. At first-tier supplier level the Chinese component sector now mirrors the global industry; virtually every significant parts manufacturer is operational in China. However, in the second and third tiers of the supply chain a different picture emerges, with far fewer overseas companies having the resources or the desire to establish a local presence. As a result, there is currently a skills and quality gap in this part of the Chinese component sector, which can cause problems, as well as additional costs, for the major suppliers in their quest to build complete modules and sub-assemblies in China. However, those indigenous manufacturers who can continue to raise their standards and eventually fill this gap will be well placed to win more business in international markets. Central government has demonstrated less inclination to intervene in the component sector than in the management of vehicle manufacturing enterprises. However, they have clearly signalled a wish to see the industry moving up the value chain and into the development and production of more sophisticated products. The

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Auto Policy document of June 2004 sets component manufacturers the goals of ‘supplying independent OEM’s … and entering the global purchasing system’. Specific support has also been offered to domestic steel producers and mould designers/ manufacturers to reach international standards.

Key statistics and trends There are no accurate statistics for the number of component manufacturers currently operating in China. The official estimate of around 8,500 is certainly too low. One recent report calculated a total of 1,200 foreigninvested joint ventures and WFOE’s (Wholly Foreign-Owned Enterprises) with over 70 per cent of the world’s leading parts makers now active in China. China’s share of global trade in automotive components is still modest. Exports in 2004 (at $7.3 billion) represented only 0.5 per cent of the total world market, and are a long way from the government’s highly ambitious target of $100 billion sales. Although China’s sixth largest component maker, ASIMCO, reported that overseas sales accounted for 30 per cent of their revenue, it is reckoned that barely 15 per cent of domestic manufacturers export more than onequarter of their output. Nevertheless, the volume of exports is increasing rapidly. Chinese shipments to the USA accounted for less than 5 per cent of America’s bill for component imports in 2004, but the value of that trade grew by a massive 45 per cent in the following six months. Both Ford and GM have committed themselves to a substantial increase in sourcing from China. By 2009, GM alone expects to buy Chinese-made components worth $4 billion for its global factories, in addition to the $6 billion

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that it will spend on locally produced parts for its Chinese assembly plants. These trade figures refer principally to product destined for OEM customers and certainly understate the value of Chinese products entering the aftermarkets in both America and Europe. Indeed, although the volume of trade is difficult to calculate, it is in aftermarket sales that Chinese producers are most visible on the international stage. Large Chinese pavilions are now to be found at all major international component and accessory exhibitions (420 separate Chinese companies exhibited at AAPEX 2005 in Las Vegas) and component suppliers who have attained adequate manufacturing standards in supplying to vehicle manufacturers within China are finding plenty of overseas purchasers of replacement parts. Conversely, within China, production for OE customers still dwarfs aftermarket sales. In 2004, non-OE sales, estimated at $3.2 billion, accounted for less than 10 per cent of total component production. In mature Western markets that figure is closer to 60 per cent. However, the Chinese aftermarket can be expected to grow swiftly as the national car parc expands, a used-car market develops and reliable national distribution chains are created. The volume of Chinese components incorporated in locally produced vehicles continues to rise. For wellestablished models, over 90 per cent of components are sourced locally. For more recent introductions, the percentage is naturally lower. New import regulations introduced in 2005 have prompted a rapid expansion in the local production of sophisticated systems, particularly transmissions and complete powertrains. Automotive air-conditioning production has also soared, reflecting the

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increased comfort levels expected by Chinese consumers.

The major international players The Europeans With VW dominating early vehicle production in China, it was natural that German component makers and other European suppliers to VW should be among the first entrants into the market. Companies like Robert Bosch, Freudenberg, GKN and Pilkington all established their first manufacturing ventures in the 1980s and early 1990s. For these first arrivals, the initial rewards must have seemed questionable, with modest production volumes for elderly models, and the difficulties of integrating with traditional local partners (a situation exacerbated by VW’s separate partnerships with FAW and SAIC). For suppliers supporting the joint ventures of PSA PeugeotCitroen, early results were even more discouraging – output at the Wuhan joint venture with DMC struggled to reach 50 per cent of predicted capacity levels and the venture in Guangzhou was abandoned without ever reaching the stage of commercial production. The early pioneers did not turn their backs on China, but preferred to await the expected upturn in vehicle demand. As an interim method of absorbing spare manufacturing capacity some companies sought to develop export business, particularly in the aftermarket where they did not risk harming their existing supply chains to the international vehicle manufacturers. The anticipated market boom came, later than expected, in 2002–2003. Coupled with the relaxation of regulations on joint ventures, it sparked a

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new wave of investment from the major component makers. Robert Bosch claim to have invested $660 million to date in their 26 Chinese ventures, and expect to double that total in the next two years. ZF, the German transmission and drivetrain specialists, now have 15 plants in China. Valeo, the leading component maker in France, opened their 10th China facility in late 2005. Many of these new investments came with a revised business plan, which envisages China-based operations now playing a role in the Tier 1 suppliers’ global manufacturing strategies. Valeo, for example intend to bring their full product range to China. Another French manufacturer, Raymond Group, expect to export 50 per cent of their Chinaproduced components to customers throughout the Asia-Pacific region. Thyssen Krupp, with major new plants opening in Dalian and Wuhan, anticipate that China will account for 10 per cent of their future global production. Alongside their manufacturing facilities, European component makers are also establishing local administrative, marketing and research functions, which will improve their ability to respond to market need. They are also seeking innovative partnerships with local companies to combine Western development and marketing expertise with the advantages of Chinese manufacturing. For example, brake manufacturer Haldex have concluded a deal with ASIMCO for the global development of a new compressor, under which the Chinese company provides the manufacturing capacity whilst the European partner supplies the technology and marketing skills.

The Americans The closing years of the 20th century brought a period of significant re-

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structuring among the leading US component suppliers. New business entities were created, as both Ford and GM spun off their in-house supply chains under the respective titles of Visteon and Delphi. At the same time, the vehicle manufacturers set out to drastically reduce the number of their direct suppliers. To match these new multi-product competitors, a wave of consolidation swept through the component industry, as companies sought to achieve the critical mass that they believed would secure their Tier 1 supplier status. Federal Mogul and TRW were notably aggressive in taking over other suppliers. As a result of these structural changes, the major US component groups in many cases ‘inherited’ Chinese operations set up by the companies that they had absorbed. TRW, for example became the owner of plants originally established by Lucas Varity. These facilities were widely scattered, produced a diverse range of parts and did not operate to a unified business plan. The task of uniting such operations under a common management and marketing strategy and achieving economies of scale is still ongoing. Delphi, who have invested $400 million in China since 1991, have 11 factories in China, engine manufacturer Cummins have 20 and Visteon’s new venture in Chongqing (with ChangAn) is claimed to be their 21st Chinese subsidiary. Visteon are one company who have made the decision to refocus their China business on specific vehicle modules (climate control, interiors and electronics). American companies have possibly moved faster than their European rivals to use China as an export base, particularly to serve their customers’ plants elsewhere in the Asia-Pacific region. Delphi plans to manufacture and supply over one million diesel common rail systems from China. American Axle Co chose to establish

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their new plant at Changsu specifically because of the location’s export potential. There has also been a trend to relocate Asia-Pacific regional headquarters to China and to open local research and development facilities.

The Japanese The traditionally close relationship between vehicle manufacturers and their component producers (the keiretsu partnership) has been sustained as Japanese companies developed their presence in China. As Toyota, Nissan and Honda have poured new investment into China, they have prompted a similar wave of expansion by their major suppliers. The Japanese have, of course, been operating in China for many years (Denso, for example have 17 local facilities), but the scale of their presence has magnified in the last five years and it is Japanese investment that has principally boosted the sector in that period. Because their market entry followed Chinese’s WTO accession, and the consequent removal of the requirement to form joint ventures with local partners, Japanese component manufacturers have been able to set up their new Chinese operations as WFOE, or at least to take a majority holding in any local partnership. In this way, they have been able to replicate the pattern of local production and supply with which they have supported the Japanese vehicle manufacturers in other markets. They have also been spared the laborious process of trying to bring together, under a single management structure, a scattered network of production facilities serving separate local clients. Whilst their initial investments have been large, they have generally been able to achieve immediate economies of scale and to instigate locally their proven production and quality standards.

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The Japanese component companies have focused their investments on the locations adjacent to the vehicle manufacturing bases of their customers. Thus, a regional cluster of Toyota suppliers (eg Denso, Pacific, Panasonic, Sanden and Tsuchiya) has grown up in Tianjin. However, the region that has benefited most from Japanese investment is Guangdong Province where Honda, Nissan and Toyota have all opened new plants themselves and brought in their respective suppliers. With three new engine plants due to come on stream by mid-2007, Guangdong will have the capacity to produce 1.1 million power units annually for the Japanese vehicle manufacturers. The strategy of establishing, from the outset, facilities to produce complete vehicle modules within China, such as engines and transmissions, has differentiated the Japanese approach from the more piecemeal arrival of European and US competitors. Major Japanese investment in local iron and steel production (Mitsui alone has partnerships with three top steelmakers) has significantly enhanced China’s ability to turn out automotivegrade steels.

The Koreans The comparatively late arrival of Korean component manufacturers in China was kick-started by Hyundai’s partnership with BAIC (Beijing Automotive Industry Corporation), signed in October 2002. BAIC’s local supply network was largely incapable of producing the range and quality of components that the new joint venture required, and Hyundai’s ambitious plans for a rapid production rampup depended on strong in-market support from their existing Korean suppliers. The Korean parts industry has responded vigorously to the opportunity

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to support their major customer in China and a network of new component factories has sprung up around Beijing. Mando (who expects to have 10 plants in China by 2010), POSCO, Shiyuan Co and Hyundai Mobis have all established major facilities. In the first six months of 2005 the value of component exports from Korea to China grew by 42 per cent to $1.24 billion, a statistic which suggests that there is still substantial scope for further Korean investments in local production within the Chinese market.

Others China is also attracting the attention of component suppliers from other developing countries. From the Chinese perspective, these companies form interesting alternative partners to the established multinationals. Bharat Forge and Mittal Group are two large Indian conglomerates that have recently concluded agreements in China as part of their strategies for global growth. Mittal have supplemented their purchases of a controlling interest in a Hunan-based steel producer by opening a local metallurgical research institute. Foreign companies that specialise in niche automotive products are also finding new opportunities in China. Westport, the Canadian manufacturer of CNG engines, has signed a development agreement with Weichai Power, no doubt encouraged by the local availability of natural gas fuel. Suppliers of electronic components (previously based in Singapore) are exploring new alliances in China.

The major Chinese players The state-owned conglomerates that control the diverse supply chains of the ‘Big Three’ auto-makers (espe-

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cially FAWER from First Auto Works and SAC from Shanghai Automotive Industry Corporation) are still the largest indigenous Chinese component manufacturers. But most of the impetus for growth amongst the domestic producers is coming from more recent arrivals. Some of the new players have themselves grown from old state-owned companies. ASIMCO, reported to be the sixth largest component producer in China, emerged from a scattered group of Chinese factories originally brought together by American investors. ASIMCO have kept their manufacturing costs low by operating away from the affluent Eastern seaboard, and now claim annual revenues of $430 million. On a smaller scale, some entrepreneurial and ambitious managers have bought out their previously state-owned factories to set up private businesses. One of the most successful component manufacturers in China is privately owned Wanxiang, set up in the early 1980s by Lu Guanqiu and a group of friends in Zhejiang Province. From a single plant manufacturing universal joints the enterprise has grown into a company that supplied an estimated $2.5 billion of diverse components in 2004. A sales network covering 50 overseas markets and the acquisition of 18 American and European parts manufacturers demonstrates international ambitions. Within China, Wanxiang are seeking to move into modular sub-assemblies and the purchase of a 4 per cent stake in vehicle manufacturer GAIC (Guangzhou Auto Industry Group) appears to be a calculated move to break into the supply chain of GAIC’s Japanese partners. Interior fitment maker CAIP (Changsu Automotive Trim Co) is another Chinese manufacturer seeking to make the step up from supplying single components to full modules

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such as instrument consoles. To help them achieve that goal, the Chinese company has hired an American executive from Visteon as their new CEO. CAIP have a partnership with Germany’s Seeber Roechling. It is interesting to note that the German company’s stated business target is to ‘produce for the China market’, but CAIP owner Luo Xiaochun has set a goal of 60 per cent export by 2010.

Future developments Despite the lack of attention commonly afforded to it, the component industry has played a crucial part in China’s automotive growth, both in terms of inward investments and export orders. It is also the sector where domestic Chinese companies can most quickly develop their products and capabilities at the same time as challenging global markets. With political, economic and logistical pressures all encouraging the localization of production of more sophisticated components and modules there is the opportunity for substantial future growth. Today, China has a huge range of component manufacturers, ranging from large state-owned conglomerates to small local producers, from world-class facilities to antiquated, low-quality factories. It has also attracted investment and engagement from most of the world’s top suppliers. However, as China becomes more integrated into the international automotive market, its auto-parts industry will become more exposed to the universal pressures of demanding customers, increasing costs, and declining or non-existent profits. Currently the component sector has to face some key challenges. For the large international players, the major strategic task is to integrate their costly Chinese investments into

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their overall production patterns in a manner which solves, rather than exacerbates, the problems that they face globally. Achieving a balance between production for export and for the local market is a key step. Although most companies cite the development of an export base as one of their prime reasons for moving into China, comparatively few have realised the objective. Second and third tier companies must decide (quickly) whether China can truly offer the cost saving which they are under such pressure to achieve or whether the risks and demand on their resources inherent in a Chinese investment are too great. If they decide to stand back from China, they must then devise a strategy to meet increased Chinese competition within their own markets. For the indigenous Chinese producers, the challenge is to move up the value chain from suppliers of simple, low-cost components to producers of sophisticated systems and modules. Automotive electronics, which can now account for up to 40 per cent of the total value of a car, will be a key sector, where there are already signs of China’s increasing importance. GM has recently relocated its global electronics-purchasing unit from Michigan to Shanghai. The establishment of effective distribution chains will be another challenge for Chinese producers seeking to grow their international customer base. The Chinese Government faces the self-imposed objective of encouraging consolidation and rationalization within the sector, in order to create the internationally competitive groupings that can drive towards its target of 40 per cent export sales by 2010. Whilst many old and uncompetitive state-owned factories have closed, there is an even greater influx of new entrants into the component industry, leading to ever-increasing (and ultimately unsustainable) price

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competition. The government also has to recognise that, with nearly all the major international players already present in China, the levels of automotive FDI are likely to decrease. To attract fresh investments from second and third tier suppliers, companies will require a simpler and more supportive framework of business regulation. These struggles will take place against a background of financial uncertainty that globally overshadows the whole component sector. As yet, there have been no high-profile withdrawals from the Chinese automotive market (as there have been in other

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industrial sectors) and the everincreasing figures for production and investment mask an underlying lack of profitability. But there will certainly be casualties. One recently debated scenario foresaw a 20 per cent failure rate for component makers in China. The companies most likely to succeed in the longer term are those that can combine a clear understanding of how to derive maximum advantage for local manufacturing, with the production of more sophisticated and higher value components and can effectively market and distribute those products to customers both in China and in other global markets.

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5. Business climate

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s China’s automotive market has evolved and diversified, a similar revolution has taken place in the structure, business models and practices of the whole industry. The skill-sets, experience and objectives of executives within the industry have also changed dramatically. In the booming market of the early 21st century there was sufficient growth to sustain all the leading players. But, as the competition and price pressures increase, the successful companies will be those who not only offer the right product range but also create an efficient business structure attuned to China’s unique requirements.

The structure of automotive businesses The traditional partnership approach Early entrants into the Chinese market were obliged to form joint ventures with existing Chinese companies. Under the principles of the centrally planned economy, the government maintained strict control over the licences to build cars and international vehicle manufacturers who wished to produce in China were directed into a partnership with one of the state-owned ‘Big Three’ or ‘Smaller Five’ Chinese auto-makers. The foreign share in these partnerships was capped at 50 per cent. Component suppliers who came to China

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to support their international customers were expected to partner with a producer of similar products within the vertically integrated supply chains of the Chinese vehicle manufacturers. These enforced arrangements produced some uneasy alliances; ‘same bed, different dreams’, in the words of an old Chinese proverb. Foreign investors viewed their Chinese partners with suspicion. Their key contributions of land, labour and local influence often came with unpalatable extras, such as phantom workers and huge social security liabilities. They could not offer effective national sales and distribution networks. And there was the ever-present, and not unfounded, fear of losing key technology to a potential future rival. From the Chinese perspective, the foreign automakers were reluctant to introduce modern products and technologies, and regarded China as a convenient second market for outdated models. In the component sector, new arrivals found that if they wanted to sell to two local vehicle manufacturers, they had to form separate partnerships with existing vendors within each supply chain. They could not supply multiple customers from a single source. As a result, it proved difficult to achieve economies of scale and their early ventures into China remained fragmented and without any overall national plan.

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The new deals The traditional industrial landscape is now changing under the influence of several key factors: a softening in government attitude, the requirements of increasingly demanding customers and companies’ ingenuity in bypassing the regulatory barriers. The 50 per cent limit on foreign ownership of vehicle manufacturing joint ventures remains in place, but the government now permits both overseas and Chinese vehicle manufacturers to form separate alliances with two partners. It is an opportunity that both foreign and domestic companies have seized with alacrity, although their enthusiasm is a clear illustration of continuing unease within partnerships and companies’ consequent desire to spread their risks. In the component sector, limitations on the percentage of foreign ownership have been scrapped. This has led to a trend for foreign manufacturers to set up 100 per cent WFOEs (Wholly Foreign-Owned Enterprises) to buy out local partners in existing joint ventures and to seek to rationalize their Chinese operations into a unified corporate structure under a national or regional head office. Another emerging pattern is the three-way joint venture, where two overseas companies (perhaps rivals in other markets) will join with a single Chinese partner. Consumer demand for the latest models and modern technology has increasingly driven reluctant partners to bring their latest offering to China. Once Honda and General Motors had led the way, other vehicle manufacturers were obliged to follow. Recently, Hyundai has won a significant market share by offering modern, well-equipped cars, and Toyota (traditionally not noted for sharing either ownership or technology with outside partners) is offering a full-model range in its assault upon China.

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Some of the global players have managed to take the dominant role in their nominally equal-joint-venture partnerships. Honda achieved it in Guangzhou, assuming the mantle of a ‘white knight’ when taking over the failed Peugeot venture. In Shenyang, BMW have recruited a new workforce, 70 per cent of who are university educated and below the age of 25, rather than take on the existing employees of their partner, Brilliance China. Recently, Honda achieved another notable first, obtaining official permission to take a majority 65 per cent holding in their new joint venture, which will manufacture vehicles exclusively for export. Shipments to Europe commenced in June 2005, but there still remains an intriguing gap between the predicted export levels and the production capacity of the plant. Meanwhile, ambitious domestic Chinese companies, who perceive good business opportunities and healthy profit margins, have muscled their way into the automotive sector, a trend that directly contradicts the government’s stated policy of consolidating auto manufacturing in the hands of the major joint ventures. These new entrants have used a variety of tactics, including collusion with local municipal authorities and buying up small, bankrupt joint ventures to circumvent their lack of vehicle-building licences. They have also not felt the need to seek overseas joint-venture partners, preferring to buy in (or otherwise acquire) foreign expertise when they needed it. As a result, neither the global auto-makers nor the Chinese Government have direct influence over the business strategies and future plans of these newcomers. Nevertheless, the central government has chosen a pragmatic approach to this new phenomenon, giving tacit support to the most successful among the new arrivals.

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Chinese business leaders The traditional manager The leaders of the state-owned companies, with whom the early foreign investors were partnered, were products of the isolationist communist era. Generally they rose from an engineering or statistical background, or they owed their position to political appointment. They were used to working within a centrally planned, supply-driven economy where competitive pressures, consumer demands and effective marketing were largely unknown. Coming from this background, it is unsurprising that local Chinese managers failed to gel with their counterparts from the overseas partners or that they provided little momentum for the automotive market to grow. Whilst traditional management styles can still be found in the upper echelons of companies based upon the old state-owned enterprises, a new breed of Chinese manager is rapidly populating senior positions within the automotive industry.

The new executive Over 350,000 engineers now graduate annually from China’s colleges and universities. Many of these continue their studies overseas, collecting a second degree from the American, Australian and British universities that compete vigorously for their custom. For Chinese parents, investment in their only child’s education is a top priority. For these graduates, their initial employment targets are large multinational companies who offer not only higher salary levels and the cachet of a ‘big name’ employer, but also the opportunity to acquire international business experience. China’s rapid

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economic expansion has created a great demand for English-speaking business graduates and there are plenty of opportunities for suitable qualified young Chinese executives to build up their expertise by frequent ‘job-hopping’, both within China and abroad. Thus, a new management class has emerged in China that understands not only local conditions and cultures but also international business standards and practices. With this dual perspective, and a range of skills not available to previous generations, the modern Chinese executives now have a positive advantage over their Western counterparts in handling multinational partnerships. Coupled with the rapid changes in the overall market, the evolution of a capable management class has presented a business advantage to those companies geared to taking decisions at a local level. Foreign investors, who have continued to manage their Chinese operations from afar and offer their local teams little autonomy, are now finding themselves out-manoeuvred by rivals with a more devolved management structure. Other employment routes are also opening up for this new breed of Chinese business person, as ambitious domestic companies are showing themselves willing (and able) to attract talented professionals with international managerial experience. Thus Chery’s recently recruited VicePresident of Quality and Manufacturing, Wen Tianzhong, came from Toyota, the acknowledged world leader in automotive manufacturing processes. Some Chinese companies have even successfully wooed top Western managers; interior module manufacturer CAIP, based in Jiangsu Province, recently appointed an American executive from Visteon as their new CEO.

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Key Chinese business attitudes Despite the twin influences of Confucius and communism, the Chinese approach to business (and to career development) is now highly competitive and based on the pragmatic view that ‘material gain and personal advancement is good’. It forms a marked contrast to the Japanese quest for consensus and conformity. Price is the key competitive weapon in Chinese business culture. Companies will ruthlessly imitate rivals’ products/services and undercut their prices to win market share, often setting aside quality, safety and environmental considerations to drive down their production costs. Even profitability can sometimes be sacrificed to boost the level of sales. Against this background of downward price pressures, it is inevitable that many Chinese enterprises will be financially unstable and unable to sustain long-term business plans. Successful companies tend to be those able to react faster than their competitors to new market opportunities, which, in turn, demands effective management and decisionmaking processes at a local level. The competitive Chinese business spirit also encourages both companies and individuals to aim for the top spot. This sits uneasily with the concept of joint venture partnership (the original and approved model for the automotive industry). It is noticeable that whilst official policy produced a large number of joint ventures between overseas and Chinese companies, partnerships between domestic automakers are rare, despite the government’s wish to see consolidation within the industry. As profitability in the sector declines, many uneasy partnerships will be increasingly strained. Personal and corporate ambition also fuels many of the speculative production and sales targets publicly

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proclaimed in China (although, in private, Chinese business leaders are inclined to set more modest growth goals). Adding to the competitive pressures, China’s increasing army of vehicle buyers are proving to be demanding customers themselves, who seek not only keenly priced but also well-equipped vehicles. Nor are they shy to publicly display their displeasure when purchases fail to live up to their expectations. Both DaimlerChrysler and BMW have experienced the wrath of disgruntled customers who took drastic and widely reported action against vehicles that failed to live up to expectations.

The role of government At the highest level, the Central Chinese Government has indicated a general desire to play a less intrusive and constrictive role in industrial planning. In the automotive sector, this will be based upon setting ‘strategic guidance’ rather than numerical targets. However, by continuing to designate the sector as a ‘pillar industry’ the government has also demonstrated that it regards vehicle making as strategically important to the Chinese economy and that, where deemed necessary, it will continue to intervene. One area of concern is China’s growing dependence on imported oil. In the near future, automotive demand is projected to account for 57 per cent of national petroleum demand. So governmental action (through taxation and other measures if necessary) can be expected to further promote the sales of smaller, fuel-efficient cars. The level of foreign direct investment is another key issue for China’s rulers; if there are signs that, in an increasingly competitive market, investment levels are falling or more money is

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going to developing rivals like India, swift intervention can again be expected. There is other evidence that the government will take action when it believes that the industry is headed in the wrong direction. In 2004 the potentially embarrassing spectacle of two competing national auto-shows being staged simultaneously in Beijing was promptly averted when the government brought the rival organisers into line. Below the national government, the element of competition re-emerges, as municipal and provincial authorities vie with one another to boost their regional economies with automotive investment and to support their established local companies. Provincial government backing can be a crucial factor in successfully establishing a new manufacturing venture, but it can also inhibit subsequent attempts to expand the business on a national scale. Some component makers have discovered that local protectionism, as much as logistical problems, can disrupt their attempts to supply customers in other provinces. When the chairman

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of Shenyang-based China Brilliance was ousted for alleged financial improprieties, it was believed by some industry analysts that his real mistake had been to favour relocating part of the company’s production to Ningbo. At all levels of government China still supports, as it did in imperial times, a huge and ponderous bureaucracy, whose regulations and requirements must be observed, or at least acknowledged. Business registration and reporting processes have not been streamlined to match China’s rapid commercial growth. There also exists a lack of communication between individual government agencies and ministries, which can descend into open rivalry and competition to control key projects. Therefore, whatever the intentions of the national leaders, it seems certain that companies operating in China will regularly encounter official intervention at one level or another. In handling these issues, an effective local management team, able to identify and interface with the relevant decision-makers, will remain crucial to business success.

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6. China’s influence on the global automotive industry The great awakening Having been taken largely unawares by the automotive explosion in 2002– 2003, industry commentators and analysts now give China a very high priority. The volume of investment pumped in by the global auto-makers is closely mirrored by the columninches devoted to trends in the Chinese market. However, much of the attention remains focused on either the growth of China’s domestic market or the likely effect of rising Chinese export volumes (both whole vehicles and components). Whilst these are certainly important issues for the global industry, there are other significant ways in which China’s growth threatens to change the international automotive scene. Chinese companies are becoming not only more influential but also more skilful and diverse in developing their worldwide business.

Key automotive trade statistics The bare statistics show that in 2005, China became a net exporter of vehicles for the first time. Total vehicle exports surged by 250 per cent to 172,600, whilst the import figures declined to just over 160,000 units. However, the bulk of export sales is still made up of low-priced CVs destined for developing markets in Africa and

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the Middle East. Passenger cars accounted for just 33,000 of the total and, in value terms, China’s vehicle imports still outstrip exports by a ratio of 3:1. In the component sector, which accounts for the majority of Chinese trade in automotive products, a somewhat different picture emerges. Component shipments accounted for an estimated 78 per cent of China’s $8.5 billion automotive exports in 2005, an overall rise of over 60 per cent. At the same time, despite the continued growth in vehicle production, the value of imported components fell. In particular, the importation of engines and powertrains showed a marked decline as new regulations designed to encourage more local production came into force. Whilst China’s share of the total world trade in automotive products remains modest, (much of what it currently produces goes either to developing countries or to aftermarket sales in mature economies) export sales are rising inexorably and China is clearly destined to achieve a considerable automotive trade surplus.

The global industry’s perspective on China Only five years ago China remained very much on the fringe of the global strategies pursued by the major

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automotive players. The country was perceived as offering good profit margins on aging products. At the same time, there was the opportunity for low-cost manufacturing, principally to serve the local market. Now, the impacts of China’s explosive automotive growth are driving those companies to integrate their Chinese products and facilities into their broader strategic plans. Within China, a combination of government regulation and consumer expectations is sustaining the need to produce and market modern vehicles fitted with up-to-date technologies. At the same time, the market is fragmenting, with the result that manufacturers cannot expect to sell large volumes of a single model. It has been estimated that average annual production per model has declined from 75,000 units in 2000 to less than 40,000 by 2005. For the major vehicle producers who are committed to increasing their production capacity in China, this is a worrying trend. Only a limited number of models can be assembled efficiently at one plant (a problem that vehicle manufacturers generally handle by having different sites designated as their global production base for particular models). With China simultaneously taking a larger share of their manufacturing capacity and demanding an ever wider product range, they have to start figuring their Chinese plants into their global production plans. Increasing cost pressures are also compelling manufacturers to refine their perceptions of manufacturing in China. When vehicles could be sold at healthy profit margins, there was little pressure to streamline supply chains and eliminate inefficiency and expense. Now margins are much tighter and suppliers, whose Chinese facilities previously produced mainly for the local market, are obliged to revise their business structures and planning

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so that their China operations become an integrated part of their global supply systems. To achieve that objective they have to add world-class quality standards and improved logistics to the existing benefits of low-cost labour. Some international players have been more successful and dynamic than their competitors in integrating China into their global strategies. General Motors have, from the outset, seen China as a key route to boosting their sales and profile in the AsiaPacific region. Their well-resourced PATAC research centre in Shanghai is already a key player in their product development programmes, and much work has been undertaken to adapt and develop models specifically for the Chinese market. The Aveo (a small car designed for sale in many markets) was given its world premiere at the 2005 Auto China Show. Honda is already exporting compact cars from China to Europe, and Toyota, a late entrant to China, is determinedly demonstrating a willingness to introduce the latest technologies. By contrast, European vehicle manufacturers have been slow to adjust their perceptions of China. For third-world and developing countries, China’s economic growth has offered the prospect of a new ally in world affairs, as well as a new source of technology and investment. This trend is clearly visible in the automotive sector. Iran, for example, whose potentially large automotive industry has been constrained by isolation from the United States and uncertain political relations with Europe, sees investment from Chinese companies like Chery as a way to obtain both knowhow and funding. In Russia, underdeveloped national auto-makers are looking to potential Chinese partners as an alternative to the recognized multinationals.

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China’s perspective on the global industry In scarcely 20 years, China has been transformed from a closed society to a global economic powerhouse. As part of that process, significant regional differences in economic growth rates, individual wealth and international exposure have been created. It is, therefore, no surprise to find divergent attitudes and approaches to international business development within the Chinese automotive industry.

Make it and sell it Local manufacturing has underpinned China’s economic growth and the Chinese are understandably proud of their new reputation as the ‘manufacturing workplace of the world’. With the government committed to sustaining and expanding a strong manufacturing sector and plenty of foreign investors ready to transfer production facilities to China, the business plans of Chinese automotive companies naturally lean to local production. Utilizing a favourable combination of low labour costs, undemanding and ineffective financial institutions and a sometimes cavalier attitude to copying and intellectual property rights, Chinese manufacturers have, in the past, competed principally on price. It has been a successful formula and there is no doubt that the value of China’s automotive exports will continue to climb. However, in an industry sensitive to local consumer tastes and heavily reliant on ‘just-in-time’ supply chains, a strategy of exporting from a low-cost production base has limitations. The experience of both Japanese and Korean auto-makers demonstrates the importance of pro-

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ducing in, or close to, the intended market. At the same time, Chinese manufacturers are finding themselves obliged to upgrade (at significant cost) their production skills and technologies so that they can meet the demands of both local legislation and international quality standards.

Buying the assets A logical way for an ambitious Chinese company to move forward is to purchase assets and equipment from overseas. Chery, currently the fastestgrowing domestic vehicle manufacturer, started out with an assembly plant acquired from SEAT in Spain and an engine production line purchased from Ford in the United Kingdom. Nanjing Auto apparently chose a similar strategy when they paid £56 million for the assets of MG Rover (see below). The stagnation of sales in the world’s mature markets and their depressed profit margins has caused serious financial problems for many automotive companies. Trading conditions have proved particularly difficult for first-tier component suppliers, with a number of large American corporations forced to seek Chapter 11 protection from bankruptcy. Ford and GM have been obliged to provide renewed support to Visteon and Delphi (the component divisions which they had ‘spun off’ several years ago). In this depressed climate there is no shortage of automotive assets, divisions or whole companies available for purchase. Increasingly, the potential buyers are coming from developing markets like India and China. Lifan (the Chongqing-based motorcycle maker who is now developing a passenger car range) is reported to be bidding to buy the Brazilian Tritec engine plant, currently jointly owned by

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DaimlerChrysler and BMW. Component manufacturer Wanxiang Group is considering the purchase of some US-based Visteon subsidiaries. As more automotive assets around the world come under Chinese control, it will be interesting to see whether the new owners transfer production back to China or seek to develop their new acquisitions in their existing locations.

Prosperity through partnership From a Chinese perspective, the joint ventures, which characterized the early growth of the auto industry, have delivered products and profits, but not the free transfer of technology that the central government sought. Foreign partners are accused of limiting their cooperation to the production and marketing of vehicles, of which development has largely taken place outside China. Many local companies now recognize that they must invest, to acquire their own research and development and product development skills necessary, to compete on the global stage. One option is the outright purchase of overseas businesses. But this strategy is expensive and better suited to the acquisition of equipment and tangible assets than to gaining access to technical expertise and knowledgeable personnel. There is now an increasing trend for Chinese automotive manufacturers to engage internationally recognized design and engineering specialists to conduct specific projects on their behalf. This approach enables the Chinese partner to advance more rapidly and to take ownership of the technology at the end of the project. For the overseas design engineering companies, it opens up new business opportunities to compensate for a downturn in the number of contracts from their traditional customers. Many of these

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companies have now established permanent facilities in China. SAIC (Shanghai Automobile Industry Corporation) is an example of a major domestic producer who has adopted both the acquisition and the partnership approach to developing their own vehicle portfolio. In 2004 the company purchased SsangYong, the Korean SUV maker, outright. The following year it selectively bought some of the intellectual property rights of MG Rover and supplemented these by engaging Britain’s Ricardo to conduct a series of design and development programmes. Both deals form part of SAIC’s strategy to develop their own range of vehicles, independent of their existing joint ventures with VW and GM.

The MG Rover story The events surrounding the collapse of MG Rover and the subsequent tugof-war over its assets between Nanjing Auto and SAIC provide an instructive case-study of China’s evolving relationship with the international automotive industry. Following earlier failed attempts to partner with China Brilliance and India’s Tata Corporation, the British auto-maker had few remaining options when, in 2004, they entered into negotiations with SAIC. It was hoped these would result in the Chinese company investing sufficient money to finance the new product range that MG Rover urgently needed. Despite the gravity of their situation, the British company and supporting government officials appeared wholly confident that a deal would be struck and it came as a considerable shock to them when SAIC decided to turn down the proposed joint venture. In fact, the Chinese side had to deliver an uncharacteristically blunt statement before their decision was finally acknowledged by MG Rover and, shortly

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afterwards, the administrators were called in. In the bankruptcy negotiations both SAIC and the Nanjing Auto lodged bids with the administrators for the remaining MGR assets. There was some surprise when the much smaller company won the bidding contest, which gave them ownership of the MG brand and the Longbridge assembly lines. Subsequently, Nanjing Auto moved swiftly to transfer the key production equipment to China, whilst their promised plans to restart vehicle manufacturing in Birmingham remain shrouded in doubt. However, SAIC also did not come away emptyhanded. Having already purchased intellectual property rights at an earlier stage in the negotiations, they engaged a UK-based engineering consultancy to help them develop Rover-derived vehicles and engines for their own product range. Key exRover staff were recruited to support this process. This episode neatly highlights the differing approaches of the two Chinese companies. Nanjing Auto has chosen the ‘traditional’ Chinese model of acquiring assets cheaply, moving production to China and not offering a long-term business plan. SAIC have eschewed this route, preferring to work with an experienced technology partner towards the strategic goal of developing their own product range. Additionally, SAIC’s refusal to take on existing Rover liabilities presents an interesting irony for business advisers long used to cautioning Western customers about the hidden costs and commitments within Chinese joint ventures. It also demonstrates that Chinese automotive investors can take a cautious and professional approach to overseas acquisitions.

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China’s future position in the global automotive industry China’s position as a key player in the global automotive industry is no longer in doubt. The future development of both China’s domestic market, coupled with the likely international demand for the automotive products that it manufactures, now has the full attention of business leaders and commentators, around the world. However, much uncertainty remains around the speed and scale of China’s global growth. Questions posed, but not yet answered, include : „ Can China internationalize her auto industry in the way that Japan and Korea did? Or will internal rivalries prevent Chinese companies from growing to a viable global size? „ Can Chinese brands win international recognition? „ Will increasing automotive exports lead China into trade conflicts? It is an uncertainty apparently shared by the Chinese industry. A recent survey of automotive business leaders revealed an air of cautious optimism, characterized by the expectation that China might export 7–10 per cent of its total vehicle production by 2010 (though the figures for components were much higher at 50 per cent). This measured approach offers an interesting contrast to some of the more ambitious predictions being offered by overseas distributors clamouring to represent the Chinese manufacturers. For global automotive companies facing problems of over-capacity, declining profitability and market saturation, China’s dramatic growth has offered welcome opportunities for

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new sales, manufacturing locations and investments. The degree to which those opportunities are compromised by the threat of new competition

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within the world’s mature auto markets (which still account for 70 per cent of total vehicle sales) will be a crucial issue over the next five years.

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Other reports in the series The Automotive Industry in Emerging Markets: India’s Automotive Industry With vehicle sales static or declining in the established markets of North America, Western Europe and Japan, global automakers are looking at emerging markets in their quest for new customers, low-cost manufacturing and sustained profits. The first publication in this new series, focusing on the automotive battlegrounds of the twenty-first century, featured China. This second report explains how India’s awakening automotive industry is making an impact on the world stage and provides detailed authoritative analysis of the rapidly expanding passenger car, commercial vehicle and component sectors. Already the world’s second largest maker of two- and three-wheeled vehicles, India passed the symbolic production milestone of 1 million cars in 2004. In an economy now benefiting from market liberalisation and the steady growth of an urban middle class, that total is predicted to rise to 1.7 million units by 2010.

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But the automotive industry in India is already looking outwards. Major international players – both vehicle manufacturers and tier 1 component suppliers – have designated India a global production hub. And top Indian companies have embarked on their own programmes of global expansion and acquisition. With a young highly skilled workforce and its strong legal system, India has some attractive advantages. One top Japanese executive recently declared it a better investment target than China. This report analyses the future prospects for the automotive industry in India, and considers whether the Indian elephant has really built up enough momentum to challenge the high-flying Chinese dragon. Author: Mark Norcliffe; Series editor: Jonathan Reuvid Future titles in The Automotive Industry in Emerging Markets series will look at Eastern Europe, South East Asia and Latin America. To see a full list of current publications from GMB Publishing Ltd visit: www.globalmarketbriefings.com

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