BRIC Spotlight Report

Automobile Sector in China: On the Fast Track

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December 2009 The global financial crisis and the ensuing slowdown in the world economy have ironically turned into a blessing in disguise for the Chinese automobile sector. The Chinese vehicle market has recorded phenomenal growth since 2001, at an average pace of 21%. The recent surge in sales has been attributed to the favorable monetary and fiscal support by the government, which has recognized this vital sector as one of the ten pillar industries of the Chinese economy. Overtaking Japan in 2006 to become the world’s second largest country by vehicle sales, China’s automobile sector is poised to surpass the United States in 2009 to become the biggest vehicle market globally. The immense potential of Chinese consumer demand to offset weak sales in developed markets is also being realized by global auto majors, who have hastened to invest in the economy in the last few years. Vehicle sales in China have raced upwards by 42.4% in the first 11 months of this year to 12.23 million.The China Association of Automobile Manufacturers estimates full-year sales to top 13 million.

Fast Facts In January 2009, China became the world’s largest automobile market by vehicle sales. Passenger car sales have jumped 49.7%, while auto sales including commercial vehicle sales have climbed 42.4% in the first 11 months of 2009. Overall vehicle sales zoomed 96.4% in November 2009 alone. First time buyers constitute 70% of customers. Small car sales contributed to over 50% of total auto sales in the first half of 2009. Growth potential in the automobile sector is immense as the Chinese still own just 40 vehicles per 1000 persons, compared with more than 500 cars per 1000 people in developed nations. The market is highly fragmented, with more than 150 registered vehicle manufacturers, and about 2000 auto parts manufacturers. In 2008, the sale of the top ten automobile companies accounted for over 80% of total vehicle sales in the country. Seven out of the top ten producers have joint ventures with global auto majors.

Source: China Association of Automobile Manufacturers

Market Structure: The key growth drivers

Top ten Vehicle Manufacturers in China Rank Manufacturer JV Partner Sales (Units) Market Share 1 SAIC GM, VW 1,720,650 19% 2 FAW VW, Toyota, Mazda 1,532,923 17% 3 Dongfeng PSA, Nissan, Honda 1,320,606 14% 4 Changan Auto Ford, Mazda, Suzuki 861,377 8% 5 Beijing Auto Hyundai, DaimlerChrysler 771,639 8% 6 Guangzhou Auto Honda, Toyota, Isuzu 525,979 5% 7 Chery -- 356,093 4% 8 Brilliance BMW, Toyota 285,242 3% 9 Hafei Suzuki 223,902 3% 10 Geely -- 21,823 2% Others 1,560,000 17%

The auto sector in China remains highly fragmented with 150 registered vehicle manufacturers and the top ten manufacturers appropriating over three quarters of the market share. Breaking down production according to vehicle type, sedans grab a 54% lion’s share of the total, followed by commercial vehicles at 28%. Micro-vans, sports-utility vehicles (SUVs) and multi-purpose vehicles (MPVs) together account for the remaining 18% of Chinese automobile production. Characteristically, the sector is infused with a presence by foreign enterprises, who have become partners with their Chinese peers. These joint ventures dominate production in the passenger car segment, contributing to 73% of total production. However, domestic Chinese automobile makers have been performing well on the commercial vehicle front, where they contributed to almost 95% of production in 2008. In the sedan passenger car market, Chinese manufacturers occupied 26.6% of domestic production, while MPVs, SUVs and micro-vans constituted 53.5%, 50.5% and 48.6% of domestic production respectively.

Government Regulation: Powering China’s new growth engine

With the onset of the global economic crisis, the Chinese government adopted a proactive approach to stimulating investment and growth in the automobile sector. This thrust has been a critical factor in re-orienting the Chinese growth model towards domestic consumption; in the process, the economy’s export dependence has been moderated.

Two separate sets of measures have been devised to reshape and strengthen the sector:

Demand-side measures: These initiatives, introduced in January 2009, have aimed at boosting vehicle sales in the country. They included halving the purchase tax on smaller cars, providing subsidies to rural residents who exchanged old vehicles for new ones, and lowering the retail fuel prices. Supply-side measures: The second package, launched as the Automotive Industry Revitalization Plan in March 2009, focused on restructuring and strengthening the industry. The plan primarily consolidated the Chinese automobile space into a ‘top ten’ group organized into two distinct tiers. The government has already identified eight of these top ten players- Tier 1: Companies with an annual capacity of two million units, which would be encouraged to acquire smaller automotive companies in China: Shanghai Automotive Industrial Corp (SAIC) First Auto Works (FAW) Group Dongfeng Automobile Changan Automotive Tier 2: Companies with an annual capacity of one million units, which would drive regional consolidation: Beijing Automotive Industrial Corp (BAIC) Guangzhou Automotive Industrial Group (GAIG) Chery Automobile China Heavy Duty Truck Corp (CNHTC)

In addition, the government is also encouraging foreign acquisitions that would infuse advanced technology and knowhow into the Chinese automobile industry. Some recent examples are the potential sale of Ford’s Volvo brand, GM’s Hummer brand and Chrysler’s discontinued products. An important deal that materialized was Geely’s $58 million acquisition of Australian transmission manufacturer Drivetrain Systems International. The development of electric and hybrid vehicles, which currently constitute 5% of passenger vehicle sales, has been given a boost for research by government support.

In what can be viewed as a dominant driver for this sector, the government recently abolished the 25% tax imposed on some imported automotive parts in accordance with a World Trade Organization (WTO) decision. The policy, which was implemented in April 2005, slapped a 25% tax on imported parts if the number or value of imported parts used in an assembled vehicle exceeded the threshold limit of 60%. Currently, a standard 10% tax will remain on all imported auto parts below this threshold.

Also propelling the sector, over half of the Chinese government’s $586 billion dollar stimulus package has been directed towards infrastructure development and roads in particular. This will have a long-term positive effect, stimulating the domestic demand for automobiles.

Zooming in top gear

Undoubtedly, China’s automobile sector has made a significant impact on the global automotive landscape. Yet, while the sector has been successful in attracting foreign investments, it still faces the challenge of developing crucial technological expertise. While assembling cars and developing supply chains have thus far been the forte of domestic Chinese vehicle manufacturers, they have heavily relied on their foreign partners for key technologies.

The global financial crisis and the subsequent receding demand for automobiles in the developed world have led to major upheavals in the global auto industry. Many global auto companies have been inclined to hive off assets and businesses in a bid to trim costs. Seizing the opportunity now, the Chinese auto industry can hasten its ascent in the global automotive space by following an acquisition route, tapping opportunities through the purchase of foreign companies. The long-term development of this sector will depend on how well the highly-fragmented sector succeeds in consolidating and thereby reaping the benefits of economies of scale. While the path to globalization in the auto space is fraught with numerous challenges, the Chinese Dragon is bracing to tackle these speed bumps head-on.