The Chinese Car Market in the 21st Century
Since the inception of the Open Door Policy in 1978 by Deng Xiaoping, China has made great strides in the area of development as it announced its entry into the world market. During the reign of Mao Zedong this was not the case as China by then was practicing a self-sustaining policy. The shift to the Open Door Policy by Deng Xiaoping paved the way for the entry of foreign investments in China. Slowly but surely Chinese economy shaped up as firms for various parts of the world relocated its business to the country.
One of the sectors that benefited from this Open Door Policy is the Chinese car market. Multinational automobile manufacturers such as General Motors, Toyota, and Honda, along with local Chinese manufacturers such as Chery and BYD Auto have boosted market shares in the industry. Long ago, the dominant car market was either the United States or Europe, but the car manufacturers are shifting their focus towards China to gain volume of sales. The Chinese car industry is slowly positioning itself among the top automobile manufacturer in the world. The potential of China to become the industry hub of automobiles is being realized. The car industry is one of the fast developing markets in China, wherein foreign car manufacturers are taking notice. Over the years, production and sales of automobiles in China has improved.
This research paper will firstly discuss the potentials of the Chinese car market in the 21st century that aims to position a global share. Secondly, the discussions will cover China’s placement in the world’s car manufacturing sector of industry. And, thirdly the discussions will examine and point out the rationale behind the capabilities of China in the aspect of car manufacturing. On the other hand, the review of several literatures will be the method of research throughout this paper.
Brief History of the Chinese Car Market
Although the Shenyang Military Factory was already producing trucks in 1927, it was not until 1958 that the Dongfeng 71 (the first Chinese passenger car) was developed. Prior to 1949, China had not developed any particular vehicle. There were, however, individuals and small firms who were knowledgeable in recreating imported vehicles. They were located in the major cities of China and had no capacity of producing motor vehicles. The relentless war during that time has eventually stopped the development of the firms and ruined the infrastructures in China, such as roads, harbor, and rails, among others (Li 2002).
During that time, China could not boast of having a local car industry. They did not even have the capacity to manufacture the needed materials for producing an automobile. Although there were 12 firms, they were concentrated on repairing vehicles designed for military and civilian use. Majority of these firms were focused on motor vehicle accessories which were utilized as assembly plants for imported parts and components until 1953 (Li 2002).
In March 1950, Chinese leaders held a national meeting for the purpose of setting up the Chinese automobile industry. Still, a very young sector during that time, the car market was facing technical and economic difficulties. There was limited technicians and trained manpower. Infrastructure was also a problem and even slowed down the development of the automobile industry.
Aside from that, China lacked the needed capital for supporting such industry. As they lacked the necessary skills and funds to sustain the market, the Soviet Union played a significant role in the development of the Chinese car market (Li 2002).
With foreign aid coming from the Soviet Union, China was able to set up wide-scale modern firms as well as the conduct of trainings for technicians. As part of efforts for developing the Chinese car industry, the government undertook the First Five Year Plan from 1953 –1957. Most of the workers committed all their time and effort in setting up the automobile industry, despite the meager salaries and poor working conditions which is the vital reason why the Chinese car industry had a sluggish development (Li 2002).
On July 15, 1953, the construction of the fist modern automobile facility commenced. After three years of construction, the First Automotive Works (FAW) located in Changchun City, Jilin Province was in placed. The new car company had set its objectives to produce 300,000 vehicles.
A year after the construction of the FAW, the Jiefang Truck was developed. It was recognized as the first 4-pound truck built in China. On July 1958, the Hongqi CA72 was completed, being the first Chinese luxury car passenger. After 1958, the FAW became a force to reckon with as far as vehicle production is concerned (Li 2002).
Initially Changchun City was the heart of the Chinese automobile industry. After its pioneering vehicle manufacturing was launched, FAW started expanding its product lines. It began producing jeeps and the productivity output was increased to 600,000. In the latter part of the 1950’s, the Chinese Government adopted the “One Province One Factory Policy.” This resulted to the establishment of small-scale automotive firms.
The facilities concentrated on repairing automobiles began to manufacture motor vehicles as well. At that time, there was increasing tension between China and Soviet Union. As a reaction to the situation, the Chinese government decided to move majority of its industries to the mountainous and rural areas (Li 2002).
The political situation in China during the 1960s slowed down the growth of the Chinese automobile industry. However, this event did not have any effect on its slump during the 1970s. During the political tension in China, automobile consumption was regulated. Cars were considered as a product rather than a commodity.
The local car market was non-existent because all the cars developed were up for allocation rather than for sales. The economy of that time was adopting “command control” from the government authorities and not the carmakers who has controls in developing the industry. Most automobile companies were government owned and had no interest in customer satisfaction (Li 2002).
Before 1961, the task of allocating automobiles was given to the Transportation Ministry. However, in 1961, the Material Bureau took over the role and allocated the cars using regional material-supplying centers with large capacity. They were supplied rather than sold.
Likewise, the Chinese government had direct control over manufacture of car components during that time. After 1961, the Transportation Ministry became the primary agent mandated to control the manufacture and allocation of car components. The agency assembled 158 outlets in order to distribute automotive components throughout the country during that time (Li 2002).
The Growth of the Chinese Car Market
Nowadays, it is quite normal to see a Ford Focus running along the streets of China’s major cities and municipalities. It is the result of a joint venture between China’s Chang’an Group and Ford Company of the United States.
However, buying a car such as the Ford Focus could not have been possible ten years ago when the cost of an automobile was almost fifty percent higher of the current cost of automobiles. The reduction in the cost of automobiles in China has paved the way for many people to live a comfortable life that they used to dream of (Xinhua News Agency 2006).
The production of motor vehicles in China reached the 1 million mark in 1992 from 200,000 in 1980. In Japan, the process took place from 1955 to 1963 which reflects a 25-year lag between the developments of the car industry of the two countries.
At the same time, the number of Chinese car manufacturers slowly increased as well. As the demand in the local market increased and the Chinese government adopting favorable policies, automobile companies put in large investments to expand their capabilities. However, there was no further development due to the adjustments in the economy implemented by the Chinese government in the latter portion of the 1980s (Li 2002).
Aside from the amount of automobiles produced, the sale and production of automotive components rapidly increased as well. From 1,870 automotive accessory firms in 1978, the numbers has grown to 2,136 in 1982.
To boost the supply of car accessories as well as technical services, the Automobile Accessory Company was re-established in 1982. Based on the results of the Automotive Accessory Industry Investigation, six car component firms exceeded sales of more than 1 billion in 1999, from which the number of automotive institutes were also growing by this time (Li 2002).
In February 1994, the Chinese government adopted the Automobile Industry Industrial Policy which requires car manufacturers to establish their own sales and after-sales service system. By 1995, more than 95% of automobiles manufactured in China were sold locally. Since the latter part of the 1990s, the “Four in One” system has been drawing interest in the industry. Developed by Guangzhou Honda, the system incorporates four business processes into one manufacturing firm, namely sales, after-sales, supply of parts, and customer service (Li 2002).
Meanwhile, the Japanese car companies, such as Honda and Toyota, were able to immediately penetrate the Chinese market in the 1980s. Their entry to the local market was made possible through the combination of trade and technology transfer.
By closer analysis, it will be easy to notice that the primary objective of Japanese car companies is to export rather than manufacture cars. At that time, it was much easier to export than manufacture cars. The Japanese companies had minimal interest in putting up a facility in China because they had already invested huge capitals. When Japanese firms set their sights on North America instead, Volkswagen entered the market through a joint venture with FAW and SAIC (Li 2002).
One of the major factors that led to the rise of the Chinese car industry is its accession to the World Trade Organization (WTO) in 2001. China was among the pioneers of the General Agreement on Tarriffs and Trade (GATT) when it was established in 1947. However, it withdrew its membership in 1950.
China expressed its desire to return to GATT In 1986, but the GATT was abolished and subsequently replaced by the World Trade Organization in 1995. As cited, China then missed out the opportunity to become a founding member of this new organization (Xinhua News Agency 2006).
There were many obstacles that impeded China’s eventual entry into the World Trade Organization. The signing of a bilateral agreement between the United States and China in 1999 facilitated the entry of the latter into the WTO. In 2001, the Fourth WTO Ministerial Conference was held in Doha, Qatar.
One of the major agenda in the event was to decide on China’s membership to the World Trade Organization. Finally, China became the 143rd member of the organization in December 2001 (Xinhua News Agency 2006).
As part of its commitment to its WTO membership, China agreed to implement cuts in its tariff levels. From 15 percent in 2001, it went down to just below 20 percent in the year 2006. Tariff cuts for imported automobiles showed a much more considerable drop from 80 to 100 percent in 2001 to 25 percent in 2006.
Towards the mid-2006, China has already completed its commitment to the World Trade Organization as far as reducing tariffs in the automobile sector. Likewise, trade barriers and the securing of a license were abolished to stir growth in car imports (Xinhua News Agency 2006).
Since its accession to the WTO, figures from the Chinese Customs have revealed a gradual growth in the imports of vehicle and vehicle parts. From US$4 billion in 2001, sales went up to US$16 billion in the first nine months of 2006. This could be attributed to the fact that imported vehicles are much cheaper than they used to be.
Like in the case of the Mercedes Benz S600 which reflected a drop of 1.1 million RMB Yuan in 2002. This was also applicable to other luxury cars like BMW and Audi, which was cheaper by 15 to 20 percent in 2003 compared to its cost prior to China’s membership in the World Trade Organization (Xinhua News Agency 2006).
Aside from the reduction in price, another factor that contributed to the growth in China’s car industry is the improved quality of the automobiles. The reduction in the cost of imported vehicles paved the way for local car manufacturers to reduce the cost of their products as well.
Within a year after local car manufacturers increased the cost of their vehicles by 29 times, local cars were immediately sold out. In 2003, the cost of local automobiles was down by almost 60 times. It was possible to purchase a locally made Buick for 160,000 RMB Yuan, which would have been sold at 200,000 Yuan 5 years ago (Xinhua News Agency 2006).
In a research conducted by J.D. Power Asia Pacific, it reported that Chinese car manufacturers have improved the quality of the cars they manufacture which has given them the edge over foreign manufacturers. They spend a lot of money producing luxury and clean vehicles. Aside from that, Chinese car manufacturers also invest in enhancing their production facilities while closely monitoring quality control. Likewise, they are constantly upgrading the manufacturing plants (Rowley 2009).
Consequently, the Chinese car industry has captured more than 40% of the local market. According to Ashvin Chotai, who serves as Managing Director of Intelligence Automotive Asia, Chinese car manufacturers have built a momentum and are now enjoying the “critical mass” in the industry. Chotai predicts that by 2015, Chinese car manufacturers will control 38% of the local car industry. For Scott Laprise, an analyst and broker of CLSA in Shanghai, the government could see a turn around, and local car manufacturers would comprise 50 percent of new car sales in a period of three years (Rowley 2009).
Due to the rapid growth of the Chinese car industry, global car manufacturers have now shifted their focus towards China for 2009. It is expected to become the United States’ top rival as the largest car manufacturer in the world. In just the first three months of 2009, automobile sales in China increased by 4.3% representing 2.7 million vehicles.
According to London Consultant Intelligence Automotive Asia, 2009 sales of local manufacturers could reach as high as 10 percent in contrast to the 23% and 15% decline in the United States and Europe, respectively. By the end of the year, China is expected to become the leading car manufacturer in the world (Rowley 2009).
In addition, China has invested billions of Yuan in implementing stimulus car measures, such as implementing tax cuts in car purchase, subsidies for rural buyers, as well as a program for subsidizing “old-for-new cars”. This has contributed greatly to the rejuvenation of the car market and boosting consumer confidence in local Chinese cars. Likewise, the local industry has also increased its production quota. In the midst of the looming global financial crisis, the Chinese car industry is believed to have reached its “golden period” (Zheng 2009).
Despite the positive outlook for the Chinese car industry, more work needs to be done if China is expected to become the top car manufacturer in the world. Although there is a growth in the sales of mid and high-quality automobiles, there is a need to focus on improving sales of passenger cars, preferably those with small exhaust. Likewise, the demand for commercial vehicles is relatively weak.
The sales of commercial car showed a negative growth in the initial five months of 2009 and about 10% decrease in May. More resources should be allocated in order to accelerate the input of commodity cars as well as entry-level models. According to the National Passenger Car Association, the sales of passenger vehicles in China’s local industry has experienced a slumped of 19 percent in the initial week of June, so as local car manufacturers should be vigilant with regards to this aspect (Zheng 2009).
Aside from car sales, the automotive parts sector is likewise picking up. In fact, from the period 2001 to 2005, more than 6,300 companies have reported a compound average growth rate of more than 30 percent, which translates to US$ 56 billion worth of components in the year 2006. According to a recent survey, the sales of components could reach US$ 161 billion by 2010. Aside from local Chinese companies, foreign firms have also become prominent in China’s component business. Among the top 100 companies, half of them are occupied by foreign firms (KPMG 2007).
In December 2006, the China Compulsory Certification System was established as a measure to raise standards. However, the local industry focused instead on improving low-end capacity rather than boosting standards. There were minimal investments in the field of research and development which was the principal weakness of domestic components industry.
As part of its commitment to the World Trade Organization, the average tariff for import of automobile components was reduced by 25 percent. However, with the presence of foreign car manufacturers, the local industries would have no other choice but to increase their standards (KPMG 2007).
According to an article by KPMG Huazhen (2007), another sector that contributed to the overall growth of the Chinese car industry is second-hand automobile sales, which netted a growth of 34 percent in 2006 or 1.8 million units. In fact, it is growing much higher than new cars and has become a target of online automotive businesses.
A report by South China Morning Post revealed that venture capital firms had a total online investment estimated at US$ 60 million dollars, with the $25 million of Chinacar.com, led by Goldman Sachs, leading the way. The US$10 million investment of Nippon Venture Capital Corporation and Doll Capital Management in bitauto.com is the second leading investment. 2008 estimates placed total second hand cars at $5.3 million. With the establishment of 2005 regulations, the number of retailers allowed was severely limited (KPMG 2007).
The Export Car Market
Locally-developed cars dominated China’s export cars market. In 2006, the number of export cars sold were doubled to 340,000 units and reached 500,000 in 2007. Passenger cars comprised one quarter of the total car exports. Chery, China’s biggest car exporter achieved overseas sales of over 100,000 units. Its target includes developing countries such as Asia, Eastern Europe, the Middle East, and Central and South America. Honda Motors China sold 24,000 units of Jazz in 2006 and a year later it increased to 43,000 (KPMG 2007).
In 2007, Chery signed an agreement with Chrysler to manufacture small cars for Dodge. In 2008, sales to Latin American countries were initiated with the United States as a potential target within the year 2009. The biggest obstacle to the sales of export cars is safety. Recently, several manufacturers have showed poor performance in safety tests conducted by European automotive associations, such as Germany’s ADAC (KPMG 2007).
Most of China’s car manufacturers are positioning themselves for potential growth as they are set to introduce fresh models of car in the coming years. Chery is looking to boost its sales this year by at least 18% to 419,000. The company’s A3 city car, featured in a Shanghai car show, garnered a 5 star rating based on China’s safety standards. Likewise, it is planning to bring into the market 36 new models within the next couple of years. The initial model, Riich G6 is a sedan-type is built with a 3.0 liter V6 engine and earmarked to pass the European emission standards. Its competition is Audi’s A6 model. The price between the two is a big difference. The price range of the G6 will be from $29,000 to $43,000 while the Audi costs from $51,000 to $102,500 (Rowley 2009).
Other Chinese car manufacturers are aiming to boost its car sales as well. In 2008, billionaire Warren Buffet paid a total of $231 billion representing 10% shareholding in BYD Auto. According to Henry Li, General Manager of BYD Auto, they are expected to increase their sales to over 400,000 units this year. Its F3 model was the leading car during the first three months of the year, achieving an 84% growth to 47,800 units.
Geely, a local car manufacturer based in Hangzhou, is expecting to increase its sales by 25% this year and hopes to achieve three times its domestic sale by 2015. One of its models, the GE which resembles a Rolls Royce, will be introduced to the market in a span of 3 years and cost around $22,000 (Rowley 2009).
Moreover, the growth of the Chinese car market is likewise attributed to joint ventures between Chinese car dealers and global car manufacturers such as General Motors, Toyota, Honda, Volkswagen, and Ford. Because of these joint ventures, the cost of cars has become more affordable and people can now buy cars.
According to Prof. Hu Shuhua from the Wuhan University of Technology, joint ventures provide the benefit of bringing capital and technology. However, it can harm the local car industry as well as it could result to over-reliance on foreign technologies and insufficient ability to innovate by them (Xinghua News Agency 2006).
The presence of foreign car manufacturers has somehow challenged local makers to meet the competition head on. With joint ventures, domestic manufacturers can take advantage of agglomeration economies in expanding and acquiring new skills from the joint venture. This happened to Shanghai Automobiles Industry Corporation (SAIC) which benefited from its partnership with General Motors and Volkswagen, and developed the Roewe 750. First Auto Works developed Besturn which incorporated technologies used in Mazda 6 (Xinghua News Agency 2006).
The Potentials of the Chinese Car Market
In an article by Dan Lienert (2006) in Forbes Magazine, he believes that the potential of China as a market leader is huge. Car manufacturers in the United States, Japan, and Europe are setting their sights towards China. Volkswagen, the largest car manufacturer in the European Union, sold more cars in the Asian countries than in Germany. These augers well for the Chinese car market which is boosting its automobile industry with assistance from foreign investments. According to Chinese laws, an individual is not allowed to own more than half of a Chinese manufacturer, so it should establish a partnership with Chinese car companies to be able to gain entry to the market (Lienert 2006).
Even if they cannot venture by themselves, foreign car manufacturers are still positive about their outlook in China even if the economy is still not as developed. According to General Motors, it is expected that 74 million Chinese families has the capacity to purchase automobiles despite having a per-capita yearly income of only $930 in the city and $299 in the country. This comprises about 80% of Chinese savings deposits. Although they cannot afford to buy a car, the people of China knows how to save their money and credit has been easily accessible in the last two years (Lienert 2006).
Under the Five-Year Development Plan for the Automotive Industry of the State Economic and Trade Commission of China from 2001 to 2005, two to three huge car manufacturers would gain considerable strength in global competition by the conclusion of the program.
Marketing of cars and after-sales service that meets international standards will be in place. Likewise, the program aims to improve the shares of domestic products with the hope of exceeding the 70% mark. Aside from that, a vehicle components group will be established consisting of 5 to 10 firms. The leading three parts companies will make up of the local market and the cost of exports of automotive supplies constitute 20% of the entire sales volume (Lienert 2006).
At the moment, Volkswagen is the top foreign car manufacturer in China with a market share of at least one-third. General Motors ranks second with below 10%. In the first three quarters of 2003, GM’s sales went up by 38% due introduction of new products in China.
Other foreign car manufacturers competing with the two automobile conglomerates are Ford, Honda, Nissan, and Hyundai. However, the main problem of these companies is that they cannot meet the high demand for automobiles in the country. Due to the lack of a delivery infrastructure, import of automobiles may require at least a week to one month before they are delivered (Lienert 2006).
It is noteworthy to mention, the rapid growth of the Chinese car market is the opposite of what is taking place in North America. In 2007, American car manufacturers recorded severe losses and experienced its worst sales in the last 15 years. On the other hand, the Chinese auto market has seen a 500 percent growth in the last decade.
Industry experts predict that the Chinese car industry would continue to experience yearly growth of 10% for the coming decades. According to Nick Reilly, President of GM Asia Pacific, this is a product of a huge transformation in the world economy as well as the changing political situation in China, India, and Russia. These areas are now experiencing an economic turnaround (China Daily 2008).
In China, there are about 43 to 47 million vehicles on the road, which is equivalent to the number of vehicles on US roads in 1947. According to a report by the University of Michigan Transportation Research Institute, only 33 out of every 1,000 people in China own a car. IBM Business Consulting estimates that for every 1,000 people, 44 own an automobile. According to Frank O’Brien, Executive Vice President of Magna International Inc. Asia Pacific Region, compared to world averages, this translates to 120 cars for every 1,000 people. In the United States, the ownership rate is more than 800 for every 1,000 Americans (China Daily 2008).
However, this is expected to change drastically as vehicle ownership in China is likely to increase to 100 for every 1,000 people by the year 2015. By 2030, ownership rate is estimated to be 178 to 269 for every 1,000 people. From bicycles, families in the rural Chinese regions would switch to small, basic vehicles. It is expected that young professionals would purchase sedans and luxury vehicles. This trend is moving towards China’s second and third-tier cities consisting of 5 million to 15 million residents (China Daily 2008).
Likewise, the potential customers of foreign made automobiles have changed. Five to six years ago, government workers accounted for 60 to 65 percent of car sales. Presently, 6 out of 10 buyers come from the private sector.
General Motors was the first company to reach 1 million units sold on a yearly basis. Chrysler recently introduced Dodge Journey, a two-door Wrangler and special edition 300C. As far as automobile sales are concerned, it is a level playing field between foreign and local car manufacturers. The key to winning lies on boosting their quality or risk losing their market position (China Daily 2008).
The Strengths of the Chinese Car Market
The Chinese car market provides a favorable industry for boosting competition. Private cars are becoming a requirement in China as the increasing gross domestic product in the country has been an encouraging factor for investments in the market. Tariff cuts implemented by the government have allowed foreign auto makers to cut their cost and make them competitive in the local car industry. Aside from that, the enactment of new rules evaluating the qualification of car dealers guarantees duly authorized companies and fair competition in the market (Frost & Sullivan 2007).
Additionally, new government policies have led to the improvement of quality and components which can provide an assurance of safety on the part of passengers. Promotion of low cylinder volume cars will not only boost their environmental effects but also increase the cost of luxury cars. The rationalization of the automotive industry structure will put an end to the irrational extension of production. In the end, this will boost the total revenue of passenger cars (Frost & Sullivan 2007).
The strength of the Chinese car market is deeply rooted in the country’s rapidly growing economy. At 9 percent per annum, it seems that the economy of China is showing no sign of slowing down. People in China are earning income sufficient for buying a car. It is expected that the rate of demand is expected to increase by 10–15 percent annually (Dyer 2005).
The Weaknesses of the Chinese Car Market
Despite all the hype and forecasts regarding the rapid growth of the Chinese car market, it may still take some time before China can indeed become the leading car manufacturer in the world. Local car manufacturers do not have the expertise in design, branding, and marketing which is required to sell cars in the United States and other countries.
Being a newcomer in international car making, another vital issue that will come into play is quality. Producing unreliable cars can be a fatal mistake that the Chinese can commit as they have been plagued with low-cost manufacturing issues already (Dyer & Macintosh 2005).
The problem of quality was tackled in a study conducted by RL Polk & Co. concerning the Chinese auto market. According to the China Automobile Consumer Satisfaction Index, for every 100 cars in China, the number of faults increased from 246 in 2005 to 338 a year later. 4 out of 5 cars have an issue within the first six months of ownership. With the retail cost falling by RMB10, 000 ($1,250) annually, car makers implemented cost cutting measures rather than improve quality. As a result, they end up using low quality materials and exert less time on testing (Stanford University 2006).
Because of the problem with quality, the plan of Chinese auto manufacturers to export cars in the developed world has been delayed. Most of the automobiles are instead exported to Africa, Southeast Asia, and the Middle East where there are lower expectations and price is more important.
The plans of Chery and Geely to invade the Western market have likewise been delayed (Stanford University 2006). Likewise, Chinese safety standards remain in question and are way behind policies in the European Union and the United States, like in the case of ‘Chery’s QQ compact car’ which is perceived as being fragile (Liu 2009).
Pushing through the international car making also requires huge financial capability. In order to succeed in the world market, car manufacturers like SAIC and Chery would have to rely on the local government. This means they would need backing from their own leaders to provide Chinese car manufacturers with the necessary funding they would need to make it big (Dyer & Macintosh 2005).
Aside from that, Chinese car manufacturers still lack the marketing and consumer research that big car makers such as General Motors and Ford has. This was evident during the Shanghai Auto Show wherein Li Shufu, who is the company head of Geely, invited participants to fill up suggestion forms on the spread of new products. This is in contrast with the intensive research conducted by Ford on China’s below 30 buyers which the company is targeting for their Ford Fiesta. The results of the study led to the firm’s tying up with Microsoft to introduce SYNC technology so they could connect their automobiles to their MP3 players. According to John Parker, their audience preferred style, fuel economy, and Internet connectivity (Liu 2009).
Another potential weakness of the Chinese car industry is that it does not have a secure market in its own home soil. Japan and South Korea developed their own models because they knew that their domestic market would give them a steady flow of income as well as room to correct their mistakes. This is not the case with China which has stiff competition from foreign car manufacturers’ right in their own home (Dyer & Macintosh 2005).
Challenges to the Chinese Car Market
Expanding to the Western market would be a major challenge for the Chinese car industry. One major challenge that local Chinese car makers must address is how they would penetrate into distribution channels and convince foreign customers to have confidence with Chinese cars. Local automobile manufacturers have built a reputation of cutting costs instead of coming up with high quality innovative vehicles. At the moment, China has no capacity to develop safe and quality cars (Roberts 2007).
If ever they would venture overseas, Chinese car manufacturers have three possible options namely mergers and acquisitions, building facilities, and direct exports. The first one will be the boldest move to take for the Chinese car makers. SAIC ventured into the overseas market by merging with South Korea’s Ssangyong Motors where they have a majority stake. SAIC is the first Chinese car maker to have majority stakes in a foreign vehicle maker (China Daily 2004).
According to industrial experts, Chinese car makers are not yet ready to make huge investments and build manufacturing plants on their own since they are not yet stable as multinational companies and are not familiar with the international car market. They should first work on improving direct exports of vehicle and components. This sector of the market is growing considerably and is much smaller than the country’s imports. The Chinese government should do their part in encouraging domestic car makers to hasten exports of vehicle and spare parts (China Daily 2004).
In comparison with international car manufacturers, Chinese auto companies are much weaker on the aspect of financial stability, developmental skills, production volume and quality, as well as sales, marketing, and services. As a result, they can not cope up with competition from foreign companies. Before they can venture in the international market, they should first strengthen their competitiveness. If possible, the government should provide funding for domestic manufacturers to assist them in strengthening vehicle and component exports (China Daily 2004).
Another challenge for the Chinese car industry is pricing. With the tough competition from foreign car manufacturers, the companies like Chery and Geely must see to it that their prices remain competitive. In order to do this, Chinese car manufacturers should work out financing schemes or cut their costs in order to maintain their market share. With the tough competition, it is unlikely that companies would return to the 1990s price level (KPMG 2007).
Improving the quality of producing automobile components is another major challenge. The proliferation of foreign car companies in China may be a stumbling block in efforts of the government to raise safety standards. Meeting safety and environmental requirements is crucial if Chinese car manufacturers would venture into the overseas market.
To cite, government initiatives pushing for national brands could be a major obstacle on the part of foreign companies. At this point and time, the government is limiting holdings by foreign companies of local firms more than 50 percent (KPMG 2007).
The foreign car manufacturers will remain as the biggest threat to the Chinese car market. In May 2005, General Motors blocked moves by local car manufacturer Chery to register a US trademark on the premise that it had similarities with the Chevy, the monicker for Chevrolet, which is distributed by General Motors. Likewise, when Geely tried to purchase specialized machines for making gearboxes, it took them over a year to find a supplier. This was attributed to multinational firms pressuring the manufacturers of such machines (Dyer & Macintosh 2005).
Another major challenge that Chinese car manufacturers face is consumer concerns. This has something to do with the safety and reliability of the cars. In a crash test conducted in Germany, Chinese cars did not do well and folded up like a cardboard once it made an impact on the crash test dummies.
Cars are regarded as one of the safest vehicles and bringing in a product that is inferior in this aspect can be an obstacle to success. In which case, Chinese car makers need to comply with the necessary quality and safety standards to get the attention of European and North American car owners. This is what happened to Japanese and South Korean car manufacturers which corrected their safety issues (Henry 2008).
Already besieged by other reliability issues, such as the pet food scandal and lead-contaminated toys, China needs to deal with its manufacturing standards if it is aiming to bring its car market overseas. They need to disprove the argument that communist countries are not good car manufacturers.
For example, the Russian Lada was not successful in North America in the 80s. Most drivers claimed that screws were hammered and not screwed into place. After only a few months of purchase, the car literally broke down. Car manufacturers need to meet its production target and make sure that they meet Western standards (Henry 2008).
Recently, BMW and Mercedes filed a case against Chinese car manufacturer Shuanghuan for allegedly duplicating their models. The car involved was BMW’s X5 and the Mercedes Benz Smart car. However, the Chinese car manufacturer defended by saying that it is not wrong to copy other designs. For China, they need to disprove the perception that they do not have the capability to create their own designs (Henry 2008).
Since 2005, Chinese car manufacturers have been attempting to export their cars into Western market but as of now, not a single automobile from China has made it to the United States. In contrast, Chinese car makers have already successfully sold cheap vehicles in other countries. Experts believe that it would still take some time before China can compete in US market. This is because Chinese automobiles have not successfully met emission and safety standards required for exports to the US (Kimes 2008).
Likewise, their attempts to enter European markets have also been thwarted by car manufacturers from different parts of Europe. Aside from having a rigid safety and emission policies, European car manufacturers have been aggressively battling attempts by Chinese car makers to copy their designs. Italian manufacturer Fiat recently had a successful case against Chinese car manufacturers (Kimes 2008).
The Perceived Future of the Chinese Car Market
Driven by their desire to gain entry into the Western market, the Chinese government has decided to assist Chinese car manufacturers succeed in pushing their cars into the United States and Europe. Their first move was to implement tight safety regulations and encouraged local carmakers to produce original designs. They encouraged the manufacturers to push for competition not on the basis of costing. Chinese officials are moving to erase their branding as copycats (Kimes 2008).
Chery, China’s largest car manufacturer recently purchased an Italian company for the purpose of improving their designs. Shanghai Automotive Industry Corporation (SAIC) acquired the British firm MG Rover Group, the same firm that sold the Land Rover to Ford Motors. BYD Auto, which originally had Mitsubishi on their engines, began manufacturing their own engines by February 2008. Likewise, they constructed a 120,000 square meter R & D facility for the purpose of building original cars (Kimes 2008).
Chinese car manufacturers are also setting their sights on producing hybrid cars. In June 2008, they sold 100 new energy vehicles. The Chinese government recently implemented a 40% sales tax on large vehicles in an effort to boost fuel efficiency. BYD Auto designed the F3e, a battery-powered car as well as the E6, which is the electric counterpart. BYD has Warren Buffet to thank for who recently acquired 225 million shares in the company (Kimes 2008).
Not getting much success in the US market, Chinese car makers are preparing to bring their models to the European market. Bringing their cars to Europe is the more promising option for Chinese car makers since there is now a greater demand for fuel efficiency and small cars.
The first three months of 2009 saw Chinese car makers selling 3.4 million new cars which are 17 percent lower than the similar time the previous year. Experts believe that Chinese car manufacturers would be able to accomplish what the Koreans achieved. According to Ferdinand Dudenhoffer, an automobile expert based in Germany, Chinese car makers would find success in electric and hybrid cars. He envisions that China would become the hub of the automobile industry by the year 2020 (Wanzeck & Li 2006).
Chinese car maker Brilliance Jinbei has already entered the European market through its BS4 automobiles. It would be easier for Chinese cars to enter Switzerland. In Germany, the company has already been granted a certificate to locally distribute their cars.
Hans Ulrich Sachs, who is the Managing Director of HSO Motors Europe, the European partner of Brilliance, sales is expected to hit 3,000 units this year. Its competitiveness and excellent design will be its major selling point. Likewise, it has passed safety standards (Wanzeck & Li 2006).
Although Brilliance Jinbei is targeting the upper and middle class, Dudenhoffer believes that Chinese car companies would be able to compete with the likes of Volkswagen or Mercedes. He believes that their key would be small cars with security and quality standards.
Michael Benning, who is the Sales and Marketing Director of BLG Automobile Logisitcs, believes that Chinese cars would even be a hit to the upper class market. At present, Volkswagen is the top selling car in Europe, with a market share of 18.8 percent and sales of around 3 million cars in 2008. French car manufacturer PSA and the United States’ company Ford Motors ranks second and third with market shares of 13.5 and 10 percent, respectively (Wanzeck & Li 2006).
In addition, the Chinese government has already provided their full support to Chinese car manufacturers. The State Council has implemented tax cuts in car purchase and promised incentives for manufacturers who will develop clean fuel cars. The tax cuts augured well for companies such as Geely, which predicts a boost of 25 percent in its sale with new models to be introduced in the market. Already, it has surpassed Japan as the second largest car manufacturer in the world (China Economics Blog 2009).
Beijing has also required government agencies to purchase cars from local manufacturers when making fleet purchases. The Chinese government is moving towards consolidating the domestic car market. Compared to the 15 car manufacturers of the United States, the leading car market in the world, China has three times more automobile companies. According to analysts, the growth in the sales of the car market could reach 10 percent, which is still slightly lower than the compound growth rate of 15 to 20 percent in the last 5 years (China Economics Blog 2009).
To boost its weak car market, Chinese Premier Wen Jiabao introduced the Auto Industry Revitalization Plan. Under the new program, the cost of tax for purchasing a passenger vehicle with an engine below 1.6 liters would be reduced from 5% to 10% from January 20 to December 31. This could be a huge advantage to the consumers since they can look forward to price reduction when they buy low-emission passenger cars.
Zhang Boshan, Secretary General of the China Association of Automobile Manufacturers, the sales of passenger cars with an emission of less than 1.6 liters constitute 60% of the overall sales so the new rate would be beneficial to most consumers (Chinamac Journal 2009).
With the implementation of the new tax cuts, customers became more encouraged to buy small-displacement cars. The Big Three car manufacturers in China reported improved sales for cars below 1.6 liters. Other carmakers are set to introduce new cars with low-emission engines. SAIC, which is among the top 5 car manufacturers in China, intends to add turbocharged engines with 1.3 to 1.5 liter emissions to its 5 Series of the MG5 and Roewe 350. Other car manufacturers are expected to follow (Chinamac Journal 2009).
With the launching of the Plan, sales of passenger cars with below 1.5 liter emission immediately picked up and rose by 18.8 percent in January, which is 1.5 percent higher during the previous years. 56,700 units of cross passenger cars below 1 liter emission were sold, reflecting a 151.24 percent increased month on month and 3.24 percent year on year.
Likewise, a total of 72,500 units of cross passenger cars ranging from 1L to 1.6L have been sold, which is an increase of 32.16 percent month on month and 25.93 percent year on year. Sales of mini cars also picked up showing a 266.61 percent month on month increase (Jiang & Wang 2009).
The Auto Industry Revitalization Plan likewise paved the way for the development of energy efficient cars which is an important component of the program. The Plan provides incentives for car manufacturers which will develop energy efficient cars. Within the next five years, most car manufacturers would develop hybrid energy vehicles (HEV). At present, the Chana Group is the only manufacturer which has received a patent for producing these kinds of cars. The Chana V101 was launched in March 2009, and it will be sold to independent car makers in the next 5 years (Jiang & Wang 2009).
In an article written by Chrysler (2009) for WardsAuto.com, industry analysts are excited about the prospects. The sales of light vehicles are expected to increase between 9% to 10% or 9.6 million vehicles. The delivery of light vehicles is likewise projected to increase by 7 percent representing 6.3 million. According to a report by J.D. Power, the annualized sales for the month of April were placed at 11 million units.
However, all the forecasts could disappear if the Chinese Government pushes through with its plan to consolidate and reorganize the local industry. Under the consolidation plan, the more than 100 domestic car manufacturers would be greatly reduced until there is only about 4 large companies and 5 to 6 smaller groups.
The aim of the plan is to reduce excessive competition among the domestic car manufacturers, strengthen the newly formed groups, and promote an independent industry. At the moment Chinese car makers are categorized into independent and dependent (Chrysler 2009).
The aim of the consolidation plan is to give the strong car manufacturers the opportunity to develop. However, those who are opposed to the plan believe that the industry should offer an opportunity for people with ingenuity and energy to make a significant contribution. Likewise, it would be a challenge to stop the foreign car manufacturers from operating as the demand for foreign cars is huge. Besides, these companies would want to recover their losses in the United States and other countries and they will look to China to fulfill that goal (Chrysler 2009).
Despite the consolidation plan, foreign auto makers are still bent on continuing their efforts in China. Italian manufacturer Fiat has recently signed an agreement with Guangzhou Automobile Industry Group for the construction of a RMB3.4 million JV for manufacturing 140,000 vehicles and 220,000 engines yearly commencing in 2011. Likewise, GM China insists that they will continue being among the leaders in the Chinese car industry. The sales of the foreign car maker continue to gain ground increasing 33.8% year-on-year (Chrysler 2009).
The consolidation plan is included in the stimulus package launched by the Chinese government to boost domestic sales of Chinese car industry. The aim of the program is to establish 2 to 3 car manufacturers earning and producing 2 million vehicles each and 4 to 5 automakers selling 1 million vehicles annually.
At the moment, only Shanghai Automotive Industry Corp., partner of GM and Volkswagen, is close to meeting the criteria after they sold 1.8 million vehicles in 2008. Under the consolidation plan, the Chinese government is hoping that the sales of domestic car makers would hit 10 million units this year and maintain an annual sales growth of 10% in a span of three years (Jin 2009).
The consolidation plan will have a huge impact on the top 10 Chinese carmakers, which accounted for 83% of overall sales in 2008. At the moment, consolidation is taking place. Beijing Automotive Industry Group, the fifth biggest car maker in China, is set to be merged with Fujian Automotive Group for production expansion.
Guangzhou Auto, the local partner of Toyota and Honda, is looking to merge with SUV maker Changfeng Automobile. With the implementation of the larger stimulus plan, the government is offering $1.5 billion as funds for developing new energy vehicles. $1 billion worth of subsidies is also in place for purchasing vehicles in rural areas commencing March 1. Lastly, sales tax on smaller engine vehicles will be reduced to 5 percent (Jin 2009).
The future of the Chinese car market is bright in the coming years. The main characteristic of the industry is that it is vigorous. New models with state-of-the-art technology come and go. Current models of cars have recently integrated computer and information technology along with the common features. It is the goal of the Chinese car market to become the leading country in the global car industry.
The bright prospect of the domestic market is accompanied by apprehensions especially with the situation that happened in Japan, where the industry became stagnant after its rapid development (Li 2002). Moreover, Li (2002) pointed out that regardless of the potential threat, an evaluation on the future of the Chinese car market should critically consider the following factors:
· The automobile is used for business as well as individual purposes, wherein the income of people will continue to increase, and thereby making cars a high priority since the Chinese car market is considered part of the “growth industries” with a promising opportunity and potential.
· The Chinese car market is prone to politics in the country since it is a crucial industry in the country which it contributed largely to the Chinese economy.
· The Chinese car market is a difficult industry to reorganize which likely needs government intervention.
· The global car industry has a huge impact on the Chinese car market in the same way that the car industry of China has an impact on the world automobile industry.
Based on the literature review, the Chinese car manufacturing has long been into establishment since the inception of re-industrialization of the Communist China in 1950. It is found that the re-orientation of emerging industries has started by integrating the technical capabilities in the assembly line of assembling car parts. However, the time of war was not a favorable and opportune time for a breakthrough, considering the fact that most of major road infrastructural networks and facilities were destroyed.
The Communist-Socialist alliances between China and Russia can be perceived as the breaking point to aiming high in car manufacturing. However, China has to pass through a “thin line” in the foreign enterprise and liberal trades. Likewise, largely to consider was the technical inadequacies in generating the qualities of skills in manufacturing and required capacity to produce substantial raw materials, wherein technology transfer was lacking.
Furthermore, the capital budget was on top of the predicament of China to enable the resourcing method of sustenance in terms of foreign financing. Foreign investors could have been easily discouraged by the “socio-political climate” which may not serve the interests of profitable financial equity.
Several literatures reveal that the turn of 21st century has paved the industrial emergence of China in car manufacturing. This has been brought about by the strategic international trade cooperation of China through the World Trade Organization (WTO).
Erstwhile the domestic and minimal car production and market niches the global supply where mass production has loomed. The 21st century Chinese car market has somehow perceived by industry experts as a “façade” of China’s re-emergence in the liberal market and globalization from the seeming effect of its close door policy while the population continuously increases at the peak level.
From which the “socially-commune” nature of governance must tactfully reconsider the economic will of ballooning population. This showed for China to break the tie of socio-cultural-political isolation from the rest of the world, wherein millions of Chinese merchants have migrated around the world.
Overall, it may be found that the Chinese car market in the 21st century is an effect of a mass production scale, adoption and transference of Western technologies, from which China aims to compete by volume of supply. However, considerable flaws in the manufacturing are found as a non-substantive phasing-in of China in the 21st century technological competition.
It may be said that the Chinese car market provides a competing trend in the industry among the foreign manufacturers, international investors and traders, and local distributors. On the other hand, the supply aspect due availability of varied types of vehicles favors the consumers, for them to take advantage in selecting the kinds of vehicles at an affordable pricing as a result of supply glut.
However, the negative effects on the available volume of vehicles worldwide can be defeating the environmental concern to minimize air pollution, balance on the use of energy, traffic decongestion, and preservation of human lives from vulnerabilities of vehicular accidents. This could be a minimal attribution on such effects aside from the impending wars due positioning of economic interests.
At hindsight, the mass production of Chinese cars may not guarantee the quality supplying to consumers considering the inadequate adoption of quality-tested technologies in car manufacturing, in which seasoned competitors would apparently keep the trade secret. Otherwise the merging and acquisition would be consolidated within the car manufacturing industry. To mention from the above discussions, the Chinese car market aim to position and earmark the big share of the global market through joint ventures and other forms of partnership, but industry experts believes union of trade with China could be a “one-way- deal”; for the great advantage of Chinese manufacturers.
The only deal of competition which China must rationalize is to refocus its domestic production parallel to generating economic balance of its consistently rising population. This generation of economic balance could be the inclusion of basic and advance technologies and machineries in agricultural and industrial sustainability, instead of taking advantage the export market for cars.
In addition, the Chinese car market in the 21st century must adhere the remodeling of quality vehicles that are economically beneficial and environmentally compliant, aside from integration of new technologies that conforms driving safety standards. Thus, China must realize that the 21st century must be a new venture to showcase the rationality of social order from its long struggle of socio-cultural reform and neo-liberalism, instead of transformational capitalist emergence.
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