China is attracting attention from the global automotive industry. The country is a fast-growing economy with considerable potential in domestic and export markets.
From 2010 to 2020, the Chinese car industry can be described as more international, greener, bigger, more diversified, and more high tech.
In 2009, china superseded the US as the world’s largest auto market. Although there was a considerable slowing down of the Chinese auto market—especially in 2011, and expected to continue in the years to follow—analysts are forecasting that the country’s auto market will exceed 30 million vehicles by 2020.
China’s car industry has focused on the development of new energy cars in the years 2011-2015. However, challenges such as high production cost, low battery efficiency and lack of charging facilities pose a real challenge.
The main markets in the USA, Western Europe, and Japan are almost stagnant, making China the new favorite of investors.
Until about 1975, there was virtually no car production in China. Most vehicles produced were trucks and to a lesser extent motorcycles, and possessing these vehicles was the prerogative of a relatively small number of high-ranking officials.
However, by 2004, China, with domestic car sales of 2.3 million units, challenged Germany for the position of third-largest market in the world, only superseded by the size of the US and Japanese markets.
The automotive industry is nearing stagnation, but China is seeing a growth of opportunities in this sector. Part of the global presence of the vehicle manufacturers is the establishment of manufacturing facilities in the country. For instance, Volkswagen has been operating in China since 1985. The firm ranked as one of the leading 50 foreign firms in China in terms of revenue for 19 consecutive years.
Key Challenges in China’s Value Chain
The automotive value chain in China is in transition. From a closed market before 1980, the country has become one of the largest global markets, with all major players including Volkswagen, BMW, Mercedes-Benz, Mazda, Nissan, Honda, Ford, General Motors, Hyundai, Toyota, and Suzuki.
Despite the fact that suppliers have gained competitiveness in terms of unit costs, which is largely due to low wages, the challenge remains which is the lack of product development capabilities.
Furthermore, the distribution channels in China have changed drastically. Although private ownership of passenger cars was never forbidden in China, the cost was prohibitive.
Government Investment and Development Plans
The Chinese government is looking into indigenous innovation and local brand development. This includes the local improvisation of localized production, establishment support of professional mould design and manufacturing centers, support to qualified regions to develop their auto parts industrial cluster, encouraging auto-makers and auto part suppliers to jointly develop complete vehicles, and formation of large auto part conglomerates through cross-region M&A and restructuring, targeting both domestic and overseas markets.
Main automobile production bases are situated in the cities of Changchun, Tianjin, Beijing, Wuhan, Chongqing, Guangzhou, and Shanghai.
The five major local automobile groups in the Chinese automobile sector, accounting 65 per cent of the market share are Shanghai Automotive Industry Corporation (SAIC), First Automotive Works (FAW), Dongfeng Motor Group (DFM), Beijing Automotive Industry Corporation (BAIC) and ChangAn Motor.
Local producers find it difficult to make it to the top segment due to image and quality problems, in some cases. Joint ventures which provide strength to companies like SAIC, are also required to develop the national models, bringing high-tech and know-how to China.
Most small and medium sized companies need professional and all-around assistance in order to find success in the intricate and highly competitive market.
China’s Auto Industry Protection
China has been aiming to build its own brand in the global automotive industry since it opened its market to outside foreign automakers, requiring outside firms to partner with domestic automakers. However, this forced partnership has its own disadvantage, and that includes its inability to produce genuine innovation. So, the hope to surpass its foreign partners has eventually vanished. China has realized that, without outside help, it is unlikely to catch up, with Chinese brands holding just 34.6 per cent of passenger car market through July this year and global automakers enjoying huge profits in China.
In order to protect their auto industry, China’s regulators have taken further steps by bringing antitrust investigations against foreign competitors. Recently, Audi AG, BMW and Mercedes-Benz AG have announced cuts to spare-parts prices, in view of the investigations conducted by China’s National Development and Reform Commission. Despite its insistence that the Chinese government does not specifically target foreign multinational enterprises, but its move to go after excessive profits in the luxury car business hurts foreign firms. However, foreign automotive firms seem willing to reduce their healthy margins to keep their access to the Chinese market.
The Chinese government’s new interventions are supposedly for anti-monopoly and pro-consumer regulation, but their conformity with long-standing policy goals suggests that China is still aiming to build a globally competitive auto industry. With the apparent support from the government, China’s most viable automakers will have the best possible chance of joining the global elite. Market efficiencies may be unlocked along the way, but these come only second to China’s primary goals.