LETTER FROM CHINA: Foreign Automakers are scrambling for China
This editorial was produced by The Beijing Axis for Business Day by Kobus Van Der Wath.
In recent weeks, global automakers have announced their intentions to increase their focus on China. For example, General Motors stated that it would invest USD 12 billion from 2014 to 2017, and VW recently announced plans to invest USD 25 billion from 2014 to 2018. These statements are unsurprising when one looks at the progress China’s auto market has made up to now, and the room it still has to grow into.
Since 2000, when 1.8 million automobiles were sold in China, until 2013, when 21.98 million units were sold, sales growth reached a compound annual growth rate of over 20 percent. China’s auto market exceeded 25 percent of the global automobile market by 2013 and is expected to become nearly a third of the world’s total auto sales by 2020 with roughly 34.7 million units. Furthermore, taking into account the fact that China’s projected car ownership rate (number of cars owned per 100 of the driving population) of 16% in 2020 will be well below that of the US at 99%, the potential for automakers is difficult to overestimate.
However, due to the size of the opportunity, competition among foreign and local automakers will continue to be high. Additionally, with some import tariffs as high as 25%, it is easy to see why so many of the foreign automakers are looking to undergo a very aggressive and rapid localization strategy. Without tariffs and with less expensive locally-made parts, Chinese consumers can expect better priced vehicles. In addition, due to the wide variety in tastes throughout China, automakers are looking to expand their portfolio of models. In 2008, there were less than a dozen luxury car models sold in China under five brands, while today, there are ninety models offered by twenty five brands according to research firm TNS.
One segment of the market to look out for is the hybrid vehicle. Because of China’s air pollution crisis and increasing manufacturing capabilities, it may not be long before China represents the world’s largest market for hybrids. The government is planning to have 5 million hybrids on the road by 2020 and has already begun a subsidy program to help achieve this goal. Depending on the city, individuals who purchase hybrids will receive benefits ranging from a USD 19,500 handout and a free license plate (which costs a minimum of USD 1,600 in large cities) to exemption from travel restrictions that owners of petrol-driven cars face.
Toyota is already on schedule to manufacture the entire hybrid version of the Corolla and Levin sedans in China by the end of 2015. Daimler is also looking to dramatically increase sales of its DENZA brand through its joint venture with Chinese partner BYD. Even Tesla, the Silicon Valley manufacturer of electric vehicles, is looking to manufacture them in China within four years. However, while the future may look promising, large capital expenditure on charging infrastructure will have to be made to make owning an electrical car convenient for drivers in China’s cities.
In the meantime, there is little stopping the overall positive growth in demand for petrol-driven cars. Although China’s major cities currently offer the largest demand currently, the competition there is also at its highest. Certain automakers are already seeking to get ahead of this trend and looking to frontier markets where competition is lower but growth prospects are still high. VW and General Motors, the two most successful foreign automakers in China by sales, are such examples. VW opened factories in Chengdu (central China) and Urumqi (northwest China) in 2013 to tap these inland opportunities, while GM has announced that it will also open five plants across inland China and less developed cities in eastern China. Expect other foreign automakers to follow suit.
These developments will no doubt please government officials looking to boost consumption and wean the country off its dependence on exports for growth. Similarly, the larger the role China plays in the global auto market, the more technological expertise will likely emerge and develop in China. In the near future, we might see vehicles that are fully designed in China become global best sellers and play a role towards lowering global greenhouse gas emissions.
Kobus Van der Wath is group MD of The Beijing Axis. He can be reached at firstname.lastname@example.org
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