New Cars,Old Ways
When I received an email invitation from my Public Communications colleague K to join the company’s Expo Social Media Website as a “Blogger”, I hesitated and ignored her mail (I was lazy to be exact). Later along the hallway as I was greeted by K’s charming smile and earnest plea, I knew I have no more excuse but to accept her invitation. So here I am, writing my own Blog for the first time and joining the oceans of opinion activists “out there”.
K mentioned that anyone who writes well and has impressed the “Big Boss” would be rewarded with a new car from the company! Wow! What a fantastic opportunity? (I was only joking of course! In such times, the best reward is that I still have a job and if I am lucky there might just be a small bonus by the end of the year!)
In this blog, we could write freely any topics related to the auto industry, urbanization, or our involvements in the Expo Project. I thought that it would a good platform for me to express my views and opinions of the auto industry. I might receive support, disagreements or may be even criticisms. All should be helpful to make my thoughts and analysis more robust and rigorous nevertheless.
New Cars, Old Ways: The Tortuous Roads to Auto Industry Development
Several years ago, I was asked if industry competition in China is “very intense”. I had this spontaneous response: “Not only very intense, but epically cut-throat!” The degree of industry competition in China is probably as unforgiving as the state of affairs during the “Spring-Autumn Era” (B.C. 770 through B.C. 476). Then, the whole of China was experiencing a perpetual state of barbaric civil wars among the feudal states of the formal Zhou dynasty. Several hundreds of small states were eventually consolidated into a handful of stronger ones, needless to say, through many bloody battles.
China’s auto industry began to take off at the turn of this century as private vehicle purchases replaced government and corporate demands as the main driver of growth. The industry growth since then has been nothing less than spectacular. In less than a decade, China is well placed to become the world’s largest automotive market in terms of annual sales.
During this period, many global automakers have entered China through mandatory joint ventures. Indigenous makers have also mushroomed rapidly, supported by government or entrepreneurs. Hundreds of the latest vehicle models have been rushed out to the market, to fulfill the unappeasable desires of actual and aspiring car buyers.
The business strategy adopted by most (not all) indigenous makers has been rather similar. These OEMs have attempted to gain a foot hold in the rapidly growing industry by starting from the “low-end” in terms of size and price, typically with first generation products “adapted” or licensed from other established makers. They would also invest heavily in new product development, hoping to capture more market share with improved and better quality products over time. They would then work on improving their brand image and distribution channel. In times to come and with luck, they might just become big and globally competitive.
Rising tides raised all boats. After year of rapid market growth, sales of indigenous auto makers now accounted for about a third of the passenger vehicle industry. This is not a small accomplishment given that not too long ago, they were practically nonexistent. In reality, sales of many local brands and models have been sustained by depressed pricing. Like the US market before the financial crisis, heavy discounting has become the single most effective (but unprofitable) means to keep customer buying.
I believe that the picture would be rather ugly if profitability and balance sheets of these local makers are brought into scrutiny. It is highly conceivable that many of these indigenous makers would have serious financial difficulties if not for the profits from their joint ventures with foreign makers and/or continued financial support, directly or indirectly, from local governments. (Do not get me wrong, I am not against government policies to groom local industry champions. Successful experience from other countries have shown that in order for these policies to be effective, government support has to be very selective and targeted. Sowing seeds too wide on the other hand risks wastage of resources as companies that are unable to stand on their own continue to be sustained.)
So it has become quite clear that industry consolidation urged by the central government has not been taken seriously. As many local makers continue to exist (there are about 20+ local passenger vehicles makers in China currently), price-cut to gain market share is almost inevitable and over-capacity will become a serious problem when strong market growth subsides. Long-drawn and painful consolidation appears unavoidable. Would long-term, sustainable profitability and effective use of capital become pipe dreams as a result?
China’s auto industry appeared destined to travel down this treacherous path of development. Or does it?
Future Urban Transportation: Opportunity for Alternative Business Strategy?
If the number of vehicles (both concept and production-ready) with alternative propulsion system put on show at the Frankfurt Autoshow is a reasonable indicator of things to come, the global auto industry could witness the beginning of mass acceptance of hybrids, plug-in hybrids and EVs in the next few years. It remains to be seen how many Chinese auto makers are prepared to use this opportunity to “leap-frog” traditional methods of competing and emerge as new industry leaders.
As the world urbanized rapidly, the United Nations estimated that 5 billion people globally and 1 billion people in China would live in urban areas by 2030. How would the automotive industry present itself by then? What products, technologies or services would auto makers provide to urban customers in future? Would automobile as we know it today be marginalized by urban planners who like to see a higher usage of public transportation in future cities? Would the Chinese auto industry find itself in a dead-end after thirty years of development if urbanization made automobile irrelevant?
It seems inevitable that the automotive industry needs to transform itself as mass urbanization becomes unstoppable. But how?
More on the above in my next update…
See you!
when the speed of autos is like that of the camels in the city.....