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backCHINAtalk October, 2004
China powers ahead – but how far, how quickly, and how will it be managed?
by Max Pemberton, Autelligence
With the global automotive industry busy gaining footholds in China, Max Pemberton of Autelligence looks at the long-term size of the market, and the financial, human and environmental changes it will bring to not just China but the entire planet.
The pace of vehicle sales growth in China is exceeding the expectations of most commentators and forecasters. The change to market economy more than twenty years ago is now bearing fruit, and motorisation is transforming the face of the Chinese economy now and for the future.
China has become the fastest growing automotive market in the world and has leapt into third position in the world sales league, behind only the USA and Japan, ahead of Germany. Such is the rate of growth forecast for China, that sales volume is predicted to overtake Japan in 2008 and to start to challenge the USA for market leadership shortly after 2020. In parallel, production volume is forecast to surpass that of Japan by 2014 and to match the USA by 2020.
These forecasts should not startle too much as China had the largest population in the world, at nearly 1.3 billion people in the year 2000, and had the world's second largest economy on the PPP (Purchasing Power Parity) measure of Gross National Product (GNP) in the same year, at $US5.4 trillion. Within the total population, no less than 130 million people, or the top 10% of the total, had a personal income of almost $US 13,000 on the same PPP measure. A major increase in motorisation is an absolutely essential ingredient if China is to lift all of its population out of poverty and provide nourishment and healthcare, and even a modest standard of living for its people. Even so, progress will be long and relatively slow, although the country has made major strides over the last two decades.
Our core forecast shows that total sales of motor vehicles (passenger cars and commercial vehicles combined) will reach 15.6 million vehicles a year by 2020, and that a cumulative volume of 160 million vehicles will be sold in the country over the period 2005 to 2020 inclusive. What's more, China will become a net exporter of motor vehicles, and will need the equivalent of an additional 40 new factories, each with a capacity of 300,000 units a year, to meet domestic and export demand. In reality, the new capacity will consist of a number of factories of varying sizes, spread across the country, in an attempt to produce vehicles where the demand exists. It is also important to realise that - during this transition - all the existing factories will need to be renewed, retooled and refurbished if they are to remain at the forefront of technology, and continue to allow the economic production of motor vehicles. This is crucially important, as - inevitably - the exchange rate of the Yuan will change dramatically as the economy develops, as was experienced so powerfully in Japan that country became a major global trading nation.
Perhaps one of the most remarkable aspects of the Chinese market, due to the sheer size of the population, is that expansion, even at this rate, barely scratches the surface of the eventual level of demand in China. For example, there were just 14 vehicles per 1,000 population in China in the year 2000, compared with 126 per 1,000 population on a global basis, 585 vehicles per 1,000 population in the MDCs (More Developed Countries) and 41 per 1,000 population in the DVC's (Developing Countries). Therefore vehicle ownership, or motorisation, in China in 2000, was only one-third that of even the DVCs, and the forecast for 2020, of 78 vehicles per 1, 000 of the population, will still be only around the level of ownership in the DVCs at that time.
The implications of the size of the Chinese market in the year 2020 are clear to see. An entire new supply chain will need to be established in the country, supplying all the components, parts and services required to operate such an immense undertaking. The entire distribution network will need to be expanded and developed. Parts and service operations will need to cover the size of the vehicle parc, forecast to be 113 million units by 2020. The number of vehicles scrapped will need to be collected, dismantled and disposed of, with the number of vehicles scrapped by 2020 reaching nearly 10 million units a year. New factories will have to be designed and built and utilities such as water, electricity and sewage installed, as well as the development of the physical infrastructure of roads and access.
In addition to these physical aspects, the bureaucratic needs of managing the industry and its spin-offs, such as logistics, vehicle licensing and testing, taxation and systems will need to be developed, and software and hardware necessary to allow everything to operate will need to be put in place. And last, but far from least, all the people to be employed in the industry and its associated activities will need to be educated, recruited and trained. We forecast the number of personnel needed to operate the system to rise from an estimated 1.3 million in 2000 to 9.1 million by 2020.
Other items that will govern the future size of the market are the age and structure of the population, and its location. Of particular importance is the size of the population in the 20-to-64 year old age group. We calculate that this age group accounts for 95% or more of all activity in the automotive market, especially vehicle purchase and ownership.
Of equal importance, perhaps even of the greatest importance, is the effect such a major expansion will have on the future of the planet, its resources and the environment. The importance of China, and later India and other emerging markets, must inform the way the industry and its future is viewed. The potential size of the market will undoubtedly have an effect on legislation relating to the motor vehicle and the industry, which will have to be agreed and implemented on a global basis. Items such as the control of fuel consumption, emission levels, vehicle operating performance, weights and dimensions and vehicle cross sections and footprints, will become necessary if a doubling of the overall number of vehicles on the roads of the world is to be contemplated with equanimity. These items would have to go hand in hand with legislation on vehicle testing for safety and compliance with emissions standards, as well as End-of-Life legislation (along the lines of current EU initiatives) to ensure that vehicles are disposed of in an environmentally responsible manner.
As the Chinese market is expanding so rapidly and the potential is so great, all of the companies that currently operate on the international stage will be forced to operate within China. In fact, any company that has ambitions to be a major player in the international arena will have to have a presence in China. This realisation has been one of the elements driving the rationalisation in the automotive industry over the last decade, with the major manufacturers seeking alliances with companies across the regions of the world. Due to this process, there is every chance that China may become one of the most open and competitive markets in the world, with just about every major player operating there, as it will undoubtedly be the world's largest market in twenty to twenty five years' time. However, such is the level of demand that China's entire output could be used to satisfy domestic needs, without resorting to exports of motor vehicles. Clearly there will be imports and exports of vehicles and China is forecast to be a net exporter, but not at the massive levels seen in Japan thirty years ago and continuing to this day. A major export programme would also have severe political ramifications if such a programme were to cause undue levels of unemployment in the countries that supplied much of the investment technology and know-how in the first place. But that, as they say, is another story entirely.
All in all, there is little doubt that the tilting of the balance away from the developed world to the developing world is well and truly underway, and that emerging markets will dominate the auto industry in the future, although the developed world will continue to underpin the industry though the next twenty years or more. India will be the next big market, lagging China by five years or so, provided the recent change of government in India does not change direction too much. This will add to the pressures for global legislation – in the shorter rather than the longer term!
Source: Max Pemberton, Consulting Editor, Autelligence
The forecasts used in this article are taken from Max Pemberton's China Strategic Market Profile, which is available from GlobalAutoIndustry.com. For more information on the China, India, Japan or other profile reports, click here.
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