Daniel P. Malone
Sourcing automotive components globally
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ASIA: "Asia Pacific Law@Work" Alert - May 2009. 12-page Alert by Baker & McKenzie.
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backASIAtalk June, 2009
China Automotive Update: A crisis is a terrible thing to waste
Governments and automakers around the globe have entered crisis mode as the auto industry works to avert collapse. However, the Chinese government views this crisis as an opportunity to address long standing structural concerns such as a high level of market fragmentation, excess capacity, and the lack of environmentally-friendly and safe products.
Overview
China's light vehicle sales growth slowed to a paltry 6% in 2008, the lowest rate in more than a decade. With the Chinese economy also expected to slow to nearly 6% growth in 2009, auto sales are likewise expected to grow between 3% and 6%.
To help boost near term sales, China launched an automotive stimulus plan in January 2009. The stimulus has already generated positive momentum in the market. Cars under 1.6L, which account for roughly 70% of the passenger car market, increased by 8.2% in March. Sales of minivans and mini-trucks have also responded to the stimulus with YoY sales of SAIC-GM-Wuling up by 38% in March. While positive, March has historically represented peak sales for the market and hence, the uptick in sales is not likely to sustain.
While the stimulus is expected to boost sales in the near term, it is restricted to low displacement vehicles and the rural consumer demographic. Even as the growth in inland China offsets the decline in coastal markets, it is likely not significant enough to sustain the high double digit growth trends in China's recent past. Falling global demand for Chinese exports has created a huge strain on the economy over the past two quarters, especially along coastal China, which is home to primary automotive markets.
State of the Industry
- A driver of economic activity, many city and provincial governments nurtured the growth of regional automakers and suppliers creating more than 80 vehicle manufacturers and 7,000 suppliers
- This structure created intense competition among the ranks of Chinese automakers and is the fundamental cause of their weakness
- Lacking the scale and resources to develop products and technologies, most of these manufacturers depended on technology transfers and competed solely on pricing, thereby eroding the profitability of the entire sector
- Sustaining this highly fragmented structure was the fast growing Chinese market, which for the past decade, grew at a CAGR of 24%. Slowing sales during 2008 challenged the viability of many smaller players
- However, regional interests continue to impede the market driven consolidation and prevent not only the creation of large-scale Chinese automakers, but also prevent them from operating profitably
Leveraging the "Crisis"
Beijing has always viewed the automotive sector as a critical component of its economy. Creating Chinese automakers with the scale and technology to compete in the global marketplace has been a long-standing government ambition. Viewing the current industry turmoil as an opportunity to affect change, Beijing launched the "Automotive Industry Restructuring and Revitalization Plan" with the following goals in mind:
- Rationalising the current 14 major domestic automakers to less than 10. Create 2 to 3 automakers capable of sustaining annual volumes above 2 million units and about 4 to 5 automakers capable of sustaining annual volumes above 1 million units
- With a targeted market share of 40%, these automakers will have the capability to develop and grow indigenous brands and products. They are projected by Beijing to command an impressive 90% of domestic brand sales
- State owned automakers such as FAW, SAIC, Dongfeng, Changan, BAW, GAIC, Chery, etc are expected to emerge as the prominent players after this wave of consolidation
- China will actively support these domestic automakers and key suppliers to develop independent brands and build auto and parts export bases
- Promote development and adoption of alternative energy vehicles by subsidising development and ownership costs
- By leveraging both the current downturn in the global auto sector (which has delayed many R&D plans) and the lack of mature electric vehicle technology, China will help its automakers develop technology and scale to compete internationally in this increasingly important segment
- China has earmarked nearly 500,000 units of capacity to be transformed for production of pure electric, hybrid and plug-in hybrids, which is equivalent to nearly 5% of overall sales
- On the battery front, the government aims to create a capacity to produce 1 billion Amp/Hr of high performance battery modules; a capacity theoretically equivalent to that of 750,000 Chevrolet Volt battery packs
- As a starting point, China has already earmarked funds of CNY 10 billion to support Chinese automakers to upgrade technologies and develop new alternative energy engines
The plan, if implemented effectively, could prove to be the tipping point in the global expansion of China's automotive industry. Chinese automakers like BYD are already scrambling to seize this moment of opportunity and the greater global industry is likely to witness several significant breakthroughs from the middle kingdom.
2009 Automotive Stimulus Plan:
- Lowers vehicle purchase tax from 10% to 5% on cars under 1.6L (Jan 20th - Dec 31st 2009)
- Allocates CNY 5 billion to provide allowances to rural citizens to upgrade 3-wheelers and low speed vehicles to mini vehicles under 1.3L (Mar 1st - Dec 31st 2009)
- Increases subsidies for people to scrap old cars and cancels regulations that restrict car purchases
- CNY 10 billion fund to support Chinese automakers to upgrade technologies and develop new alternative energy engines
- Aims to improve existing credit system for loans
Summary
A pillar industry of the economy, China's automotive sector garners a lot of attention and aid from all levels of the government. China has long maintained ambitions to create global Chinese automakers. With the global industry in turmoil, Beijing views this juncture as an ideal time to realise that goal. Not only are there multiple distressed automakers and suppliers up for sale, but the advent of the electric vehicles has levelled the playing field in terms of propulsion technology. With fewer stronger players and adequate support from the government, it is not beyond the realm of possibility to see global Chinese brands emerge.
Source: PwC Automotive Institute - GAI
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