Life & Style | Motoring
Economies of scale should drive China's auto market
The biggest surprise in the Chinese car market has been the sudden emergence of the local carmakers.
- Financial Times
- Published: 23:03 October 15, 2007
The biggest surprise in the Chinese car market has been the sudden emergence of the local carmakers. From almost nothing a few years ago, Chinese brands now command about 28 per cent of the market and rival the Japanese for first place. That means that Chinese companies will sell about 1.5 million of their own cars this year.
One Chinese carmaker, Chery, now has a 7.9 per cent market share and is the fourth most popular brand in the country. Chinese companies have become adept at marketing to the cost-conscious, newly middle-class families who are first-time car buyers. That is the good news. The bad news is that the total sales are divided up between a large number of companies.
There are 30 different Chinese manufacturers with cars on the market and 24 of those have a market share of less than one per cent, according to the consultancy JD Power. Few of the Chinese brands are anywhere near achieving the economies of scale needed to guarantee long-term survival.
"There are far too many competitors for us in this business," reflects Wang Yanhui, president of Chongqing Lifan Automobiles in central China. Lifan is a good example. The company started out making motorcycles and became one of the largest exporters in the industry in China. However, it began to look for new areas when margins on bikes were driven sharply lower by price-cutting rivals. So the company built a car factory and began producing a sedan model. Yet with sales of only 16,165 so far this year, Lifan is finding the industry tough going.
Obstacles
China's new generation of carmakers is facing other obstacles. For a start, there is the issue of quality. About 80 per cent of car-buyers in China at the moment are purchasing their first ever vehicle, which means they tend to be less concerned about dependability.
The Chinese companies have attracted many of these buyers through low prices, which they have often achieved by using lower-quality components than those purchased by the multinationals.
The problem with this approach is that it means their vehicles tend to be less reliable than cars made by multinationals. The quality data compiled by JD Power show that Chinese brands have been getting better in recent years, but that they are still well behind the foreign brands. As Chinese customers start to buy their second or third cars, the reliability issue will begin to play a bigger role in their decisions.
Finance will also be an important factor in the development of the industry. A few of the Chinese companies have relatively deep pockets, such as Shanghai Automotive Industry Corporation (SAIC), which has lucrative joint ventures with Volkswagen and General Motors and a rich state patron in the Shanghai government. But for companies such as Geely or Lifan, which are privately-owned, one of the big challenges will be to find the financial resources needed to develop new cars. Some relief could come from the buoyant conditions in the mainland stockmarket. This has encouraged a string of Chinese carmakers to consider flotations.
China South Industries, Guangzhou Automobile (a joint venture partner of Honda and Toyota), First Auto Works (which has a JV with Volkswagen) and Lifan have all said they are planning initial public offerings. If the mainland capital market remains strong for a number of years, it could provide an important lifeline to China's aspiring carmakers.
"The Chinese automobile industry is in a period of fast growth and at this stage the capability to raise money through the stock market is extremely important," says Chen Qianning, auto analyst of TX Investment Consulting in Beijing. "As the auto industry is capital intensive, raising funds from the stock market will be crucial for winning the future competition."
In the long term, the Chinese industry will need to see a considerable wave of consolidation if there are to be many survivors.
Signs of change
Government planners in Beijing have been pushing this issue for several years, however, without much success. Yet there are some signs that this situation might be about to change.
SAIC has announced that it is in talks to merge with Nanjing Automobile, a state-owned group which has a JV with Fiat. The two Chinese companies picked up parts of the UK's Rover group two years ago when it went into bankruptcy and since then they have launched almost identical versions of a former Rover sedan. Some observers believe the talks could be a forerunner of other mergers - especially between state-owned companies.
Such talks are politically delicate, however. Nanjing Auto is one of the industrial standard-bearers of its local government, but its Fiat joint venture has struggled and the company does not appear to have the financial resources to invest heavily in its own brands. Yet, any eventual deal will have to avoid appearing like a humbling takeover of Nanjing by its bigger Shanghai rival.
China's carmakers have made an impressive start but many face a long road before they become viable competitors with sustainable businesses.
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