The rise of the Chinese ‘independent’ OEMs has been interesting to watch in recent years. But there has been a little bit of smoke and mirrors going on. There has been hyperbole, but that’s not to say that these firms are to be casually dismissed. It’s just that the reality is sometimes a little at odds with the public rhetoric.
Have the rapidly emerging independents been cutting corners on the product engineering front? Of course they have – it’s how they got started. An engineering culture that began with reverse engineering and blatant copycat models may be evolving, but it won’t change overnight. China’s booming car appetite required feeding with product and start-ups were able to quickly jump on the bandwagon with cheaply acquired factories and car designs.
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And meeting the requirements of the Chinese market is one thing. Taking products on to international markets is quite another. There may well be some markets around the world where low-hanging sales of cheap cars can be easily scored and the export destination stats for some companies certainly make for interesting reading (Asia, Africa, Latin America…). But if you are thinking of selling cars in the EU or North America, tough regulations on safety and emissions standards have to be met. That costs, as does ensuring that quality meets what customers expect in developed automotive markets – even in ‘value’ segments.
Understandably, the real priority for the emerging independents has been sales in China. That’s where the major volume growth has been and that’s where profits have come from. Get scale economies at home and then look at moving up the quality curve, spending more on product development and thinking about global expansion strategies (or buying brands, as Geely did). But, first priority, make some hay and some profit while the sun shines at home.
But there’s an important domestic political element here, too. China’s auto industry is still highly fragmented. Becoming internationally competitive requires higher industrial concentration, more volume per company. If further industrial consolidation is ahead – and it is – there’s a need to present your company as a ‘winner’ on the domestic stage. Highlighting ambitious export plans plays well at home. So does attracting high-profile international investors with what sounds like clever future-oriented automotive technologies (as BYD attracted Warren Buffett with its ambitious soundings electric car tech claims).
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Investors should tread carefully. As the Chinese car market cools, the challenges facing Chinese OEMs will intensify. There is talk of an emerging price war at home.
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By GlobalDataWill China’s indigenous auto industry eventually graduate to international markets as Japan’s and South Korea’s did? There seems little doubt that it will eventually happen. But it will likely take time and the sheer size of China’s market has complicated things, acting to slow international expansion plans further. And the indigenous product, with some exceptions, is generally not quite ready for a serious assault on international markets (anyone recall Hyundai’s premature and disastrous foray into North America in the 1980s?).
How will China’s auto industry shape up over the next five years? Some big uncertainties remain. The large groups with foreign joint ventures are spawning new local brands, which will compete with the independents for the new and relatively price-sensitive Chinese consumer. Where will the domestic market settle and what brands will prove to be hits with Chinese consumers? Will EVs figure prominently and if so, how big a role will government – central and local – play in making that happen with incentives, charging infrastructure?
And following an industrial shakedown, who will be left standing and in a position to be truly internationally competitive?
After the phenomenal market growth of recent years that turned the Chinese car market into a kind of free-for-all bonanza where no-one could fail, we’re entering a more challenging phase for all. And that is especially true for the independents who have got to grow volume and develop better products than they have in the past. They won’t all be around, at least in the form that they are today, in five years’ time. Place your bets.
March 2010 management briefing: China’s emerging auto industry
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