Press day at Auto China 2006, the Ninth Beijing International Auto Show, was busy – very busy. Some 560 vehicles were on display including ten global debuts, up from just one – the Ford Focus – at Auto China 2004, writes Dave Leggett.
Go deeper with GlobalData
If you could get near to an unveiling you deserved a medal of some sort.
There was a palpable sense of a coming of age for the Chinese auto industry. Volkswagen said that it had upgraded the biennial Beijing show to ‘A’ status, putting it on a par with the Geneva and Frankfurt shows (and ahead of Tokyo).
VW Neeza heralds self-development for JVs
Among the exhibits attracting most interest was the VW Neeza concept, developed by Shanghai Volkswagen (SVW), Volkswagen’s joint venture with Shanghai Auto Industry Corporation (SAIC). According to the company, the model combines global VW design principles with Chinese culture.
The Neeza is described as a ‘crossover between a sports coupe and an estate with off-road appearance’ that has been designed in China for China (the bright red colour reinforces its Chinese origins). The name ‘Neeza’ originates from ‘Ne-zha’ the name of a mystical figure from Chinese history who had magical weapons and fought evil spirits.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataThe design evokes comparisons with the Passat estate, but any production version would certainly have a reworked interior and doors. The main point of the Neeza is to demonstrate that a local design capability for SVW has been realised.
Volkswagen also showed the Magotan large sedan, which is heavily based on the locally-built Passat with some tailoring to the Chinese market. The Magotan goes on sale in 2007.
The switch in emphasis to self-developed models reflects Volkswagen’s determination to hang on to market share (which has been steadily eroded as competition in the market has increased) – now under 20% compared with 70% in the 1990s.
It is believed that locally developed models can combine the need for a degree of customisation to Chinese market needs with the positive values associated with a global brand. It’s seen as the next evolutionary stage as foreign makers move on from their current role as simple technology donors in local assembly JVs.
But the challenge from local assemblers – some of whom maintain ‘own brand’ operations alongside multiple JVs with foreign makers – is gaining momentum too.
SAIC’s high ambitions
SAIC – one of Volkswagen’s Chinese partners and the biggest Chinese carmaker – made its upscale, higher margin, ambitions clear with its Rover-derived Roewe brand at the Beijing Show and its Rover 75-based saloon, the Roewe 750. Changes on the defunct Rover 75 were difficult to identify beyond a few minor cosmetic modifications, but SAIC claims ‘significant improvements’ to give the car appeal to Chinese consumers. The interior was Rover 75 through and through and SAIC is clearly aiming to emphasise the new brand’s upscale and English associations.
Alongside a picture of London’s strikingly designed and high-tech Swiss Re building (aka ‘the gherkin’) and a quotation from no less a statesman than Winston Churchill, an ad in the China Daily newspaper proudly proclaimed:
‘As the first British-made automotive in China, ROEWE 750 widely adopts the European technology used in upscale cars. This new bleed [sic] offers elegant and stylish outlook, remarkable handling, classic and honorable British style. Such kind of spirit, which generates from the classics, but not limits to the classics, will accompany with the new ROEWE 750 on the way up in the future!’
SAIC aims to spend more than ten billion yuan (US$1.25bn) developing some thirty models under its own nameplates by 2010 and it wants to be selling 200,000 of its own brand cars annually by 2010. The firm’s international ambitions are reinforced by the appointment earlier this year of ex-GM China head Phil Murtaugh to lead its international strategy.
Does SAIC’s strategy undermine its relationships with JV partners, VW and GM? “Not at all,” Murtaugh told delegates at the Automotive News China Conference in Beijing last week.
“SAIC’s objective is not to compete with GM and Volkswagen; our objective is to become a globally respected automotive company. 99.9% of our profits and revenues today are generated through our joint ventures with GM and Volkswagen. They are extremely profitable ventures, extremely important ventures and they are going to remain that way for as long as any of us can see into the future.”
And SAIC also controls the Korean Ssangyong brand – a marque with further potential going out.
Murtaugh said that Roewe works for SAIC on several levels and that both Roewe and Ssangyong provide a platform for SAIC to further develop core competency in R&D.
Buick gets ‘revenge’
Detroit may be taking a hammering at home, but GM – via its Chinese JV with SAIC – is soaring in China (market leader in passenger cars) due to strong sales of Buick and Chevrolet models. The Buick Excelle (a mid-sized saloon sold elsewhere in the world as the Chevrolet Lacetti) has been a notably strong seller in a vibrant market segment. Indeed, the Buick brand in China is heading for 2006 sales that exceed the brand’s US sales total.
GM China President Kevin Wale believes that a key to GM’s success in China is a broad range of offerings across segments and backed up by a multitude of brands. A diverse brand and product offering is key to GM success in China, he said. And GM, like VW, is also focussing on developing products geared to the local market. Cadillac has launched a version of the CTS sports sedan – called STS – that has been lengthened to yield more rear seat room – seen as important in the luxury end of the market where a chauffeur-driven element remains very significant. Wale also pointed out that the Buick LaCrosse sold in China differs from the US one.
Small independents emerge
Besides the big JVs that involve foreign OEMs and local partners, the Chinese auto industry is also seeing the emergence of smaller independents. The list of such companies is getting longer and one of the games that journalists and analysts were playing in Beijing last week was spotting apparent infringements of intellectual property. Some of the more blatant rip-offs are being stopped now (Shandong Huoyon’s electric powered City Spirit – a Smart ForTwo look-alike that was apparently based on a toy Smart – being a topical case in point) but there is still plenty of ground to play with. As the man from Ricardo observed, the Chinese have been enthusiastic adopters of reverse engineering.
Firms such as Chery, Lifan, Great Wall, Brilliance Jinbei and Geely are growing rapidly in the Chinese market and new domestic players sometimes bubble up out of nowhere. Much of their impact has rested on the provision of cheap product (with product development costs minimised on the back of IPR violations and reverse engineering – some of which is obvious, much of it less so).
Xi’an based BYD Auto is an interesting new player and case study that once made a version of the Suzuki Alto and was taken over by a mobile phone battery maker in 2003. In Beijing the firm showed a new sports car model called the F8 (which retails at around US$11,000). BYD Auto (Build Your Dream is the company strap line) sees itself as a high-tech company and is achieving rapid sales growth from a standing start (44,300 units sold in the first three quarters of the year – mainly the F3 4-door sedan, which will now be joined by the F8). The design of the firm’s logo certainly says something about how it wants to be perceived (BMW colours). BYD Auto’s impact and apparent ease of entry to the market raises the question: are there any more new entrants coming?
State of play
So, where is the Chinese auto industry in 2006? On the demand side it’s a largely positive story – volume is being propelled by rapid economic growth, advancing consumer spending power and lower vehicle prices. But overcapacity is a concern and there are some risks ahead. As the number of new entrants has proliferated industry profitability has declined – Volkswagen has even owned up to making losses – and the strength of competition from emerging local players adds further to pricing pressures going forward.
As car demand continues to move towards private retail buyers and away from the big coastal centres to inland centres of population, market segmentation will likely shift towards small cars. Earlier this year the central government signalled that it wanted local authorities that had introduced traffic controls on small cars (in the face of congestion problems) to remove them. There have also been tax cuts on small cars. China’s dependence on imported oil makes it likely that official policy will be to encourage smaller cars.
The big joint ventures whose dominance of the industry is threatened are fighting back with models better attuned to local tastes. The Shanghai-Volkswagen Neeza shows just how serious foreign players are becoming about hanging on to market share and investing in Chinese products.
The next few years in China will be critical in terms of market evolution and positioning. The Chinese government’s latest five-year plan has set an ambitious objective for Chinese ‘own brand’ share growth. Will Chinese makers be able to maintain their price advantage over the JVs as they have to spend more on product development? Will Chinese car consumers (a rising number of car sales will be replacement ones, a proportion looking to upgrade) be attracted to the positive values of Western JV brands over cheaper Chinese ones?
The attitude of the Chinese authorities could be key. In August the Chinese government decided to postpone by two years a plan to impose high tariffs on some imported automotive components – a move designed to diffuse EU and US trade concerns. JVs would have been hit hard. But the row is far from over.
China may decide to tighten the screws on foreign makers if it thinks it can get away with it and that that is in the best interests of its developing indigenous auto industry. In these circumstances it is hardly surprising that foreign makers are going for a degree of ‘sinofication’ and having to play ball with the locals more than they might like to on technology (the GM hybrid plan for China is more about politics than selling cars).
China’s auto sector is certainly a high-growth environment and one that global carmakers cannot afford to ignore. But it has its challenges ahead too.
Dave Leggett
See also:
CHINA: ANALYSIS: ‘He who wins Guangdong wins China’
CHINA: Uncertainties cloud growth outlook – consultant
