Blog: Dave LeggettChina's fragmented industry

Dave Leggett | 26 April 2010

China's auto industry is still highly fragmented and has stubbornly resisted efforts to bring about faster consolidation. The reason is mainly political. Local municipal authorities in China carry a lot of weight and tend to support local manufacturing activities (they might also own them).

China's economy is regionally organised and automakers in a given area mainly serve a local – if large - hinterland. The cars on the road in the major Chinese cities firmly reflect the local regional manufacturing set-up.

One intriguing question is how the structure of China's auto industry will be shaped by the boom in demand now taking place and projected to continue over the next five years. Will we see the emergence of clear winners and losers, the market winners able to further exploit scale economies for competitive gain and force further restructuring of the auto industry?
The pessimists will argue that local/regional interests will remain as entrenched as ever, acting as an obstacle to further consolidation that would improve international competitiveness. Market growth that makes the overall market pie bigger could even help to keep small players – who would perhaps be uneconomic producers in other circumstances - in business.
It's a headache for those in China who would like to set a development strategy for the industry as a whole. The impediments to free markets in China are not necessarily controlled from Beijing, which makes the formation of a credible national strategy for China's auto industry as elusive as ever.
But how will the boom in sales over the next five years ultimately help to shape China's auto industry? It's a big question and one that will have a major bearing on future profitability for car companies operating in China.

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