Every senior executive wants to have a crystal ball that can predict the future so that they can understand what the industry will be like in ten years time. Of course, this is just an unimaginable dream.
Today, we are looking to the future and trying to describe the development of the Chinese automotive market by 2015, including the overall market, laws and regulations, products and markets, manufacturing and assembly, supply chain, branding, and marketing and aftermarket. Key areas. We will focus on describing the major trends in these areas and the accompanying "market discontinuities" and how automakers, suppliers and other market participants should properly respond to these trends and changes.
The second largest automotive market in the world
First of all, in terms of the overall market for Chinese cars, at least in the next few years, until 2015, Chinaâ€™s gross domestic product (GDP) is expected to grow at an average annual rate of 8% to 9%, resulting in an increase in wealth. Therefore, people's demand for automobiles will also increase. According to our forecast, by 2015, the annual sales of Chinese automobiles will exceed 10 million. This increase will quickly make China the second largest auto market in the world. This scale will have a direct impact on the fate of the Chinese auto market for many vehicle manufacturers (VMs) and suppliers around the world.
The Chinese market is likely to have a period of excess capacity. This situation is caused, on the one hand, by policies formulated by the government because the government wants to adjust the growth of demand through various policy levers; on the other hand, the vehicle manufacturers and Suppliers have long been entrenched in this rapidly growing market and are continuously investing funds. In this process, in order to gain more market share, vehicle manufacturers are likely to continue to shorten the cycle of new product development, which will further stimulate demand growth.
Second, in the policy environment, the Chinese government will continue to balance the overall development of the domestic automotive industry in accordance with its commitment to the WTO. The slowdown in the development of the automobile sector in early 2005 has further proved that this area is still largely under the government's macro-control, and both supply and demand need the government to control it through policy levers. The following are the levers for the control needs that several governments are using and/or may consider to use: including tightening loans (such as banning the four major state-owned banks from providing auto loans); introducing fuel taxes; tariff and non-tariff barriers; and increasing franchise fees, etc. . The government also manages the supply of cars by cooling investment in upstream production capacity through stricter investment control measures.
However, the government's 2010 work goal (the 11th Five-Year Plan) is to establish a mature, globally competitive automotive industry in China, making it one of China's pillar industries by 2010. At the same time, the auto industry must also complete another task, which is to increase fuel efficiency by 15% or more than the level in 2003. In order to accomplish this task, China has taken the initiative to develop low-cost, fuel-efficient cars that can use hybrid energy, hydrogen power, and/or existing new technologies during development.
Thirdly, in terms of products and markets, the current dominant market in China is still the joint venture brand of foreign brands and foreign companies and domestic companies. We expect local and foreign vehicle manufacturers to separate their ways in the next decade and gradually form their own brands.
China's major vehicle manufacturers will have their own research and development platforms, at least initially, to develop Chinese own brands that target entry-level customers and the mass market. Certain joint venture brands will even be split so that the joint ventures can seek their own development without any burden. Chinese automakers may go further, tailoring a car specifically for emerging markets around the globe, such as Eastern Europe, Southeast Asia, or India, and ultimately with its quality, safety and reliability, and with South Korean vehicle manufacturers. Similar or lower price positioning to the world.
We expect that at least one Chinese vehicle manufacturer will gradually enter the market segment of luxury or sub-luxury cars after 2015, while Korean and Japanese vehicle manufacturers will use it for nearly 50 years and 30 years respectively. Reach a similar stage of product development.
The fourth aspect is manufacturing and final assembly. Because after a large amount of investment in recent years, in the current mature, consumer-driven market environment, some vehicle manufacturers operating in China are facing from overcapacity, price and profitability. The pressure - this is the bitter fruit of overly optimistic and blindly increasing production capacity in the past.
We expect that these OEMs will seek to have manufacturing and procurement capabilities that compete globally, seek cost leadership, participate more in all aspects of the entire value chain, and gain more in the entire value chain. Economic benefits. In the next decade, we are likely to witness the emergence of a dynamic industry structure: many vehicle manufacturers will endeavor to merge and acquire shares of smaller Chinese vehicle manufacturers and even their foreign partners. Achieve greater business scale and product richness. The current general view is that before 2015, this market will be merged into three or four complete vehicle manufacturers, plus a few manufacturers occupying special market space.
Fifth, spare parts supply. At present, in order to better serve the customers of vehicle manufacturers in China, many suppliers continue to import large quantities of components and carry out production operations on a smaller scale. However, after the integration of vehicle manufacturers, the first-tier suppliers will also carry out further integration in order to achieve scale, higher profitability, and ultimately achieve world-class cost competitiveness. State-owned suppliers with R&D, supply chain, and export capabilities will be able to take their business to a new level.
By making full use of its position in China's domestic market and competing in terms of price, these suppliers will eventually achieve the above goals. They may also use their lower-cost process technology and production scope to increase their parts to a higher level. The cost-effective sales to overseas markets.
The last important aspect is that in the brand, sales, and aftermarket, as the customer obtains the bargaining power of cheaper products and services, the vehicle manufacturers and dealers will face considerable marketing, sales, and service aspects. The challenge. With the continuous expansion of product models in the market, branding and marketing will become more important. Vehicle manufacturers will have to invest more in marketing efforts to establish their brands, improve their product status, and promote product differentiation. .
We expect that by strengthening its brand position, vehicle manufacturers will play a more active role in product sales through restructuring and equity participation. The focus of work is to increase the overall standards of its dealer network to meet the standards of the developed countries' markets. In order to win new customers, vehicle manufacturers will increase the coverage of their sales network, so that the investment cost of each shop will increase and the sales volume of each dealer will remain at a low level. Managing profit margins will be a major challenge they must address.
On the other hand, the used car market will thrive and promote the sales of cars in areas where China's economy is relatively underdeveloped. At the downstream end of the value chain, vehicle manufacturers or other independent companies are likely to start real car life cycle management, sell these second-hand cars from first-tier cities and second-tier cities to third-tier cities, and ultimately increase overall car ownership. Rate, and shorten the new car purchase cycle in the main market. In order to meet the growing and complex needs of increasingly wealthy Chinese consumers, the sales of parts, accessories and accessories will also evolve rapidly through the sales network of world-class brands.
Trends and "inflection points"
Looking ahead to the market after 2015, we expect that there may be five "reasonable development trends" and four "inflection points."
The focus shifts toward small vehicles: The current passenger car market has already begun to clearly favor small and medium-sized cars, and this trend is unlikely to change fundamentally. The increase in the ability of individual consumers to pay, and the tendency of sales from institutional customers to individual customers, will continue to drive the development of small cars.
The shortage of oil will bring increasingly greater pressure on energy conservation, which will also accelerate the development of energy-efficient vehicles. Since vehicle fuel consumption accounts for one-third of China's total fuel consumption, it is necessary to take this step.
Competition for low-cost leadership: Foreign and domestic companies continue to inject funds into the automotive sector, which will lead to a stage of excess capacity.
Vehicle manufacturers will continue to increase vehicle richness to maintain and increase their market share. For instance, due to the inability to update the models, Volkswagenâ€™s market share in China has rapidly declined in recent years, which is a lesson for other companies.
New car prices will continue to decline, which will further stimulate demand. However, if vehicle manufacturers cannot reduce costs by about 8% per year, the increase in sales volume will not offset the impact of price reductions. They are likely to face long-term losses.
At present, parts and components are the main source of automotive costs: Although China's labor costs are extremely low, China's manufacturing costs are sometimes even higher than the world-class level by about 20%, so the cost of Chinese parts has remained high.
At present, China's auto parts market is still in a decentralized, small-scale state, the top ten parts companies only have 20% market share. With the continuous integration of the parts market, vehicle manufacturers will realize that even if they do not save costs at the expense of quality, it is possible to achieve real cost reductions. Although the procurement work in China will continue to increase, the relative gravity of China compared to Eastern Europe and other Asian regions will continue to be determined based on different procurement products, which will encourage vehicle manufacturers to continue to make decisions on different types of procurement products.
Rapid integration of vehicle manufacturing and supply chain: Driven by declining unit costs of auto parts and assembly and increasingly fierce competition, global vehicle manufacturers will pass through the three major auto manufacturers (FAW Group, The joint venture between smaller vehicle manufacturers other than SAIC and Dongfeng Motors continues to compete for its position in the market.
Although vehicle manufacturing is still highly fragmented, by 2015, vehicle manufacturers may still merge into three to four complete vehicle manufacturers and a few special vehicle market segments. Existing dozens of smaller vehicle manufacturers will find it difficult to achieve economies of scale and will eventually exit the market.
Faced with the challenge of marketing and sales: Although Chinese consumers are still in the process of forming brand preferences, compared with global standards, Chinese consumers' brand loyalty is indeed very low. Therefore, vehicle manufacturers need to invest a lot of money to establish and strengthen their brand status. Although brand awareness and brand preferences will ultimately affect the consumer's buying decision, the price (or at least the consumer's subjective perception of value) will remain the most important purchase criterion for the foreseeable future. Brand image and service will still be the main purchase criteria for vehicles in the mid-end and above markets.
Ultimately, as the brand positioning and quality performance of all domestic and foreign companies become clear, these standards will also apply to the low-end market.
In the era of state-planned distribution, supply needs to be distributed through central agencies, and vehicle manufacturers do not have, or have only a small amount of control over, the way they sell vehicles. Today, the way in which cars are sold has changed dramatically. Looking ahead, we believe that after participating in the WTO, this market will gradually enter the sales model under the control of vehicle manufacturers. In the near future, we are expected to see professional auto dealers who provide all-round sales, service, financing, etc. for domestic and imported products at the same time.
Most vehicle manufacturers will continue to face major problems in all major areas of sales work. This situation will take many years and a lot of investment to solve. The logistics network will also be continuously upgraded. The experience of Shanghai Volkswagen and Shanghai GM will become an important lesson for other Chinese vehicle manufacturers. VW and GMâ€™s expansion of their car service network has created a certain competitive advantage, and its nationwide warehousing, transportation and logistics network can meet consumers' demand for parts and services throughout the vehicle's service life. For smaller companies and newcomers to the market, the lack of such networks will become a major challenge, which makes them unable to provide high-quality parts and maintenance services with high cost efficiency. Enterprises such as Ford who later entered this market must quickly establish such a network before they can become long-term competitors in China.
The value is gradually turning to the downstream: At present, China's domestic revenue and profit sources are biased towards the upper reaches of the value chain, and investment is mainly concentrated in automobile manufacturing and parts wholesale. However, as in other markets, income and profit flows are likely to shift downstream, into areas such as auto financing, leasing, maintenance and service, auto parts, and other automotive services.
In addition to these major trends, we also found that this market still has a lot of uncertainty:
RMB value adjustment: For most multinational corporations, the adjustment of RMB value is a problem that must be forecasted and managed.
For China's OEMs, the value adjustment of the renminbi will reduce the attractiveness of China's export products while also reducing the cost of imported parts. For foreign automakers, adjusting the RMB value will increase the cost of overseas investment in China, but it will also reduce Chinaâ€™s import costs. For auto suppliers, after the value adjustment, the cost of purchasing imported raw materials and parts will be greatly reduced, but the price pressure on export parts will also increase. Finally, the operating costs of offshore financial companies in China will also increase.
Seeking development in the global market: The fierce competition in the domestic market and the success achieved in the early stages will all stimulate some Chinese OEMs to go global, including entering other emerging markets.
China's major vehicle manufacturers, including Chery and Geely, seem to be ready. Chinese automakers have begun to display their products at overseas auto shows, such as the Frankfurt Motor Show. Chinese vehicle manufacturers are also selling cars to other developing countries to gain experience in operating overseas. The experience of the Korean automotive industry also made a vivid lesson for Chinese automakers.
Develop energy-saving vehicles that meet China's national conditions: Due to serious concerns about the issue of fuel consumption, China will first propose relevant laws and regulations on a global scale and launch a series of cheap, energy-efficient vehicles. At present, China is facing severe challenges in energy conservation, air and water pollution.
The emergence of automotive life cycle management: As we can imagine, as the tide of car popularization develops from east to west, China will soon have a company that specializes in managing the automotive life cycle. This will encourage domestic and some foreign vehicle manufacturers to participate in it, so as to obtain profits in all aspects of the entire value chain.
Although our forecasting results are not specific and specific, we still hope to be able to map out major development trends and discontinuities that may affect industry development in the next decade. The road is long and long-term. The road ahead may not be smooth, but those who search and succeed and pass through will eventually be rewarded.
(The authors He Degao, Tan Bingyao, and Lin Zhaoxian, respectively, come from Boside Allen Greater China Vice President, Booz Allen Greater China Director (Shanghai), Booz Allen Greater China Director (Taipei). Booz Allen Consulting The company (Booz Allen Hamilton) is a consulting company and has been at the forefront of consulting services for companies and governments for more than 90 years.)
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