China is selling cars faster than anywhere else in the world. In 2007 it overtook Japan and two years later, automotive sales overtook the US to become the world’s largest automotive market. The staggering sales and output is showing few signs of stopping; in 2009 China outproduced the US almost 2 to 1 with 19.27 million units produced compared to 10.3 million units in the US. 2014 showed signs of a slowdown, as have the first quarter of 2015; total sales growth is still expected to rise with 8% reaching total sales of 21.3 million vehicles this year.
The sales are mainly driven by Original Equipment Manufacturers (OEMs) and is funneled through China’s 2770+ authorized dealers. A rough quarter of the authorized dealers are so called mega dealerships which belong to a network of OEM-authorized auto dealerships that sell multiple brands under the same roof. The mega-dealerships account for close to half of China’s total auto sales.
As of 2011 there were 115 native automotive companies in China, despite government attempts to consolidate the industry into a few major players in accordance with the very succesful Japanese model. The major Chinese automotive manufacturing entities such as SAIC, Dongfeng, Geely, and GAC are State Owned Enterprises which focuses on output rather than quality and innovation and has done poorly in international markets. Repeated low ratings in safety tests have furthermore cemented the reputation about Chinese cars as being unsafe, despite efforts to correct this.
Domestically, Chinese brands account about 42% of total sales. As of last year, GM was the bestselling international brand in China with 14.7% of the market, closely followed by Volkswagen with 14.6% of the market share.
A brief history of China's automotive industry: Early Joint Ventures
Volkswagen made history as the first Western company to build a plant in China when it joined the Shanghai Automotive Company (now SAIC) in 1982. The Joint Venture set the stage for the model and policy dictating how the West would do business with China; by partnering up with Western car companies, the Chinese automotive companies got valuable lessons about R&D, while the access to the enormous Chinese consumer market was a deal too good to pass up on for Western car companies, despite difficulties of protecting their intellectual property in the JV. Currently, virtually every major car manufacturer is no collaborating in Joint Ventures with one or more Chinese counterpart.
Volvo's latest R&D facility under construction constructed in the Jiading car district in northern Shanghai.
Policies for energy efficient vehicles
During 2009, the Chinese government introduced auto stimulus policies which led to a staggering 40% growth rate in China’s auto market during the following year. The stimulus was followed by a second stage of reconstruction, concentration and stability between 2011-2013. The current stage is one of “indigenous innovation” which focuses on new technologies to promote energy efficient automobiles, most notably Battery driven vehicles and Plug-in Electric vehicles. This is also in accordance with the 12th 5 year plan (2011 – 2015) which includes specific directives to promote New Energy Vehicles and is also part of China’s efforts to have its industry climb up the value chain.
The Chinese government is actively supporting this growing segment making it a major opportunity for foreign companies with expertise in this area. The stated goal is to have 500 000 Battery Electric/Plug-in Hybrid Electric vehicles on the roads by the end of this year, and a total of 5 million by the end of 2020.
Further trends & opportunities
Aftermarket sales as the market matures
80% of China’s current auto parts and accessories market revenue comes from new vehicle sales; only 20% comes from aftermarket sales (here being defined as car maintenance, parts, modifications and renting). This can be compared to Western markets where the aftermarket sales account for a whopping 60% of the total revenue. The aftermarket is part of a maturing car market and is where much of China’s future revenue will take place.
Used car market
As a testament to the rapidly maturing car market in China, sales of used cars went from 250 000 in 2000 to 3.3 million a decade later. Major auto manufacturers are intending to take advantage of this booming segment by offering used-car services in its certified dealers across China.
Recreational vehicles (Mobile homes)
A growing segment in China’s automotive industry is the Recreational Vehicles (RV) market which follows the new aspirations of China’s growing middle class as they go on holiday in China. China has over 3 billion domestic tourists annually. The RV-market is growing by 30% annually and is this year it’s expected that the number of RVs on the road will reach 15 000. The RV-market is still very small compared to Western countries but is expected to grow steadily. Following this development, the first RV camping site was established outside Shanghai as of last year.
The new tier 2 and 3 markets
Shanghai and its surrounding provinces (Zhejiang, Jiangsu and Anhui) still accounts for about 44% of all domestic production, making it a natural place to start when entering the Chinese automotive market as a Western subcontractor. But a lot of the most interesting development is happening in tier 2 and 3 provinces. The automotive cluster located in Chongqing in China’s inland for instance, accounts for 11% of domestic car production making the region China’s 4th largest automotive producer.
The prospects of cheaper labor and closeness to the new tier 2 and 3 consumers are growing increasingly attractive among Western car manufactures.
Sustainability
Furthermore, the soaring car ownership in coastal Tier-1 cities such as Beijing and Shanghai is creating congestion where the current levels of vehicle growth per year (currently around 6-12%) cannot be sustained. In Beijing, vehicle plate registration is controlled by a state lottery and in Shanghai its regulated by its auctioning out a limited number of plates per month; in these auctions prices typically reach a staggering 70 000 – 80 000 RMB. Despite these efforts, almost 100 000 car plates are expected to be registered in Shanghai in 2015 as the roads are getting more and more congested.
New markets
Road grids in tier II and III markets inland are still able to absorb new traffic and is growing increasingly relevant for both domestic and international car companies. These markets focus on smaller and cheaper cars, such as the Baojun by the Joint Venture GM-SAIC-Wuling which was designed especially for the low priced market where it has experienced explosive growth. Similarly, a Nissan/Dongfeng JV has launched its on budget car called Venucia to compete in the below 10 000 USD market.
Conclusion
China’s automotive industry presents plenty of opportunities for Western subcontractors, especially in the field of New Energy Vehicles and in aftermarket services. Tier 2 and 3 markets are hotspots for international car brands selling smaller, low priced vehicles; development is sure to continue booming in industrial parks across regions like Jilin, Chongqing and Guangdong. Shanghai and surrounding regions is still a major hub for R&D and manufacturing and presents perhaps the easiest target for a Western subcontractor looking to enter China.
More information about China’s Business Clusters.
More information about China’s Tier 2 and 3 markets.