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.

When locating specific suppliers in China, business clusters are usually a good place to start. A business cluster is defined as a geographical concentration of interrelated businesses which benefits from the co-location in a number of ways as well as a value added production chain. If you are looking for aluminum products, source in Nanhai, if you are looking for linen products, turn to Suihua in Heilongjiang, IT and circuit boards, source in Suzhou, etc. Knowing about these clusters is valuable knowledge when deciding about where to set up operations, outsource production or find suppliers in China.

Formation

Business clusters usually form spontaneously by the work of market forces, or develop out of pre-existing special economic zones, such as the information and technology clusters in Beijing and Shenzhou and the electronics and biotech clusters in Shanghai’s Pudong area. There are export driven clusters, resource-driven clusters, market driven clusters, and so forth, depending on their geographical location.

The tailors of Cixi

Regional specializations are nothing new to China. One interesting example is the tailoring center of Cixi in Ningbo which traditionally served as a major clothing manufacturer to Beijing from 1680’s to the 1930’s. When the local government looked for ways of growing their region, they looked back in history, and transformed factories producing military uniforms to instead produce more specialized garments, and gave support to local business owners. The Cixi cluster now produces around 5% of China’s total textile output.

Other notable specialized clusters are Datang in Sichuan province which produces some 6 billion pairs of socks each year, or the city of Dongguan in the Pearl River Delta which creates a third of the world’s supply of magnetic recording devices used in computer hard drives.

Differences between clusters and Special Economic Zones

Sometimes a specialized cluster develops out of China’s many Special Economic Zones (SEZs), but most of the time they do not, and a business cluster differs quite a bit from SEZs generally speaking, in that the SEZ usually receives more foreign direct investments, have stronger focus on export with closer links to the global markets, and usually have greater access to technology. Conversely, a business cluster tends to operate in more labor intense, low-tech environments where local government support isn’t quite as enthusiastic as in a SEZ.

Industrial Parks

In some cases, the local government supports the specialized cluster by establishing an industrial park, which in effect is a government entity. If you are establishing a factory in China, locating in an industrial park can offer some unique benefits, such as proximity to local officials, tax authorities, environmental inspectors, etc., who usually have offices in the industrial parks. This proximity can facilitate increased Guanxi with such officials, and offer unique advantages, as one well connected Chief Finance Officer said in an article in Asia magazine: “For other companies it will take three months to get one approval. For us, maybe three days”.

Where to look

The vast majority of China’s industrial clusters are located near China’s east coast, where infrastructure is much more developed than in the west. A survey made in 2006 of 138 foreign and domestic logistics companies by real estate firm Jones Lang LaSalle, found that over 80% of their warehouses were located in just three different regions: the Yangtze River Delta, the Pearl River Delta and Greater Bohai Bay.

Bild: Scandic Sourcing

Ett växande antal västerländska företag har börjat flytta tillbaks sin tillverkning från Kina till sina hemländer; ser vi början på slutet för tillverkningsindustrin i Kina? 

Ökande lönekostnader för arbetare i Kina har fått en del Amerikanska företag att flytta tillbaks sina fabriker till USA. En undersökning av Boston Consulting Group i September 2014 visade på en 20%-ig ökning bland Amerikanska företag som flyttat tillbaks sin produktion till USA eller till det billigare Mexiko.

Trenden att flytta ut ur Kina sker dock i väldigt liten skala och är begränsad till vissa industrier. Medan industrier som textiler, skor och klädesplaggsföretag i stor grad flyttat eller anammat en +1 strategi för sin tillverkning från Kina till länder som Vietnam och Bangladesh, (där lönenivåerna ligger på ungefär en tredjedel motsvarande Kinas), så gäller detsamma inte inom mekanisk industri. Enligt ännu en undersökning av Boston Consulting Group i Februari 2012, har en majoritet av producenter av metallprodukter, elektroniska och elektrisk utrustning, datordelar och industriell maskineri, inga planer på att flytta tillbaks sin industri. 

80 000 tillverkningsjobb har flyttat tillbaks till USA under de senaste tre åren. Idén om att tillverkningsjobb i stor skala kommer återvända är dock inte realistisk.

“Huvudskälet till att Kina fortfarande är attraktivt för västerländska tillverkare är att det inte finns tillräckligt med kvalificerad personal på hemmafronten, särskilt inom mekanisk industri”, säger Per Linden, VD för Scandic Sourcing som har konsulterat västerländska företag hitta leverantörer i Kina i över 9 år. ”Det finns fortfarande gott om kvalificerad personal såsom ingenjörer, maskinoperatörer och svetsare i Kina och kapaciteten för industriell produktion är enorm; trenden att tillverka i Kina kommer inte vända i någon nära framtid”.

 De flesta experterna är eniga.

“Det har tagit 60 år för [outsourcing] att hända, och det kommer ta årtionden för det att vända”, säger Harry Moser, grundare och VD för Reshoring Initiative som aktivt lobbar för att få tillbaks tillverkningsjobben till USA. Enigt Moser är trenden med att företag lämnar Kina överdriven. ”Ingen påstår – åtminstone inte vi – att vi kommer se miljoner jobb komma tillbaks”, säger Moser. ”Det vore både irrationellt och ansvarslöst att påstå. Och vi har inte arbetarna, yrkesutbildade arbetare att klara av det”.

Många amerikanska tillverkningsföretag som har flyttat tillbaks till USA har upplevt problem med just att hitta tillräckligt med utbildad och pålitlig personal, enligt Forbes. 

En annan stor anledning som gör att företag väljer att stanna i Kina är Kinas konsumentmarknad. Med en växande medelklass i storleksordningen 350 miljoner människor är Kina troligen en viktig marknad för många företag under de nästkommande årtionden och det är skäl nog att behålla en fot i dörren. Därför har även företag inom textilindustrin kvar tillverkning i Kina och flyttar produktion till Sydostasien med en såkallad +1 strategi, hellre än att helt lämna Kina.

En stor anledning till att företag blir kvar i Kina: direkt tillgång till en av världens största konsumentmarknader. 

Per Linden sammanfattar situaitonen med att tillgången och prouktionskapaciteten I Kina är såpass stark att huvuddelen av världens tillverkning kommer förbli kvar I Kina under lång tid framöverk, och att trenden att flytta tillbaks produktion till sitt hemland förblir i liten skala och är begränsat till vissa industrier. Framtiden för tillverkning i Kina är således fortsatt ljus, trots de ökade lönekostnaderna för kinesiska arbetare. ”Även i Kina är det stor efterfrågan på verkstadsutbildad personal som maskinoperatörer, svetsare osv., så framtiden kommer innebära mer effektiva fabriker som blir mindre personalkrävande, med effektivare flöden”, avslutar Per Linden, vilket kommer göra Kinesiska fabriker än mer konkurrenskraftiga i framtiden.

China might be enveloped into one border, but the differences in development and culture from region to region is enormous. Albeit the central and western parts of China has seen tremendous development efforts the last 10-15 years or so, they are still a far cry from China’s Eastern seaboard in terms of everything from local government support, to infrastructure, salaries and standards of living. Every province has ups and downs; and more crucially, every region challenges Western business owners with some kind of trade off in terms of cost vs supply chain. So the big question for any international business owner looking to invest in China is – where to start? Scandic Sourcing has put together an analysis.

Setting up in Eastern China – pros and cons

The bulk of Chinese manufacturing is taking place in China’s Eastern provinces such as Guangdong, Beijing and Shanghai. These regions subsequently has the highest salary- and operation costs and the lowest provincial GDP-growth – as much of the Foreign Direct Investment (FDI) is now streaming westwards with provinces such as Chongqing now receiving almost as much FDI as Shanghai. But China’s Eastern seaboard do offer other benefits such as greater access to a full supply chain, logistics and labor.

Increased Costs

The biggest benefit with moving West is the much reduced land and labor cost, which has skyrocketed in Eastern China the past years, especially in cities such as Beijing, Shanghai and Hangzhou. Just the cost of industrial land has seen an average increase with 11 USD to 21 USD per square foot in Eastern China and the minimum wages has risen with over 70% the last couple of years. Some western companies interviewed in a 2012 study by the British Chamber of Commerce claimed that the salary costs in Shanghai for an experienced engineer was almost the same as in the UK, whereas had they located in Xi’an in the Shaanxi province, the cost had been much lower.

The growth of Central and Western China

Western China and Central China has been targeted by two concurrent government campaigns such as the ”Go West” initiative in 1999 which targeted 12 Western provinces with over 8.5 trillion yuan over a decade, during which imports and exports in these provinces grew nine fold. Another campaign, the Rise of Central China campaign in 2004 saw a similar influx of government funds to bolster Central China’s regional development. The FDI to central China has risen dramatically with the growing development; for instance in Chengdu, the capital of the central Sichuan-province, 238 of the global fortune 500 companies has set up shop and the city now receives more foreign investments than Beijing. The future holds great promise for the Central and Western regions of China with cities such as Kunming, Chongqing and Chengdu destined to become future metropolises in par with Beijing and Shanghai.


Moving to Central China – pros and cons

The reasons to move to Western and Central China are, as mentioned, its much reduced labor and land costs. While the minimum wage can rise to 1600 yuan/month in regions such as Shanghai and Guangdong, it can dip well below 1000 in Western and Central China, and factory rental space can be one fourth of eastern counterparts. A study cited by China-Briefing from 2012 found that factory rental space fluctuated from 41 usd/square meter in the Eastern province of Tianjin, to 10 usd/square meter in Qingdao, which of course is significant.

One of the problems with these reductions in operating costs is that when they are balanced against the rising cost of transportation from the inland to China’s ports (a cost almost equivalent or more expensive than bringing the goods from China to its Western destination), the de facto cost savings for companies is not as big as one might expect.

Companies such as Kolkraft considered moving their operations to Hubei in central China and calculated that the total savings would only amount to 5-10% - which wasn’t enough to justify relocation considering the added difficulties in Central/Western China. Another company cited in a recent Economist article, Topline, found that moving inland would induce huge extra costs and take more time as shipping their products through China to the coast would take an extra week. Consequently, their supply chain remains on the coast. 

Other problems with inland China is that the local government isn’t as professional as they might be in the East, as they are not as used to dealing with foreigners, and more often than not adopt a supervisor role rather than a service providing role (although this might be true to some degree in almost entire China). Firms setting up in Chengdu, Wuhan and Chongqing describe the efforts as almost completely unassisted by the local government, whereas they previously enjoyed thorough support in the regional city governments in coastal provinces.

Regional Cities

China’s leading cities such as Shanghai and Beijing are surrounded by a cluster of smaller cities where conditions might be more ripe for investment for foreign business looking to reduce costs while not sacrificing access to supply chain and infrastructure. Sub-cities such as Kunshan, Suzhou and Hangzhou, west of Shanghai enjoys the benefits of the latters infrastructure and high speed rail network, while having lower operating costs (such as electricity, land and labor costs) as well as a more enthusiastic local government support. One company cited in a Brittish Chamber of Commerce report from 2012 said that the local government in Shanghai wasn’t interested in talking to them lest they invest a minimum of 100 million USD; but after inquiring into relocating to the neighboring city of Suzhou, half an hour west by the high speed train network, they found that the local government was much more willing to offer valuable support in form of tax breaks, reduced rent, accelerated investment approval and other preferential treatment without such requests.

Conclusion:

Research the local conditions of various regions to find the one most suitable for your specific business. The most succesful businesses operating in China are the ones who adapts their business model to suit local conditions. Having adequate knowledge about local conditions, such as the legal environment, local customs, and potential business partners and suppliers in the area is crucial. One good place to start is to ask yourself where your competitors are located. Where are they and why are they there? Manufacturing in Central China can be a good choice if domestic customers are the focus. Similarly, if export is the main focus of your business, the coastal areas should rather be considered.