Understanding the Chinese automotive industry for 2010 - With over 100 companies, the battle to acquire customers has now heated

Theme05

Understanding the Chinese automotive industry for 2010

Part.2
With over 100 companies, the battle to acquire customers has now heated

　Competition is heating up in China’s automotive market. The continued rapid growth of the Chinese market has attracted a vast number of new companies wishing to enter the market, and there are now more than 100 manufacturers participating. In China, the market positions of participating companies are relatively vulnerable. Only companies that can adapt to changes in the market are able to attain the market, irrespective of past performance or brand power. The selling price of passenger vehicles in the popular price bracket continues to fall by around 2 to 5% annually. To gain an edge over the rivals, the ability to perform low cost manufacturing has now become a crucial issue for car manufacturers.

China, as a competitive market crowded with many manufacturers

　One of the competitive characteristics of the Chinese market is the sheer number of participating manufacturers. There are currently more than 100 car manufacturers, both foreign-affiliated and Chinese-funded, participating in the Chinese market. As markets in developed nations reach maturity, major automotive manufacturers from those countries have positioned China as a highly important market. There has also been a succession of new entrants with Chinese capital. Besides automotive manufacturers established by the central or regional government, companies from various industries such as military, aircraft, finance and investment, automotive components, motorbikes, and consumer electronics, have incorporated car manufactures. New car companies spawn all over the place.

　As a result of the vast number of new entrants, the share of the Chinese market is quite scattered. Figure 2-1 illustrates the combined market share of top three companies in China, Japan, the U.S. and Germany. While the top 3 companies account for more than 50% of the market share in the U.S. and Japan, this figure is only a little over 20% in China (refer to the left-hand side of Figure 2-1). Furthermore, there is no single manufacturer seen as a dominant leader in the Chinese market. In both Japan and Germany, the leading manufacturer owns approximately 30% of the total market, and in the U.S., the market leader accounts for more than 20%. In contrast, however, the share of the leader company in China doesn’t reach even 10% (refer to the right-hand side of Figure 2-1). In sum, there is no absolute market leader recognized in China, nor does there exist any top group formed with the power to dominate the market.

The position of each company is in flux, with one hit model enabling inversion

　The market share is highly fluid in the Chinese market. Only manufacturers responding to the changes of the market are able to increase their sales. Figure 2-2 depicts the top 10 companies with the highest number of shipped vehicles in 2009 (for locally-produced vehicles only), and analyzes the relationship between the shipment in 2008 and the incremental increase from 2008 to 2009. Figure 2-2 does not indicate any correlation between the performances of the two years. In the rapidly expanding Chinese automobile market where the majority of consumers purchase a car for the first time, automotive manufacturers need always reinvent their existing distribution networks and spill over brand power.

　BYD Auto is one manufacturer that demonstrated a particular surge forward in 2009. BYD Auto is the automotive arm of BYD Co., Ltd., a company that manufactures and sells lithium-ion batteries for computers and mobile phones. In 2003, BYD Auto was founded when its parent company acquired a small automotive manufacturer with an annual production scale of 20,000 vehicles. BYD Auto has now shipped more than 450,000 vehicles annually to rank as the 6th highest of all passenger vehicle manufacturers (including foreign-affiliated companies), behind the likes of VW, GM and Nissan. It is the top Chinese-funded passenger vehicle manufacturer, having overtaken Chery Automobile Co. Ltd. and Geely Automobile, the two companies previously ranking in the top positions (see Figure 2-3). The ‘F3’ (Figure 2-4) from BYD Auto, a sedan with 1,500cc displacement, largely contributed to the company’s huge leap forward. Although the design of the F3’s external appearance is reminiscent of the Toyota Corolla, its sales price was originally set at 70,000 yuan (approximately 10,000 U.S. dollars), which is about half the retail price of a Corolla. It was introduced to the market progressively from 2005, mainly to regional cities. With the help of the Chinese government’s favorable measures for compact vehicles, BYD Auto sold 290,000 units of F3 in 2009, making it China’s most popular passenger car that year.

Reduced prices led by Intensified competition

　The increased intensity of the competition has appeared as the fall in sales prices. Figure 2-5 depicts the changes in sales prices of the 15 popular models between 2006 and 2008. Prices dropped by 2 to 5% annually as for the models in the range of 50,000 to 200,000 yuan. Given that the operating profit of automotive manufacturers is 7 to 8% (*1), it is noted that approximately half the profit of automotive manufacturers in the Chinese market is being stripped away each year due to market competition.

　While the sales price of basic model of BYD F3 had been set at 70,000 yuan initially, the actual retail price of this model fell to approximately 60,000 yuan in 2008 (see Figure 2-5). AS Chinese manufacturers have superior cost structure over foreign-affiliated manufacturers, they take the lead in price setting, as far as the cars in the low and middle price bracket are concerned. Foreign-affiliated manufacturers must build more competitive cost structure. Whether a company can reduce its manufacturing costs largely depend upon whether it can reduce the costs of components, which are said to account for approximately 70% of vehicle manufacturing cost. Foreign-affiliated manufacturers are now looking at switching from imported parts to local parts, expanding the field of locally procured parts, and exploring new partnership with local suppliers.(»Download a free whitepaper to read the full story.)

（*1）In the period ending March 2008, which was the latest reporting period prior to the Lehman collapse and without its resulting influences, the consolidated operating profit of Toyota, Honda and Nissan was 8.6%, 7.9% and 7.3%, respectively.

Go back to Part.1

Free download of the related whitepaper is available
Please click the button below.