The history of automotive industry in China

Over the past two and a half decades, China has experienced rapid growth in the population of motor vehicles on its roads. The annual rate of growth in China’s vehicle stock has been over 10%, and this trend will continue. As the world’s largest emerging economy, China has become the most important investment destination for automotive companies. According to Reuters, in 2002 China overtook the USA as the biggest recipient of foreign direct investment, rising to an estimated US$53 billion. In 2009 China overtook the USA again as it stepped up to be the world´s largest automobile market thanks to rural subsidies and tax cuts on purchases of smaller vehicles.This clearly reflects the importance of the country’s position as a major production site and marketplace for automotive products. It also highlights international investors’ support for China’s entry into the World Trade Organization (WTO) in November of 2001

China’s auto industry first came into being at the beginning of the 1950s. The First Auto Factory was founded in Changchun, northeastern China, with the technological assistance of the former Soviet Union. The Second Auto Factory was completed in Hubei province, however total car production in China amounted to a mere 5000 units even in 1983. In 1985, Shanghai Auto Factory and Volkswagen inaugurated production of the "Santana" in China. From this point on, there was full-scale cooperation between the Chinese auto industry and multinational auto companies. In the 1990's, with the expansion of China’s openness, the major multinational automakers of the world advanced into China one after another and auto production in China increased rapidly until 2000. After China entered the WTO in 2001 the reduction of entry barriers attracted the rest of the global automotive manufacturers to enter the market. According to China’s auto industry policy, the portion of ownership of foreign automakers cannot surpass 50%. Therefore, a foreign auto company trying to enter China’s market must cooperate with a Chinese automaker. Moreover, the number of partners is stipulated at no more than two. As a result, the market shares of foreign automakers also reflect the market shares of automotive companies in China.

Although foreign automakers have been operating in China for almost three decades, the trend of conducting their product research and development in the Empire of the Middle is relatively new. Up until the late 90s China was still considered a destination of cheap labor only, however in recent years the increasing amount of governmental investment in institutions of higher education, logistics, technological parks and infrastructure have attracted foreign auto manufacturers to setup R&D centers there.

Due to the constant growth of the Chinese automotive market in the last years, OEMs and suppliers have faced a shortage of time, funds, resources, engineers and managers. Although there are several universities in China with automotive departments, given the increasing demand for automotive specialists, there is still an insufficient number of qualified automotive engineers when compared to international standards. Despite these difficulties, every global auto manufacturer has now established R&D centers in China and continue to increase their investments in them. As a response, the local government has attempted to even out the distribution of foreign presence, by establishing and expanding automotive centers in more remote regions of the country.

The ever growing importance of the Chinese market and the strategic significance of creating competitive advantages in China, has led foreign automotive companies to invest in their activities in China and to conduct on location R&D activities. The main reason for this is that the automotive business requires intense local product adaptation and intensive customer cooperation.

In order to overcome the difficulties, within the Chinese automotive industry, most companies have resorted to co-operation with universities and automotive companies along the supply chain. This has mainly offered advantages with respect to development time reduction, joint use of resources and facilities and regional market knowledge. In many cases the cooperation with universities has been preferred since universities are a good source of qualified automotive engineers. Second, universities might possess testing facilities crucial for product development, such as an engine testing facility. Both reasons are resource-based. Siemens VDO (now Continental AG), for example, has a strong exchange and cooperation agreement with the automotive faculty of Changchun University of Science and Technology. Another potential source for co-operation partners is Chinese automotive firms along the supply chain (vertical integration). They can help to attract customers and build long-term business relationships with key customers. In this case competitors are not be considered as cooperation partners due to apprehension of unwanted technology transfer.

In this article we have taken a look at how the Chinese automotive industry came into being. Next up, I would love to expose some of the advantages and potential pitfalls that foreign companies may face, when entering this very special market. I hope this was an enjoyable read and I look forward to meeting you again in the next post.

Possible strategy for conquering the chinese automotive market

In the last article of this series about the Chinese automotive market, we will take a deeper look at  how the industry is currently divided. I will wrap up the topic with a possible market strategy, which could be pursued by foreign start-up companies looking to tap into China.  If you have arrived here  by accident, then I suggest you start with the first article of the series: The History of Foreign Automotive Companies in China.  Now that I've got my introduction paragraph out of the way, let's get to what really matters, shall we?

Despite its potential, China's consumer market is not one without challenges and limitations. Boasting one fifth of the world’s population and a diverse income disparity between urban and rural residents, China's consumer market is very much fragmented. Although China's overall consumption has been growing exponentially in the past decade, individual markets have been developing at their own pace, factored by variations in the level of economic and social development in different regions and cities within the country.

The urban Chinese market

Changing demographics in China has raised a generation, below 30 years of age, that is less careful in consuming, as compared to their predecessors who were brought up to cherish the virtues of saving, under the influences of the Cultural Revolution. Due to the country’s one-child policy, the new generation of Chinese  was raised by several adults, thereby enjoying a larger margin for spending. Now of consumer age, this group of individuals is constantly exploring the market for global trends, under the influences of the internet and foreign media.

The Chinese middle class is also observed to be stronger. Broadly based on the level of disposable income, educational levels, as well as purchasing habits and attitudes, this group of consumers has adopted modern purchasing habits. Estimated at 250 million of the population, this group of middle class consumers is fast becoming one of the key drivers behind the growth of most product categories that enjoy high penetration within the country.

The rural market

In 2009 the Chinese government launched an incentive for purchasing cars with engines under 1.3 liter. Sales in China's immense hinterland are booming, encouraged by tax cuts, government subsidies and growing consumer spending power. Through these measures, a door has been opened to an immense number of first-time buyers who did not have the perspective of owning a vehicle before. Many of these customers are laborers returning home after years of work in eastern cities and are now deciding to invest their savings in the purchase of a family car.

In farmlands throughout China, the vehicle of choice appears to be micro-minivans such as those made by Wuling and Changan. The reason for this being the fact that these type of vehicles can be easily used as means to generate income for the car owner.

Possible market strategy for China

While the per capita disposable income of urban households in Shanghai was at RMB 20,668 in 2006, in Gansu, a less developed province, the per capita net income was no higher than RMB 8,921. As a result of this economical disparity, comes also a disparity in the expectation of consumers towards the market. While the more influential city population seeks for greater brand value in products, others are contended with meeting bare necessities. As such, companies entering into the Chinese market should adopt a strategy to reach the different markets.

Instead of just targeting consumers with a higher income, brands must stretch vertically, to reach the majority of Chinese with a lower disposable income. Processes down the line of supply chain management must be adjusted, while products characteristics are modified, so that prices are made more affordable for a wider customer base.

According to statistics provided by Shanghai Securities Journal, women are now the major car buyers in the Chinese market. In the first two months of 2012 women consumers accounted for 51.4% of car sales whilst men accounted for 48.6%, the first time that female consumers had exceeded male consumers in the Chinese market. Start-up automotive companies should seek to gain an edge over the competition, by developing products that appeal to the taste of these new buyers. They must identify fields where the competitors have not yet reached and work there strategies from there. Because China is a very complex and unique market, these opportunities could arise in sectors that are less obvious in other regions.

China’s capability in developing indigenous auto parts and core systems remains rather limited. In recent years, with the support of the Chinese government, the auto industry has invested heavily in R&D and an increasing number of R&D centers and laboratories have been established by Chinese automakers and research institutes. Meanwhile, several international auto giants are moving their R&D centers to China. Joint R&D centers and laboratories are still strongly encouraged by the government. Due to ongoing concerns with regards to the protection of the environment and energy consumption, innovations in areas such as fuel cells, hydrogen power, natural gas engines, and hybrid engines present good opportunities in China.
Well, this is it for this series on the Chinese automotive industry. At this point, I would like to thank you for taking the time and would strongly suggest that you browse our other articles focusing on this and other industries in China.