Chinese Car Manufacturing by Bernhard Adriaensens International Consultant in Automotive Marketing and Management (www.marketing-automotive.org). Academic Director Executive Programme for the Automotive industry (www.solvay.edu/auto)

1. The Chinese Car Industry
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2. Is there something we can call
«the chinese car industry model» ?
• Less than 10 years ago, China's annual car production did
not match the output of a single large auto company in a
developed country.
• China’s monthly vehicle sales surpassed those in the United
States for the first time in January 2009, moving this
country closer to becoming the world’s biggest auto
market.
www.marketing-automotive.org
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3. Is there something we can call
«the chinese car industry model» ?
• The Chinese government will spend 5 billion yuan (about
$730 million) on subsidies to farmers to replace high-
emission vehicles, three-wheelers or outdated trucks,
• and another 10 billion yuan ($1.5 billion) to automakers to
upgrade their technology and develop alternative energy
vehicles.
• Yet China is home to almost as many automakers as the
United States, Japan and Europe combined.
www.marketing-automotive.org
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4. Is there something we can call
«the chinese car industry model» ?
In this short survey we will
try to find out the key
differences between the way
cars are manufactured in
China compared to other key
countries.
www.marketing-automotive.org
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5. Sourcing strategies
• Compared to the Japanese automakers sourcing usually
from two or three suppliers for each category of parts
(multi-sourcing), the Chinese manufacturers buy a single part
from two suppliers (double sourcing).
• If, at the launch of a new car model, the Chinese
manufacturer is not able to select two suppliers, they will
source from a second supplier as soon as the new model
enters in mass production.
www.marketing-automotive.org
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6. Sourcing strategies
• In Japan, the supply relationship will last as long as the
production of the model continues (usually for 4 years).
• In China, the relation between assembler and supplier last
for one year.
• A new bidding will be organised year by year (short term
relation).
www.marketing-automotive.org
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7. Sourcing strategies
‣ In some cases for cars which have been produced since
several years, Euro-Sino assemblers use double sourcing
qnd for new models single sourcing
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8. Development costs
• In Japan, the cost of developing a new component is born by
the assembler. The supplier recovers the cost on
installments. This is done in 24 months by adding the
development costs to the price of the component.
• In case, the sales of the car fall short of the initial plan, the
assembler compensate for the remaining development cost
(risk sharing system).
www.marketing-automotive.org
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9. Development costs
• In China, the supplier will recover the development cost by
adding it to the price of the component.
• But the assembler will not take into consideration the cost
in case it stops purchasing one-sidedly (High risk for the
supplier).
• In case the Chinese assembler buys from a foreign supplier,
it may take care of the development costs by buying the
tools or by guaranteeing a minimum amount of parts.
www.marketing-automotive.org
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10. Development costs
• European assemblers usually pay for the development costs
(including the cost of making dies) right after the supplier
has completed the parts development.
• Some Euro-Sino joint ventures adopt this way of
proceeding.
www.marketing-automotive.org
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11. Development costs
• Euro-Sino joint venture strategy stands in the middle of the
two extremes.
• Sometimes they buy from more than two suppliers.
• They classify the suppliers in three groups : A, B and C.
‣ they buy 60 to 70 % from A,
‣ 30 to 40 percent from B
‣ and keep C as reserve in case the car model is a big sales
success.
www.marketing-automotive.org
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12. Why these differences ?
• The Japanese model :
• Early involvement of the suppliers during the
development phase of a new car forces the suppliers to
invest in making dies and specialized equipments and
therefore a lot of man power and development costs
before having a return on investment.
• Without a clear guarantee from the assembler, very few
suppliers would accept to enter in such deals.
• Japanese-style sourcing give to car pricers the advantage
of a great commitment from the suppliers to the
development of new cars (they think long-term).
www.marketing-automotive.org
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13. Why these differences ?
• The Chinese model :
• Chinese car producers develop new cars by using existing
components (with some modifications, if necessary)
• Therefore supplier’s initial investment for developing new
components may not be very expensive.
When an assembler stops buying a specific part, there are
great chances that the suppliers can find other
assemblers who will buy the same components.
• In this case, the risks of new development costs, are
relatively low.
www.marketing-automotive.org
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14. Why these differences ?
• The Chinese model (continued) :
• In the case of light wagons, small trucks and motorcycles
many assemblers produce very similar vehicles using
same parts.
• The Chine-style sourcing forces the suppliers to compete
fiercely and reduces components buying prices.
• The disadvantage is that it is difficult to expect suppliers
to make big investments in R&D of new parts.
• As a result, assemblers will buy common parts and their
cars will also be «common».
www.marketing-automotive.org
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15. The future
• The Chinese procurement strategy is fine in the first
stages of the development of the car industry in a
developing country.
• But this gives still large possibilities for Western and
Japanese car manufacturers to sell great quantities of
luxury and expensive cars in China.
• This as a cost for the Chinese balance of payments and
also for the future development of the market.
www.marketing-automotive.org
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16. Car production in China
(Local producers and JV’s)
Years Number of cars produced Change versus previous year
2000 2,069,000
2001 2,334,000 + 12 %
2002 3,286,000 + 41 %
2003 4,443,000 + 35 %
2004 5,224,000 + 17,5 %
2005 5,708,000 + 9,3 %
2006 7,188,000 + 26 %
2007 8,880,000 + 25 %
2008 9,345,000 +5%
2009
www.marketing-automotive.org
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17. Top world car producers in 2008
(including light commercial vehicles)
Country Nbr of cars produced (in 000 units)
1. Japan 11,564
2. P.R. China 9,345
3. USA 8,075
4. Germany 6,040
5. South Korea 3,806
6. Brazil 3,220
7. France 2,568
8. Spain 2,541
9. India 2,314
10. Canada 2,077
World total 70,526
www.marketing-automotive.org
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18. Contact
www.marketing-automotive.org
Bernhard Adriaensens
International Consultant in Automotive Marketing and Management
Academic Director Executive Programme for the Automotive industry
(www.solvay.edu/auto)
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