September, 2011   BeijingChina’s Automotive Industry in 2011Irish Network DinnerSeptember 14, 2011Bill Russo              ...
Part 1: Review of 2010 market development and automakers’ performancePart 2: Emerging consumer trends and government polic...
Part 1: Review of 2010 market development and automakers’ performancePart 2: Emerging consumer trends and government polic...
Year 2010 was another hall-mark year for China auto industry after the short setback in 2008 due to global financial crisi...
China exceeded US to become the world largest Auto market in2009 and maintained leadership in 2010                  Top Fi...
Among international brands, VW, GM and Hyundai hasreinforced their market leadership over their competitors               ...
Part 1: Review of 2010 market development and automakers’ performancePart 2: Segment growth in 2010 and government policy ...
While there is clear growth in the SUV, MPV and cross-over segments, China remains a 70% sedan market                     ...
Driven by government tax incentives and shift of productpreference, 2010 has seen a mixed results of segment growth     Se...
China government incentives successfully boosted sales of 2009 and 2010, however, most policies will discontinue in 2011Go...
With termination of incentives, China auto sales will downshift toa stable growth from 2011 and rise to 20 million in next...
Part 1: Review of 2010 market development and automakers’ performancePart 2: Segment growth in 2010 and government policy ...
Trend 1: Sustainable demand growth fueled by urban economic development Rapid urbanization is anticipated to rise from 48%...
Trend 1: Sustainable demand growth fueled by urban economic developmentIn the coming decade, we will see a significant inc...
Trend 1: Sustainable demand growth fueled by urban economic developmentYet China is still just entering the accelerated gr...
Trend 1: Sustainable demand growth fueled by urban economic developmentIt is likely that China’s strong economic performan...
Trend 2: Shifting preferences for increasingly savvy consumersChinese customers become increasingly savvy and motivated by...
Trend 2: Shifting preferences for increasingly savvy consumersYoung generation buyers are increasingly influencing automak...
Trend 3: Value and relationship oriented approach to address lower tier market demandChina is a country equivalent to a co...
Trend 3: Value and relationship oriented approach to address lower tier market demandHowever, 87% of total population live...
Trend 3: Value and relationship oriented approach to address lower tier market demandMarket share of lower tier cities mai...
Trend 3: Value and relationship oriented approach to address lower tier market demandAutomakers need to realign their prod...
Trend 4: Hyper-competition across the automotive market segmentsChinese car market has seen substantial price falls and ac...
Trend 5: Divergence of performance due to deteriorated industry profitabilityLocal VMs are growing market share significan...
Trend 5: Divergence of performance due to deteriorated industry profitabilityManufacturing capacity oversupply will be int...
Trend 6: Adaptive brand innovation to extend product reach and grow shareEstablishment of R&D and production development c...
Trend 6: Adaptive brand innovation to extend product reach and grow shareAudi’s product localization strategy has been an ...
Trend 6: Adaptive brand innovation to extend product reach and grow shareGM is another successful example of gaining compe...
Trend 6: Adaptive brand innovation to extend product reach and grow shareTo extend product reach and grow shares, internat...
Trend 7:Increasing focus on the automotive aftermarketLeading automakers have fully established dealer network inhigher ti...
Trend 7: Increasing focus on the automotive aftermarketAutomakers can use sub-dealer network to extend their productand se...
Trend 8: Accelerated drive to globalization Strong rebound of overseas market fueled Chinese automakers’ export, Great Wal...
Trend 8: Accelerated drive to globalizationTo expand global distribution, Chinese OEMs are aggressivelytrying to close the...
Part 1: Review of 2010 market development and automakers’ performancePart 2: Emerging consumer trends and government polic...
In summary, we recommend carmakers to realign their strategicfocus with shift of demand and markets of highest potentials§...
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China's Automotive Industry in 2011

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China's Automotive Industry in 2011

  1. 1. September, 2011 BeijingChina’s Automotive Industry in 2011Irish Network DinnerSeptember 14, 2011Bill Russo 1
  2. 2. Part 1: Review of 2010 market development and automakers’ performancePart 2: Emerging consumer trends and government policy changes in 2011Part 3: Emerging trends to anticipate in 2011 and beyondPart 4: Conclusion and recommendations 2
  3. 3. Part 1: Review of 2010 market development and automakers’ performancePart 2: Emerging consumer trends and government policy changes in 2011Part 3: Emerging trends to anticipate in 2011 and beyondPart 4: Conclusion and recommendations 3
  4. 4. Year 2010 was another hall-mark year for China auto industry after the short setback in 2008 due to global financial crisis Overall China Auto Industry* 2010Sales 2009 Sales 18.06 Million 13.64 Million 32% 2007 Sales 2008 Sales 46% 8.98 Million 8% 9.67 Million 2006 Sales 22% Truck 7.34 Million Truck 21% 20% Truck Truck 21% Truck 22% PV Bus PV Bus 21% Bus 64 3% 62% 3% 2% PV Bus PV Bus 61% 2% % Van Van PV Van 60% 2% 59% 18% Van Van 13% 14% 16% 16%PV*=4.45 Million PV*=5.43Million PV*=5.91Million PV*=8.73Million PV*=11.26Million §  Passenger vehicles consistently represent the majority of total automobile demand §  Robust growth momentum is continued in 2010 driven by government incentive program and infrastructure investment Note: * PV volume excluded pickup and van sales volume Source: CAAM auto market press release 4
  5. 5. China exceeded US to become the world largest Auto market in2009 and maintained leadership in 2010 Top Five Auto Market in the World(1) Total China Auto Sales 2008 - 2009, in million units 2005 - 2010, in million units 66.0 63.6 US market sales in 2010 is only 11.58 Million, 36% less than China sales 50% 45% Others 18.06 +23% 13.64 5% Brazil 4% 6% Germany 9.67 5% 8.98 7% Japan 8% 7.34 16% US 5.90 20% 20% China 13% 2008 2009 2005 2006 2007 2008 2009 2010Note 1): Data does not include heavy truckSource: Global insight; CAAM auto market press release; Literature research; Booz & Company analysis 5
  6. 6. Among international brands, VW, GM and Hyundai hasreinforced their market leadership over their competitors Passenger Vehicle Sales by Top 10 Manufacturers (2002 Vs. 2010)Shanghai Volkswagen 31% Shanghai GM 7% Faw-Volkswagen 22% Shanghai Volkswagen 7% Shanghai GM 12% FAW-VW 6% Tianjin Faw 10% Beijing Hyundai 4% 4% Peugeot Citroen 9% Dongfeng Nissan 3.8% Changan Suzuki 7% BYD 3.6% Guangzhou Honda 6% Chery 3% Chery 5% Geely 3% Geely 5% Changan Ford 2.8% Dongfeng Nissan 4% FAW Toyota 2.0% Others 21% Others 53%Source: China PV Database; Booz & Company analysis 6
  7. 7. Part 1: Review of 2010 market development and automakers’ performancePart 2: Segment growth in 2010 and government policy changes in 2011Part 3: Emerging trends to anticipate in 2011 and beyondPart 4: Conclusion and recommendations 7
  8. 8. While there is clear growth in the SUV, MPV and cross-over segments, China remains a 70% sedan market SUV/ Micro Small Compact Std / Lux Mid Std Lux / MPV Brand 2010 PV Sales Market Share Full Cross-over 7% 12% 36% 12% 2% 28% 3% 1,830,000 14% 959,900 7% 406,400 3% 656,400 4.8% 646,600 4.7% 1,093,000 7.9%COPV: Crossover Passenger Vehicle - i.e. pickup and light buses with 9 seats or under Source: Accuracy Automotive, CAAM 8
  9. 9. Driven by government tax incentives and shift of productpreference, 2010 has seen a mixed results of segment growth Segment   Sub-segment   2010 sales   Year on year growth   Sales growth of SUV and MPV (‘000)   outperform passenger cars (%)   Vehicle sales   Total 18061.9   32.37   Passenger Total   13757.8   33.17   Vehicle   2.0L and below accounts for 60% of total SUV sales. 2WD is sold 1.7 SUV   Subtotal   1326   101.27   times more than 4WD vehicles Compact SUV 2.0L and below   799.8   105   MPV   Total   445.4   79.82   1.6L and below cars account for Passenger Car   Subtotal   9494.3   27.05   70% of total passenger car sales <1.6L   6631.8   27.98   1.6-2.0L   2152.7   29.77   Pickup and minibus enjoyed a 28% growth attributed to favorable Crossover   Pickup, 2492.1   27.77   government subsidies Minibus, etc.Source: China Automotive Industry CAAM report Literature research; Synergistics Limited analysis 9
  10. 10. China government incentives successfully boosted sales of 2009 and 2010, however, most policies will discontinue in 2011Government Incentive Incentive Summary Impact assessment • Mar. 2009-Dec.2010 Many personal buyers pulled ahead car purchase plan • 5% sales tax reduction in 2009 and Sales Tax down to 2.5% only in 2010 from in 2009 for 5% tax incentive and stimulus effect Break weakened in 2010 • For sales of all 1.6L and below vehicles • Mar 2009-Dec.2010 • 10% off retail price, 5,000CNY at Successfully boosted sales of mini-bus and pickup, light Subsidy for maximum truck , up by 83% in 2009 and 28% in 2010 the farmers • For farmer buyers of mini-bus, pickup and light truck • June 2009-Dec.2010 Trade-in • 5,000/car, 6,000/van, 18,000CNY/ Low subsidy level and complicated trade-in process truck discouraged car owners, the effect is very limited subsidy • For trade-in of 15+ years used cars Subsidy for •  June 2010-present Successfully boosted sales in 2nd half of 2010 and • 3,000 CNY for car buyers 1.6L and • For 1.6L and below cars and require 20%+ continue to take effect in 2011 below cars better fuel efficiency than standard Source: Literature research; Synergistics Limited analysis 10
  11. 11. With termination of incentives, China auto sales will downshift toa stable growth from 2011 and rise to 20 million in next 5 years Unit ‘000 China new passenger vehicle sales 22,000 (2004-2015E) Adjusted forecast 20940 20,000 18,000 16187 14582 Initial GI forecast 16,000 13760 13137 14,000 11835 12,000 10662 9606 10,000 8654 8,000 6,000 5294 5704 Total Passenger Vehicle 4,000 4328 3267 2,000 2631 0 2004 2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F Year on Year growth % 21% 24% 33% 22% 8% 52% 11% 11% 11% 11% 11% 11% Initial GI forecast Source: Global Insight 2010; Booz & Company analysis 11
  12. 12. Part 1: Review of 2010 market development and automakers’ performancePart 2: Segment growth in 2010 and government policy changes in 2011Part 3: Emerging trends to anticipate in 2011 and beyondPart 4: Conclusion and recommendations 12
  13. 13. Trend 1: Sustainable demand growth fueled by urban economic development Rapid urbanization is anticipated to rise from 48% to 60%, a fundamental driving force of private demand for cars Chinese Urbanization in Comparative Context China’s Urban PopulationUrban population as ashare of the total (%) 1,258 1,285 1,308 1,328 1,343 1,413 65 60 Forecast China 55 Overall Emerging Markets 50 43% Rural 54% 52% 45 61% 57% 65% 40 35 30 25 20 57% Urban 15 43% 46% 48% 35% 39% 10 5 0 1950 60 70 80 90 00 10E 20E 30E 1999 2002 2005 2008 2010F 2020F Source: Literature research; Booz & Company analysis 13
  14. 14. Trend 1: Sustainable demand growth fueled by urban economic developmentIn the coming decade, we will see a significant increase in middleage population and many of them will be wealthy China Population Breakdown by Age (2007 Vs. 2020E, Million) Comments Population Increase 1,432 2008 Vs. 2020 §  By 2020, Chinas population in the age 1,321 268 +32 group 45 and above will increase 118 0 -14 236 million, while the 25-44 age group will 180 -17 decrease 22 million 15-24 197 §  By 2020, with the fast wealth 417 -22 accumulation, a significant portion of the 25-44 439 400 million 45-64 age group people will be wealthy 400 +75 45-64 325 §  Those affluent mid-age people will be +43 major customers for luxury products 65 and over 124 167 2007 2020ESource: EIU; “China 2047”; China Statistic Year Book 2007; esa.un.org; Booz & Company analysis 14
  15. 15. Trend 1: Sustainable demand growth fueled by urban economic developmentYet China is still just entering the accelerated growth phase typicalof emerging markets Canada 600 Australia Discussion Germany §  A country’s threshold 500 U.K. of mobility lies near US The S- curve U.S. $10,000 GDP per capita Poland (PPP), where 400 automobile ownershipCars per 1,000 People Malaysia accelerates Russia 300 Argentina §  China is at the early taking-off stage of the S- Mexico curve 200 Brazil Turkey §  India remains fairly distant from the mobility India Thailand 100 inflection point, but Iran continues to make China Indonesia steady progress 0 India 1,000 10,000 100,000 China GDP Per Capita (Logarithmic Scale)Note: Each line of symbols represents a 19-year progression for one country, from 1990 through 2008, GDP Per Capita is in Purchasing Power Parity (PPP)Source: Booz & Company analysis 15
  16. 16. Trend 1: Sustainable demand growth fueled by urban economic developmentIt is likely that China’s strong economic performance will continueto stimulate car industry growth for the foreseeable future China Passenger Vehicle Installed Base (PARC) Key Drivers Forecast (2009-2030) §  Car ownership in China is powered by the 600 Increase in Car growing economy – the upside is High Forecast Ownership substantial Base Forecast 500Passenger Vehicle PARC (million units) Low Forecast 480 §  Government has been continuously 400 410 Government’s guiding and supporting the industry’s Support to Auto development across manufacturing and Industry distribution 330 300 §  China’s financial system is less exposed China and GDP growth is still very fixed 200 Economy’s investment driven, thus is less vulnerable Resilience to recent financial turbulence impact 100 §  Highway network development provides Infrastructure foundation for more motor vehicle-based 0 Development based transportation 2009 2014 2019 2024 2029 §  China is investing in infrastructure to support alternative propulsionNote: Passenger vehicles contain sedans, MPVs and SUVsSource: Global Insight 2010, OPEC, DGS Report, Booz & Company analysis 16
  17. 17. Trend 2: Shifting preferences for increasingly savvy consumersChinese customers become increasingly savvy and motivated byemotion and self-expression, luxury B segment as an example Prioritized Purchasing Factors Prioritized Self-expression Motivations B Segment Customers B Segment Customers Driving experience 45 To enhance my 36% business image/ status Brand 40 To reflect my personality 36% Safety 38 Appearance 36 To reflect my good taste 30% Price/performance ratio 18 To integrate into 20% Quality 10 my social circle Comfort 9 Sense of independence 17% Fuel economy 7 Sense of family 17%After-sales service, maint. Costs 5 Configuration 5 My personal space 15% Trim 3 Stylish/trendy 12% Interior space 2 Versatility 2 Others’ admiration 11%Note: Based on new car buyers during Jan-May, 2009; B segment N=570, A4L N=175, 3S N=168 Driving experience includes factors such as power, handling and braking Source: Luxury Car Consumer Quantitative Survey(11-12, 2008), Booz & Company analysis 17
  18. 18. Trend 2: Shifting preferences for increasingly savvy consumersYoung generation buyers are increasingly influencing automakers’product design More sporty, sculptured and Integration of cutting edge and premium-oriented design functional technologies Sonata 2010MY Sonata 2011MY Focus 2011MY Focus 2012MY Sebring 2009MY 200C 2010MY Quest 2010MY Quest 2011MYSource: Automotive news, Booz&Co. literature research 18
  19. 19. Trend 3: Value and relationship oriented approach to address lower tier market demandChina is a country equivalent to a continent, large anddiverse China and its Three Major Economic Regions §  Three Major Economic Regions consist of Tier 1 and 2 city groups –  Yangtze River Delta Region •  Centered on Shanghai •  80 million population •  ~4.5 trillion RMB GDP –  Pearl River Delta Region •  Centered on axis between Guangzhou and Shenzhen •  45 million population •  2.5 trillion RMB GDP –  Beijing-Tianjin Region •  Bohai Sea region •  25 million population •  ~2 trillion RMB GDPSource: China Statistical Yearbook, The China Strategy, Booz & Company analysis 19
  20. 20. Trend 3: Value and relationship oriented approach to address lower tier market demandHowever, 87% of total population live in Tier 3 and lowercities, among which 61% are from Tier 5 & 6 cities Diversity: Socio-Economic Levels of City Tiers (2007) GDP Per Capita (US$) 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Population Tier 1: Big 4 Tier 4: The next wave Tier 5-6: Rural and remote Tier 2: Mega cities Tier 3: Emerging middle classSource: China Statistical Yearbook, Literature Research, Booz & Company analysis 20
  21. 21. Trend 3: Value and relationship oriented approach to address lower tier market demandMarket share of lower tier cities maintains increasing, at a fastergrowth rate than Tier 1 and 2 cities Market Share by City Tier (2005 - 2008) CAGR% 100% 5% 6% 6% 7% Comments Tier 6 43.1% 18% 19% §  The 6 tier city class was 20% 21% Tier 5 34.6% identified by several indices such as GDP, sales volume etc, for 10% example: 11% 11% 12% Tier 4 35.9% –  Tier 1: Beijing 22% –  Tier 2: Chongqing 24% 24% 23% Tier 3 29.8% –  Tier 3: Wenzhou –  Tier 4: Langfang 22% 21% 21% 20% Tier 2 23.9% –  Tier 5: Xining –  Tier 6: Zhangjiajie 23% §  Need for extensive dealership 20% 19% 17% Tier 1 15.6% and service network development 2005 2006 2007 2008Source: China PV Database; Booz & Company analysis 21
  22. 22. Trend 3: Value and relationship oriented approach to address lower tier market demandAutomakers need to realign their product and marketing strategieswith distinctive consumer dynamics of lower tier citiesConsumer Profile Survey findings Automakers’ approach • 90% are first time car buyers Vehicle pricing to be affordable and • Car budget is 80,000RMB ($12,000) on competitive Income and average Budget Innovative brand strategy such as “Mid- • 100K CNY($15,000) disposable income annually per household market brand” development • Less financial pressure Build a trustworthy and valuable brand • More positive life attitude image Purchase • Car purchase for community and family motivation Address consumers’ roominess and care • Make less controversial choice performance needs • less product knowledge but faster Smartly decontent vehicles’ “impractical” purchase process. Purchase • Value durability, economy and electronics and features Consideration convenience Enhance vehicles’ durability and versatility • Trustworthy and value for price brand •  TV commercial, internet Take advantage of every accessible touch Information • Word of mouth is most influential point with consumers to set up emotional Channel • Outdoor ads board, car display bonding and delivery brand message • Dealer showroomSource: Nielsen 2010 Dec. China forum 22
  23. 23. Trend 4: Hyper-competition across the automotive market segmentsChinese car market has seen substantial price falls and acceleratedproduct launches over past decade, undermining VM profitability Average Sales Price (ASP) index in China Discussion •  Vehicle prices have declined about 40% since 2002; Major driving forces are •  A sharp reduction in tariffs since 2001 WTO entry • Increasing competition • Hypercompetition after local brands get involved PV price development by segment in China •  Average MSRP is estimated to fall 2-3% in 2010, a much lower rate than previous years •  With increased capacity and demand slow- down, automakers will face increasing downward pricing pressure in 2011 § VMs have to launch more refreshed models or new vehicles to fix down pricing pressureSource: CAAM, Forum, Nomura Research 23
  24. 24. Trend 5: Divergence of performance due to deteriorated industry profitabilityLocal VMs are growing market share significantly butinternational OEMs still dominate INTERNATIONAL/ LOCAL OEM CHINA PV MARKET SHARE International OEMs/Brands International OEMs/Brands Top Local OEMs/Brands 8 Domestic OEMs VW 17.76% 3.87% 16.77% Chery 4.47% 10.31% TOYOTA 7.14% China PV sales 2008-2010 (incl. import, million units) 5.67% GM1 8.80% FAW 9.68% 5.04% 8.47% 11.5 Hyundai 9.29% 3.34% Geely 8.29% 3.69% Honda 5.66% International 2.86% Nissan 6.46% 69% BYD 5.99% 5.7 4.65% FORD 2.74% 2.58% 1.67% 75% Brilliance PSA 3.18% 1.66% 3.19% 31% Local Suzuki 3.14% 25% 1.08% 2.28% Greatwall 2.16% 0.53% 2008 2010 MMC 0.47% 1.54% 1.14% Chang’an2 BMW 1.39% 1.92% 2008 20101) Excluding CV volumes from SAIC-GM-Wuling2) Including AVICSource: Global Insight China Report 24
  25. 25. Trend 5: Divergence of performance due to deteriorated industry profitabilityManufacturing capacity oversupply will be intensified in next 5years, and low utilization will drive up manufacturing cost level International/ Manufacturer Brand Sales in 2009 Capacity in 2010 New capacity Capacity by 2015 Local Brands (‘000 Unit) (‘000 Unit) under (‘000 Unit) construction International/ SAIC-GM Buick, Chevrolet, 1787 1560 410 1970 (incl. SGM-Wuling) Wuling Local International FAW-VW VW, Audi 682 760 200 960 International FAW-Toyota Toyota 413 470 200 670 International Dongfeng Honda 209 220 240 460 Honda International Beijing Hyundai Hyundai 568 600 300 900 International GAIC Honda, Toyota, Fiat 570 720 340 1060 Local Chang’An Chang’an 1000 900 900 1800 Local BYD BYD 437 710 800 1510 Local BAIC Foton Foton 600 700 280 980 Local Chery Chery, Reely, Riich, 470 900 400 1300 Kerry Local Geely Emgrand, GLEagle, 326 680 1000 1680 Maple Local Great Wall Great Wall 225 500 1300 1800 Others 6350 9280 2130~3630 12910 Total 13640 18000 8500~10000 26500~28000Source: CAAM, Forum, Nomura Research 25
  26. 26. Trend 6: Adaptive brand innovation to extend product reach and grow shareEstablishment of R&D and production development capability inChina is a market mandate now R&D and Product Development Capability - Global OEMs in China Stage - I Stage - II Stage - III Stage - IV Localization: 40% Localization: ~70% Localization: ~100% Complete PD Capability •  IP rights, Technology GM: Developed GL8 for the China market with 100% protection, etc. are localized content. PD and some of the concerns Continuing to increase the engineering changes led by that prevented rapid local content as supply chain PATAC develops in China. R&D investments in plans are unclear at this development of R&D / point. PD capabilities in Focused on meeting minimum local content China. requirements to preserve quality, engineering and brand differentiation. Product development and launch of VW Lavida done in China for the domestic Hyundai: Almost 100% local market content for Elantra. Highly Audi: Reached established relation-ships ~70%-80% localization with local supply base and content (by value), JV ventures for domestic designed products to ER&D and PD activities meet China market Followers LeadersSource: Literature research; Booz & Company analysis 26
  27. 27. Trend 6: Adaptive brand innovation to extend product reach and grow shareAudi’s product localization strategy has been an important driverof the brand’s success in China - e.g., Audi A4L §  61mm more wheel base than European Audi A4 version, and wider rear seat space §  Customized designed chassis (13mm more road clearance room than European Audi A4 version) to fit road and driving condition in China §  Since the gasoline quality in China market is not very stable, Audi A4L has automatic fuel quality sensing system to adjust engine performance based on gasoline quality §  Customized designed seats based on Chinese customers’ contour §  More sophisticated and fashionable internal design and decorationSource: Literature research, Booz & Company analysis 27
  28. 28. Trend 6: Adaptive brand innovation to extend product reach and grow shareGM is another successful example of gaining competitiveadvantage by adopting innovate brand strategy with local players GM’s Sales in China Expansions of GM’s Corporate Operations (2005-2009, in Million Units) in China §  Recently, GM announced a plan to set up Shanghai 1.83 GMIO headquarters, managing the unified management of all overseas business, which indicates the central role +29% 1.54 China plays in GMs global strategy §  GM and SAIC also announced to set up a GM-SAIC 1.04 Motor Investment Co. in Hong Kong with a $1 billion 0.88 investment split equally between the two for use in 0.66 purchasing 100 percent shares of General Motors India –  GM-SAIC India is expected to make small cars and commercial vehicles in India §  GM’s mini-vehicle China JV (SAIC- 2005 2006 2007 2008 2009 GM-Wuling) will introduce the first own-brand car (Baojun, meaning §  GM aims to sell 3 million vehicles a year there by 2015 treasured horse) to target the fast- as it adds new, more fuel-efficient models to meet demand growing low end market; The car §  “ China GM’s largest single market worldwide and GM will model is Based on Buick Excelle and launch 25 new models in China in 2010 and 2011 in a bid is aiming to combine world-class to maintain its leading position” - Gan Wenwei, President quality with low ownership costs and General Manager of GMSource: Automotive News; Company profile; Booz & Company analysis 28
  29. 29. Trend 6: Adaptive brand innovation to extend product reach and grow shareTo extend product reach and grow shares, international brands are tirelesslydelivering China market-specific adaptations and modifications Main Localization Features Brand Space and Appearance Safety Entertainment and Convenience Wheelbase increase: DVD backseat entertainment system, Chinese GPS, front and rear Audi AudiA6L 3.0 TFSI 2010: electronic heated leather seat, keyless entry parking assistance 185mm. A4L 2009: 61mm and start system, sunroof, cup holder Wheelbase increase: Benz DVD backseat entertainment system, front- Benz Reverse radar E300L: 140mm seat control system, sunroof, cup holder Wheelbase increase: Reverse radio sensor BMW BMW520i: 148mm system Reverse radio sensor Lexus Electronic leather seat, cup holder system DVD backseat entertainment system, Wheelbase increase: Volvo Chinese GPS, front and rear Volvo electronic heated leather seat, keyless entry S80L: 140mm parking assistance and start system, sunroof, cup holder Note, driveline, suspension, steering, braking, engine and EMS systems are generally not adaptedSource: Literature research; Synergistics Limited analysis 29
  30. 30. Trend 7:Increasing focus on the automotive aftermarketLeading automakers have fully established dealer network inhigher tier region and start to shift focus to lower tier cities now Sales Breakdown by Province Market Share of Each Brand in Top 5 (2009) Provinces (2009) 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 Unit ‘000 Zhejiang 62.2 3% 1% 1% 1% Beijing 42.3 5% 3% 4% Cadillac 5% 6% 7% 6% VolvoGuangdong 41.4 11% 16% 8% 9% 21% Lexus Jiangsu 33.3 18% 17% 20% Benz 24% Shanghai 20.8 22% Shandong 16.9 29% 26% 28% BMW 27% Sichuan 14.6 Liaoning 14.1 Top 10 provinces account for 45% 38% 13.2 about 75% of premium car sales 36% 29% 34% Audi Fujian Hebei 10.7 Zhejiang Beijing Guangdong Jiangsu Shanghai Other 92.5Source: Jan-Dec2009 new car registration 30 30 30
  31. 31. Trend 7: Increasing focus on the automotive aftermarketAutomakers can use sub-dealer network to extend their productand service reach to lower-tier city’s buyers Higher Tier Cities Trade-off Lower Tier Cities §  High margin of the total sales and after- §  Low margin of the total sales and after- Economics of sales revenue sales revenue Dealer §  Able to get enough discount from §  Get very low discount from original original manufacturers manufacturers §  Provide different kinds of sales and §  Provide limited sales and after-sales Service Range after-sales services services Step Up §  High standard - cost of set up is usually §  1S or 2S sub-dealer facility: Standards of the 2-5 times that of low-end brand Independent Car showroom, without or Shop according to the international principles with a shared workshop §  Provide extensive trainings to dealers, §  Only provide basic training, usually no Dealer’s Support including personal development plan specific development plan for dealer’s (i.e. training) employees Operational §  Develop strict operational policy - will §  Provide basic standards, but lack of cancel the contract if dealer could not execution capability Management satisfy the requirementsSource: Interviews; Booz & Company analysis 31
  32. 32. Trend 8: Accelerated drive to globalization Strong rebound of overseas market fueled Chinese automakers’ export, Great Wall Motor has seen a remarkable growth Annual Sales Volume of GWM GWM’s overseas market sales share* (2003 – 2010, unit) (Total export of 2010CY: 55,000 vehicles)450000400000 CAGR (’03-’10) 34%350000 Others Australia300000 27% 20%250000 Lybia Russia200000 0% 12%150000 Algeria 4%100000 Chili 8%50000 Iran South 0 9% Italy 2003 2004 2005 2006 2007 2008 2009 2010 Africa 11% 10% China Export *=based on sales revenue of GWM in each country market out of total export revenue Source: GWM Mid-term Report 2010 32
  33. 33. Trend 8: Accelerated drive to globalizationTo expand global distribution, Chinese OEMs are aggressivelytrying to close the capability gaps in R&D, parts sourcing, andbrand equity Chinese Major OEMs Capability Gaps in the Auto Value Chain Recent Trends on Efforts to Close the Gaps Sourcin Sales & R&D Manufa g Marketing Take Equity of Foreign Companies to ctur-ing Access Core Technologies §  Mostly rely §  Strength of §  High ability to §  Needs further on external supply base adapt for development design or and quality localization of local and JV’s foreign vary across §  Only some international technology VMs brand equity Increase Investment in R&D to Build VMs have Own R&D Own Capability capacity for needs to low-cost pass foreign manufactur- safety ing standards Marketing and Portfolio Expansion to Build Brand No Capability Full CapabilityNote: Evaluation based on assessment of major Chinese OEMs such as First Automobile Works, Shanghai Automobile Industry Company, Dongfeng Motor Corp, Guangzhou Automobile Group, Chery Automobile, Great Wall Motor, Chongqing Chang’An Automobile, Haima Automobile, Beijing Automobile, Fujian Motor Industry GroupSource: Automotive News, Company profile, Booz & Company analysis 33
  34. 34. Part 1: Review of 2010 market development and automakers’ performancePart 2: Emerging consumer trends and government policy changes in 2011Part 3: Emerging trends to anticipate in 2011 and beyondPart 4: Conclusion and recommendations 34
  35. 35. In summary, we recommend carmakers to realign their strategicfocus with shift of demand and markets of highest potentials§  Automakers need to allocate resources to where they can outperform their competitors. One of the key takeaways is to make sure their product and service offerings address the lower tier city buyers§  International automakers need to extend their product reach and grow share by delivering China market-specific adaptations and modifications, extending the range of segment participation, and consider creation of new brands with Chinese partners§  Carmakers need to increasingly focus on the automotive aftermarket, including establishment of sub-dealership network and heavier involvement into service delivery and innovation§  Chinese brands must increasingly focus on closing the capability gaps with foreign VMs, with particular focus on product excellence achievement by both organic and inorganic means. Thank you! 35

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