The Coming Structural Realignment Of Chinas Automotive Sector En


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The Coming Structural Realignment Of Chinas Automotive Sector En

  1. 1. Perspective Bill Russo Tao Ke Edward Tse The Coming Structural Realignment of China’s Automotive Sector
  2. 2. Contact Information Beijing Bill Russo Senior Advisor +86-10-6563-8300 Shanghai/Beijing Edward Tse Senior Partner +86-10-6563-8300 +852-3650-6100 +86-21-2327-9800 Tao Ke Principal +86-21-2327-9800 Booz & Company
  3. 3. EXECUTIVE We are fortunate to be living in historic times. While in the grip of the most severe economic contraction since the SUMMARY 1930s, it is in such times – and only in such times - that truly transformational structural change is possible. While much has been said and written about the rapid emergence of China as the largest automotive market in the world, this obscures the reality of just how many structural problems remain unsolved in an industrial sector that China describes as a “pillar” of its economy. In this first article in a 3-part series on the China auto industry, we will describe how the global financial crisis is the triggering event that will precipitate a major restructuring of the Chinese automotive sector. The global car industry has long as a result of global interdependence suffered from overcapacity resulting along with a synchronization from overly ambitious assumptions of business cycle among these for market growth combined with interdependent markets. According to optimism surrounding whatever a recent forecast from Global Insight, product or technology was being 2009 will likely witness the first drop offered. Ambition and optimism in global GDP since the 1930s. are the first victims of a recession as businesses struggle to realign to a In previous economic crises, the U.S. new era of fiscal conservatism. This has always come to the rescue and translates into a major reduction in restored hope to a troubled world. capital spending and asset sales as The $838 billion economic stimulus businesses attempt to adjust their bill enacted in February 2009 was size in order to regain a profitable designed to create millions of new footing. The financial crisis, which jobs and jump-start the economy. worsened in the 3rd quarter of 2008, However, most experts do not foresee has dragged the world into its deepest a recovery until 2010 at the earliest. economic downturn since the Great As a result, the world is increasingly Depression. A unique attribute of this looking elsewhere for leadership and recession is how quickly the financial signs of recovery. China has for many turmoil has spread across the world years experienced the most explosive Booz & Company 1
  4. 4. MAnIfESTATIonS of ThE GlobAl fInAnCIAl CRISIS In ChInA While auto sales indicate that things are simply humming along in China, one must look deeper into the facts before drawing quick conclusions. As noted earlier, overall GDP growth—while positive at 6%—was dramatically lower in 2008 and in economic growth, and as such can Given recent developments, China fact well below the 8% target that be viewed as both an opportunity as will surpass the U.S. market in sales Beijing views as “essential” in order well as a threat to the stability of the for the overall calendar year 2009. to sustain the Chinese economic world’s economy. After many years Given such startling developments, engine and maintain “harmony”. of double-digit GDP growth, China one might expect a bit of a “swagger” There has been a steady rise in has seen a dramatic slowdown in its to emerge from the Middle Kingdom’s inflation over 2 years to a nearly GDP growth in 2008 to less than 6%. automotive policy makers. But this 6% level in 2008, coupled with a However, this stands in sharp contrast is definitely not the case, for they strengthening of the Chinese RMB to the declines witnessed virtually recognize that they must now seize vs. the U.S. dollar. Additionally, everywhere else in the world. As a upon the crisis to trigger the necessary there has been a significant reduction result, China is increasingly viewed structural changes required to build a of Foreign Direct Investment (FDI) as a bellwether market for signs of an healthy and sustainable auto sector. coming into China resulting from the economic turnaround. stress placed on the balance sheets of companies investing globally. All of Much has been said and written these factors create real challenges about China’s rapid rise to the top for sustaining the development of the position in domestic market auto Chinese economy. The impact of the sales. In fact, China has surpassed crisis across the Chinese economy can the US in automotive sales for the be summarized as follows: first half of 2009, posting sales of 6.1 million units versus 4.8 million • Industrial production dropped 5.3% vehicles sold in the US market. In fact, since 2003 China’s vehicle • Money supply dropped 12% market has more than doubled in size from 4.56 million units to • Vehicle exports saw first decline 9.67 million units (in 2008). Of over past decade this total, 61%, or 5.91 million units, represent passenger vehicles • 9% reduction in year-over-year (excludes buses, trucks and other growth in exports commercial vehicles). • 20 million migrant workers lost jobs • 6.1 million new university graduates seeking jobs 2 Booz & Company
  5. 5. ChInA’S Understanding the extent of the threat of the crisis to China’s economy, the • Government spending allocated to infrastructure and public CoMMITMEnT government has undertaken a series insurance system To STIMUlUS of focused stimulus actions that are designed to help China achieve its 8% • Lowered bank interest rates by 5 GDP growth target. These actions can times in 2008 be grouped into four areas: • Eased deposit reserve ratio boost Domestic Demand requirement of commercial banks • Fiscal subsidy to farmers for electronics and vehicle replacement Secure and Create Jobs • Encourage development of • Car purchase tax rate reduction medium/small enterprises and by 5% service industry • Tax and interest rate cut for • Support SOEs to reduce job cuts housing transaction • Ease enterprise burden by • Relax consumer credit to promote suspension or exemption of social individual and family buying insurance fee Stimulate backbone Industries • Offer professional training to • Published stimulus plans of 10 migrant workers and university key industries in January to graduates February, 2009 Given the positive developments • Encourage industry consolidation observed in 2009, it appears that and technology upgrade these stimulus measures are having an impact: it is evident that Chinese • Promote export and autonomous consumers—especially first time car brand development buyers—are in fact helping to boost domestic demand and are taking Increase Money Supply advantage of the tax and other • New bank loans soar to 1.6 trillion incentives currently available. RMB in January Booz & Company 3
  6. 6. RISInG fRoM While China pursues a plan to achieve 8% overall GDP growth, and registered automotive manufacturers. The top 10 OEM’s account for ThE AShES continues to enjoy strong automotive 83% of vehicle sales and the top 20 sales growth, the global automotive OEM’s account for 95% of sales. industry faces a crisis of historic This creates a significant challenge proportions. Global light vehicle to the health of the many businesses production declined by 4.6% in 2008 that struggle to sustain operations to 67 million units and the Global in an environment where economic Insight forecast for 2009 calls for a growth is by no means assured. further double-digit decline to fewer Additionally, approximately 66% of than 60 million units in 2009, with vehicles sold carry a foreign brand, the North American and Western which makes it very difficult for European markets taking the largest Chinese domestic brands to generate reduction. As a consequence, the sufficient volumes or profit margins US, Canadian and other European to remain economically viable. This governments have been asked to help fragmentation is mirrored in the companies like GM, Chrysler and automotive component supply base, others bridge the crisis. Lacking a where Jack Sayer of Sayer Partners blueprint or vision for transformation, LLC has recently estimated that 40% there is a great risk that short-term of auto suppliers face severe liquidity government actions taken during a issues in 2009. crisis either prolong the inevitable restructuring, or worse—generate As a result, the Chinese government unintended side-effects which has pulled-ahead its plan to weakens companies which would consolidate the OEM landscape in otherwise emerge stronger when the order to achieve economies of scale. recovery does inevitably come. Prompted by the economic crisis, the China government in January, 2009 However, this stands in sharp contrast published stimulus plans for 10 key to the situation in China. The volume industries including automotive. The declines in the global markets plan clearly articulates the vision for render China’s recent growth even industry consolidation, technological more remarkable. The expectation upgrade, export, and brand going forward is that growth in the development. The main objectives automotive industry will in large of the policy can be summarized as part be centered on the growth of the follows: China, India and ASEAN markets, and over the next 10 years China will 1. To boost sales and production account for more than half of the in 2009 to 10 million units and growth of the Asia Pacific region. keeping growth at about 10 percent in the next 3 years In spite of this, there are numerous • Market share of passenger vehicles structural problems in the China with domestic brands should rise automotive industry. While light up from 34% to 40% vehicle sales stand at historic highs, 2. To consolidate numerous small overcapacity and lack of scale remain regional manufacturers into bigger major problems. This is true largely national auto groups because of the highly fragmented and • No. of OEMs account for 90% of scattered OEM landscape. China’s total vehicle market to reduce from auto industry today includes over 150 14 to 10 4 Booz & Company
  7. 7. 3. To encouraging use of more fuel- It is noteworthy that this is not a efficient, lower-polluting vehicles final list of surviving companies as • Market share target of 1.5L it represents only 8 of the “top 10”, and below passenger vehicles to and by calling it “top” 10 there is increase to 40%, among which obviously room for others below the 1.0L and below will be 15%, “top”. Once can anticipate that OEM consolidation and rationalization will • Building up total 500K new surely be accompanied by a major energy vehicle (NEV) capacity, and restructuring of the Chinese auto increase market share of NEV to supply base. 5% of total PV sales. It is also noteworthy that companies The most sweeping proposal in this such as BYD, Geely and Great plan is the intention to consolidate Wall are not included on the list. the industry into a “top 10” group These companies are considered organized into 2 distinct “tiers”: the “independent” manufacturers and Tier 1 group consisting of companies are not afforded the same level of with an annual capacity of 2 million government support as traditional About the Authors units that are encouraged to acquire State Owned Enterprises (SOEs). smaller automotive companies Many consider these companies to be Edward Tse is Booz & Company’s senior throughout China, whereas Tier the most nimble and entrepreneurial partner and chairman for 2 consists of companies with an automobile companies in China, and Greater China, specializing in annual capacity of 1 million units therefore the most likely to become definition and implementation that are encouraged to drive regional global players. In any case, China’s of business strategies, orga- consolidation. The plan even names policy makers have clearly signaled nizational effectiveness, and 4 Tier 1 companies as well a 4 Tier 2 the rationale and urgency around corporate transformation. He companies: the issue of consolidation, and why has assisted several hundred companies—headquartered the time to act is now. Clearly, the both within and outside Tier 1: China government has a playbook China—on all aspects of • Shanghai Automotive Industrial for the industry and intends to use business related to China and Corporation (SAIC) the economic crisis as the triggering its integration with the rest of event to start calling the plays, as the the world. • First Auto Works (FAW) Group recently announced merge between Chang’an and AVIC showes. Bill Russo is a senior advisor • Dongfeng Automobile with Booz & Company as well as the Founder and President Please note: of Synergistics Limited. He lives • Chang’An Automotive This is the first in a series about in Beijing and has more than 20 the developments occurring in the years of experience in the auto- Tier 2: Chinese automotive industry. The motive industry, most recently • Beijing Automotive Industrial next installment will address the serving as Vice President of Corporation (BAIC) role of M&A—in particular, how Chrysler’s business in North the acquisition of foreign assets East Asia. • Guangzhou Automotive Industrial can further the development of the Tao Ke is a project principal Group (GAIG) Chinese automotive industry. with Booz & Company and is a member of the core financial • Chery Automobile services leadership team in Greater China. He has more • China Heavy Duty Truck than 10 years’ consulting Corporation (CNHTC) experience in a broad range of strategy, operations, organization, and risk manage- ment assignments, covering the financial services, automo- tive, consumer, and telecom industries. Booz & Company 5
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