• Share
  • Email
  • Embed
  • Like
  • Save
  • Private Content
The Eight Overarching China Automotive Trends  En Part 2
 

The Eight Overarching China Automotive Trends En Part 2

on

  • 3,307 views

Booz & Company Viewpoint Publication of article describing the trends of China auto industry. Part 2 of a series.

Booz & Company Viewpoint Publication of article describing the trends of China auto industry. Part 2 of a series.

Statistics

Views

Total Views
3,307
Views on SlideShare
3,307
Embed Views
0

Actions

Likes
0
Downloads
148
Comments
0

0 Embeds 0

No embeds

Accessibility

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    The Eight Overarching China Automotive Trends  En Part 2 The Eight Overarching China Automotive Trends En Part 2 Document Transcript

    • Perspective Bill Russo Edward Tse Tao Ke Bill Peng The Eight Overarching China Automotive Trends That Are Revolutionizing the Auto Industry Part 2
    • Contact Information Beijing Bill Russo Senior Advisor +86-10-6563-8300 bill.russo@booz.com Bill Peng Senior Associate +86-10-6563-8300 bill.peng@booz.com Shanghai/Beijing Edward Tse Senior Partner +86-10-6563-8300 +86-21-2327-9800 edward.tse@booz.com Tao Ke Principal +86-21-2327-9800 tao.ke@booz.com Booz & Company
    • EXECUTIVE In Part 1, we introduced the Eight Overarching China Automotive Trends That Are Revolutionizing the Auto SUMMARY Industry, and provided an in-depth look into the first four trends. The eight trends are again summarized here: 1. Policy-driven Consolidation of Chinese Vehicle Manufacturers 2. Global Redistribution of Assets by Non-Chinese Companies to Capture China Market Growth 3. Acquisition of Foreign Assets and Key Development Competencies by Chinese Companies 4. China’s Investment in New Energy Vehicles and Related Infrastructure 5. Utilization of China’s Automotive Capacities for Global Expansion 6. Hyper-Competition Across the China Automotive Market Segments 7. China Vehicle Manufacturer’s Push to Build Brand Equity 8. China’s Rapidly Changing Demographics and Growing Demand in Lower Tier Cities Booz & Company 1
    • TREND #5: The growth and development of China’s automotive market is UTIlIzATION transforming the automotive business Of ChINA’S model for the entire global auto industry. While it is obvious that AUTOMOTIVE China already has become the world’s CApACITIES factory for “everyday low price” merchandise, the ramifications of the fOR GlObAl rapid development of the Chinese EXpANSION automotive base on the global auto industry are less intuitively obvious. While we call this trend the “Utilization of China’s Automotive Capacities for Global Expansion”, it is not simply about exporting finished vehicles from China. Rather, the more significant trend is how In our judgment, we believe China is other elements of the automotive the catalyst for the restructuring of value chain are impacted by the the global automotive industry, and development of China’s automotive that the trends described here act as capacities and capabilities. the driving force behind the many of the changes that are occurring. China has rapidly become the largest car market in the world. For the first As an economic bellwether, the half of 2009, China posted sales of automotive industry captures a great 6.1 million units versus 4.8 million deal of interest. Many auto industry vehicles sold in the U.S. market. It observers view recent events on a now seems like all the ingredients are shorter time horizon and see the there for the “Chinese automotive auto industry restructuring of 2009 factory” to expand to the global as having been precipitated by the markets. In fact, much of the content global financial crisis. In our view, in cars sold in the U.S. and elsewhere we are witnessing the early stages of today already does come from China. an economic revolution: a shift of the Because a significant percentage global center of gravity of economic of the total cost of a car is in the strength towards the east, which will manufactured components, there has result in fundamental and irreversible already been a significant movement changes in numerous industries. In of the production of supplied parts this context, the global financial crisis was a triggering event that accelerated the structural changes that were ultimately unavoidable. In Part 2, we will look in depth at Trends 4–8 and summarize how the eight trends are revolutionizing the global automotive industry. 2 Booz & Company
    • to China. A great many of the rethink their global footprint. Several Similarly, exporting a business model components used in cars today either examples have already been noted in designed for the home market to are or can quickly be manufactured Trend #2: Global Redistribution of foreign markets only serves to limit in China. This is purely driven by Assets by Non-Chinese Companies the ability of the organization to the efficiencies gained from sourcing to Capture China Market Growth. embrace the capabilities of the in China. Most consumers are Clearly, the global center of gravity of foreign market. unaware of how much Chinese automotive strength is shifting east. content may already be in their Automotive manufacturers in current car. However, our focus here If we look out over the next decade, concert with their key stakeholders is on the globalization of China’s we can with confidence anticipate a must redefine their business models automotive capacities. resumption of global auto market for the new reality of 21st century growth, particularly fueled by competition. Going global is not Despite the rally in China’s domestic economic recovery and robust a simple transplant of the current sales, China’s largest car exporters demand from emerging markets. This business model to a foreign location. reported fewer export sales in 2009 will create many opportunities for the This implies a transformation of when compared with last year. China reconfigured industry with its new the entire automotive value chain auto insiders have pointed to the “Asia—centric” footprint. to leverage the opportunities made overall decline in worldwide demand possible by globalized capabilities. as the reason, particularly in such key leveraging Regional Automotive It involves redesigning business markets as Russia where protectionist Capacities and Capabilities processes across the value chain measures have had a direct impact on The reality of the 21st century in order to deliver to the customer vehicles entering the market. But this globalized auto industry is that a brand with a Unique Selling is not a complete explanation. The businesses models must be redesigned Proposition (USP) relevant to the challenges faced by China’s domestic to fully leverage the capabilities local consumer. This will require that companies in their efforts to go global that are now accessible in newly 21st century global auto companies were covered in detail in our previous emerging markets. Unfortunately, fundamentally rethink their entire Viewpoint entitled The Path to in order to become global, most value chain from the consumer Globalization of China’s Automotive automotive OEMs have attempted to back through sales and service, Industry. export a business model optimized production, supply and R&D. Key for their home market to their stakeholder groups, including the As a result of the unprecedented international locations. Migrating national governments with an interest restructuring of the global automotive development capacities to markets in the global competitiveness of industry, several OEMs and suppliers that lack the competency to perform their domestic auto industry, must have filed for Chapter 11 bankruptcy the work misses the entire point of contribute to this development. protection, and are in the process globalization. Pursuing cheap parts of restructuring and selling assets. or cheap labor is ultimately self- Businesses capable of leveraging Going forward, global automotive defeating when doing so robs an global capabilities will ultimately be companies have been forced to organization of its core competencies, able to deliver a relevant USP at much radically and often involuntarily thereby accelerating their demise. lower cost. The Logan produced by Booz & Company 3
    • Renault in India is one good example. and for reasons noted in Trend #4: However, Chinese auto companies Through engine re-engineering China’s Investment in New Energy are developing rapidly and aspire and parts simplification, Renault Vehicles and Associated Infrastructure to become global companies. SAIC successfully adapted this car to be it will also the strive to become most and FAW already possess significant more cost efficient and easy to repair fuel-efficient market. China’s sales scale advantages as a result of their for Indian customers. growth will be also fueled by small successful JVs. FAW’s own brand displacement cars demand from B50, B70 and Xiali products are well International OEMs are doing two those 1st time buyers from lower-tier received by market. Chang’An group types of differentiation in overseas cities. This has a profound impact on has recently demonstrated market markets, such as China. The first China’s capacity to leverage the scale leadership and capability in the small practice is the local adaptation on and competencies that accrue from car segment. Chery has developed top of existing platforms. This is becoming the largest production base full range of products with their own represented as changes to styling, for energy efficient vehicles. platforms, transmissions, and engines. functions and features to meet local regulatory requirement and From the supply side, we can foresee One must also take note of the market tastes. Recent examples are the trend of consolidation of vehicle astonishing rise of independent extended wheelbase luxury cars such makers, growth of local brands, and companies such as BYD, Great Wall as Volvo S80L and Audi A4L, the development of New Energy Vehicles. and Geely. BYD—a cell phone and refreshed Buick Regal and LaCrosse, The future belongs to those who battery maker aspiring to become a and the Hyundai Elantra Yuedong. can extend their capabilities beyond leader in electric vehicles has clearly Excellent sales have resulted from low-cost production and supply startled the world by delivering delivering products tailored to the to areas of world-class R&D and the first mass-produced plug-in local consumer taste—delivered at brand management—essential steps EV. Several of these independent a cost made possible from the cost on the path to globalization. It is companies can become successful efficiencies and scale achievable in the important to note that opportunities global car companies. China market. to integrate these capabilities into the business system are available Several Chinese companies may The second type of differentiation is to both local firms as well as prove capable of becoming icons development of a brand new vehicle multi-national companies. One of of the 21st century global auto “top hat” (uniquely styled upper the poorest assumptions made by industry. However, they must also body with common chassis and industry analysts when observing learn the lessons from the failure of powertrain). Products such as the the China auto market is they often the 20th century industry icons, who Lavida by Shanghai VW are excellent assume that only Chinese firms will ultimately became “healthcare and examples of low-cost derivatives from ultimately benefit from the growth of insurance providers backed by a global VW platform tailored to the the Chinese market—and they must vehicle sales”. taste of the local consumer. therefore eventually dominate the global industry. This is a simplistic China’s Emerging Role in the Global view, particularly when one considers Auto Industry that foreign brands still hold about Over the next 5–10 years, China will two-thirds of the share of the Chinese be the world largest auto market, domestic market. 4 Booz & Company
    • TREND #6: The rapidly changing structure of the China automotive market resources to seize the opportunities presented by the Chinese market. hYpER- is having a dramatic impact on COMpETITION the product portfolio and brand strategies for the industry both The high popularity of the April 2009 Shanghai Motor Show further ACROSS inside and outside of China. While illustrated the attraction of the ThE ChINA many Vehicle Manufacturers have reported robust China sales in 2009, Chinese market. The show stand covering 170,000 meters attracted AUTOMOTIVE industry watchers often overlook an over 660,000 visitors with over 900 MARkET important point: China is a market where quantity of sales should not be models on display, over 300 of which were imports. Over 1,500 exhibitors SEGMENTS confused with quality of sales. The were present at this year’s show. China market is now experiencing what many companies doing business Early-movers in the China market in the United States have come to such as Volkswagen and General understand for many years: Motors have enjoyed significant hyper-competition. profit margins by occupying mid- size, full-size and MPV segments With Tremendous Growth Comes without a great deal of competition. hyper-Competition In such a market environment, profits As described in detail in Trend #2: could be made on products such as Global Redistribution of Assets by the VW Santana and the Buick GL8 Non-Chinese Companies to Capture minivan—older technologies that China Market Growth, China’s dominated their segments with good vehicle market has more than doubled margins. However, today’s China in size from 4.56 million units (in market no longer offers such an easy 2003) to 9.67 million units (in 2008). road to profitability. Virtually every Global Insight has forecasted that the major vehicle manufacturer is now Asian markets represent the largest present in the China market. A recent growth potential in the global auto J.D. Power & Associates study has industry—with a combined 4.7% reported that many of the cars sold compound annual growth rate over in 2009 were in low-end segments the next 10 years (compared with that are eligible for tax incentives 2.9% in NAFTA). Within Asia, and that many of these cars earn the 54% of that growth is expected to manufacturers as little as $100 each. come from China. With the promise of tremendous growth, many However, hyper-competition actually international firms as well as Chinese began several years ago, with the firms are encouraged to allocate onset of a phenomenon called “net Booz & Company 5
    • negative pricing”. In fact, Global cause for concern as there are already portfolio into these smaller segments. Insight reported the following net many weak vehicle manufacturers in Examples include the Ford Focus segment price declines over a four- the market today, and it is unclear Hatchback, Chevrolet Cruze, PSA year period (starting 2004): whether the government will extend 207 Hatchback, Hyundai i30, VW the tax cuts and rural subsidies that Polo Sport, Toyota Yaris, smart 1. Micro (A-segment): 20.4% expire at the end of this year Fortwo, and Kia Soul. 2. Small (B-segment): 27% into 2010. 3. Compact (C-segment): 32.5% Attracted by the desire to raise their 4. Standard (D-segment): 26.3% Beyond simply adding capacity brand image, and achieve higher 5. Luxury (E/F-segment): 12.1% to produce more of the same type margins, the Chinese carmakers of cars, there is evidence that the are also expanding their product The outlook is that local brands competitive structure of the market portfolio—into larger segments. and international brands will install will take on a new dimension in Examples include Chery’s Rely V5, more capacity in China, placing the near future. For the early stages Riich G6, Dongfeng’s S30, BYD’s S8 even more pressure on pricing in of the development of the China and M6, Geely’s Dihao and Yinglun order to increase capacity utilization. market, the multi-national brands and the Brilliance Zunchi. Weak brands and older models will and Chinese brands were for the become the first casualties as market most part not competing directly While top-down advice to cool things and competitive forces squeeze them with each other. Foreign brands down may be helpful, it is rare to see out. The competitive battle can only enjoyed a tremendously high share any organization unilaterally opt for be won with strong brands and of the passenger vehicle market, conservatism in the face of optimistic contemporary models that can be with overall share of more than market forecasts. Since China has delivered profitably to savvy Chinese 70% as recently as last year. Until become the most attractive area consumers with choices that demand recently, the more affluent Chinese to invest for growth, it seems that a competitive price. consumers who tended to shop for Chinese consumers will be enjoying foreign branded products largely even more choices and even more The problem of Overcapacity drove China’s automotive market. attractive pricing as a result of Chen Bin of the National Development However, this year’s sales jump has hyper-competition. and Reform Commission has been largely driven by first-time recently encouraged automakers to consumers entering the market to These developments will have “keep their heads cool” to prevent buy the low-displacement micro-and significant implications on the global overcapacity. With an expectation of small-segment cars that are supported auto industry, as the installed capacity a 28% jump in vehicle sales in 2009, by the tax policies. These segments in China will increasingly be used many automakers are announcing are for the most part served by the to serve demand beyond China’s aggressive expansion plans. With sales Chinese local brand manufacturers. borders. Structurally, many vehicle now expected to surpass 13 million manufacturers will either learn to units this year, there is every cause This is about to change. Attracted profit in this hyper-competitive to be bullish about China’s future by the tremendous growth of these market, or will find their ability automotive market. However, China’s segments, many multi-national to compete here, and thereby industry planning agency has good brands are expanding their product elsewhere, compromised. 6 Booz & Company
    • TREND #7: China opened its domestic market to foreign vehicle manufacturers develop industrial bases to create investment opportunities and jobs in lOCAl VEhIClE in the 1980’s, starting with the order to accelerate China’s economic MANUfACTURER’S first sino-foreign automotive joint venture between American Motors development. However, as was noted in Trend #1: Policy-driven pUSh TO bUIlD Corporation (AMC) and Beijing Consolidation of Chinese Vehicle bRAND EqUITY Automotive Industry Corporation (BAIC). Through the use of the joint Manufacturers, there are numerous structural problems in the China venture form of cooperation, the automotive industry that result from government then hoped a domestic the highly fragmented landscape of industry would emerge where licensed car manufacturers. The fact the Chinese domestic companies that that there are over 150 registered would learn from their partners manufacturers is an outgrowth of a and eventually emerge as successful start-up phase for China’s auto sector. automotive companies. However, the highly fragmented industry that results from this In theory, the domestic companies creates enormous inefficiency for the would learn from their foreign management of critical assets. counterparts the skills needed to manage a complex business, establish This fragmentation also makes it manufacturing and supply bases very difficult to focus and allocate to produce vehicles and ultimately resources to the development of transfer critical technological critical technologies as well as brands. development capacities in order build This is an area of particular weakness their own-branded products. While for Chinese OEMs who have relied on the China automotive market has their foreign partners to take the lead indeed developed rapidly, it is very in the development and integration clear that the 25-year journey toward of key technologies. Foreign vehicle establishing independent automotive manufacturers, through their JVs have capabilities is still a work in process. also lead the establishment of branded vehicle distribution networks. In fact, the model for development of Chinese-branded vehicles have China’s domestic automotive industry largely played the role of “bottom was also designed to facilitate feeder” by selling a cheaper form of development of China’s industrial transportation to first-time consumers base. Provincial governments, who are not as concerned over with the support of the central whether their product meets world- government, were encouraged to class standards. Booz & Company 7
    • The majority of Chinese consumers Chinese-manufactured vehicles meet the quality requirements of understand this quite well—which is to Australia, Latin America, the Chinese consumers, many of whom the reason why foreign brands held Middle East, Africa, and Southeast are entering the market for the a 66% share of the China market Asian countries. It stands to reason first time. in 2008. The China government that less mature markets have understands that in order to create demographics that lend themselves brand Equity—With Chinese a healthy industry, they must first to new market entrants who Characteristics raise the perception of “Made in compete primarily on price. The capabilities of local Chinese China” cars in the minds of Chinese 3. Foreign vehicle manufacturers may OEMs have come a long way in a consumers. This is why there is a goal actively participate in local brand short time. Chinese firms will learn for Chinese OEMs to achieve a 50% development in order to expand quickly as they grow their share share of domestic sales in 2010. The their market reach and receive of the domestic market. However, stated expectation is for the domestic preferential treatment. Honda is much work needs to be done to gain manufacturer to introduce vehicles in fact taking this approach and acceptance of the Chinese consumer with their own brand trademark is investing RMB 2 billion to of Chinese manufactured goods. This either through their existing joint develop a local brand with must be the first priority as it stands to ventures or other subsidiaries. Guangzhou Automotive through reason that if it is difficult to convince We can therefore anticipate the their joint venture. a Chinese consumer, it will be even following trends: harder to convince a foreign consumer To support the growth of local to accept a “Made in China” car. The 1. The government will likely require brands, the government in 2009 fact is that with the proper attention a foreign partner seeking to form has reduced tax rates by 5% on the to quality management discipline and a new JV to provide the support purchase of vehicles below 1.6L with the transfer of critical know-how needed to introduce a Chinese engine displacement, as well as in the area of vehicle synthesis and local brand. fiscal subsidies to rural customers development, it is indeed possible 2. Domestic vehicle manufacturers for vehicle replacement. These for Chinese firms to capture greater will seek to improve brand policies clearly favor the local brand share of the domestic market, and image, enhance quality and manufacturers who tend to build eventually of the global markets. target international expansion. small, compact cars with smaller Having enjoying rapid growth the engine displacements. Such policies While building equity in Chinese China domestic market, several have helped companies like BYD and domestic brands is a tremendous Chinese car companies including Geely become the shining stars of challenge, there is a significant benefit Chery, Great Wall and others China’s domestic market by offering of the joint venture approach taken have already started to export competitively priced small cars which in the development of the Chinese 8 Booz & Company
    • domestic auto industry. While the process upgrade their image from saying “A brand is closely related to learning from their global partners a maker of “affordably priced cars” to its cultural background. Isolated from how to become global players is one that delivers “safe, fuel efficient, that background, it is worthless,” easier in theory than in practice, this and environmentally-friendly cars”. stressing that it would not be very approach has helped China establish easy for Geely or any other Chinese a global supply base, with virtually This year, Chery Automobile carmaker to grow its brand portfolio. all international auto parts companies Company has taken a similar He noted: “A brand is like a person’s now represented in China. By building approach with the expansion of name. Even if I change my name to and leveraging the capacities of such their brand portfolio to four brands: Hu Jintao, I am not Hu Jintao.” suppliers, and by selectively acquiring Riich, Rely, Karry and Chery. Such the assets of such suppliers, Chinese an approach carries significant risk, A significant part of addressing this automakers are striving to build a as the investment and resources challenge will be to overcome the more upscale image. Several examples needed to develop unique products perception that “Made in China” were previously noted in Trend #3: and market separate brands is quite is equivalent to “Cheap and Poor Acquisition of Foreign Assets and significant. Alfred Sloan’s pioneering Quality”. However, great rewards Key Development Competencies by concept of “different cars for different accrue to those firms who understand Chinese Companies. buyers” was the centerpiece of GM’s how to adapt their positioning to early 20th century expansion—and the unmet needs of the local Using this approach, Zhejiang Geely this was perfect for an American consumer. Successful firms find a Holding Group has introduced industry in its infancy. However, the way to take their brand value several products and uniquely cost of engineering unique products proposition and uniquely position it positioned brands, including Gleagle, for as many brands as GM had in relative to competition in their target London Taxi, Shanghai Maple, and its portfolio became too great. GM’s markets—creating a unique selling Emgrand. New models such as the reluctance to give up brands because proposition (USP). EC718 will be introduced under of their historic value became a major their new Emgrand brand at price financial burden. After GM’s sale of points (starting at RMB 82,300) not Hummer, Saab, Opel, Vauxhall and previously achieved using the Geely the wind-down of Pontiac, only 4 brand. Convincing consumers to pay brands will remain: Chevrolet, Buick, more for a relatively unknown brand Cadillac and GMC Truck. will require a clear value proposition. Geely intends to increase their brand Geely’s Chairman Li Shufu apparently equity by sourcing from the world’s understands the brand equity leading auto parts suppliers, and in challenge. He was recently quoted as xxx Booz & Company 9
    • TREND #8: The dramatic rise of China’s automotive industry, in terms of both This is followed by a group of 21 Tier 2 cities. Chongqing is the largest ChINA’S RApIDlY consumer demand and production municipality with a total population ChANGING supply, is truly unprecedented in the history of the industrialized world. of 32 million residents, however only 6 million are considered urban. DEMOGRAphICS No country has risen from a nearly Other Tier 2 cities include Dongguan, AND GROWING standing start to the size and scale that China has achieved in such a Nanjing, Wuhan, Hangzhou, Shenyang, and Harbin. Smaller DEMAND IN compressed time frame. It was, after cities such as Zongshan, Xiamen, lOWER TIER all, just 17 years ago when Deng Xiaoping made his now-famous visit Changzhou and Zhuhai are also included because of their higher per CITIES to Shenzhen where he announced capita GDP. the creation of Special Economic Zones and thereby sparked China’s Over the last decade, a set of third- wave of economic momentum. The tier “emerging middle class” cities logical question to ask is whether this have also emerged, including cities momentum is sustainable, particularly like Dalian, Qingdao, Shantou, as it relates to the most iconic of Kunming, Zibo, Huizhou, Zibo, consumer goods: the automobile. Shijiazhuang. The last of the Eight Overarching A fourth-tier “next wave” group of China Automotive Trends That cities is also beginning to emerge Are Revolutionizing the Auto as economic development begins in Industry addresses the underlying earnest in yet another group of mostly socio-demographic forces that are interior Chinese cities. And finally the driving the recent economic “rural” and “remote” population developments in China: and why groups complete the classification of there is every reason to believe that, the Chinese population of over 1.3 barring unforeseen geo-political billion people. instability, China has a very bright automotive future. In fact, the emergence of this multi- tiered structure is a result of the China’s Multi-Tiered Cities economic development path that was Since the early 1990s, China’s initiated by Deng Xiaoping. Prior to economic development has been this, over its history of nearly 5000 centered the metropolitan areas years, China had been a rural and of China’s coastal regions and agricultural economy. In the space surrounding areas. Shanghai, Beijing, of just few decades, a significant Guangzhou and Shenzhen are percentage of the population of our typically identified as Tier 1 cities planet has migrated to the cities of with the highest income, largest “new China”, and in the process population base and largest GDP. these people are moving from poverty to prosperity. 10 Booz & Company
    • Urbanization Trends “middle class” as people with Automotive Implications At the start of the reform era, 82% annual income greater than RMB The statistics on urbanization, income of China’s population was considered 150,000 (USD 22,000), this number growth and population demographics rural. By 1990, this percentage has increased from 1.5 million to point to very favorable conditions had declined to 74%. By 2000, the 4.8 million individuals from 2000 for the continued robust growth of percentage was 64%. In 2008 this through 2008. This number is the automotive market. However, had further declined to 55%, or expected to increase to over 40.3 many people question whether approximately 720 million people. million individuals by 2020. China has sufficient infrastructure to Clearly, these shifts represent a handle the increased volume of cars migration of population towards the The China government estimates that and whether resource constraints areas of economic development and there are over 45 million families that (people, energy, investment capital) concentration of wealth. The creation have reached the threshold of RMB may eventually limit the growth of new wealth has had a profound 30,000 (USD 4,400) of expendable of the market. While these are all impact on the development of the money, which is considered a legitimate issues, it is useful to first cities across all of the previously threshold for entry into the car view China’s automotive development described “tiers”. This has also buying population. Urban wealth in contrast with that of other impacted the development of rural accumulation is undoubtedly fueling developed countries. areas as urban wealth has a positive the growth in automotive sales. The impact on extended family members fact that 85% of all vehicles are sold A commonly used benchmark to who remain in the rural population. to urban residents is a clear sign of compare the development of the the relationship. car industry across markets is cars While China possesses a migrant per 1,000 of population. On this workforce of over 200 million Ageing and Increasingly measure, China is tied with Belize people, there is no mistaking the Affluent Population in 107th place at 10 cars per 1,000 trend of permanent migration of The growth of a more affluent (source: www.nationmaster.com). The rural population to existing urban urban middle class, combined with a U.S. leads with 765 cars per 1000. areas. Looking forward, it is expected generation that has lived under a one- Of course, the U.S. market may not that nearly two-thirds of China’s child policy is creating yet another be a fair comparison as it is a mature population will be in urban areas by consequence: wealth accumulation market with a historically large car 2020. This represents a whopping for an increasing number of middle population. A fairer comparison rise in urban population of nearly and older age groups. By 2020, it is would be a market like Mexico with 200 million people in just over 10 estimated that China’s population will 138, Russia with 124, and Brazil years. Essentially, China creates grow by approximately 110 million, with 81. Clearly, there appears to be the population-equivalent of a city yet the number of individuals over upside growth potential for China. of between 1.5–2 million people 45 will increase by 118 million. It is each month! It is no wonder why also expected that the population of Forecasts of the China market over China’s cities are continually under individuals between 25–44 will shrink the next decade anticipate that the construction. by 22 million. This has significant passenger vehicle population will implications for product preference, grow from 100–200%. Global Income Growth as middle-aged and older consumers Insight’s base forecast anticipates A growing middle-class is emerging tend to seek more luxurious products. growth in the passenger vehicle in these urban areas. If we define population from 10–153 million units Booz & Company 11
    • from 2005 to 2030. The high forecast The Chinese local manufacturers, by Lower tier cities are capturing an places the number at 327 million contrast, are more focused on the increasing share of the market and units. The bottom line here is that lower tier cities. Local brands offer a are experiencing the highest year- it is hard to be pessimistic China’s better fit to the purchasing power of over-year growth. Recent data from future automotive prospects. the consumers residing in these lower China’s National Statistics Bureau tier cities. Driven by the onset of the highlight this trend (See Exhibit 1). The Growth of the lower-Tier Cities global financial crisis, the Automotive A key reason for optimism is Industry Stimulus Plan published in As a result, we can expect to see even the anticipated development of early 2009 took specific measures more intense competition among the China’s lower tier cities. While designed to spark the growth of foreign and domestic brand vehicle China’s economic revolution has consumer demand in these lower manufacturers as they attempt to been clustered around the Tier income cities. Measures including the capture this growth opportunity (see 1 and 2 cities, it is important to reduction of sales tax for cars below Trend #6: Hyper-competition Across understand the real impact that the 1.6L engine displacement, along The China Auto Market Segments). lower-tier cities will have on the with subsidies for new minibus or As this is happening, the local future development of the market. light truck sales for rural residents manufacturers are striving to upgrade Interestingly, most multi-national have accelerated the auto market their brands and product portfolios corporations had focused their expansion in these markets, helping to to meet the more upscale image businesses and sales activities around boost the performance of the Chinese aspirations of Chinese consumers (see the Tier 1 and Tier 2 cities. For local manufacturers. Recognizing this, Trend #7: Local VM Push To Build example, Toyota has derived 20% multi-national companies are placing Brand Equity). of its sales in 2009 from Guangdong more focus on the development province, and 5 of China’s 31 products suited for the tastes and Clearly any growth strategy in China provinces account for 49% of their preferences of consumers in these requires an understanding of the sales. Similarly, VW generates 40% of lower tier markets. rapidly changing demographics and a its sales from its top 5 provinces. plan to capture the growth in China’s lower tier cities. Exhibit 1 Recent data from China’s National Statistics Bureau City Classification Market Share Growth Rate Tier 1 13.9% +8.1% Tier 2 47.2% +27.6% Tier 3 21.3% +33.7% Tier 4 17.7% +36.0% Source: Booz & Company analysis 12 Booz & Company
    • About the Authors Edward Tse is Booz & Company’s senior partner and chairman for Greater China, specializing in definition and implementation of business strategies, organizational effectiveness, and corporate transformation. He has assisted several hundred companies—head- quartered both within and outside China—on all aspects of business related to China and its integration with the rest of the world. Bill Russo is a senior advisor with Booz & Company as well SUMMARY This article brings us to the conclusion of this in-depth look as the Founder and President of Synergistics Limited. He into the Eight Overarching China lives in Beijing and has more Automotive Trends That Are than 20 years of experience Revolutionizing the Auto Industry. in the automotive industry, most recently serving as Vice Taken collectively, it is clear that President of Chrysler’s these trends signal a shift in the business in North East Asia. global center of gravity towards the Tao Ke is a project principal east. The dramatic shifts that have with Booz & Company and is occurred over the past year in the a member of the core financial structure and brand portfolios of services leadership team in the vehicle manufacturers are simply Greater China. He has more the early stages of a process of asset than 10 years’ consulting reallocation and global realignment experience in a broad range that will unfold over many years. of strategy, operations, organization, and risk manage- These trends are reshaping the ment assignments, covering brands, products and global footprint the financial services, of those who hope to prosper in the automotive, consumer, and 21st century automotive industry. telecom industries. Indeed, China has taken center stage in the battle for global auto Bill Peng is a senior associate industry dominance. with Booz & Company. He specializes in overall strategy, branding, marketing, chan- nel and entry strategy in the automotive and automotive supplier industry, with focus on sales/marketing/branding and channel functions. Booz & Company 13
    • The most recent list of Worldwide Australia, Dublin Middle East Mexico City our office addresses and Offices New Zealand & Düsseldorf Abu Dhabi New York City telephone numbers can Southeast Asia Frankfurt Beirut Parsippany be found on our website, Adelaide Helsinki Cairo San Francisco www.booz.com Auckland London Dubai Bangkok Madrid Riyadh South America Brisbane Milan Buenos Aires Canberra Moscow North America Rio de Janeiro Asia Jakarta Munich Atlanta Santiago Beijing Kuala Lumpur Oslo Chicago São Paulo Delhi Melbourne Paris Cleveland Hong Kong Sydney Rome Dallas Mumbai Stockholm Detroit Seoul Europe Stuttgart Florham Park Shanghai Amsterdam Vienna Houston Taipei Berlin Warsaw Los Angeles Tokyo Copenhagen Zurich McLean booz & Company is a leading global management consulting firm, helping the world’s top businesses, governments, and organizations. Our founder, Edwin Booz, defined the profession when he established the first management consulting firm in 1914. Today, with more than 3,300 people in 59 offices around the world, we bring foresight and knowledge, deep functional expertise, and a practical approach to building capabilities and delivering real impact. We work closely with our clients to create and deliver essential advantage. for our management magazine strategy+business, visit www.strategy-business.com. Visit www.booz.com to learn more about Booz & Company. Printed in Greater China ©2009 Booz & Company Inc.