1. China in 2025 and
Implications for
Automakers
Bill Russo
Edward Tse
Chee-Kiang Lim

2. Preface
As we know, China’s economy has been growing dramatically for
more than two decades. China is now the world’s second largest
economy. Recently, we see rising concerns over the impact of a
deceleration in overall economic growth, especially on the
automotive sector.
China’s economic growth is likely to continue over the next decade,
driven by a mix of continued (albeit more selective) fixed-asset
investment and growth in consumption. Continued investment in
infrastructure to support a more than 60% urbanized population is
anticipated. Household consumption levels will rise as a result of
the growth in the population of middle-class wage earners and
overall rising incomes. A broad transformation is expected to
continue and will present an environment that is characterized by a
long term and sustained shift towards a middle-income,
consumption-based economy. This trend would lead to a
profoundly different economic landscape.
We believe discontinuities in the political, social and economic
landscape have the potential to reshape China dramatically in the
next decade. While the outlook is positive, there will likely be
discontinuities – some upward and some downward – along the
way. We believe that the key to sustainable success for businesses
in China will depend on their ability to anticipate those trends and
challenges that are in the “blind spots” today - but which can create
disruptive threats or discontinuous opportunities for those who are
able to respond rapidly. In essence, an “early warning system” is
needed which leverages unique insights that can be brought to bear
on the question of how the market, the regulatory system, and
business models may develop over the next decade in China.
In this analysis, we will apply such a thought process to anticipate
plausible scenarios for the China auto industry in 2025.

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China in 2025 and Implications for Automakers
China has gone through rapid
urbanization over the past few decades,
with urban population share rising from
17.9% in 1978 to 53.7% in 2013. City
clusters such as Beijing-Tianjin,
Shanghai-Yangtze River Delta and
Guangzhou-Pearl River Delta are home
to 18% of China’s population and
generate 36% of the nation’s GDP. Cities
are the main engines of China’s rapid
economic growth in the past few
decades. Nonetheless, the development
is highly unbalanced with urbanization
rates of 62% in the coastal regions, but
only 44%-48% further inland.
The urbanization momentum will
continue, on a size and scale never
before experienced in history. By 2025,
65% of Chinese citizens will live in urban
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Urbanized world population centers. This will no doubt
place significant stress on the
environment as well as the urban
transportation infrastructure, which is
already struggling to keep up with the
current urban population. While
restrictions placed on car registrations
have limited growth rates in the more
mature coastal tier 1 and tier 2 cities,
China’s automotive industry will continue
to expand, albeit at a more sustainable
rate, with a steady stream of first time
purchasers from lower-tier cities joining
the repeat buyers and upgraders of the
more mature regions. Emergence of the
less developed lower-tier regions will be
the key driver to incremental demand for
personal mobility.
On one hand, a more “binary” market will
emerge with consumers in the more
mature upper-tier cities continuing to
prefer globally recognized car brands,
while those from lower-tier cities will seek
Exhibit 1
China 2025 Scenarios: Urbanized World
Possible 2025 scenarios Implication to automakers
Emerging from China’s lower-tier region, a
Chinese automaker has become the first to sell
1M cars in overseas markets, and they are
commonly called ‘the Chinese Hyundai”.
Chinese OEMs are now competing in the EU
and North America
To secure long-term growth,
automakers must strengthen
offerings in the entry-level
segment, in addition to offering
newer products that cater to the
emerging middle class
Leverage China as the base to
develop entry-level models for
export to other developing markets
Having successfully penetrated China’s lower-
tier markets with cars engineered in China,
automakers are selling “Engineered in China”
cars in the global markets
To expand the market, auto loan penetration
reaches 50% in China and financing becomes a
critical lever for growth, particularly with younger,
budget-conscious buyers
Deployment of an innovative
business model for selling a full
range of mobility and after-sales
services

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Today, China has 14 cities with more than
10 million residents. This number will
likely double by 2025. As the home to
many densely populated urban areas,
China will require unique solutions for
traffic congestion, energy consumption
and pollution. The privately owned,
energy-intensive and people-driven cars
on the road today are not viable and
sustainable solutions for future urban
mobility.
By 2025, new urban mobility solutions will
be comprised of a mixture of public
transportation, non-motorized alternatives
and energy-efficient personal
transportation solutions. Innovations in
technology, business models and
regulation will come together to disrupt
the automotive industry. We anticipate a
number of discontinuities:
Innovative car use model
In an effort to rebalance supply of
transportation solutions with demand for
mobility, we believe a car ownership
model will gradually shift towards a “pay-
per-use” service model, especially in the
higher tier cities. The pace of this shift
can be significantly accelerated with
regulatory intervention forcing higher
usage charges on those who choose to
own vehicles.
New mobility solutionsno-frills products and solutions from
brands that deliver “the greatest bang for
their RMB”. On the other hand, pockets
of “new wealth” will also emerge in the
lower tier cities, which will begin to mimic
the buying patterns of more affluent
consumers in the higher tier cities. This
presents unique opportunities for both
foreign and domestic manufacturers.
Domestic brands will remain more
popular among lower-tier cities’
consumers as they penetrate the market
with lower-priced cars that are “good
enough” to meet their mobility needs.
Chinese automakers could continue to
serve this base by leveraging their lower-
cost advantage and improving their
product safety and quality performance.
International OEMs must also seize the
opportunity to develop competitive entry-
level models and no-frills platforms
tailored for the Chinese market, while
subsequently leveraging such
“Engineered in China” offerings to
penetrate other developing markets.
China in 2025 and Implications for Automakers
4

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By 2025, a pay-per-use model will
emerge as a viable alternative for
providing personal mobility in populous
urban areas. On the one hand, the China
government will continue to regulate new
car registrations through tax or quota to
limit the growth of private car ownership
in large urban areas. On the other hand,
escalating parking and traffic congestion
charges will make private vehicle
ownership less economical and therefore
less attractive.
A technology-enabled intelligent model
will supplant traditional car leasing and
rental companies’ asset-heavy offline
model. This will confer advantages and
pave the way for internet-powered
“mobility services” companies to emerge
in the market. Moreover, peer-to-peer
(P2P) car sharing will position platform
companies at the center of the eco-
system, connecting online and offline
activities through advanced mobile
technology. As the ownership-usage
model evolves, OEMs will need to partner
5
with digital players and service providers
to offer innovative products in order to
maintain their market shares.
Connected “smart” cars
In large cities, driving is becoming an
increasingly frustrating, time-consuming
chore. At the same time, traffic accidents
and congestion are by-products of human
driving behavior and inadequate traffic
and urban infrastructure planning. Smart,
connected cars will rely on
telecommunication and sensor
technologies to respond to vehicles,
objects and people while navigating, and
communicating with its passengers
through their on-board telematics system.
A smart transportation system has the
potential to eliminate accidents, increase
the capacity of existing road
infrastructure, collect and disseminate
useful real-time traffic data, and at the
same time facilitate new models of
vehicle ownership, increase travel time
predictability, and improve productivity
and energy efficiency.
Exhibit 2
China 2025 Scenarios: New Mobility Solutions
Possible 2025 scenarios Implication to automakers
Chinese internet companies vertically integrate
car leasing services into their internet portals
Partner with innovators and
internet companies to deliver
“urban mobility services” for
different markets
Alibaba successfully builds alliances with leading
OEMs to develop synergies with the “Internet of
Mobility”
Tencent successfully acquires a recognized
automotive brand
China in 2025 and Implications for Automakers

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Exhibit 3
China 2025 Scenarios: Connected “Smart” Cars
Possible 2025 scenarios Implication to automakers
Driven by policy in tier 1 and some tier 2 cities,
China has invested in building a smart
transportation infrastructure and 300M “Smart
Vehicles” are on the road
Consider leveraging China as a
base platform for smart car
technology development for the
global markets
Just 17 years of age, Jasmine Wang summons
her Xiaomi car via her mobile device, which
arrives at her door step within minutes and
delivers her to school, while allowing her to do
her last minute revision for her college
examination, Gaokao (高考), en-route
Invest in disruptive technologies at
the intersection of automotive and
internet - leveraging both organic
and in-organic business
development
“TencentCar” competes with “Apple Car Play”
and “Android Auto” on user experience, network
connectivity and localized content – and enjoys
strong user acceptance
(EV) subsidies and qualify a wider range
of fuel-efficient and environmental friendly
technologies. These and other similar
forthcoming policies are critical for China
to fulfill its commitment to slow and then
stop its emissions growth by 2030 under
the recently concluded climate change
agreement with the US.
City cars will adopt fuel-efficient and
environmentally friendly technologies,
such as lightweight composite
components and electric powertrains.
New generations of ultra-light weight
personal urban mobility (PUM) devices
will become popular – designed
specifically for city-use to transport 1-2
persons and light cargo over short
distances. OEMs will partner with non-
traditional suppliers and utility companies
to complete the eco-system.
According to China’s Ministry of Industry
& Information Technology, as a strategic
focus of the national development plan,
the Chinese Government will provide up
to 10B RMB in subsidies to catalyze the
development of “smart mobility”.
Energy Saving & New Energy Vehicles
China has become the world’s largest
carbon emitter. Big cities suffer from
pollution, often exceeding “hazardous”
levels. By 2025, China will become the
world’s largest oil importer, spending
USD500B a year on crude oil imports,
66% of which will likely be from OPEC
nations. Worsening pollution and energy
security has compelled China to seriously
invest in New Energy Vehicles (NEV) and
related infrastructure development. The
Government will continue electric vehicle
China in 2025 and Implications for Automakers

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Exhibit 4
China 2025 Scenarios: Energy Saving & New Energy Vehicles
Possible 2025 scenarios Implication to automakers
China’s investment in EV charging stations and
smart grid construction has created the complete
eco-system for “Made in China” New Energy
Vehicles, which are now being exported to the US
and Europe
Engage with Chinese partners
(auto, government and
infrastructure) to build the
supporting ecosystem in order
to make the EV technology
value proposition accessible in
the China market
New generation of ultra-light weight personal urban
mobility (PUM) devices are popular – designed
specifically for city-use to transport 1-2 persons
and light cargo over short distances
All taxi and bus fleets in China are fully electrified,
with foreign brands excluded from the approved
vendor list
Energy Saving and New Energy Vehicles achieve
25% share of a 40M unit market as traditional
gasoline-powered cars are banned from densely
populated cities
positional advantages, i.e., those which
have been bestowed upon them by the
government.
Starting in 2015, a new round of SOE
reform will be led by the State-owned
Assets Supervision and Administration
Commission of the State Council
(SASAC). These reforms will focus on
diversifying ownership, adopting modern
corporate governance, and establishing a
state-owned asset management
company. This will greatly impact the
auto sector. As a result, state-owned
automotive OEMs and suppliers will have
the mandate to become more efficient
and market-driven. Ultimately,
consolidation should eliminate the weaker
players. Several of the remaining local
Over the last several decades, China’s
policies and industrial developments have
typically been implemented via
investments made with government-
backed State-Owned Enterprises (SOEs).
While many SOEs have shown good to
strong profitability (at least on paper),
their capabilities and entrepreneurial
capacities vary a great deal. Many,
especially those in government-protected
sectors, derive their competitive
advantages through mostly structural
Emergence of “reformed”
SOEs alongside innovative
new entrants
China in 2025 and Implications for Automakers

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OEMs and suppliers will play an even
more important role in the global
automotive industry.
Meanwhile, we expect to see new
entrants into the automotive ecosystem,
especially innovative companies armed
with disruptive technologies. It is entirely
plausible that an Internet mobility
services provider becomes a major player
the automotive industry by initially
offering a portal to provide “mobility
services”.
8
Exhibit 5
China 2025 Scenarios: Emergence of “Reformed” SOEs
Alongside Innovative New Entrants
MNC players will need to adjust their
strategies to address a competitive
landscape that includes a new breed of
new players and new suppliers who will
be “mixed-equity enterprises” rather than
wholly-state-owned companies, as well
as nimble Internet mobility services
suppliers who aim to create a new
ecosystem of personal transportation
services. Many of these services may be
first incubated in China before being
rolled-out to the rest of the world.
Possible 2025 scenarios Implication to automakers
Reformed, more efficient, SOEs who have
become “mixed equity enterprises” and
innovative new entrants with preferred access to
the 40M unit China market provide a platform for
rapidly scaling up new transportation solutions
for global deployment
Re-define relationships with the
reformed SOEs based on a deep
understanding of who they are and
what you would like to achieve,
e.g. become strategic partners to
jointly exploit overseas market
leveraging China as a base
飞马 (Fei Ma, or Flying Horse) is the top selling
luxury sedan globally for the past 5 years; fully
designed and crafted by skilled artisans in
China, it offers unparalleled but understated
luxury with strong oriental themes and
innovative technologies that have become the
rage of the globally mobile elite around the world
China in 2025 and Implications for Automakers

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Conclusion
The discontinuities we have described
are all very plausible and in fact, we
believe many of them will emerge well
before 2025 – the key question is
whether traditional auto OEMs will first
recognize the potential disruptive threats,
and are then willing to seize the
discontinuous opportunities that may
ensue. Like Nokia and Motorola 10 years
ago, auto OEMs may be facing an
existential threat from new entrants from
outside their traditional competitive
sphere. Such competitors are anxious to
seize on the Chinese consumer’s rapid
acceptance and adoption of mobile
technology and pervasive Internet
connectivity services to deliver a new
ecosystem for “mobile connected car
services”.
Automotive OEMs have the complex
challenge of addressing this potential for
disruptive change, while simultaneously
continuing to deliver better and more cost
efficient products in the hyper-competitive
China market. In addition, for many
international OEMs, their joint venture
partners who are today SOEs will most
likely morph into something different over
the next decade. Understanding the new
agenda of these partners in their new
form will be a critical factor in sustaining
the business relationship going forward.
Furthermore, there is a high probability
that the current joint venture policy for
OEMs could be re-defined or even
abolished. To what extent the
international (and for that matter, the
local) OEMs are ready to deal with such a
change is a big question mark.
In summary, the ability to simultaneously
address these challenges will separate
the ultimate winners and losers in the
next decade. The only thing that is
certain is that the formula that has
worked until now is no guarantee for
future success.
China in 2025 and Implications for Automakers

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About the authors
Edward Tse is founder and CEO of Gao
Feng Advisory Company. He built and
ran the Greater China operations of two
leading international management
consulting firms for a period of 20 years.
He has consulted to hundreds of
companies – both headquartered in and
outside of China – on all critical aspects
of business in China and China for the
world. He also consulted to the Chinese
government on regional strategies, state-
owned enterprise reform and Chinese
companies going overseas. He is the
author of over 150 articles and three
books including the award-winning The
China Strategy. His fourth book, China’s
Disruptors, is coming out in mid-2015.
Bill Russo is Managing Director and the
Automotive Practice leader at Gao Feng
Advisory Company. His over 30 years of
experience includes 15 years as an
automotive executive, including 11 years
of experience in China and Asia. He has
worked with numerous multinational and
local Chinese firms in the formulation and
implementation of their global market and
product strategies. While the Vice
President of Chrysler North East Asia, he
successfully negotiated agreements with
partners and obtained required approvals
from the China government to bring six
new vehicle programs to the market in a
three-year period, while concurrently
establishing an infrastructure for local
sourcing and sales distribution. Mr.
Russo is a highly sought after opinion
leader on the development of China’s
automotive industry.
Chee-Kiang Lim is a Principal at Gao
Feng Advisory Company. He has over
18 years of experience, including 10
years of consulting experience in strategy
development and operational
improvement for large multinational
corporations. In addition to the
automotive sector, he also has deep
expertise in the oil & gas, mining and
high-tech industries in China, Southeast
Asia and Australia. He has previously
worked in telecoms and high-tech start-
ups in the Boston area and the
Administrative Service of the Singapore
Government.
China in 2025 and Implications for Automakers

11. Gao Feng Advisory Company (www.gaofengadv.com) is a pre-eminent strategy and
management consulting firm with roots in China coupled with global vision, capabilities,
and a broad resources network. We help our clients address and solve their toughest
business and management issues -- issues that arise in the current fast-changing,
complicated and ambiguous operating environment. We commit to putting our clients’
interest first and foremost. We are objective and we view our client engagements as long-
term relationships rather than one-off projects. We not only help our clients “formulate”
the solutions but also assist in implementation, often hand-in-hand. We believe in teaming
and working together to add value and contribute to problem solving for our clients, from
the most junior to the most senior.
Our senior team is made up of seasoned consultants previously at leading management
consulting firms and/or ex-top executives at large corporations. We believe this
combination of management theory and operational experience would deliver the most
benefit to our clients.
Our name Gao Feng is taken from the Song Dynasty Chinese proverb Gao Feng Liang Jie.
Gao Feng denotes noble character while Liang Jie refers to a sharp sense of integrity. We
believe that this principle lies at the core of management consulting – a truly trustworthy
partner who will help clients tackle their toughest issues.
For More Information:
Edward Tse
Founder and CEO
Gao Feng Advisory Company, Ltd.
Email: edward.tse@gaofengadv.com
Bill Russo
Managing Director
Gao Feng Advisory Company, Ltd.
Email: bill.russo@gaofengadv.com
Chee-Kiang Lim
Principal
Gao Feng Advisory Company, Ltd.
Email: ck.lim@gaofengadv.com
Note: The above authors wish to thank
Ms. Emily Wang for her efforts in
researching and summarizing the
findings of this analysis.