Chinas Next Revolution En


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Booz & Company Viewpoint Publication of article on China auto industry. Part 3 of a 3-part series.

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Chinas Next Revolution En

  1. 1. Perspective Bill Russo Tao Ke Edward Tse China’s Next Revolution Transforming The Global Auto Industry
  2. 2. Contact Information Beijing Bill Russo Senior Advisor +86-10-6563-8300 Shanghai/Beijing Dr. 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 Henry Ford’s introduction of the moving assembly line in 1908 changed the world: making automotive transportation SUMMARY affordable for the masses, accelerating the industrial revolution, and shaping the distribution of economic wealth. While the world has witnessed great technological advances over the past century, the automobile industry still resembles that which was pioneered over a century ago. Simply stated, the crisis faced by today’s automotive industry has a lot to do with the application of a “one size fits all” 20th-century industrial paradigm to a 21st century global environment. This paper describes how the rapidly expanding China market has become the catalyst driving the transformation of the business model and technological underpinnings of the global auto industry. Booz & Company 1
  4. 4. BACkgRoUNd Is Henry Ford turning over in his grave because of what is happening dynasties must eventually be replaced. This lesson also applies to business to his legacy, the American car models: they are only relevant for a industry? While an unprecedented finite period of time and must then restructuring is currently underway be transformed or replaced. Ford’s within the global auto industry, we “Mass Production” paradigm was believe Mr. Ford would probably be the transformational shift of the 20th most disturbed by the fact that the century—helping to spark an era of “mass production” business model mobility and economic development has only changed incrementally in previously unrivaled in history. It is a over 100 years since he introduced testament to its power that it has only it to the automotive industry. Ford’s been incrementally updated in this introduction of the moving assembly time frame. The most notable recent line in 1908 changed the world: adaptation is the “Toyota Production making automotive transportation System” and it’s principles of lean affordable for the masses, accelerating manufacturing. However, many forces the industrial revolution, and shaping are driving the transformation of the the distribution of economic wealth. global automotive business model. While it is true that there have been The first article of this series entitled significant technological advances The Coming Structural Realignment as well as paradigm shifts in the of China’s Automotive Sector way to organize automotive supply described China’s emergence as the chains and assembly operations, one largest car market in the world, and cannot deny the fact that the car the potential changes to the structure today is still propelled by an internal of Chinese domestic industry. The combustion engine, and is assembled second paper entitled The Path to in a factory environment that would Globalization of China’s Automotive not seem very different to Mr. Ford. Industry explained the challenges While the world has witnessed great faced by Chinese Original Equipment technological advances over the past Manufacturers (OEMs) in their century, the automobile industry still efforts to expand internationally. resembles that which was pioneered This paper describes how the over a century ago. Simply stated, rapidly expanding China market the crisis faced by today’s automotive has become the catalyst driving the industry has a lot to do with the transformation of the business model application of a “one size fits all” and technological underpinnings of 20th-century industrial paradigm to a the automotive industry. 21st century global environment. It is a lesson of history that all great 2 Booz & Company
  5. 5. ACCElERATINg As noted in the first article in this series, we are living in historic times. partnerships for organizations that are financially weakened. As a result ThE INEVITABlE The global economic crisis presents of the developments in their home TRANSfoRMATIoN the world with a compelling case for change, and it is in times of crisis markets, automotive companies and their suppliers must strive to when truly transformational changes deepen their participation in the often occur. It is important to note China market if they hope to remain that the economic crisis is simply a viable. It only stands to reason that triggering event that freezes debate on companies that have weakened whether change is needed and opens positions in their domestic market up opportunities for collaboration would benefit by redistributing some among governments, industry of their focus to the growth markets competitors as well as between and in particular China. government and industry. Several macroeconomic and sociopolitical For the first half of 2009, China challenges are directly linked has surpassed the US in automotive with the automotive industry: the sales, posting sales of 6.1 million redistribution of global economic units versus 4.8 million vehicles sold power, energy dependence, global in the U.S. market. In fact, since trade balance and environmental 2003 China’s vehicle market has concerns. The sheer size and influence more than doubled in size from 4.56 of the Asian economies—especially million units to 9.67 million units China—will trigger the inevitable (in 2008). The astonishing growth and overdue transformation of the in car demand is a direct result of automotive business model. many factors that are fueling China’s economy. This includes the significant If you follow the trajectory of the investment made in the development past several years, you find that the of the infrastructure to support strength in the global auto industry transportation. The China government has been shifting eastward to places views the automotive industry as a like India and China. Most of the “pillar” of its economy since it brings recent growth in the world’s auto technology, jobs and investment to the industry has been in the Asia-Pacific economy. As such, several agencies of region, and more than half of that the China government play an active growth over the next decade is role in sponsoring initiatives to further forecasted to come from China. The stimulate automotive development growing influence that China wields and growth. While it may not be is not just its ability to influence apparent to the rest of the world, standards and direction, but also its these initiatives are accelerating not ability to create opportunities through just China’s economic development— Booz & Company 3
  6. 6. lEVERAgINg This year, in order to face the financial crisis, many national governments • Remove restrictions on auto purchases ThE ECoNoMIC have enacted stimulus plans designed CRISIS To to create jobs and stabilize the economy. In the case of China, the • Boost auto sales in countryside AChIEVE PolICY stimulus plan has several intentions: • Subsidize new minibus or light oBjECTIVES • Stimulate the economy with a truck sales for rural residents particular focus on backbone As a direct result, sales of vehicles industries engines with 1.6L or lower engines • Push a huge amount of capital have grown by 56.5 percent through the banking system year-over-year. Chinese consumers— (US$588 billion total with 45% especially first time car buyers—are of stimulus targeted at in fact helping to boost domestic infrastructure development) demand and are taking advantage of • Drive domestic consumption to the tax and other incentives currently reduce dependence on exports available. The policy also encourages consumers to shop for more The China government launched the fuel-efficient cars, which supports Automotive Industry Revitalization China’s efforts to reduce fuel Plan in March, 2009. The plan consumption. Targeting stimulus included several features designed actions towards purchase of vehicles to stimulate the development of the with lower engine displacement automotive sector, including: has the secondary effect of creating demand for smaller, lower-priced • Eight development goals for the vehicles—and this tilts the playing industry from 2009 to 2011, field toward local Chinese brands. designed to ensure domestic growth of automobile production and sales • Reduce half of sales tax for 1.6 liter or smaller cars 4 Booz & Company
  7. 7. foCUSINg ThE As the size of the auto market inexorably expands, China will energy prices. No doubt, China has a clear and compelling need to dEVEloPMENT play an increasingly key role in the reinvent the propulsion technology of NEw development of new automotive technologies. To some people who of the automobile. For alternative propulsion technologies such as clean PRoPUlSIoN observe the industry, this seems diesel, hybrid and electric vehicles you TEChNologY counterintuitive. Most industry watchers believe that development will find that China does not lead the technological development. leadership is purely a function of product innovation, and China is To address this, China’s stimulus not a place where you will find measures are targeting initiatives leading-edge innovation, especially for to increase energy efficiency and automobiles. The China automotive reduce greenhouse gas emissions by market is still very young, and in reducing energy intensity, increasing many cases the domestic producers the share of renewable energy used, of vehicles that are sold in China are implementing tough auto emissions also fairly early in their development standards, and adding investments stage. But that is the view from the for clean energy. China’s Minister supply side. The area where China of Science and Technology, Mr. has the opportunity to lead is on the Wan Gang—a former automotive demand side. development engineer for Audi—has recently unveiled a plan to support China’s emergence as the leading the development of what China calls automotive market in terms of sales “New Energy Vehicles” (NEVs). The has several implications. While most Ministry of Science and Technology, attention has been paid to relative working with the Ministry of Finance sales performance of the foreign and and the National Development and domestic companies, what is arguably Reform Commission, is sponsoring an of more long-term significance ambitious plan to promote the use of is the impact of China’s market NEVs initially targeting 13 pilot cities, expansion on energy consumption which include Beijing, Shanghai, and environment. Ten years ago, Chongqing, Changchun, Dalian, Bejing, Xi’an, Shenyang, Shanghai Hangzhou, Jinan, Wuhan, Shenzhen, and Guangzhou were already listed Hefei, Changsha, Kunming, and among the Top 10 cities with the Nanchang. The plan includes support worst air pollution. The massive for the development of energy-saving growth of the automotive market only technology for use in government adds to the problem. Additionally, fleets, including buses, postal, and China imports two-thirds of its oil, sanitation vehicles. The plan targets and its ever-increasing thirst has the deployment of 60,000 energy had a dramatic impact on global saving vehicles in China by 2012. Booz & Company 5
  8. 8. While Chinese car companies today will eventually come to the market. incentives for the retail consumer to do not lead the development of When it does, the Chinese car purchase new energy vehicles. Chinese propulsion technology, they simply companies will begin to close the consumers have less experience don’t need to at this time. Consider gap relative to the industry leaders. with gasoline-powered cars, and are that about 45% of China’s $588 What makes the development of already accustomed to short distance, billion USD stimulus plan is to alternative propulsion technology low-speed commuting—conditions be invested in projects related to particularly challenging is not simply very favorable for electric cars. developing China’s infrastructure. the vehicle itself—but the need for Replacing internal combustion invention of the infrastructure for The China government’s willingness engines with other technologies—such delivering renewable sources of to invest in the infrastructure to as hybrid electric, full electric, electricity and installation of battery support alternative propulsion hydrogen powered vehicles or clean charging/replacement stations. As technology will ultimately help drive diesel - requires collaboration between the largest car market, and the place demand side market acceptance. This business and government to develop with the largest need for alternative is where China has the opportunity the infrastructure in tandem with energy solutions, we can expect to to take the lead, and that will drive development of the technology. The see China place a heavy emphasis on supply side investment in new economics of the product itself and development of the electric vehicle technology. For the development ultimate market acceptance is very (EV) infrastructure. The country of NEVs, the infrastructure must much dependent on the availability that leads the development of this come first—and this will drive of the infrastructure to recharge or infrastructure will undoubtedly supply-side innovation. It takes replenish the fuel. It’s not realistic lead in attracting the investment in a combination of business and to expect a company to reinvent development of the technologies that government working together to the technological underpinnings plug in to that infrastructure. make such a transformational change of the automobile unless there is possible—and nowhere in the world a concurrent development and Consumer acceptance of new energy is there a closer link between business investment in the infrastructure to vehicles is yet another challenge. and government than in China. Unlike support that new technology vehicle. While the infrastructure investments the recent US government intervention This is especially true in today’s already described will help tip the that is occurring with no preconceived weakened global economy. scales in favor of new energy vehicles, notion of the “end game”—China’s consumers must also be convinced policy makers have for many years been As the largest automotive market, that the price and performance of crafting the development plans for the and because the China government the new energy vehicle can in fact auto industry. These plans are surely has the capacity and willingness meet their expectations. As a national not perfect—but such plans come in to invest in the infrastructure for priority, we can expect the China handy when navigating a crisis. alternative propulsion, the technology government to help by offering 6 Booz & Company
  9. 9. REShAPINg ThE An unprecedented restructuring of the global automotive industry resulted in many OEMs and first-tier suppliers outsourcing critical AUToMoTIVE is underway. Several OEMs and competencies that are necessary BUSINESS ModEl suppliers have filed for Chapter 11 bankruptcy protection, and are in for differentiating the company’s products. Pursuing cheap parts or the process of restructuring and cheap labor is ultimately self-defeating selling assets in order to regain a when doing so robs an organization profitable footing. However, it would of its core competencies. Similarly, be misleading to lay the blame for exporting a business model designed the failure of these businesses on the for the home market to foreign global economic crisis. As described markets only serves to limit the ability by this author in General Motors: of the organization to embrace the The Fall of An American Icon, “the capabilities of the foreign market. recent global economic crisis has accelerated the need for restructuring Automotive manufacturers in through bankruptcy”. The failure concert with their key stakeholders of automotive companies is the must redefine their business models consequence of not transforming the for the new reality of 21st century 20th-century industrial paradigm to competition. Going global is not a 21st century global environment. a simple transplant of the current It was never a question of whether business model to a foreign location. the dominant auto giants of the 20th It implies a transformation of the century auto industry would fail, but entire automotive value chain to when they would fail. The global leverage the opportunities made financial crisis merely exposed the possible by globalized capabilities. fatal flaws that were already present It involves redesigning business in the industry. processes across the value chain in order to deliver to the customer The painful reality of globalization a brand with a relevant Unique is that it is not a straightforward Selling Proposition (USP). This will process. In order to become global, require that 21st century global auto most automotive OEMs have companies fundamentally rethink attempted to export a business model their entire value chain from the optimized for their home market consumer back through sales and to their international locations. service, production, supply and R&D. Migrating development capacities to Key stakeholder groups, including markets that lack the competency to the national governments with an perform the work misses the entire interest in the global competitiveness point of globalization. Worse, the of their domestic auto industry, must blind pursuit of cost efficiency has contribute to this development. Booz & Company 7
  10. 10. ChINA’S While many may question whether China can take a leadership role carefully deployed a business model that yields innovative products while REVolUTIoNARY in the transformation of the global leveraging the best and most cost RolE: ThE auto industry, one cannot deny the influence that China has had on effective capabilities from home and abroad. While many auto companies CATAlYST foR recent developments. The sheer size could argue that they are global, this TRANSfoRMATIoN and growth of the China market has forced most companies to reprioritize fundamental Apple-style rethink of the entire value chain has really not their capital plans and resource occurred in the automotive context. allocation. The reallocation of production and supply resources to The emergence of China as the largest China has fundamentally changed the automobile market in the world is cost structure of the industry—which a significant event only in the sense changes the entire competitive pricing that it causes the entire world to take game. China’s increasing thirst notice of just how fast this economy is for energy has created much price developing—and to also understand volatility in the energy and resource precisely how China is transforming sector, which has a direct impact on the global auto industry. Rather consumer buying behavior. China’s than trying in vain to turn the clock government policies and centrally back to the way things used to be, planned economy have supported the it would be wise to learn how to creation of the infrastructure needed use these transformational forces to to stimulate both the supply and define a business model to leverage demand side of the auto business. the capabilities which globalization makes possible. A catalyst is defined as “a person or thing that precipitates an event”. This Please Note: is an appropriate characterization of This is the third and final installment China’s role in the transformation in a series about the developments of the global auto industry. In a occurring in the Chinese automotive globalized world, we will likely industry. find that the transformation of the automotive business model may not be linked to any one company or country. Instead, successful 21st century companies will be the ones that can quickly adapt to the reality of globalization. One of the best non-automotive examples is Apple Corporation, a company that has 8 Booz & Company
  11. 11. About the Authors Dr. Edward Tse is Booz & Company’s senior partner and chairman for Greater China, specializing in definition and implementation of business strategies, orga- nizational effectiveness, and corporate transformation. He has assisted several hundred companies—headquartered 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 as the Founder and President of Synergistics Limited. He lives in Beijing and has more than 20 years of experience in the auto- motive industry, most recently serving as Vice President of Chrysler’s business in North East Asia. Tao Ke is a project principal with Booz & Company and is a member of the core financial services leadership team in Greater China. He has more than 10 years’ consulting 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 9
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