Auto Industry, Talking Point

The main event

Is China’s auto show now the global car industry’s most important?

The main event

The X factor: Daimler flew in singer Leona Lewis (centre) to add glamour

An anticipated 700,000 visitors; a thousand vehicles on display (most with at least one female model draped over the bonnet); and a major announcement about Lionel Messi, potentially the greatest footballer the world has ever seen.

That was the action this week in Beijing, as the Auto China show clicked into gear. The event, which alternates between the capital city and Shanghai, is now firmly entrenched with Frankfurt and Detroit in the industry’s top tier of annual gatherings.

A must-attend occasion?

It looks like it, as far as the international car industry executives are concerned. Most of them were in town to pay their respects to a market now regarded as the industry’s shining hope.

Hence Nissan co-CEO Carlos Ghosn was keen to mention that his company would be opening a new design centre in Beijing, so that “the cars we develop will be designed by people who understand Chinese tastes.” Volkswagen also announced its latest China investments and Hyundai vice-chairman Euisun Chung unveiled a new model designed specifically for Chinese drivers. “It’s one of the very few times we’ve done a world premiere outside of Korea,” he told reporters. “It’s our way of recognising how important our Chinese customers are to us.”

Of course, such studied endearment has an obvious context; a spectacular 2009 in which 12.9 million light vehicles (cars and vans under six tonnes) were sold to Chinese drivers. As a result, the country overtook the US in passenger vehicle sales for the first time.

In fact, the pick up in business was so rapid that some doubted that 2010 would be able to keep pace. But vehicle sales are up again in the first quarter, almost 72% in year-on-year terms, according to data from the China Association of Automobile Manufacturers. All of this despite a scaling back on tax discounts for smaller engine cars, as well as a general tightening in credit conditions.

Such a frenetic pace looks unsustainable over the longer term but forecasters still expect sales to grow at a more-than-decent tempo. Ownership levels in China remain low by international standards – at 50 cars per thousand people – and millions of households are breaching the annual income thresholds said to trigger visits to showrooms.

Which puts China’s carmakers in pole position?

That is one interpretation, and it usually portrays the global financial crisis as a watershed event. Cue imagery of ravaged US carmakers looking despairingly in their rear view mirrors, as Chinese competitors race up menacingly behind.

Recent M&A deals (like Beijing Auto scooping up Saab’s car-and-engine technology or Geely’s acquisition of Volvo from Ford), as well as news that at least 89 new vehicles (mostly Chinese-made) are being given their global debut at this week’s show, is offered as a sign of an industry turned upside down.

Research from JD Power, an automotive forecast firm, offers a little more perspective. Yes, more passenger vehicles were sold in China than in the US last year. But the average price of about $17,500 was well down on the $27,500 spent in the US. Do the sums, and roughly $100 billion more was spent on new cars by Americans than Chinese in 2009.

All the same, the gap is going to narrow every year and China sales will inevitably take the lead in both volume and value terms. But this need not spell disaster for the international manufacturers, all of whom have commercial skin in the game via a range of joint ventures with Chinese partners.

GM has nine JVs, for instance, plus two wholly-owned enterprises. And its top performer is very much a made-for-China vehicle. The Wuling Sunshine (a mini-van “reminiscent of a 1960s-era VW ‘hippie bus’ but half the size”, says Forbes magazine) is rolling off production lines co-owned with Shanghai Auto (SAIC), China’s largest carmaker. Almost 600,000 were sold last year, mostly to small business owners and farmers.

But won’t the Chinese expect to dominate their home market?

Certainly, they will hope to. Domestic brands have also grown in market share to almost a third of sales last year, according to Alix Partners, a consultancy. Foremost amongst them is BYD, which is going gangbusters on sales of its F3 sedan (it is something of an irony that the current darling of the “green car” community is making inroads with a traditional gas-guzzler).

But a quick look at this year’s sales figures shows too that foreign brands have 10 of the top 15 bestsellers. So although Shanghai Auto is the number one manufacturer (thanks to huge joint ventures with GM and VW, respectively), Volkswagen is the top selling brand. Toyota, Hyundai, Honda and Nissan follow behind. Clearly, foreign is still fantastic for a huge chunk of Chinese drivers.

Of course, the pecking order is not pre-ordained. Local ambitions are often expansive, even if sometimes in the earlier stages of the commercial cycle. Take Geely, which has about a 3% share domestically. It had 39 new models on display in Beijing this week – but the massive majority were “concept cars”, still some way off mass production.

Be patient, say the analysts. Chinese brands will become more popular as quality improves, and as people get more used to seeing them on local streets. What took the Japanese 25 years and the Koreans 15, might only take 10 in the Chinese case. Others wonder if the wait might be a little longer. While Japan, Korea and the US each host only a handful of auto firms, China has many times that number. This makes it harder for genuine champions to develop the economies of scope and scale that allow for world-beating vehicles (and export volumes). The central government knows it too, and says it will consolidate the industry into a two-tier group of 10 or so leading firms.

The problem, says Greg Anderson at blog ChinaBizGov, is that there isn’t much sign of progress on the policy goals. Perhaps that’s because local bureaucrats are getting mixed messages. On the one hand they know that they will be scored on the growth, jobs and tax revenues created in their provinces. But on the other they are being told to support a restructuring that could see their local carmaking champion disappear (and tax revenue and jobs with it).

Where are the other battlegrounds?

One beachhead is in hybrid or electric vehicles, where Chinese firms are often said to have advantages. We have written extensively about BYD’s claim to leadership here (see issues 52, 25 and 11). No one has made any money on green cars yet.

Others think we will soon see a lot more Chinese cars on foreign roads. But that looks unlikely in the immediate future, as Chinese brands are not well known overseas. This must have contributed to another of the big announcements at this week’s show in which Chery – based in Anhui province – unveiled Barcelona’s wunderkind Lionel Messi as its new international face.

“It’s a smart move because those unfamiliar with Chinese cars need a famous ambassador to develop an initial interest,“ says Liu Lixi, an analyst with Northeast Securities in Shanghai.

Perhaps the car bosses are best advised to concentrate closer to home for the time being. And sections of the Chinese media would love to see a loosening of the stranglehold enjoyed by Audi, Mercedes-Benz and BMW on luxury car sales. But there’s no sign of this happening yet, either. In fact, it is just about the only segment where imports still crop up in the sales data (self-respecting Chinese millionaires clearly want their BMWs made in Munich, not in Shenyang).

For the real battle, look elsewhere. That’s because although the early prize was in premium vehicles, the newer one is in midsize and compact cars. The two markets are generating two-thirds of sales volumes nationwide (versus around 3% for the luxury brands). Sales can only increase too, as demand builds in third and fourth tier cities.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.