A Research Report on the Change in Global Auto Industry (XVI)

③ Blind optimism of some companies will cause their strategic blunders in future

Unexpected growth in the domestic market has given Chinese-brand automakers opportunities to catch up with global automakers. But this is also a double-edged sword: As the sales are excellent, many companies begin to make wrong judgments and overestimate their own ability and underestimate the difficulty of the competition. Over 80% of the experts in our survey believe that some companies may become too optimistic, which will lead to their strategic errors, as mainly reflected in four aspects:

(1) Too many similar or same models are put to the market quickly

As the domestic market is highly competitive, different market segments need different new or upgraded models, which is a strategy many automakers should implement. However, it is very common that in one year a Chinese-brand automaker launches a large number of models which are similar to the existing models and have vague market orientation, and before the introduction of new models, the companies conduct no detailed market research.

A new market-oriented model, from its R&D to production to its upstream and downstream supply chain, needs an investment of several hundred million dollars. Failure to reach large sales will not only cause the loss of profits, but also reduce the investment in other major models. This is a very dangerous signal.

(2) The multi-brand strategy is implemented with insufficient planning or support

It is understandable for an auto group to implement its multi-brand strategy, but from their establishment to ultimate recognition by consumers, a carmaker's multiple brands require a large capital investment. If there are insufficient funds to invest, and the brands are hard to achieve profit within a certain period of time, then the planning has a big problem and will also be difficult to implement.

Industry experts have great doubt about the multi-brand strategy pursued by Chinese automakers. Only 20% of the survey respondents think it is now high time to implement the multi-brand strategy, and 70% believe that Chinese automakers are currently unable to operate multiple brands, and nearly 10% are pessimistic about the multi-brand path.

(3) Carmakers are rushing to new energy vehicle plans

The Chinese government supports the development of new energy vehicles and has issued substantial policies to encourage the development of new energy vehicles, which is part of the country's decisions made for its energy security concerns.

However, the new energy vehicle has a still very vague concept. Its technical support line and external environment have more variables, and therefore the new-energy vehicle planning needs careful consideration and positioning, such as what is most important in developing new-energy vehicles? What role will a carmaker play in the new-energy trend? Otherwise, limited resources will be wasted and opportunities for conventional vehicles will be missed in the coming decade.

Our survey has also showed that the majority of the automakers have been offering their new-energy vehicles mainly to meet the government policy and to win the policy support. There is still a long way to go to win the market.

(4) The acquisition impulse lacks conditions for integration

In order to increase the concentration of its auto industry, the Chinese government encourages mergers and acquisitions (M&A) among its automakers. From the perspective of macro-management of the industry, this policy is understandable. However, the Chinese market is still growing as an emerging market, and the conditions for the M&A among its automakers are not ripe yet. More than 80% of the respondents noted that given the complexity of China's auto industry, the administrative efforts on the M&A implementation don't come in line with the market laws and therefore are open to question.

China's two auto giants FAW Group and SAIC Group have been listed among the World's 500 largest companies, but the global auto industry rarely sees FAW and SAIC as independently competitive automakers. They rely more on government policies, as a foreign automaker that enters China for production must form its joint venture with a local automaker and can't be the majority shareholder. Although the Chinese auto giants are also developing their own independent brands, their revenues and profits of those brands are also negligible. Other similar Chinese auto groups have much less independent competitiveness.

Therefore, there is no such mature M&A opportunity in China for "independently competitive carmakers" to buy other "less competitive carmakers." The government can only integrate and redistribute its auto assets or resources. This is not operated by the market law and therefore can't generate the synergy needed for the integrated companies, let alone boosting their independent competitiveness.

If a Chinese carmaker hopes to take advantage of the financial crisis to buy a global auto brand or company, it will be more dangerous. The M&A rush without integration conditions may evolve into a very political show and become a heavy burden on the carmaker's corporate development.

(To be continued)

A Research Report on the Change in Global Auto Industry (I)

A Research Report on the Change in Global Auto Industry (II)

A Research Report on the Change in Global Auto Industry (III)

A Research Report on the Change in Global Auto Industry (IV)

A Research Report on the Change in Global Auto Industry (V)

A Research Report on the Change in Global Auto Industry (VI)

A Research Report on the Change in Global Auto Industry (VII)

A Research Report on the Change in Global Auto Industry (VIII)

A Research Report on the Change in Global Auto Industry (IX)

A Research Report on the Change in Global Auto Industry (X)

A Research Report on the Change in Global Auto Industry (XI)

A Research Report on the Change in Global Auto Industry (XII)

A Research Report on the Change in Global Auto Industry (XIII)

A Research Report on the Change in Global Auto Industry (XIV)

A Research Report on the Change in Global Auto Industry (XV)

A Research Report on the Change in Global Auto Industry (XVII)