The eight overarching China automotive trends that are revolutionizing the auto Industry (1)

In my recent article "China's Next Revolution: Transforming the Global Automotive Industry", I brought forth the argument that some readers have found controversial: that China is the catalyst behind the restructuring of the global automotive industry. Some believe the automotive industry is undergoing change because of the global economic crisis, which has little to do with China. Still others believe that the restructuring is a result of mismanagement and that major OEMs can be restored to greatness with a change to new leadership possessing sufficient vision to adopt a new course.

However, I believe we are witnessing the early stages of an economic revolution: a shift of the global center of gravity of economic strength towards the east, which will result in profound changes in numerous industries.  As an economic bellwether, the automotive industry captures a great deal of interest.  However, it is apparent that there are many who still do not comprehend that the changes are in fact fundamental and irreversible.

It is apparent that more explanation is needed for many to grasp the fact that China is the catalyst for this automotive revolution, and that the opportunity exists for China and its fledgling automotive companies to assume a leadership role in the 21st century automotive industry. This explanation will be offered by highlighting eight overarching trends which are shaping the China automotive industry: now the largest in the world and the new battleground for domination of the global auto industry.

Eight Overarching China Automotive Trends:

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

The cumulative impact of these trends is essentially revolutionizing the business model of the global automotive industry. I will elaborate further on each of these trends in this and future articles.

TREND #1: Policy-driven Consolidation of Chinese Vehicle Manufacturers

There has recently been many announcements regarding potential mergers and alliances among the China domestic vehicle manufacturers, including Beijing Automotive Industry Corp (BAIC) and Fujian Daimler, Guangzhou Automobile Group Co. (GAC) and Zhejiang Gonow Auto, Chery Automotive and Jianghuai Automobile Co. (JAC), Dongfeng Motors investment in Yulon's LuxGen (Hangzhou) Motor Co., and First Auto Works (FAW) and Brilliance Auto.

The rationale for this major restructuring is clear: the current structure of the automotive industry reflects an industry in its early stage of development.  There are more than 150 registered vehicle manufacturers in China. In 2008, only 10 of these manufacturers accounted for 83% of the vehicles sold. This highly fragmented structure cannot provide for a stable development of the current domestic players.

As a result, the Chinese government has pulled-ahead its plan to consolidate the vehicle manufacturer landscape in order to achieve economies of scale. Prompted by the economic crisis, the China government in January, 2009 published stimulus plans for 10 key industries including automotive. The most sweeping proposal in this plan is the intention to consolidate the industry into a "top 10" group organized into 2 distinct  "tiers": the Tier 1 group consisting of companies with an annual capacity of 2 million units that are encouraged to acquire smaller automotive companies throughout China, whereas Tier 2 consists of companies with an annual capacity of 1 million units that are encouraged to drive regional consolidation. The plan even names 4 tier 1 companies as well a 4 tier 2 companies:

TIER 1:

· Shanghai Automotive Industrial Corp (SAIC)

· First Auto Works (FAW) Group

· Dongfeng Automobile

· Chang’An Automotive

TIER 2:

· Beijing Automotive Industrial Corp (BAIC)

· Guangzhou Automotive Industrial Group (GAIG)

· Chery Automobile

· China Heavy Duty Truck Corp (CNHTC)

It is noteworthy that this is not a final list of surviving companies as it represents only 8 of the "top 10", and by calling it "top 10" there is obviously room for others below the "top". One can anticipate that OEM consolidation and rationalization will surely be accompanied by a major restructuring of the Chinese auto supply base. It is also noteworthy that companies such as BYD, Geely and Great Wall are not included on the list. In spite of this, there is a clear indication of the rationale and urgency around the issue of consolidation, and why the time to act is now.

But, how does a restructuring of the domestic structure in a single auto market revolutionize the global auto industry? Taken as a stand-alone trend, it certainly is not sufficient enough to unleash a global transformational force. However, one must consider the fact that we are talking about the largest and still rapidly expanding China auto market. By seizing on the financial crisis as a triggering event to drive forward the necessary consolidation, the China government is ensuring that it can more efficiently develop the industry around the fewer, and stronger auto groups that remain. This is a necessary foundation-building step from which fewer, yet stronger China auto companies can emerge. While providing a base, it is the cumulative impact of this trend along with the remaining seven yet to be described that will revolutionize the business model of the global automotive industry.

In the next article, I will describe the trend of "Global Redistribution of Assets to Capture China Market Growth".

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About the author: Bill Russo is the Founder and President of Synergistics Limited and a Senior Advisor with Booz & Company.  He has over 20 years experience in the automotive industry.  Bill is a sought-after opinion leader, having recently appeared on CBS News and China Radio International.  He has been quoted numerous times in such journals as Newsweek, the Wall Street Journal, the Washington Times, Straits Times as well as National Public Radio.  He is also a guest auto industry columnist for the popular Chinese newspaper Southern Weekly.  His work in strengthening operational transparency has been featured in leading business journals (Harvard Business Review, Controlling magazine).