China will be an R&D hub for most OEMs and top suppliers

Jochen Siebert

Gasgoo.com: China has become the world’s biggest automotive market. How would that change the global auto industry?

Jochen Siebert: Measured by the number of all vehicles, China is the biggest market by now. In terms of passenger vehicles it has become the second biggest after the USA. In the next 10 years, China will also overtake the USA and become the biggest market, provided there are no unforeseen issues in the future. More importantly, China currently is the only big market that still has room to grow. We expect the passenger car density to rise from about 40 per 1000 to about 250 per thousand in 2050. By that time, we estimate the passenger car production will have grown to about 40 million units per year.

For more and more OEMs, China will become the most important market in 10 to 15 years; and for some, it is already. It has been the biggest market for Volkswagen since last year. It will be biggest market for Audi in two years time.

The OEMs always look at 10 or 15 years ahead. It has to deal with the next generation or the next generation after the next generation of cars -- how to engineer them, where to make them, who should be behind it. You will see that by the end of this decade, 2018 or 2019, some of the very important cars around the world will be engineered or designed first and foremost for the Chinese market, and then for the other markets. It has been the other way around until now. Volkswagen has been engineering cars for Germany, and selling and building them in China. But this will turn around in about 10 years. It is almost inevitable.

Gasgoo.com: In the next 30 to 40 years, will most OEMs treat China as an R&D hub?

Jochen Siebert: Absolutely, they have to and they have started to. Volkswagen has pioneered that R&D effort in a small and trial fashion. Its Lavida and the new Bora are very good examples of engineering a car specifically for China. As you know, these two cars are only sold in China. But that is only the beginning. Some parts are newly engineered, but it was not a totally new platform, not a totally new kind of generation. They use something that has been there before. But even that is not an easy task. But you will see other cars like the new compact sedan, which is already, to certain extent, engineered in China. But not totally, it’s actually a divided between Volkswagen Mexico and Volkswagen China.

I see other pioneers as well. Honda is starting to create a new brand -- Linian in China. They will create cars specifically for China, which is a start. First you have to create a car specifically for China, before you can create a car in China for the rest of the world.

General Motors (GM) however is certainly one of the pioneers and will be able to go further, maybe even further down the road than Volkswagen. I think the most significant event in 2009 regarding Chinese OEMs, is the fact that SAIC and GM set up a joint venture in India. That is the first time an international OEM goes together with a Chinese OEM without governmental mandatory requirements. GM obviously has seen SAIC as a very important partner for emerging markets like India, which has the potential of becoming the next big thing for the automotive industry at some point.

Toyota will have an R&D center here in Shanghai to create low cost cars, which will be partly designed and engineered in China, and I would expect them to build the same or a variant of that car in India as well. The majority of the R&D will be done in Japan for the time being, but I’m sure Toyota will let go after some years.

PSA has set up a design center in 2008, and starting from 2011, they will update their whole model line. However, they are playing catch up rather than being a pioneer. The same goes for Fiat. They have to start on a very small scale for their come back to China next year. I also don’t see Ford as a pioneer in China right now.

Let’s look at India versus China for a moment. China is much more mature in terms of R&D for vehicles than India. India has a very small automotive industry. They have very few cars that are built there, and they are all very cheap cars, while the Chinese engineers learn from the international players how to build more expensive cars as well.

In conclusion, China will be the center of creation of vehicles, for most international OEMs. They will see their R&D centers shrinking in their home market, while at the same time, R&D centers are getting bigger and bigger in China.

Gasgoo.com: And how about the suppliers?

Jochen Siebert: They have to follow. Up to 70% of the value added comes from suppliers. The OEMs ask for solutions for emerging markets and the suppliers have to come up with them. When I’m talking about the R&D, it’s not only about the OEMs, but even more so about the suppliers.

Gasgoo.com: Which kind of global suppliers would be the pioneers to set up R&D centers in China?

Jochen Siebert: The top 100 global suppliers, because they can afford to. For example, Continental has just started a new R&D facility in Shanghai. You will see more suppliers coming with R&D centers here over the next few years.

There are many medium sized suppliers in Europe with sales of around 100 million Euro, which can’t afford having another R&D center other than in their home country. For many of these smaller companies, things will be very difficult. They have to face the fact that they might disappear, be consolidated, or be acquired by a bigger company, possibly by Chinese suppliers.

Gasgoo.com: What might be the factors hindering the global OEM and suppliers’ deeper localization in R&D in China?

Jochen Siebert: Firstly, it is a political issue. The international OEMs can’t really develop and built a vehicle in China and send it to their home markets, because the governments and trade unions there have always strongly opposed such moves.

Secondly, there is a lack of high level engineers in China. Right now, we actually see a strong influx of expat engineers, as the international OEMs and suppliers believe that they don’t have enough Chinese talent to be lead engineers. This situation will become severe especially in Shanghai with so many OEMs and suppliers setting up or increasing their R&D facilities. There will be a war for talent and fluctuation will increase tremendously. So the problem will be finding and retaining good Chinese engineers for many years to come.

Thirdly, the global suppliers also worry about the intellectual property issue in China. De jure, the intellectual property regulation here is actually very strong, even stronger than in Europe. De facto, there are not enough lawyers to put it into force. It will take some years for this problem to disappear.

All in all, it will not be an easy ride, but for any OEMs and suppliers in the automotive industry, there is no other way than becoming a major force in the biggest market.