Emerging trends driving the 2010 China auto industry: an introduction

2009 was a year of tremendous historical significance to the China auto industry.  Triggered by the global financial crisis, the global automotive industry witnessed a year of unprecedented restructuring, as many industry icons struggled for their survival.  After peaking in 2007 at 70 million units, the global automotive markets experienced a contraction of nearly 10% over the next 2 years.  The mature "triad" markets of North America, Western Europe, and Japan have led this decline.

China is the noteworthy exception.  In 2009, China easily surpassed the US in total car sales to become the world's largest automotive market.  China's vehicle sales of 13.64 million units were more than 2 million units ahead of the second largest market, the United States. The astonishing growth in car demand was a direct result of many factors that continue to fuel China's economy.  This includes aggressive tax cuts as well as significant investment made in the development of the infrastructure to support transportation.  The China government views the automotive industry as a "pillar" of its economy since it brings technology, jobs and investment to the economy.  As such, several agencies of the China government play an active role in sponsoring initiatives to further stimulate automotive development and growth.

Driven by the onset of the global financial crisis, the Automotive Industry Stimulus Plan published in early 2009 took specific measures designed to spark the growth of consumer demand. Measures including the reduction of sales tax for cars below 1.6L engine displacement, along with subsidies for new minibus or light truck sales for rural residents have accelerated the auto market expansion particularly in China's lower-tier cities, helping to boost the performance of the manufacturers of these smaller vehicles.

While aggressive tax cuts and subsidies have been behind much of the demand growth in 2009, the question remained regarding how stable and sustainable this growth would be in 2010.  While very few expected a repeat of the 41% growth experienced last year, the question regarding sustainability of demand growth was often raised at the beginning of 2010.  However, demand has continued to be quite strong through the first nine months of 2010.  In fact, auto sales in China have risen nearly 36% from a year earlier to 13.14 million units according to the China Association of Automobile Manufacturers (CAAM).  Sales for the full year are easily expected to surpass 17 million units.

However, automotive companies in China are today finding themselves confronted with a different set of challenges from what they were just a few years ago. From the demand side, Chinese consumers are becoming more selective and are making more diverse and personal choices: making their own individual choices, not just for their family.  Meanwhile, demand growth is increasingly driven by lower-tier (Tier 3 and below) cities more than large and mega cities.  The Chinese government has also released more restrictive regulatory requirements for safety, environmental care and foreign investment.  From the supply side, almost every international player has recognized China as their largest source of future profit and has thereby committed significant investment. Additionally, Chinese local brands have never been so aggressive in fighting for market share than today.  All these challenges are pushing global as well as local vehicle manufacturers to alter their thinking and adopt new strategies to play the game.

Based on the developments of this year, we can see several emerging trends that are driving the near-term development of the China automotive industry:

- Sustainable demand growth fueled by urban economic development
- Shifting preferences for increasingly savvy consumers
- Hyper-competition across the automotive market segments
-  Adaptive brand innovation to extend product reach and grow share
-  Increasing focus on the automotive aftermarket
-  Accelerated drive to globalization

We will describe each of these trends in more detail in future postings.

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About the authors:

Bill Russo, Gasgoo.com's columnist, 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 automotive industry, most recently serving as Vice President of Chrysler's business in North East Asia.

Jeffrey Zhao, is an Advisor with Synergistics Limited. He lives in Fairfax, Virginia and has more than 10 years of experience in the automotive industry, most recently serving as Senior Manager for New Business Development for Chrysler's business in North East Asia.