PwC: China auto market to grow 6.5% in 2011

PwC predicts that global light vehicle production will increase by 26.8 million units from 2010 to 2017. And in its survey with global automotive CEOs in the 4th quarter of 2010, a full 90% of companies are somewhat or very confident of achieving revenue growth over the next 12 months. They also see a promising future in emerging markets. PwC anticipates that about 80% of global growth from 2010 to 2017 will come from emerging markets, and 34% of that from China alone.

In 2011, after several disturbing events such as the production halts caused by disastrous earthquake in Japan, the outlook of the automotive industry around the world and in China is a hot topic. On that, we interviewed with PwC’s Global automotive leader Rick Hanna, North American Automotive Leader David Breen, and Asia Pacific Automotive Leader Thomas McGuckin.

Gasgoo.com: What is your forecast on this year's global automotive market after the Japan earthquake?

Rick Hanna: First of all, the global automotive industry was progressing at a very good pace around the world. Before the tsunami and earthquake, the US market was producing higher than the forecast level, Europe was progressing very well, the luxury brands around the world were doing outstanding, they were running at full capacity, and China market was doing very well. We think in the first two months of the year, sales volumes and production volumes had exceeded most forecasts around the world.

After the March earthquake happened in Japan, everybody is trying to figure out its impact on the global industry, let alone the impact in Japan. Due to parts shortages, the Japanese OEMs are having problems with meeting production target. Toyota has announced they are going to have a 50% production reduction. But from a global perspective, we don't think that will have a major impact on the global production numbers, because there is still excess capacity at other manufacturers globally.

We are still projecting that the global automotive industry exceeds 75 million units, which is about 5%-6% increase from 2010. Of course there is risk to that: the US economy is very fragile, the European economy is very fragile with some of the central bank issues and Portugal sovereign debt issue, but still the industry is robust, there is a lot of demand, we don't see that drop so far this year.

Gasgoo.com: In China, the government stimulus packages for the auto industry have expired at the end of 2010; the growth of national economy might slow down due to the inflation risks and the policies trying to slow down the risks; the car registration limit measures in Beijing and Shanghai might be followed by other big cities. All the factors seem to drag down the China auto market growth in 2011. What's your estimate on it?

Rick Hanna: We have already forecasted China's growth in 2011 will be around 6.5% versus the 30% growth in recent two years. However, we think the demand remains very strong. The Chinese government is trying to pushing the demand in the inland cities, and raising the per capita income there. We expect that will continue. The demand for automobiles is also shifting to the inland cities, and that will change the demand shift for the product portfolio from the more luxury brands to more utilitarian brands.

Gasgoo.com: The global auto industry was hit hard by the recent financial crisis. Will there be another financial crisis in the next decade?

David Breen: In the United States, it happens every five to six years. So there might be another one.

Gasgoo.com: Then the global auto industry will suffer again?

Rick Hanna: Maybe not to the extent as it did in 2009. Before the crisis, the American auto market is about 16-17 million units, in 2009 it fell to 8 million units. The companies that have very big cost base lost significant money, that’s why certain companies went into bankruptcy. In the restructuring of North American companies in 2008 and 2009, 5 million units of capacity were taken out of the industry, and a large amount of big cost in the industry was reduced.

The companies learned, they need to be much more flexible in manufacturing process, and have a more flexible cost structure and less debt.

Thomas McGuckin: About 50% of the growth in the global automotive market will come from Asia Pacific. If we look at those countries that are contributing to the growth, the GDP per capita is lower than that in the more developed Western nations, their disposable income level is lower, and more than 50% of new buyers are first-time buyers, so the displacement of the engine will be smaller, the size of the vehicles will be smaller. And it will come down to volume and scale to a large extent. So there you see value and price sensitivity play a large role, those companies that are flexible and have that type of portfolio and range will be successful.

Gasgoo.com: What's the biggest change in the US automakers' business model before and after the crisis?

Rick Hanna: Before the crisis, the companies relied on a "push" business model: they produce cars, keep their factories running at full capacity, and then they push them to the consumers using market incentives, financing measures, and etc. So it was a very much "push" mentality.

After the crisis, the companies are trying to change to a "pull" business model, where the customers are making the decision, and they are buying the cars that they want, then the companies produce the cars. Instead of pushing them to the market, they are waiting the customers come to pull them.