China Auto Market: fast growing and expanding market provides opportunity for local automakers

Yale Zhang,  CSM China General Executive

As the Director of Emerging Market Vehicle Forecasts of CSM since April 2004, Zhang is a renowned expert in analysis and development of emerging market vehicle forecasts. Zhang also strongly supports the company's China and emerging market clients.

Zhang came to CSM from Automotive Resources Asia Ltd. in Beijing where he led in-depth market research studies for major OEMs. A skilled automotive market analyst, Zhang is widely quoted in national and international publications. He often presents at key forums such as the China Automotive Post-WTO Markets & Strategies seminar. He holds a B.A. in economics and has experience in the regional market.

 

China Auto Market Forecast

Gasgoo: We’re happy to talk with you about the China auto market which boomed in 2006. Please comment on it briefly.

YALE: In 2006, the output of passenger vehicles in China was 4.2 million units, including MPV’s and SUV’s, with a significant growth rate of 35%. The total production volume reached 7 million units including trucks and buses.  The increase in both production and sales broke through the 1 million unit mark.  China is the fastest growing automotive market in the world. The 17% growth rate is unparalleled globally.

Gasgoo: What's the percentage of passenger vehicle versus commercial vehicle in the current auto market?

YALE: Passenger vehicles accounted for 58% while commercial vehicles accounted for 42%.  The number of commercial vehicles used to be always larger than that of passenger vehicles, but in the past 4 to 5 years the development of the passenger vehicle market was so fast that the ratio has reversed lately.

Gasgoo: Moreover, exports in 2006 grew very rapidly too. 

YALE: The volume of passenger vehicles exported in 2006 was 80,000 units.  The total number of vehicle exported was over 300,000 units. The growth is considered to be very significant.  I remember that 4 years ago, the volume of passenger vehicle exports was 2,380 units. However, in spite of the rapid growth rate, our export volume is still very small compared to Japan’s.  Japan exports nearly 5 million units each year while China only exports 80,000 units currently. The passenger vehicle export only accounted for 2% of total vehicle export. The total volume of vehicle exports accounted for 4.2% of the 7 million production volume. So the export number was still low.

Gasgoo: In 2006, the Chinese automotive market was considered to be the unparalleled market in the world. How should we interpret this? Compared to the American and European mature markets and other emerging markets such as India, Russia, and Brazil, what is so special about the Chinese automotive market?

YALE: There are two explanations regarding this view: one is that the market growth is very fast and the other is that the market already has considerable demand built-in. In terms of market demand, it has already exceeded 7 million units.  This makes China the second largest market in the world.  Japan is a production giant but its domestic demand is only about 5.9 million units.  So currently, China has surpassed Japan and become the second largest market for automobiles. However, from the standpoint of production volume, China is still lagging far behind Japan.  In terms of growth, a 1 million unit increase in production from last year is unparalleled in the world.   As to emerging markets, the India light vehicle output was 1.6 million units, Brazil’s was 2.3 million units, and Russia’s was 1.3 million units. China’s growth rate is still not comparable.  Among them, India’s growing relatively fast at double digits every year, but it still has a long way to go to catch up with China.  

Gasgoo: Which segment of the passenger vehicle market received the most attention in 2006?

YALE: Passenger vehicle is often referred to as ‘sedan’ by the Chinese and is divided into five classes: A, B, C, D, and E. The C-class, including Corolla, VW Golf and Buick Excelle, grew the fastest as the car size suits the Chinese family’s needs and meets their design taste. If the car size is too big, it will not be suitable for a three-member family. If the car size is too small, it will not meet the Chinese design expectation either.  Next is B-class, like the VW Polo. Its growth rate was relatively faster in the last two years but is still not comparable to the C-class. The C-class was certainly the star of the market.

Gasgoo: Generally, how did SUV’s perform?  

YALE: The SUV market was not so active in the last two years.  But there is one type of SUV, called CUV (City Utility Vehicle) which grew very fast in the past years. Its growth rate nearly doubled in 2006 and it was the sole driving force for the SUV market growth.

Gasgoo: 2006 was a booming year for the China auto industry.  Increase in production was over 1 million units at a 30% growth rate. The growth in 2006 was much faster than 2004 and 2005.  In 2003, the Chinese auto industry experienced a similar boom. What are the similarities and differences in growth between 2003 and 2006?

YALE: The obvious similarity is that individuals became main buyers. From the beginning of this century, individual buyers have replaced company buyers to become the main buying force in the market.  In 2003, the significant growth was promoted by a great amount of individual buyers emerging in big cities such as Beijing, Shanghai, Guangzhou and the Pearl River Delta area. They were elites with high income.  While In 2006, the market growth was promoted by individual buyers from other cities such as some provincial capitals, prefecture-level cities and some inland cities. These cities played a very important role in 2005 and 2006’s auto market growth.

Gasgoo: Do you think these driving forces will continuously push the market forward in 2007?

YALE: Now that the inland markets have opened, their potentials are enormous.  Based on this, I believe the China auto market will not slow down in 2007. People might think that since the market has achieved substantial growth both in 2005 and 2006 that the pace of growth might slow down in 2007.  However, the demand remains huge. If the technical factors remain the same, such as oil price and the price of automobiles, I believe 2007 will be another thriving year. As you know, in 2007 there are many new models to be launched.  I hope vehicle prices stay steady and not like in 2003 when a price war was seen.

Gasgoo: Just now you mentioned that the auto market focus in 2007 is shifting from the developed areas to the under-developed areas. However, would diverse levels of income from under-developed areas result in diverse growth and vehicle model development in different market segments?

YALE: It is a very good question. When buying cars, the concern of individual buyers from the inland areas and that of individual buyers from developed urban areas is different.  For inland area buyers, price and quality are above all the most important concerns.  Sometimes they are even more important than brand name. But in developed urban areas such as Beijing, Guangzhou and Shanghai, the buyers will be more concerned about quality and brand. Actually, brand name is relatively much more important.  So the market presents a very good opportunity for the national brand automakers because most of them offer decent quality at a relatively low price.  Yet their brand names are less well known. These national automakers can meet the demands of inland buyers.

Gasgoo: A famous consulting institute once predicted that a type of short life cycle vehicle would most likely appear in the China market.  It offers standard safety equipment and meets emissions requirements, but it only has very basic configurations and its price is very low.  It transforms vehicles from a durable commodity into a short-term commodity. This type of vehicle will be produced in high-volume and is going to create a new trend in China.  Do you agree with this prediction?

YALE: I am afraid I can’t agree. For example, inland area buyers do not have high income, so they are more likely to buy lower price vehicles, but they are also very concerned about the quality of the vehicle.  Price and quality are the two most important concerns in their buying consideration.  Low price is good, but the safety and quality must be good as well. If this type of car is introduced in the market, maybe it will receive some attention in the beginning, but I think the situation will not last. If the brand is ruined (due to poor quality), I believe that this type of car will be kicked out of the market within 2 years.

Gasgoo: We know that in 2006 Chinese vehicle production output surpassed Germany’s and Chinese vehicle sales volume surpassed Japan’s. China became the second largest market for automobiles. Could you forecast the production output of 2007 and when China will surpass Japan and become the second largest producing country?

YALE: Based on current growth rate, China is expected to reach 8 to 8.2 million units production volume by the end of 2007.  Yet this number is still far lower than that of Japan’s.  Currently Japan's annual production volume is over 10 million units. China still needs at least 3 to 5 years to be able to surpass Japan.

Gasgoo: So your prediction is 3-5 years. You mentioned that Japan exports 40% of its production and only 60% of the production is sold in its domestic market.  China's vehicle export has increased rapidly in recent years. Do you think that exports will drive China’s automobile production to reach the same level of Japan’s sooner than predicted?

YALE: The export number will certainly grow over the years.  Currently, the two main automakers that contribute to the majority of export vehicles are Chery and Honda.  The Honda plant in Guangzhou bonded zone is producing vehicles exclusively for export purpose. If this situation persists, and no other carmakers join the exportation, there is still a long way to go to surpass Japan’s export volume of 4-5 milliion units per year. In the next 3-5 years, the capability of China national brands to export into developed countries in large scale is still very limited.  They need to face and overcome a lot of obstacles ahead.  For Chery automotive, after having signed the cooperation deal with DaimlerChrysler, its exportation to North America market may expand so rapidly that the timing of its presence in developed market might be sooner than expected.  However, for other national players, I do not think they are ready.

Gasgoo: Honda is the only MNC using China as a manufacturing base to produce and export vehicles to mature markets abroad.  If Honda's business model succeeds, do you think other MNC’s will follow its paradigm? And if that were the case, would it drive China’s vehicle exportation to increase dramatically?

YALE: Honda's case is very unique.  Honda might have used its China plant as a trial base to see whether a 30,000-unit production scale can reach low cost. Up to now all the MNC’s are still very cautious. They do not have plans to make China their production base for large-scale export purposes.  Another reason is that most of the MNCs’ facilities in China are joint ventures instead of wholly foreign owned entities.  If they decide to produce more vehicles in their plants in China for large-scale export, one plant in another country would have to cut down the production or even have to be closed.  It’s more than a production issue.  Imagine a plant in the USA has to be closed and many employees have to be laid off because the plant in China produces many more cars.  It is a complex issue.  All MNC’s have some small-scale export business, for example, Hyundai.   But exporting in large-scale is not yet on their schedule.

Gasgoo: Finally, Please comment on the performance of MNC’s and Chinese automakers in 2006.

YALE: In 2006, Chinese automakers continued to expand their market share. Their market shares have been growing at a rate of 1-2% per year consecutively from 2003 to 2006.  This is a very good result in view of the intense competition with many powerful foreign rivals.  As for the MNC’s performance in 2006, first we have to divide MNC’s into two groups (Japanese and Korean MNC’s, and European and American MNC’s.).  In the past years, Japanese and Korean MNC’s have had a very fast growth and they already have 1/3 of the market share, while European and American MNC’s market shares have been declining or stable during these years.  The European MNC’s especially have seen their market share continuously decline.  Japanese and Korean automakers have been growing very rapidly in past years but in 2006 their performance was impacted by European rivals like PSA and VW.  The launching of new or refreshed models helped them achieve relatively significant growth in 2006.  PSA’s output reached 200,000 units and VW’s growth rebounded from 2005 thanks to the success of the Jetta and Passat.  The situation in 2006 was a little different from previous years.  European vehicles recovered about 1--2% of market share.  But in following years it is expected that Japanese and Korean automakers will continue their aggressive growth, especially Japanese players like Toyota, as it has increased its focus and momentum in China.  I believe that Toyota is going to be in full swing in 2007.   In 2007, I think Chinese automakers will continue to grow in their own creative way.  As to MNC’s, I predict that Toyota will be a star.

Gasgoo: Why is Toyota going to be a star in 2007?

YALE: Because Toyota’s new products are already well introduced in the market, such as the Camry.  If sales can drive the production to its full capacity, Toyota’s market share rank is going to soar to a higher level.

Gasgoo: The sales volume of Camry last month was 14,000 units.

YALE: Yes, 14,000 units in one month. Toyota’s 2007 sales target is 150,000 units for each model. I think this goal is not difficult to achieve.

Gasgoo: Thank you for your time!

YALE: Thank you.     

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