China Auto Market: 2006 & 2007

Frank Chou

    Currently Associate Partner of Value Partners’ Shanghai office.

Frank Chou was born in Shanghai and educated in Taiwan and US. He joined GM in 1979. He has been involved in several projects in China since the mid 80's. He took part in all of the main business activities which characterized the solid growth of GM in China. In 2002, he was appointed as Director of Business Development and Planning for GM in China. 

 

China Auto Market: 2006 & 2007

Gasgoo: Mr. Chou, it is an honor to have this opportunity to talk with you. The 2006 China auto market was very active, and multi-national automobile manufacturers had different performances. Can you comment on their performances in 2006 in the passenger vehicle segment?

 

Frank: Actually, they have different backgrounds. Some are mature and some are growing. In the past four years, all international auto giants came to China and established their joint ventures and facilities. They also formed their marketing plans. I think the following step is how to promote their key products to the market as soon as possible. Last year for example, Toyota automotive introduced all of its key models in the Chinese market in spite of having entered China later than other automakers. And so did Ford. As you know, the Focus, which is a very popular model internationally, was also brought into the Chinese market.   As a result, these automakers (Toyota, Ford) achieved an even more rapid growth than those who entered China earlier and already occupied a mature market share. Moreover, Peugeot introduced two new models into the China market and PSA also had good performance last year.

 

Gasgoo: Actually different multinational automakers had different performances in this growing auto market. GM remains in first place in passenger vehicle sales, but its growth rate is lower than the average growth rate of the auto market.  Its market share also declined from 11% to 10% compared to 2005.  In your opinion, why wasn’t GM able to obtain the same growth rate of the auto market? Or what is dragging down GM’s growth?

 

Frank: I think it is because of environmental factors. GM entered the China market quite a long time ago and had already positioned its products well in the market.  In this case, when some strong competitors came into play and brought their best products to compete, it was inevitable that GM’s market share would be affected.  It is very natural. Not long ago one MBA student asked me to predict the development trend of VW’s market share.  I replied that it was very obvious that its share would decline.  VW’s market share was over 50% at that time.  When more and more competitors came into this market, it was inevitable that VW had to give up a portion of its market share to its new and competitive rivals.

 

Gasgoo:  So in your opinion, the situation is that the market leaders are doing everything they can to protect their market share; however it is very easy to lose their market share when there are new competitors coming into play.  So you think that it is normal and almost certain that the leaders’ market share will decline.  However last year, we saw an example that contradicts your prediction.  VW’s market share increased in 2006 under the same circumstances you just mentioned such as getting into China the earliest, having a large market share and being challenged by strong rivals like Toyota and Ford.  Why?

 

Frank: The auto market of last year was a blowout. VW has a lot of advantages such as mature products and a strong sales network. So its existing consumers are interested in buying VW’s mature products when they feel the price is right.  I studied the sales figures of VW and found out that a big part of their sales was coming from the Jetta, Santana and Santana 3000.  That means that when people are buying cars, the automaker that has the best brand strategy and strong sales network can achieve substantial growth and gain more market space.  It's understandable. 

 

Gasgoo: Can I explain it this way: as long as a mature brand name automaker understands the market in depth, it can retain its leading status by improving its operational efficiency, brand name, and sales network?

 

Frank: I do not think so. It's just a short-term effect.  In 2006, VW had substantial growth yet it might not achieve the same success in 2007.  I think it’s not a long-term effect.

 

Gasgoo: So you mean that VW’s success in 2006 is only because of its successful operations (in sales and marketing) in 2006; however VW’s growth will not be sustainable if VW does not introduce new products to the market continuously. 

 

Frank: Sure, it is difficult to predict if VW will achieve continuous growth if it does not introduce new products. Actually we have seen fluctuations in VW’s sales in recent years. In 2005, VW’s sales result was in a very complicated situation, which maybe justified why VW could achieve relatively big growth in 2006. As you know, in 2005 VW had to replace its sales manager due to great losses in sales. So in 2006, the management was very well adjusted inside VW and what’s more, the market was very active at that time.  All of these factors contributed to the success of VW in 2006. However, will this success be sustainable and continuous?  I don’t think that would be possible.  Long-term sustainable success has to rely on products.

 

Gasgoo: So the magic formula for auto industry competition is product. Continuously launching new, attractive products is the key.

 

Frank:  Yes, that is for sure. Products come first. Brand name and sales network are all very important but having quality products is fundamental above all. Without quality products, everything else (good brand name or good sales network) can only make a difference within a short-term period.

 

Gasgoo: Put it in this way, during certain company transition periods, one can use skillful operation, and sales and marketing strategy to ensure the smooth transition during the short-term period.  As you know, VW is going to introduce a new model – Skoda – in 2007 while there were no new products introduced in 2006.  VW was using aggressive sales and marketing strategies to ensure the company’s smooth transition from 2005 to 2006, which was a very successful strategy.

 

Frank: Yes, I agree.  That was a successful strategy.

 

Gasgoo:  Relatively speaking, GM was not as successful as VW although GM has very similar advantages such as strong brand name, good sales network, and quality products. 

 

Frank: GM only has very few mature and good value models.  For example, Jetta (VW) is a very mature product and the price is quite low.  So is Santana. Santana and Jetta are designed for a certain group of customers.  GM does not have products similar to those.

 

Gasgoo: So you mean GM is lacking these kinds of base products.

 

Frank: Yes.

 

Gasgoo: Last year, GM was greatly impacted by Toyota in the medium-class vehicle market, and it was also greatly impacted by Ford in the economy vehicle market.  In the low-end vehicle market, we didn’t see much growth in Chevrolet.  I think all of these factors above caused GM’s growth rate to be lower than the market average. So what should GM do as a next step? Should GM enhance its competitiveness in the low-end vehicle market or should it get in a dog-fight with Ford and Toyota in the medium-class vehicle market?

 

Frank: GM China now has three Chinese JV brands: Cadillac, Buick and Chevrolet. It needs to understand the needs of different segments and develop more models.

 

Gasgoo: Which segment do you think GM should focus on?

 

Frank: For example, Buick has a lot of models in the low-end vehicle market yet it does not offer any competitive models in the medium-class vehicle market.   Buick is one of the first to offer small cars in the low-end market. Chevrolet does not have any models for the medium-class vehicles either.  I believe that GM will obtain a market space in specific segments for a given time if it does more research on market segments and develops more products to the customers’ needs.

 

Gasgoo: Let’s take a look at the competitors that GM is facing: in the medium-grade market, there are Honda and Toyota, who are getting more and more aggressive.  In the economy vehicle segment, there is Ford and the Korean automakers.  If GM focuses its strategy on developing small or mini vehicles it would face strong rivals from domestic brands. Under this circumstance, what is GM's future? Will GM face more obstacles and its market share will continue to decline?

 

Frank: I think the advantages GM has now are the following: it has a very good management team, a well-established brand name, and a very strong sales network. So I believe that in the near future, GM will remain a strong competitor in the China auto market.

 

Gasgoo: Will GM retain its leading status?

 

Frank: Let’s wait and see what happens in 2007. Let the facts tell us.

 

Gasgoo: Let's talk about Ford. Ford was the super star of 2006 because of its over 100% growth rate, which was the fastest growing company among all of the multi-national companies. People said the reason was simple: Ford’s baseline was pretty low. Ford was very successful in introducing its car models into the market. Moreover, it is strategically positioning its facilities around China, including building assembly plants and acquiring Mazda. What is the prospect of Ford in the next 2 or 3 years in your opinion?

 

Frank: As you mentioned, Ford’s baseline was low so we will see its fast growth in the coming years. Moreover, it has not taken part in a lot of segments yet.  With more and more new models to be introduced in the future and expanding production capacity, Ford's future performance will be pretty satisfactory.

 

Gasgoo: In your opinion, in which segment will Ford be most successful considering its global production capability?

 

Frank: It's hard to say now. Focus is a very popular model internationally and I think it will do pretty well in medium- and small-size vehicle market. As to medium-grade vehicles, Ford might reach a similar position as it does in the international market.

 

Gasgoo: As we all know, Ford’s pick-up is very popular in the U.S. Do you think that if it is introduced in China, it will achieve the same success?

 

Frank: Pick-ups are exclusive to the U.S.  They do not mean much to other markets. I do not have high expectations for pick-ups in the Chinese market.

 

Gasgoo: How did you see the performance of other automakers, such as Nissan, BMW, Hyundai, and Honda? What do you think about their performances in 2006?

 

Frank: I read some documents, but I didn’t realize who was standing-out and should give special attention to. I think in 2007 they are going to retain their present places.

 

Gasgoo: Let’s get back to China’s overall automobile market. Do you think the factors driving the auto market in 2007 will change? For example, will the government’s macro economic planning policies passively affect auto market growth and MNC’s performance?

 

Frank: I think the market determines everything. The government’s macro-economic planning policy is only applied to productivity.  “Productivity” has a special definition in government planning policy.  It is not the addition of real capacities of all manufacturers. Most Chinese MNCs’ productivity far exceeds what the Chinese government’s definition is. So the macro-economic planning policy of productivity will not affect the auto market in the coming years. Market is the determiner.

 

Gasgoo: When reviewing GM, we omitted one thing: GM’s growth rate in passenger cars is lower than average but it succeeded in the mini vehicle segment. GM acquired WuLing and promoted its fast growing mini vehicle segment. It is a very successful case. Can other auto companies learn from this example and achieve the same success?

 

Frank: Of course there are good lessons to be learned, but the environment has changed a lot. Chinese government control on M&A activity has gotten more and more strict.  What’s more, the Chinese market has gotten very hot recently, so the cost of M&A becomes a lot higher. In this case, I think there will be less and less M&A activity in the present situation. However, the China auto industry has its own characteristics and competitive advantages.  For example, in the light truck vehicle segment, some auto manufacturers, such as Futian and Jianghuai, can be very competitive compared to their international rivals.  They would be very appealing to foreign companies if the M&A opportunity came up. But currently the government is very strict about the M&A approval process and emphasizes the development of national brands. One merger deal means one less Chinese enterprise. So I think there is very little chance for such merger deals. There are some companies, for example Chery, Jianghuai, Futon, and Great Wall Corp., which have reached a certain scale and are very appealing to foreign companies. I think the government is trying to protect its own national brands, so presently it is impossible that M&A’s might occur.

 

Gasgoo: This case is very interesting. GM acquired many enterprises around the world but few succeeded.  GM does not have mini car models itself so it acquired Wuling in China which offered GM a mini car model line.  What did GM bring into Wuling which led to the success of the company?

 

Frank:  This is the outcome of the strategic cooperation between GM and SAIC. Initially GM and SAIC were working together to seek a potential market segment to get into. You know Mini vehicles were invented by the Japanese and later became a very Chinese-characterized model. There are not many in the city but they dominate in the suburbs. The sales volume for 2006 was more than 900,000 units.  You can see many people still using motorcycles to transport goods in China.  The mini vehicles are most likely to replace motorcycles because of their low price. GM and SAIC realized that mini vehicles are very suitable for China’s market needs.  At the same time, Wuling automotive also felt pressure coming from its competitors.  It is a local enterprise and has to compete with several state-owned enterprises, which affiliated with former Space and Aviation Ministries as well as Arms and Ordinance Ministries.  Under those circumstances, GM and Wuling automotive joined hands to complement each other.

 

Gasgoo: I wonder what GM brought to Wuling? Brand name? Or management team?

 

Frank: Brand name and management team both played very important roles in Wuling automotive’s success. If you have chance to visit Wuling, uou will find they are very eager to gain new knowledge.  When GM brought in management skills, quality system and technologies, Wuling began absorbing that knowledge so fast and so diligently, which enabled GM and Wuling to improve their brand value and create a great success.

 

Gasgoo: It means the brand strategy plays a more and more important role in the Chinese automotive industry.

 

Frank: Sure, without a doubt.

 

Gasgoo: Lastly, let’s talk about the used car market in China.  In a mature market, the trade volume of used cars is two or three times that of new cars.  However, China's used car sales are still less than that of new cars. Yet in certain region like Beijing, the sales volume of used cars is larger than new cars. What do you predict for the ‘07 used car market?

 

Frank: We studied some data of China’s used car market from last year.  The auto market grew rapidly, including the used car market.  The used car market consists of two parts: one of them is the commercial vehicles, which exist in more mature markets. Here, we will mainly refer to the passenger vehicle used car market. Presently, the culture and related law and regulations for the used car market are yet to be established.  Because the majority of people are first time car buyers, the Chinese would feel they were losing face if they became owners of a used car first.  In addition, the prices of some new low end cars are very cheap, even lower than those of used cars, which hindered the development of the used car market.  Higher-end consumers do not have the intention of buying used cars yet.  So I think the used car market is not yet mature in China and the Chinese are not ready for used cars yet.

 

Gasgoo: This is true, generally speaking. But Beijing is an exception.

 

Frank: Yes. Beijing is a pioneer. You can see the trend of the China auto market from the Beijing market. The rate of vehicle ownership in Beijing is two times larger than that of Shanghai – over 20% of the population in Beijing owns a car.  Beijing is the most mature market in China.

 

Gasgoo: Will this trend certainly spread to other cities in the future?

 

Frank: Sure, yes.  With the development of the economy and the auto industry market, other cities will certainly catch up with Beijing.

 

Gasgoo: Globally, most OEMs emphasize the used car market and aftermarket.  Especially, the aftermarket is the major strategic focus of a lot of OEM’s.  In China, with the immature used car market, what are the MNC’s doing for this market and who is the most successful player?

 

Frank: To tell you the truth, I do not know that well.  I talked to someone who was in charge of GM’s used car business and he said the main problem was the shortage of supply. I believe that the healthy development of the used car market depends on the establishment of reputable used car brands so that consumers do not worry about the quality. So it's right for OEM’s to establish their own reputable used car business. In the future, with the used car culture being established and more and more reliable used cars available, the used car market will become more and more mature and flourish.

 

Gasgoo: Thank you for your time.

Frank: Thank you.

  

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