Matthew Effect in China auto market

John Zeng
Senior Market Analyst
China Representative
Global Automotive Group
Global Insight

Gasgoo.com: What's your comment on the performance of the auto brands in China?

John Zeng: In 2007, the best players are the Japanese brands, especially Toyota. The Toyota Camry and Toyota Corolla each have sold 15,000 to 16,000 vehicles per month in average, especially in the second half of the year. The sales growth of Peugeot and Citroen is not significant. Some brands like Southeast Motor Mitsubishi, Changhe Suzuki, Hafei are experiencing a hard time. And Fiat has broken joint venture ties with Nanjing Auto. The Chinese local brands sales are flat due to lack of new models. The stronger brands in the China auto market are becoming stronger, and the weaker are becoming weaker. A good sales result is largely due to a favorable brand image in product quality and after sales services. And the sales growth can deepen the favorable brand image.

Gasgoo.com: Despite poor performance in the China auto market, Fiat has a very strong position in the Brazil market, another emerging market. Do you think Fiat still has the opportunity to perform well in the China market?

John Zeng: In the year 2006 and before, it still has a large opportunity. But from 2007, the opportunity becomes smaller, because Matthew Effect is happening in the China auto market.

Gasgoo.com: But some brands are stronger for a short time, them become weaker. For example, Hyundai Motor's auto sales are unexpectedly good, but the year 2007 saw its drop, because Hyundai thought itself as a strong brand after some success, and raise the vehicle prices.

John Zeng: Its product quality may be just better than the local brands, but its prices are almost of the strongest foreign brands in China. So its brand image in the consumer's eye is not as consumed by itself. Its quality is challenged by the stronger foreign brand, and its price is challenged by the local brand, so it is in an awkward situation, especially in 2007. But after its new models put on sale in 2008, its sales will grow.

Gasgoo.com: In 2007, PSA and Hafei Motor Company, Fiat and Chery were seeking close cooperation separately. Do you think China will have a new joint venture boom after most main foreign automakers have established joint ventures in China?
 
John Zeng: Most automakers have brought its main products to China already. Actually PSA and Hafei have no significant project in need of setting up a joint venture. Maybe they can only cooperate on the production localization of some small commercial vehicles, so they have to reconsider the significance of the localization and the necessity of a joint venture.

Gasgoo.com: It is reported that PSA intend to make China an export base. And Hafei has a production base in Shenzhen of Guangdong Province.

John Zeng: I think the biggest foreign automakers would not use China as an export base. The biggest automakers have many other production bases out of China. If they export products from China to another country with their production bases, then they are competing with themselves and take their own market share. And the earnings from export have to share with their China partner, because they have to form a joint venture (in which they can not take up more than 50% shares) with the local automakers to produce their vehicles in China.

Gasgoo.com: But one of General Motors' joint venture in China -- SAIC-GM-Wuling plans to export more in 2008.

John Zeng: The products to export are just some mini-vans which General Motors doesn't have in its product line. 

Gasgoo.com: A big event in the China auto industry in 2007 is the consolidation of SAIC and NAIC. Do you think that's the start of a merger wave in China? It's said that Beijing Motor Company would merger Fujian Motor Company.

John Zeng: Our expectation on the merger between state-owned companies is relatively conservative, because the merger is not a market behavior, but a government behavior. The early mergers between state-owned companies have had no significant influence to the company that is acquired. For example, after FAW acquired Tianjin Xiali Automobile Co., no significant change happen in Tianjin Xiali's product manufacturing and marketing activities. The only big change maybe is the change in government administration relation after Tianjin Xiali Automobile Co. changed its name to FAW Tianjin Xiali Automobile Co. The SAIC and NAIC merger is a little bit different from the former cases. SAIC is much better both in capital and marketing. We just have to wait and see how SAIC is determined to merger NAIC, because even without this, SAIC have had a good profit from the joint venture with General Motors. Until now, SAIC has done a good job in the consolidation.

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