Continental sees 4 megatrends in Chinese auto market

Jay K.Kunkel
President Asia and Member of the Management Board of Continental

Make every localization effort

Gasgoo.com: In your eyes, what kind of mega-trends is the automotive industry heading for? And is that true for the Chinese market?

Jay K.Kunkel: As the world's second largest supplier of the automotive industry, we see there're four megatrends-Safety, Environment, Information (or Connectivity) and Affordable cars. Considering the importance of the Chinese auto market worldwide--China has overtaken Japan as the second largest market, the megatrends also apply to everyone in the Chinese market.

Safety, environmental problems, connectivity are more and more concerned by the auto manufacturers and consumers here, and for the affordable cars-I prefer to use affordable cars rather than low-price cars, as low-price often gives wrong impression, which may indicate bad quality and sacrifice of designing and enjoyment.

Gasgoo.com: But the figures show that in 2007, the A-segment cars fell by 16 percent from 2006, while the sales growth of the C-segment cars tops all and C-segment cars take around 43 percent of the whole passenger vehicle market. Also Chinese buyers are inclined to choose a larger, more expensive and better car. It seems the Chinese auto market is going upward, not downward, isn't it true?

Jay K.Kunkel: Yes, as the economy develops, certain part of the market is getting richer, but the trend of affordable car is worldwide and overall. You can see there're still millions of people in need of a car, most likely their first car. The motorization rate here is still low.

The definition of affordable car differs from region to region. In Western Europe, it may be a car slightly below 10,000 Euros, like VW Fox; in China, it may be around 7,000 Euros to 5,000 Euros, like Chery QQ; in India, it may be below 5,000 Euros, like Maruti 800 and Tata Nano. Every market has affordable cars, and as for the developing stage of the Chinese market, the "affordable car" has more content and there's still large demand.

Chinese car companies are betting on affordable car as their marketing campaign when they're exporting cars to the United States and Europe, so you can see the affordable car as a dominant trend.

Gasgoo.com: As for environmental focus, what's your strategy to address the challenges here?

Jay K.Kunkel: We've started cooperation with several local OEMs to develop mild hybrid system. As the world's only hybrid system supplier not tied to an auto manufacturer, Continental has been mass producing a mild hybrid since 2003. We're ready to bring our hybrid technology to China, as the programs prosper. Also we will supply the first-time volume production of a high-performance lithium-ion battery for Daimler's Mercedes S 400 BlueHYBRID from end of 2008 onwards. But there's no plan for the Chinese automakers to introduce such technology.

In terms of environment protection, we improve the performance of powertrain system. From Continental's viewpoint, we see three levels-improved conventional combustion engines for the short and mid term; to back up combustion engine by mild hybrid cars in the mid term; and emission-free electric vehicles for the long term. And we're participating in all the three fields. We also have low rolling resistance tires, turbocharger, electronics and diesel fuel injector, etc. and all these contribute to fuel economy improvement and emission reduction.

Gasgoo.com: With acquisition of Siemens VDO, Continental has more solutions for information management. So how is the integration now? Is there any internal competition?

Jay K.Kunkel: There's no internal competition, we're one company now. We combined the R&D resources; we joined the employees and the sales channels. Who will get the biggest benefit? The customers! As they now have a combined and enhanced product portfolio and in some cases different technologies for the same product. We could say it is "one-stop shopping".

We've integrated Continental's former automotive interior electronics part and the former Siemens VDO into one division. The products, especially in Asia, have almost no overlaps, but are highly complementary. For example, Continental is leader in terms of interior controls and navigation, while Siemens VDO is advanced in telematics and mobile device connectivity; for very few areas, there're maybe overlaps, but it's different technology or solution. There is a perfect fit for information management.

JD Power identified future technologies in the automotive industry, and Continental's products now cover every category of the technology in JD Power Emerging Technology Report with the combination of Siemens VDO. We've achieved the whole system capability.

In Asia, especially in China, It's a growth market; we need additional technology, engineers, sales people and manufacturing facilities to better serve our customers. We've got more than 60 customers in China and synergy doesn't mean cost-reduction only.

Risk only "if not investing in China"

Gasgoo.com: The business here is still in the process of developing and refining. Have you monitored any risk as for investment in the emerging Asia-Pacific market, especially China?

Jay K.Kunkel: I'd rather see the risk if not investing in China. All the risks such as market fluctuation, rising raw material prices, appreciation currency, etc. are global issues. We've made larger and stable investment to cater the market. We are to construct two R&D centers in Shanghai, one is in Yangpu district and the other in Jiading district, and we moved our Asia headquarters to Shanghai from Tokyo three years ago. We encourage our engineers to innovate and give them chances for overseas training. Our first tire-making plant will be put into production in 2010, with the annual production capability of approximately 2 million units.

Gasgoo.com: As a number of workers are displaced in the industry and operations continue to globalize, the need to retain knowledge regarding key process including engineering and manufacturing is increasing. How do you develop strategies to address this outgoing knowledge problem?

Jay K.Kunkel: Certainly we understand the risk. We invest a lot in R&D facilities and we invest a lot in marketing and production. Engineers don't want to make adaptations in the technology brought from overseas market; they want to create, so we give opportunity to realize themselves and to develop locally customized products for the local market..

Our turnover rate or retention rate is roughly half the industry average-it means that we lose employees at half the rate of whole industry.

Some say that Chinese engineers are not allowed to touch the core technology in an international auto company, but it's absolutely wrong comments. As for Continental, we're the first and only global supplier that offers Mandarin voice recognition technology for the hands-free communication system. We are and have been developing technology for and in the Chinese local market. Our engineers here are Chinese engineers (over 90 percent), and we give them all they need and want to do the innovative engineering and development work. The Chinese engineers are mainly working for projects with Chinese OEMs but also for other Asian or global OEMs.

Gasgoo.com: How does Continental do the local sourcing work in China?

Jay K.Kunkel: Well, localization includes local production, local R&D, local sales network and local sourcing. We have our purchasing department here, and they conduct the job in two approaches-to identify the potential suppliers and to help them to improve and qualify them; we also have a purchasing team to do production purchasing for 14 manufacturing locations we have in China. Some products we offer are highly localized, while some are still increasing in local content.

In some cases where it's possible, we're also looking for suppliers able to supply out of China which do exist.

In 2013 or 2014, one out of two cars worldwide will be manufactured in Asia, and much of the growth in Asian auto market will come from China. For the Chinese business, we aim to raise the contribution in the whole group considerably. Product, technology, quality and price are everything. It's a simple formula, but it includes many different aspects. I believe these backing forces can lead our success in the Chinese market.

Dedicated support for Chinese OEMs

Gasgoo.com: According to latterly report, BorgWarner's advanced dual-clutch transmission (DCT) systems would be put into production in a joint venture program between BorgWarner and multiple Chinese automakers. What if it happens to Continental?

Jay K.Kunkel: We encourage such cooperation. The relationships with our customers are not just confined to the contracts. We're an innovation- and technology-driven company and it's our duty to support our customers--not only our customers coming to us, we also propose ourselves. We have developing projects with many Chinese automakers right now. The Chinese automakers will sooner or later export cars to European and American markets, and we feel that with our worldwide position and experience, we can contribute considerably to their global production plans and export plans.

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