Analysis: Does the future of domestic Chinese automotive brands lie with privately-operated companies?

Li Shufu and Wang Chuanfu, leaders of top domestic Chinese automotive brands Geely and BYD respectively, are famous in the country. In 2010 Geely succeed in acquiring Swedish automaker Volvo, while BYD has previously claimed that it will be the world’s top automaker by 2025. These two companies are privately owned businesses, and, much like other similarly run enterprises such as Chunlan, Midea and Aux, are leaders in their industry. 

Geely and BYD are not the only privately operated enterprises in the country. Several other non-state run companies, including Great Wall, Zotye, Hawtai and Lifan, have also made a considerable impact in the automotive industry this year. That has many analysts wondering if the future of the domestic Chinese auto industry lies with privately operated automakers?

It hasn’t been an easy road for private companies wanting to enter the Chinese auto industry. When Li Shufu announced his desire to turn his company, which back then was a manufacturer of consumer electronics among other products, into an automobile manufacturer, many concluded that he would not able to get official approval from the government. However, Mr. Li persisted and eventually was able to enter the industry. The entrance of privately held companies like his helped transform the Chinese automotive industry in radical ways. The effects of this change could be seen in Geely’s successful acquisition of Volvo in August 2010.

BYD’s founder Wang Chuanfu also faced a lot of difficulties when attempting to expand his company, which back then focused only on batteries, into the industry. At that time there was a lot of doubt regarding the potential of battery-powered vehicles. However, those fears proved to be unfounded, as China became the largest producer of new energy vehicles in 2015. Mr. Wang’s gamble has paid off in the end.

To deal with limited resources and lack of state funding, companies like Geely focused their efforts on producing low-cost vehicles based on copies of existing automobiles. Mr. Li explained the company’s mission in one of his statements: “To produce good cars that the average Chinese person can afford.”

Based on this, Geely focused on its efforts on researching the work of other companies in the Chinese automotive industry and making a comprehensive list of parts suppliers. The company’s first vehicle, the Haoqing SUV, was based on a design from Xiali. Several of the company’s first models were built on widely-available platforms from other companies to save on costs. This enabled the company to offer its vehicles at a low price and carve out a whole new market for itself. However a series of lawsuits forced the company to abandon this practice.

This led to restructuring of the company, beginning with the Free Cruiser, which was revealed in 2004. Geely began undertaking an ambitious new product strategy in May 2007 based on the Vision and redesigned Free Cruiser, which came equipped with internally-developed engines and transmissions. From that moment on Geely placed a great deal of value on offering in-house developed technology on its vehicles. 

BYD also has been through a similar history. Its first vehicle, the F3, was compared to the Toyota Crown; not only was their design nearly identical, several of the Crown’s components were used on the F3. This trend continued on to other models, including the F3R, F6, F0 and M6. Mr. Wang responded to allegations by stating that his company’s vehicles used technology which were not protected by patent, adding that BYD’s unique combination of publicly-available technology was the source of their innovation. BYD was far from the only Chinese manufacturer to face such allegations, with Great Wall facing similar accusations during its listing on the Hong Kong Stock Exchange in 2003. Models from fellow Chinese manufacturer Zotye continues to be criticized on the same lines.

Following decades of development, the Chinese automotive industry has basically been split into two camps making domestically-branded vehicles. On the one end are offerings from state-owned companies like FAW, BAIC, SAIC and Changan; on the other are private companies like Geely and BYD. Despite facing many obstacles, private companies have made impressive gains, with Geely and BYD having ranked in the top ten charts for best-performing automakers in the Chinese market for several years now. Their success culminated in Geely’s acquisition of Swedish automaker Volvo, an announcement which forced many in the industry to turn their heads. With a growth rate of 13.5% over the first half of this year, the Chinese passenger automobile market still possesses large potential for future development. The market for domestic branded vehicles boasts a growth rate that is even higher than that.

Private enterprises are taking advantage of these opportunities by continuing to perform well in the market. Great Wall sold a total of 60,002 SUVs in July, leading that segment by a overwhelming margin. Meanwhile, BYD’s new energy passenger automobile sales that same month totaled 10,132 units, putting it at the top of the sales charts. Geely has sold a grand total of 328,859 vehicles from January to July, representing solid sales growth of 17% year-on-year. Geely has actually raised its sales target for this year by 10%, with its sights set at being the best-performing domestic auto brand of 2016.

However, there is still challenges in line for private enterprises to overcome. BYD, which specializes in new energy vehicles, still requires support from the government sector in terms of subsidies and access to official resources. Furthermore, brands of private companies still suffer from the same crippling problem that state-owned brands have to deal with: A fundamental lack of consumer confidence in the quality of Chinese brands. This unfortunately is an issue that will require a long deal of time to resolve.

Another major development in the industry is also in the happening now: The entrance of Internet-related brands like Baidu, Tencent and LeTV. In July 2016 SAIC and Alibaba unveiled the world’s first ‘Internet connected’ vehicle. For both private and state-run enterprises to succeed in the industry will require them to adapt to this and other changes in a timely manner.