In times of financial uncertainty in the West, the Auto Industry in China has experienced unprecedented, double-digit growth rates. This year, however, the auto market in China is at a turning point, and the industry has begun to experience reduced growth rates. What is in store for the auto industry in China? How will the market play out in the next few years? and what factors have allowed for this incredible growth to occur?
“The Auto Industry in China has been growing at an unbelievable pace, and the market is now nine times larger than what it was just ten years ago.” So says Bill Russo, Founder and President of Synergistics Ltd., a Beijing based consultancy. Despite the amazing growth that the China Auto Industry has experienced in the past decade, recent trends in the Chinese economy have caused a reudction in growth. Slowed growth, combined with high congestion and pollution in China’s major cities, raise concerns with regards to the future of the Auto Industry in China. In hopes of gaining a better understanding of future trends to China’s auto industry, Lior Paritzky sat down with Mr. Russo to discuss recent and future China Auto Industry trends.
This is an exciting time for the auto industry in China because it has been through significant changes in the past few years. How do you think these changes came about, and what has been the trigger to boost the Auto Industry in China in recent years?
“First of all, the world is going through a tremendous amount of restructuring. Born out of the global financial crisis of 2008, there has been an attitude of restructuring which has led to recession in some places, definitely a realignment of the power base in terms of the opportunities for various industries, the automotive in particular. For the past ten years, since China’s succession to the World Trade Organization, the auto industry in China has been growing in a phenomenal pace. The market today is nine times larger than what it was just ten years ago, and that momentum has been sustained and even accelerated in the past two years, since the onset of the global financial crisis, because of a very purposely directed set of stimulus measures that China took to keep the momentum going. Upon contrasting that to the contraction of the global auto market in other places, particularly the mature markets -- what we in the industry call the Triad markets -- North America, Japan and Western Europe, then one can see that while the rest of the world has been in decline (or a slow and gradual recovery more recently), China has gone an amazing pace in expansion. This growth has created an awareness: China is the largest market in terms of both consumption and demand as well as production, and global automotive industry players know that if you want to win the battle in the 21st century you have to play and win in China. That is the reality that the global auto industry is now dealing with, and that in many cases means a reorientation of priorities to reinvest in future growth.”
Watch: Bill Russo Discusses China Auto Industry
How do companies adjust themselves to operate in Mainland China? How are most foreign car manufacturers dealing with the auto industry in China?
“I think it is mixed. In some cases, whether by design or by serendipity, companies found themselves either with a product shelf that was very relevant for the auto industry in China or with a partner that was able to help them accelerate their development in China. In China, a company never works alone, that is one of the uniqueness and nuances of competing here -- it is not just about the company’s ability to bring its products, it is about the ability to bring the product and to adapt it to the Chinese market. The companies who have demonstrated a willingness to make that adaptation accessible to consumers in China have done very well. Others who have brought an attitude of “I already know” to China have oftentimes found that it was not an appropriate structure to win in this marketplace.”
The auto industry in China has been growing at a stable pace for the past decade, yet 2011 is a turning point. Is it true that there is a stagnation or a decline in the auto industry in China?
“There hasn’t been a decline. There are certainly some concerns over the sustainability of the momentum of the past several years. Much of what happened in 2009 and 2010 was a result of China’s policies, in-acting some very effective stimulus measures to get first-time consumers to come into the market by offering a reduction in the tax burton for certain types of vehicles. That stimulus expired at the end of 2010, and it had a definite material impact on the acceleration of the growth. What you have seen this year is not a decline but a reduction from rates like 32-46% year over year to single digits growth this year. In certain segments, most impacted by the stimulus, there has been a decline. There are challenges that are apparent in a market that is experiencing a reduction in growth that were not eminent in the past two years. That is just a normal consequence of a market that has reached a level of maturity. you are starting to see a more competitive place to do business as opposed to one in which the fruit was very easy to pick. It is more difficult to get to the upper branches to get the more difficult sales to happen this year then in the years passed.”
In your opinion, what was the incentive for giving tax reductions and encouraging growth in the auto industry in China?
“I think that China anticipated that the global financial crisis could have a negative impact on its continued development. Therefore, China decided to massively invest in building infrastructure that made it easier for people to use vehicles for transportation. There was also a large boom in construction in China. So the market, because of that investment, has been very strong. This is a good thing, especially in a time period in which the world is going through a financial crisis. China was able to get ahead of this trend (the crisis) and lay the pathway toward recovery -- even before the rest of the world was able to do so, and China has the capacity to do so because it reinvested all the proceeds of its economic success in the past two decades into the economy, which kept things moving at a proper or an accelerated pace.”
“However, this reinvestment comes with the challenge of trying to resume a normal pattern. It is really unclear what is a normal pattern for China now, because it has been growing so rapidly for so long. When China starts taking these stimulus measures out, the market will have to go through a phase of absorbing some of the demand pull ahead which occurred. At the same time, China will experience the tailwinds of continued urbanization and of continued growth of the middle class, and the auto industry in China will have to adjust accordingly. The growth in the auto market is going to be driven not by fixed asset government led investment but by consumers who now have incomes that allow them to shop for cars.”
“I think what we have been seeing is a healthy readjustment of a stimulus driven automotive growth to a more market driven, consumer based growth for the automobile demand, and that is a healthier landscape to compete in because companies are not dependent on the government to drive the business for them.”
Beijing is one of the most congested cities in the world. Do you see the number of cars in major cities as a deterrent for future growth in the auto industry in China?
“I think one of the very unique aspects in Asian countries and in China in particular is the density of the urban populations. There is a natural constraint upon which no level of continued build out infrastructure is going to cope with the demands that all of the population places on the environment. This is true not just for automobiles but also for trains or buses. The urban population density makes it inconvenient to move around, no matter which form of transportation one uses. These are all concerns for the development of the economy in China. The drivers of the economic wealth in China are really the built out of the urban infrastructures that create opportunities for people to migrate from rural China to urban China, earn incomes, and these incomes become the fuel of the continued reinvestment of the wealth into the economy. That bumps up to certain constraints such as the physical size of the cities themselves and the ability to handle the demands that the population places on those cities. Cities such as Beijing, Shanghai, and Guangzhou are already starting to approach the limit of constraints that the environment places on the human beings that live within them. In Beijing and Shanghai, there are already measures that reduce the number of cars that are being registered, so in Beijing, for example, there is a lottery system, and that puts a cap on the number of new cars that can be introduced each month or each year. The pressures of this densely populated environment with concerns over energy security, pollution and congestion are going to naturally place some limitations on the number of vehicles that can be allowed to be registered.”
Do you think that these concerns will help increase innovation in the auto industry in China?
“Yes. Inevitably, China is already starting to invest and place a heavy emphasis on the green mobility option which basically means re-powering transportation from fossil fuel base to China’s preference electric vehicle based. This is a positive thing, but of course it is not just about re-powering automobiles it is also about re-powering the electrical generation and the grid that allow for cleaner energy sources to be used to create the electricity that would then be used in the vehicles. So, part of China’s challenge is to put a fair amount of investment into the creation of alternative energy and smart grid, as well as the infrastructure needed to allow for electric vehicles to be recharged.”
Credit to Yoav Volansky who helped execute this interview.