Future of Auto Industry in China - Essay Example

?Future of Auto Industry in China Introduction Automotive suppliers and manufacturers see China as the largest combination of low-cost supply and manufacturing base, and automotive market to emerge in decades. China represents an exceptional case of economic development in the emerging markets. The extraordinary nature of the change is characterized by the number of economic reforms the government faces, the number of individuals in the market, and the promptness at which the nation is making the shift to a full market economy. In particular, the China’s automotive industry represents an amazing case of industry development (Ban et al. 1). The extraordinary growth has made the automaker to struggle in keeping up with the demand by running their factories non-stop, ignoring regular maintenance, and paying costly overtime. The sudden sales surge has made it hard for the manufacturers to make future plans for their factories in order to meet the demand (Delsack & Associates 1). The rapid expansion of the automotive industry holds enormous potential in China. It is projected that it will take China 10 to 20 years to compete effectively in manufacturing, sales and vehicle design in the world. This is according to the University of Michigan Transportation Research Institute (UMTRI) and IBM Institute for Business Value (UMTRI 1). Industry Background In 2005, China became the world’s second largest automotive market; production and sales of the automobiles reached 5.85 and 5.75 million units respectively “overtaking Japan to become the second largest automotive market in the world” (Deloitte 12). 9 percent of the total volume of the global automobile sales and 23 percent of the world automobile market growth is represented by China (Deloitte 12). The fastest growing automotive segment in China is the passenger vehicle segment. The segment is characterized by an increasing share of the total market and the segment is the main driver of growth. The rapid growth has offered growth and development opportunities for the domestic brands and it has resulted into a more fragmented market. The growth of the automotive components and parts segment in China is also significant (Deloitte 13). The proportion of the components and parts companies in the Chinese automotive segment has also significantly increased. In the year 2005, the sales of the automotive components and part reached close to 40 percent of the industry’s total. The growth has been attributed to; (a) the historical integration of the automotive organizational structure change and the gradual increase of the share of outsourced subcomponents, (b) the consumer’s demand for a wide range of products and the expectations for addition of more value, and (c) the shift of attention to China by the global automotive components and companies [majority of these global companies are entering or intensifying their investments in China] (Deloitte 13). Auto Industry Challenges In the recent years, China’s car industry has boomed significantly. The effects of the exponential growth or the boom is catching up with the Chinese dealers, consumers, foreign firms looking for market share in China, government, suppliers, and manufacturers. There are a number of challenges affecting the auto industry in China and they include adverse traffic problems in the cities, higher demand for oil, defaults on the auto loans, uncertain associations with the joint venture partners, and higher pollution levels (UMTRI 1). The Chinese government is supposed to determine the means to control the auto economy without affecting the domestic suppliers and manufacturers or the auto industry environment. The Chinese government had hopes of acquiring expertise quickly by making sure that the Chinese auto companies owned more than 50% of any joint venture made. However, the technology transfer has failed and this is in part due to the foreign automakers concern about the intellectual property rights. The domestic Chinese auto industry feels that the main technology is still in the hands of the foreign automakers (UMTRI 1). China is far away in the development of the sales process. It restricted the auto loans numbers in 2003 after a great number of defaults and the requirement to establish solid repossession laws and credit bureaus. China possesses a number of cumbersome laws concerning the sale of used cars and has taxes that make used cars expensive as the new ones. The growth of the industry is also restricted by infrastructure issues. For example, the access to gas seems to be problematic; China has 85,000 gas stations compared to 170,000 gas stations in United States. Parking is another big issue in majority of the big cities in China such as Shanghai where majority of the parking spaces are found on the street; this leads to congestion (UMTRI 2). On the basis of price competition, the Chinese auto market is consolidating. However, the number of manufacturers who will survive in the future is determined by the Chinese government actions, for example, how it will exit the role of supporting the Chinese manufacturers or regulate car loans. The look of the industry in the future both long term and near term will depend on how the mentioned challenges will be addressed. The decisions made will affect the structure of the China’s future market, automotive infrastructure, oil supply, air quality, and joint-venture structure (UMTRI 2). Key Implications for Industry Structure China automotive industry is undergoing a number of similar challenges that other mature markets have already gone through. However, the challenges are in a faster pace and with several interesting twists. Conflicts Proliferate In Joint Venture Relationships The beneficial business relationships developed by the joint ventures (with the exclusion of research and product development) offer a suitable foundation for the future relations but the entire success has fallen below the original expectations. Foreign suppliers and manufacturers, cautious of developing their next competitor, ought to find ways of creating trust required in the joint venture relationship or risk excluding themselves from the Chinese central or local governments (Ban et al. 18). Mergers and Acquisitions Are Substituting Joint Ventures as the Next Option in the Acquisition of Technological and Industry Skill The Chinese manufacturers are procuring companies outside China in order to get the required products, technology, and skills. They are also creating relationships with the foreign engineering services specialty and firms and international suppliers in order to create new products and improve their intellectual property and skill sets. The Coming of Consolidation There are expectations that the mergers and the acquisitions in the Chinese auto industry will continue for the next 5 to 10 years and beyond. It is not clear which of the Chinese will create mergers, be divested, or be acquired. Government policy setting and deregulation at the local and national levels will remain to be major factors. However, the Chinese market competitiveness will probably drive consolidation among the suppliers and manufacturers (Ban et al. 18). The Increase in Competitiveness Although majority of the manufacturers get protection from the local government, their competitiveness could be tested by the joint venture partners and foreign manufacturers. This is so when particular Chinese joint venture partners start developing their own brands. Intellectual Property Ownership Controversy The violation of the intellectual property by the domestic Chinese suppliers and manufacturers is making it difficult to have the Chinese products accepted in the universal marketplace and to partner with the foreign companies. As the Chinese suppliers and manufacturers create their own intellectual capital, they will put measures to protect it. Quality as a Major Success Factor Quality is a long term viability of the domestic manufacturers and an ultimate need if the companies expect to export beyond China. If the Chinese manufacturers fail to meet the standard quality levels like those of their global competitors, the capability to compete will be low (Ban et al. 18). The Chinese auto industry has a future that is faced with a lot of uncertainties; there are factors that must be taken into consideration if the industry has to succeed in the future. Despite their ambitions to deal with these challenges, the future still looks bleak. Intellectual property rights are a big issue in the auto industry. The Chinese manufacturers and suppliers violate the intellectual property rights and this has had a negative effect on the industry. The foreign companies which want to consolidate with domestic Chinese companies shy away because of the violation of the intellectual property. Another impact is the difficulty of the international market to accept the Chinese products. This will affect the brand image of most of the products and eventually lead to decline in the sales volume in the future. If the intellectual property issues will not be taken care of, its negative effects to the Chinese auto industry will be adverse. Competition and quality issues will have significant effect on the future of the auto industry in China. Competition from the global competitors is increasing and it will not decrease in the near future. Although the Chinese manufacturers get protection from the local authorities, their competitiveness will be put to test by the foreign manufacturers and joint ventures. If the Chinese manufacturers fail to meet the required quality standards, the future of the industry is set on a declining state. Works Cited “The Future of the Auto Industry in China.” Delsack & Associates. Delsack & Associates, 2010. Web. 5 July 2011. Ban, L., Belzowski, B. M., Gumbrich, S. & Zhao, J. Inside China: The Chinese View Their Automotive Future. New York, NY: IBM Global Services, 2005. Print. Deloitte. Future Drivers of the China Automotive Industry. Beijing, China: Deloitte Touche Tohmatsu CPA Ltd. Print. University of Michigan Transportation Research Institute. “China’s Automotive Future.” UMTRI Research Review 36.4 (2005): 1-9. Print. Read More