China Automotive Industry and International Automotive Giants - Report Example

1. Comparison of China’s Automotive Industry and International Automotive Giants 1 Size of the Gap 1 Small Size of the Economy China’s automotive enterprises make up a small part of the total economy, yet the industry generally fails to achieve economies of scale at a critical point. Although the production of automotive companies have economies of scale characteristics, if those companies do not have a minimum production scale, then the industry cannot be profitable. There are many different levels of economies of scales depending on the various types of vehicles: the national automotive and industrial automotive production capacity is more than two million vehicles; car companies have a production capacity between 200,000 and 300,000; light-duty truck enterprises can produce 100,000 to 120,000; and heavy-duty truck enterprises can make 10,000 to 80,000 cars per year. Currently there are many automotive companies in China; however, only the FAW group and other five companies have an annual output of more than 100,000 vehicles (Lunwen, 2012). In accordance with the international economies of scale requirement of 250,000 to 300,000 vehicles produced annually, at present China cannot be considered a leader when it comes to car manufacturing, although the Shanghai Volkswagen automotive company produced 230,000 units in a single year (Shanghai Volkswagen, 2013). In other words, China’s automotive industries still have ground to make up to meet the capacity of two million vehicles produced for the global market. 1.1.2 Low Output and Low Productivity According to research, three major U.S. automotive companies accounted for 90 percent of the total automotive output in China. In Japan the same three big companies accounted 80 percent of the total automotive output; this is in a country with a higher concentration of automotive production. The number of car manufacturers in China more than those in the United States, Japan, and Western Europe combined. However, Chinas annual production of vehicles is only equivalent to one foreign automotive company’s output for a few short months. This reflects the backward state of China’s automotive industry. Also, manufacturing labor productivity is lower in China’s automotive industry. In 2002, Dongfeng Motor Corporation’s labor was three per capita. However, in 1993 the per capita output of some of the world’s major automotive companies was much higher, such as Chrysler with 24.75, Ford with 18.33, and Toyota with 32.93 (Tiny, 2010). According to Levinson’s (2013) report, foreign automotive industries attach great importance to enhancing the rapid development of labor productivity. Korea and Taiwan in particular both showed greater improvement for manufacturing labor productivity than the United States (Figure 1). Hence, it can be said that lower productivity in many areas offsets the advantage of cheap labor in the Chinese automotive industry. Figure 1: Real Output Labor Hours in Manufacturing Percentage change 2001-2011 Source: Bureau of Labor Statistics, “International comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2011 Data Tables.” 1.1.3 Low Investment and Slow Effects China’s whole automotive industry has fixed assets close to 400 billion Yuan (approx. US$64 billion), whereas General Motors Corporation’s fixed assets amount to US$36 billion. In addition, China’s key construction projects are set for a period of about 10 years, while Hyundai Motors recently invested $1.8 billion for a project that took 18 months to complete, while the full investment was recovered within four years. It can be said that China’s automotive industry is small-build and low productivity, which results in high costs. 1.1.4 Lack of Specialization and Collaboration According to Chinese culture, provinces and municipalities are given special preferential policies in order to guarantee the interests of the local economy. This is done through tax revenues and establishing barriers for foreign enterprises looking to enter the local market. As a result, the Chinese car manufacturing industry has become small-scale, high cost, and full of chaotic management. Old products still survive and hinder economic expansion of the scale of domestic enterprises and professional divisions of labor and collaboration. This results in the majority of domestic enterprises entering into mutually exclusive relationships rather than through joint ventures with foreign companies. Likewise, there have also been refusals to make joint ventures with domestic counterparts. Because of this, partnerships between local and international companies have developed over time, as shown in Figure 2 (Holweg, Luo, and Oliver, 2005). However, a lack of cooperation with local counterparts has led to China’s automotive industry relying heavily on the foreign automotive industry, which results in a lack of competitiveness when it comes to the Chinese automotive industry in the international market. Figure 2: Structure of Joint Ventures in the Chinese Auto Industry 2.1 Gap in Technology Development and Innovation Capacity Currently, most of China’s automotive industry equipment is designed for products made in the fifties and sixties and at the levels of the 1980s. Even in the large state enterprises, such as FAW group and Dongfeng Motor Corporation, machinery and equipment accounted for only 20 percent to 30 percent of the production process. The level of equipment used is very different from the international standard. From a product point of view, the basic technical level of China’s automotive products is only level with international standards of the 1970s. Also, there is still not a high degree of localization for the introduction of new products (Lunwen, 2012). China’s automotive industry is currently facing a shortage of available talent, particularly scientific researchers. “China’s Automotive Talent Development Strategy” research report predicts that the number of workers in 2010 was 356.87 million, will exceed the 500 million mark by 2015, and by 2020 will reach 776.23 million. This is an average annual growth rate of 10 percent. At present, the auto talent gap is as high as 500,000 (Zhang and Zhang, 2007). In addition, according to China’s Automotive Talent Research Association back in 2006, for the data released in the mature auto markets of Europe and America researchers accounted for the automotive industry as 30 percent of the total, while Chinas automotive industry only accounted for eight percent (Gasgoo Automotive Research Institute, 2011). Furthermore, compared with foreign automotive industries, China does not set aside many funds for research purposes. For example, when Changchun Automotive Research Institute merged with the FAW Group, research funding accounted for only one percent of the sales of the FAW Group. However, General Motors Corporation, Ford Motors Company, and many Italian companies make research expenses as a ratio to sales percentage, which works out to be many times that of the FAW Group. At present, only the FAW Group is able to independently develop cars, yet some of the key parts are imports and often times come from other vehicles (Lunwen, 2012). With rapid changes in science and technology in the world, the technical content of automotive products has quickly improved. As such, there is a certain economic strength in international car manufacturers increasing their research and development efforts. These manufacturers, with their huge investments in establishing technological research and development centers, form a strong ability to develop innovative products that lead the automotive market. Today’s global automotive industry focuses on the major critical issues of safety, energy conservation, and environmental protection. This encourages foreign study of new materials and new power and information technology. At the same time, China’s automotive industry is limited by its development capabilities. Capital progress in this area is very slow, with an obvious gap between the local and foreign automotive industries. 3.1 Operating Gap on the Concept The gap on the business concept is the biggest problem within automotive enterprise group operations. Currently, the largest parts manufacturer is the Automotive Group. This group gives priority to purchases of its manufacturing system; this is the ultimate expression of the group supporting local protection status (Lunwen, 2012). Compared to the foreign automotive industry, in recent years many car companies have reformed their supply systems through implementing global production and global sourcing. In other words, this is a significant change from the automotive parts manufacturers procuring products from a system supplier. OEMs have changed the procurement system to require the supplier to directly collaborate more closely to provide higher quality and low cost products (Chen, 2011: 4). Many of China’s automotive companies fail because domestic parts prices are distorted, supply channels are not secure, and OEM is beyond the control of the parts plant. This eventually leads to a lack of competitiveness and a limited size of the market. 4.1 Gaps in Transmission of Information For the Chinese automotive parts industry increase global procurement, the biggest problem is the lag of information, dissemination channels, and inefficiency. In foreign countries intermediary institutions and professional channels, such as newspapers, magazines, and business networks, convey information with each other. At the same time, they invite world famous consulting firms for assistance in implementation and monitoring communication methods. However, in China procurement staff from multi-national companies found that the Chinese automotive industry relies on its own strength to purchase billions of dollars’ worth of products, which is almost impossible. It is very difficult to look for the appropriate businesses and products in the huge and inefficient Chinese market (Chen, 2011: 5). If China’s automotive industry wants to lead the world’s automotive industry, then it must be have a strong brand image, market network, technological research and development area, product innovation, marketing, personal training, and other fields with a strong competitiveness. 4.2 Government Policies for Chinese Automotive Industry The Chinese automotive industry has grown significantly over the past decade, but this has also brought some problems. Pollution became so bad due to the vast number of vehicles on the roads that the Chinese government had to intervene and promote new energy vehicles. In 2009 the global automotive market was still suffering from the effects of the global financial crisis, but the Chinese government used this time to enact some new regulations to restructure the auto industry. One area of particular concern was the fact that oil prices were rising globally at that time. The Chinese government knew that the automotive industry needed to come up with a way to reduce dependency on oil. Since the early 1990s the difference between oil production and oil consumption in China had been rapidly growing (Lin, 2010: 5) (see table below): As this gap has been steadily increasing for more than a decade, it is likely that this imbalance will continue to grow. This means that the Chinese automotive industry must produce vehicles that do not rely so much on oil consumption. The gap between oil production and oil consumption hovered around 200 million tons as of 2009, but this figure is expected to grow exponentially to close to 350 million tons by 2020. New energy vehicles can reduce consumption, which will hopefully bring the figure closer to production. As a side benefit, pollution in the air can be reduced. This is also another initiative made by the Chinese government to improve air quality in China. As the Chinese automotive industry is inefficient by a global scale, the production of new energy vehicles is being encouraged by the Chinese government as a means to propel the Chinese automotive industry to the forefront of new vehicle technology. One advantage that the Chinese automotive industry has in this regard is that new energy vehicles are not yet popular globally, which means that there is a smaller gap in regards to the development of these types of vehicles. It may be too difficult for China to catch up to the rest of the world when it comes to fuel vehicles, but new energy cars represent a new chance to grow the Chinese automotive industry. While there is a gap of 20 years for traditional combustion engine vehicles, the difference between the Chinese automotive industry and the rest of the world when it comes to new energy vehicles is only between three to five years (Lin, 2010: 8). This narrow gap is not too difficult to overcome, so it should be an area of main concern for the Chinese government moving forward regarding automotive policies. Read More