Automotive Industry in China - Essay Example

Literature Review Introduction The main purpose of the literature review is to provide the readers with a brief overview regarding the China’s car industry. The literature review will gather some previous research, articles and journals that were written by accredited scholars and authorities. As part of the literature review, some of the existing secondary research studies related to the research topic will be acknowledged. History During the Mao Era between the years 1949 to 1976, there was no market for passenger cars and no one really owned a car except for the upper class people. In 1984, during the Deng era, the first private cars began to appear in Beijing (Facts and Details, 2010). As soon as China opened its doors to foreign investors, foreign-based car manufacturers were allowed to enter into joint agreement ventures with the local Chinese automobile manufactures. The main reason for allowing such business arrangement was due to the government’s desire to develop the local automobile industry quickly. Aside from allowing the transfer of foreign-based technology, this strategy opened new business opportunity for Chinese people to learn from foreign manufacturers. Since Chinese people have ten vehicles per 1,000 residents in China as compared to 940 in the United States and 584 in Western Europe (Tao, 2008), there is plenty of growth opportunities in the Chinese automobile industry. For this reason, large-scale automobile companies like Volkswagen, General Motors, Ford, and Toyota have quickly moved into China (Ng, 2009). This gives automobile companies the competitive edge to penetrate the Chinese market. The Most Recent Status of the Automobile Industry in China Because of the significant increase in the number of automobiles manufactured each year, China has become a major auto parts supplier in the global markets. Of the worlds top 100 auto parts suppliers, 70% are located in China (Tao, 2008). In 2006, China has beaten Japan to become the world’s number-two vehicle manufacturer after the United States. Furthermore, car sales increased up by 37% in China (7.2 million in total) while other vehicles like trucks and buses were up 25% (Tao, 2008). After China’s agreement with the World Trade Organization (WTO) in 2001, the automobile industry has been advancing rapidly. Within the global level, China has moved to become the third largest automobile manufacturer next to the United States and Japan. In fact, roughly 50% of the world’s automobile business activities in terms of its business capacity expansion are seen in China (Tao, 2008). In 2009, China’s car industry has been deemed to be the fastest growing industry. The country sold more automobiles than any other countries (OICA, 2010). A table below illustrates the top ten largest car production industries in the world in 2009 with China being number one and having the largest percentage change. Position Countries Number of Cars Percentage Change 1 China 13,790,994 48.3% 2 Japan 7,934,516 -31.5% 3 Germany 5,209,857 -13.8% 4 South Korea 3,512,926 -8.2% 5 Brazil 3,182,617 -1.0% 6 USA 5,711,823 -34.3% 7 India 2,632,694 12.9% 8 France 2,049,762 -20.2% 9 Spain 2,170,078 -14.6% 10 UK 1,090,139 -33.9% Source: OICA, 2010 The reason behind the significant decline in the sales of cars in other countries like the United States, UK, and Japan was caused by the after effect of the global economic crisis. Since the unemployment rate in countries other than China is high, people tend to hold onto their cash rather than to purchase a new car. As evidence behind the significant decline in the sales of cars in Japan and U.S., it is best to analyze the graph presented on page 3. Basically, the graph illustrates the total number of automobiles produced from 2000-2009 in China, Japan and US. This graph clearly shows how automobile industry in China has dramatically improved since 2000. Despite the global economic and financial crisis, the automobile industry in China was not affected since the domestic market for the Chinese market alone is sufficient in terms of surviving the crisis. Since there are still billions of Chinese people who are aiming at being able to purchase a new car, demand for new automobile is remains high. Therefore, automobile companies based in China should produce more automobile in order to satisfy the needs of the local people. Source: OICA, 2010 Economic Crisis in 2008 was a Difficult Year for China’s Automobile Industry During the 3rd and 4th quarter of 2009, there was a significant decline in the sales of automobiles by up to 10 of the total sales in comparison to the 3rd and 4th quarter of 2008 (Hogg, 2009). Because of the significant decline in the sales of automobiles in China during the 3rd quarter of 2008, the total sales of automobile amounted to only $2.04 million as compared to $2.57 million during the 1st quarter of 2008 (Yu & Yang, 2010). Government Strategies and Result of Government Intervention In response to the significant decline in the sales of automobile back in the 3rd and 4th quarter of 2009, Chinese government publicly released the Outline which tackles the comprehensive development schemes that will be used to improve the sales of vehicles in China between the years 2009 to 2011 (Yu & Yang, 2010). Serving as the basic framework for automobile industry, the Outline tackled issues related to upgrading the available technology used in manufacturing automobiles, strategies that will be used in promoting the selling of new engine designs, and issues related to economies of scale and other production enhancement strategies. Basically, several research studies explained that economies of scale combined with improvements in the available automobile technology contribute to the long-term and overall improvements in China’s automobile industry (Truett & Truett, 2008; Husan, 1997). On top of this newly implemented scheme, the Chinese government also promotes and encourages the local automobile manufacturers to enter into merger and acquisition (M&A) in order to enable the business benefit from economies of scale (Yu & Yang, 2010). Other government support in the improvements of the Chinese automobile industry includes cutting the tax on newly purchased vehicles, subsidizing the replacement of vehicles with light trucks or mini buses, funding the development of new automobile manufacturing technology, supporting the use of alternative fuel and the development of electric-operated vehicles, and encourage the purchase of locally made automobile brands (Huang, 2009). Although there was a significant decline in total annual car sales in China back in 2008, the Chinese government was fast enough to provide economic and fiscal policies that could stimulate growth in the sales of vehicles. Among the common economic and state-oriented policies that China used was implementing a tax cut for the purchase of smaller cars and subsidies to vehicle buyers in rural areas (Xiang, 2010). Based on the figure presented by the OICA (2010), the use of this particular economic and fiscal policy was effective enough to stimulate a significant increase in the car sales and consumer’s confidence in purchasing a new vehicle. Despite the significant decline in the sales of cars, a car industry analyst stated that there are still Chinese buyers who are willing to buy a new car. In line with this, a research study shows that 80% of Chinese are buying their first car (Hogg, 2009). Furthermore, the streets of Beijing were estimated to have about four million private cars each day. At one point last year, Beijing was handing out 12,000 new driving licenses each week (Lewis, 2010). As part of the Chinese government’s support during such an economic recession, a total amount of 4 trillion Yuan ($400 billion) was released by the government as economic stimulus (China Automotive System, 2010). Recently, the Government is investing huge amount of money in car infrastructure. The budget for road investment this year will be around $130 billion (Lewis, 2010). As a result of the government subsidies which aimed to aid the economic growth in China’s automobile industry, consumers’ spending habit increases despite the global economic recession. As a result of strong government support, luxury cars are becoming popular due to 825,000 people in Mainland China. As of 2009, at least $2.05 million worth of luxury cars were sold (Chang, 2010). In line with this, the chief executive of Daimler Dieter Zetsche stated that “sales of its Mercedes-Benz cars in China sold 23,600 vehicles or 112 percent during the first quarter of 2010” (Chang, 2010). Likewise, Volkswagens Audi, BMWs Rolls-Royce, Fiats Ferrari and other makers of high-priced vehicles are also experiencing a significant growth in the quarterly sales. Future Expectation Because of the continuous government support in improving the overall performance of its automobile industry, the number of local market for locally made and foreign produced vehicles continue to increase despite the global economic crisis. For this reason, the China Passenger Car Association forecasted that Chinas auto sales are expected to grow by 25 percent this year (Xiang, 2010). In relation to the government’s newly proposed and implemented Outline, China is expecting to increase its total annual sales up to 10 million units at the end of 2009 with a constant 10% growth rate over the succeeding years to come aside from consolidating the small-scale and regional automobile manufacturers (Huang, 2009). Basically, the future expectations of the Chinese government with regards to increasing the total sales of vehicles is possible given that the government has the executive power to control the market with the use of fiscal policy and regulation. As a result of encouraging more Chinese buyers to purchase a new car, the tight competition within the automobile industry is likely to increase. Therefore, local and foreign automobile manufacturers are expected to continuously improve not only the quality and design of vehicles they sell in the local and global markets but also increase the quality of their services. This is the only way automobile manufacturing companies will be able to sustain growth in sales as they try to maintain the loyalty of their customers to their brand. Conclusion Government intervention through the use of fiscal policy and regulation is effective in terms of protecting China’s automobile industry. Despite the global economic crisis, the use of strong government support by controlling taxes on newly purchase vehicles, improving the automobile technology, and releasing of financial subsidies made it possible for both the local and foreign-based automobile manufacturing companies to persuade more people to buy a new car despite the global financial crisis. As a result of strong government support, China managed to be able to sell more cars as compared to other well-known countries that manufacture luxury and standard vehicles such as the case of the United States and Japan. In line with this, cutting down the government taxes on newly sold cars will make the market price of new model vehicles attractive to Chinese buyers. Since there is an expected increase in demand for new model vehicles, the local and foreign automobile manufacturers are expected to increase not only the quantity of vehicles they production quarterly but also the added services they provide to their valued customers. References Chang, A. (2010, April 29). nzherald.com. Retrieved June 18, 2010, from China becoming engine of luxury car industry: http://www.nzherald.co.nz/motoring/news/article.cfm?c_id=9&objectid=10641464. China Automotive System. (2010). Retrieved June 18, 2010, from Behind Chinas Luxury-Car Boom : http://www.caasauto.com/caas/viewdoc.aspx?mid=wn&ID=700. Hogg, C. (2009, February 10). BBC News. Retrieved June 18, 2010, from Chinas car industry overtakes US: http://news.bbc.co.uk/2/hi/business/7879372.stm. Huang, J. (2009, February). CSM Worldwide. 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