Chinese Automobile Industry - Case Study Example

China’s Automobile Industry Automobile sale is projected at 12% in the coming years and it is a steady one for an industry that is already ahead in the global market. The growth of motor- vehicle industry will boost the growth of the auto-parts industry. Not only the local automobile industries, but many global automobile industries established in the fast growing Chinese market. The positive state of the market is visible and either the existing industries are expanding their business or new industries are entering the market. (PKG Research, 2010). China was an exception among the other leading automobile producers of the world. Its growth was substantially high since 2000. Initially, the European Union (including only the 15 members) and North America produced three times more than that of China. However, between 2000-04, China has moved forward with a simultaneous drop in US production by 800,000 units together with North America by 1.3 million units. United States Department of Labor, 2007) In 2009, there were in all 52 foreign and domestic carmakers in China, while the United States had just 15. The top car makers in 2006 include: 1) Shanghai GM; 2) Shanghai Volkswagen; 3) FAW Volkswagen; 4) Chery; 5) Beijing Hyundai; 6) Tianjin FAW Toyota; 7) Tianjin FAW Xiali Automobile; 8) Geely Automobile; 9) Guangzhou Honda ; 10) Dongfeng Peugeot Citreon. (Hays, 2010). Foreign Investors in China: American automotive companies were the major players in the Chinese market to take advantage of the liberalization in 1980s. Despite such early initiatives, Americans were losing out to the Japanese imports and the European investors, in particular Volkswagen (VW). The US Company, General Motors (GM) has been the largest investor and has been the most successful company in China with around 13,000 employees in China, in 2005. (Cooney, 2006) Table 1. Motor Vehicle Sales in China   2005   2004   2003     000s % 000s % 000s % GM- Shanghai     252   201   GM- SAIC/ Wuling- Trucks     44   50   GM- SAIC/Wuling- Buses     181   130   GM- Total 665 11.2 477 9.4 381 8.7 VW- First auto works 277   300   298   VW- Shanghai 287   355   396   VW-Total 564 9.5 655 12.9 694 15.8               Honda- GUANGZHOU 256 4.3 202 4 117 2.7 HYUNDAI- BEIJING 234 3.9 144 2.8 52 1.2 CHERY 190 3.2 87 1.7 90 2.1 Toyota- FAW     82 1.6 51 1.2 Toyota- Total 179 3 116 2.3     Ford 200 3.4 120 2.4     FAW- XIALI 180 3 131 2.6 167 3.8 NISSAN 166 2.8 89 1.8 103 2.3 GEELY 140 2.4 97 1.9 80 1.8 TOTAL 5,920 100 5,071 100 4,391 100               Source: Cooney, 2006. P. 10 Overtaking VW (with 50% market share) was another big move by GM and that further increased its market share of vehicle sales in China. Further, GM’s alliances with SAIC (with 25% market share) and Wuling gives it an even greater share in the market, including SUVs and minivans. GM in China earned a profit of $524 million in 2005, which was a contrast to its $5.6 billion loss in North American. Hyundai has also been moving up the sales chart. Hyundai in the first quarter of 2005 was in the top. The table also represents Honda’s rising sales and Toyota in the growing stages. Among the other foreign producers, Ford has started recently but had a rapid growth in sales in 2005. Fordbrand’s sales were at 41%. However, sales of DaimlerChrysler have been low and Mitsubishi is designing most of the vehicles from Beijing Jeep factory. (Cooney, 2006) Table 2: Output & Market Share of Passenger Carmakers   Output   Market Share   2007 2006 2007 2006 Shanghai GM Wuling 500,568 427,355 7.89% 7.89% Shanghai GM 294,513 374,692 7.53% 7.85% FAW Volkswagen 485,821 346,787 7.33% 6.67% Shanghai Volkswagen 466,139 350,630 7.25% 6.74% Chery 387,880 307,232 6.05% 5.84% Guangzhou Honda 289,077 262,019 4.69% 5.03% Changan 307,650 246,919 4.67% 4.66% FAW Toyota 284,373 219,839 4.49% 4.24% Dongfeng Nissan 273,880 201,251 4.32% 3.935 Beijing Hyundai 231,888 290,088 3.67% 5.87% Source: China knowledge, n.d. Source: China knowledge, n.d. The table shows that in the passenger car market, the foreign players dominate, with only Chery representing the domestic car- makers. The largest domestic competitor of Chery, Geely King did not rank in the top 10 in 2007 with output and sales around 216,841 units and 219,512 units respectively though it ranked tenth in 2006, with output and sales around 206,958 and 204,331 units respectively. Sedans specifically dominated the passenger car market. Sales of sedan kept rising from 2006 and almost 4.73 million sedans were sold in 2007, which was more than three-quarters of the total sales of passenger cars in China. Simultaneously production of sedans increased to 4.8 million units (China Knowledge, n.d.).         Table 3: Sedan makers in China Manufacturers Sales (1,000 units) Market share       FAW Volkswagen 458.3 9.70% Shanghai Volkswagen 445.8 9.40% Shanghai GM 432 9.10% Chery 321.5 6.80% FAW Toyota 269.1 5.70% Dongfeng Nissan 261.2 5.50% Guangzhou Honda 249.5 5.30% Geely 219.5 4.60% Changan Ford Mazda 213 4.50% Dongfeng peugeot Citroen 207.3 4.40% Source: China Knowledge, N.D. Source: China Knowledge, N.D. Among the sedan makers, the independent players grabbed the major share in the market with a sale of 1.2 million in 2007. This was 26% of the total sedans sold in China. Independent brand names like Jetta (Tianjin FAW), QQ (Chery) and Family (Hainan Mazda), sold around 889.1 thousand units, which was 72% of China’s autonomous sale of brand. (China Knowledge, N.D.) Competitive Labor Costs: What was the reason for this rapid growth? What attracted foreign manufacturers to China? One of the reasons is the low labor cost, with by far the world’s largest manufacturing workforce, at more than 100 million. This is where China has relative advantage in manufacturing. Local employees at the executive level receive very low salaries and at the manager level the top annual pay has been $30,000. The general pay is closer to $10,000 and some getting even as low as $3,000- 4,000. The department managers also fall in the low pay category. Only Suzhou has an annual salary that is higher than $9,000. However, this low wage rates and salaries are sometimes compensated by benefits which are as high as 30% to at times even more than 50% of the salary for the employees in the company. These benefits actually go to the government and are later returned to the employees in the form of pension benefits, medical coverage, and a housing fund allowance. (Cooney, 2006) The low labor costs in China have been the reason for the growth in the automobile industry and the overall manufacturing sector. This has been shown in the following graph and a comparison with four other countries has been drawn to bring out the large difference that exists. The 2004 data shows that China’s average hourly compensation in the manufacturing sector was too low than what was found in most of China’s largest trading partners. Source: United States Department of Labor, 2007 The estimation according to Erin Lett and Judith Banister show that China’s average hourly manufacturing compensation in 2004 was around 3% of the average hourly compensation costs of $22.87 for production workers in the United States for the same year. The high compensation that we have discussed above was $1.19 per hour for employees in the urban areas of China than the employees in town and village enterprises. Their compensation was around $0.45 per hour. (United States Department of Labor, 2007) The British experts Graeme Maxton and John Wormald, rate China among the countries still trying to develop its independent auto industry, with most favorable environment. Otherwise, the Chinese automobile market is filled with foreign manufacturers. This gives the Chinese firms direct access to the modern US automotive technology as well as the manufacturing market. The Chinese government has plans to use this to their advantage and grow their skill base to create an independent world-class automobile industry, like Japan and Korea had done. References 1) Children Knowledge (N.D.). Manufacturing in China. Retrieved on July 20,2010 from http://www.chinaknowledge.com/Business/CBGdetails.aspx?subchap=3&content=9 2) Cooney S. (April, 2006). China’s impact on the US Automotive industry. CRS report for Congress. Retrieved on July 20,2010 from http://www.fas.org/sgp/crs/misc/RL33317.pdf 3) Hays J. (2010). Automobile industry in china. Facts and Details. Retrieved on July 20,2010 from http://factsanddetails.com/china.php?itemid=361&catid=9&subcatid=61 4) Research and market (2010). China Automobile Industry - 2013. Retrieved on July 20,2010 from http://www.researchandmarkets.com/reportinfo.asp?report_id=997235 5) United States Department of Labor (2007). Labor costs in china’s manufacturing sector. Retrieved on July 20,2010 from http://www.bls.gov/opub/ted/2007/jan/wk1/art03.htm Read More