How China Is Impacting The Global Auto Industry

While the United States has long been regarded as the king of the automobile industry due to the proliferation of vehicles from major brands such as General Motors and Ford, other countries have recently come to rival the U.S. Take, for example, China which surpassed the United States to become the world’s largest automobile market in 2009 just as the U.S. market collapsed. There is every indication that China will retain the number one position for years to come.

In 2010, more than 18.1 million vehicles were sold in China- a significant 32.4 percent growth compared to the previous year. An additional 20-21 million cars were also sold in the region in 2011. In particular, demand for small and mid-sized passenger cars has increased significantly as a result of the country’s growing middle class, the take up of vehicles in tier 2 and 3 cities and the recent introduction of tax changes depending on engine size.

In 2012, however, the sector’s growth slowed significantly in the first quarter to 2%. That doesn’t mean the industry is declining by any means, rather, that it is simply plateauing after years of explosive growth. JD Power predicts that growth will be 8% to 9% during 2012, only slightly behind the U.S. growth rate but on a much bigger base.This could spell trouble for some of the fringe players who may go out of business or be purchased by larger companies.

“From the perspective of China’s central government, which has been begging and pleading for this heavily fragmented industry to consolidate itself for nearly three decades; this wouldn’t be such a bad thing,” explains G.E. Anderson, an East Asia consultant. “There are still well over 100 vehicle manufacturers operating in China, and this fragmentation prevents the industry as a whole from becoming more competitive.”

Today, much of the new automotive manufacturing capacity in the world is China. Looking forward, the number of car assembly plants in China is expected to grow from 120 in 2011 to 142 in 2015 and 50% of that new capacity will belong to Chinese OEMs. The fragmentation of the domestic industry and excess domestic capacity will inevitably contribute to the consolidation of the Chinese automotive manufacturers.

China’s Auto Industry and the Global Supply Chain

The Chinese automotive global supply chain has revolved around local suppliers of parts and materials and a significant inbound flow of complex or technology based parts from multinational tier one suppliers. Much of this overseas supply base has now localized in China and additional R&D centers are being opened in the country. The complex supply chain and multiple suppliers need to be managed well in order for Chinese manufacturers to remain competitive.

Now the industry is also looking to expand its global footprint and many Chinese auto manufacturers are expanding to developing countries and emerging markets such as Brazil. Chery is one of the many Chinese automakers to launch plants abroad, as it attempts to grow market share rapidly. With expansion overseas comes the need to manage that complex supply chain across new territories and establish new manufacturing and distribution footprints.

While questions have arisen in the past about the quality of Chinese cars, a number of automakers believe that quality will come over time just as Korean car manufacturers have become ever more reputable, Forbes notes. Indeed, JD Powers predicted in 2011 that Chinese domestic brands would achieve quality parity with international brands between 2015 and 2018. That parity may need to come a little quicker with the recent pronouncement from Beijing that procurement of government cars will, in the future, only be approved if supplied from domestic and not foreign brands.

- By Archie Cameron, Partner/Automotive Leader, CGN