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Carmakers have bigger problems than financial crisis

George Gao From Gasgoo.com| November 14 , 2008

Shanghai, November 12 (Gasgoo.com) The global financial crisis has plunged China's auto industry to a seven-year nadir. The Chinese government has recently announced its $586 billion economic stimulus package for the country's sweeping investment in the coming two years to boost market demands and economic growth. Certainly, this big policy is expected to help reverse the sliding auto market in China.

According to China's top economic regulator, the $586 billion economic stimulus package will be mostly used for investment in the country's infrastructural development, and this will indirectly raise the demand for commercial vehicles. In addition, a small part of the mega-investment will be transferred to consumer funding, which will be favorable to the passenger vehicle market. 

But in the long term, China's automakers have more serious problems than the current financial crisis to address if they expect to survive and grow in the auto market. The financial crisis has served as a wake-up call for Chinese auto companies to solve these problems. If these problems have been solved earlier, these companies could have lost less and even kept their growth amid the crisis.

It is high time now that Chinese automakers must retool and improve themselves in research and development (R&D), sourcing, production, marketing & sales, and after-sales service.

1. China's local automakers and component suppliers have very small investment in research and development compared to global automakers who put about 5% of their sales revenue in the R&D and have 10% of their staffs as R&D professionals. Few Chinese auto companies have reached these levels, with most Chinese automakers having less than 25% of the R&D spending of EU auto companies. China's market and policy are both urging its auto industry to grow by innovation, not by copying others any longer.

2. The sourcing department of a Chinese auto company should play an important role in reducing its corporate costs and controlling the product quality. It ought to supervise the auto parts suppliers, to help them raise their productivity and quality, and to push them for early or timely development of their components. The sourcing staff can also learn from their counterparts of the global automakers who are sourcing in China.

3. China's manufacturing has largely depended on the low price of labor force, but this is no longer an advantage in the country. With the rise in Chinese labor costs, automakers have to seek other cost-effective ways to boost their production.

4. In marketing and sales, carmakers should know what different customers need most, how to position new products in the market segment, and how to enhance the brand image. German, Korean and Japanese carmakers have set shining examples to Chinese companies in these aspects. 

5. The after-sales service of Chinese automakers is only limited to auto-parts sales and auto repair. But car rental seems to be an impractical business for the time being in China when its credit system still leaves much to be desired.

Many car makers, dealers, and consumers are still pessimistic about the Chinese auto market. Consumers are playing the waiting game, and carmakers are seeing their sales and profits in free fall. As a result, over 80 percent of China's auto companies have been forced to scale down their whole-year sales targets for 2008.

It remains to be seen whether this industry-wide crisis will change for the better in the first half of next year. Anyway, if an auto company has been performing excellently in its R&D, sourcing, production, marketing & sales, and after-sales service, it will see steady growth in sales and profits even in the tough days.

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