As noted in the introduction to this series, I believe we are witnessing the early stages of an economic revolution: a shift of the global center of gravity of economic strength towards the east, which will result in profound changes in numerous industries. As an economic bellwether, the automotive industry captures a great deal of interest.
TREND #2: Global Redistribution of Assets by Non-Chinese Companies to Capture China Market Growth
We are fortunate to be living in historic times. While in the grip of the most severe economic contraction since the 1930s, it is in such times – and only in such times - that truly transformational structural change is possible. The global car industry has long suffered from overcapacity resulting from overly ambitious assumptions for market growth combined with optimism surrounding whatever product or technology was being offered. Ambition and optimism are the first victims of a recession as businesses struggle to realign to a new world economic order. This translates into a major redirection in capital spending and asset reallocation as businesses attempt to reconfigure themselves in order to regain a profitable footing. Many businesses are reallocating assets from slower to higher growth markets, or otherwise selling assets or disposing assets deployed in their weakened home markets.
It is interesting to note how the financial crisis – while impacting the entire global economy – has been felt to varying degrees in different markets. While GDP declines are anticipated for 2009 in the Euro Zone, the US, and Japan, stimulus measures taken in China have yielded remarkable growth in many sectors of its economy. China's stimulus plan provided UD $588 Bn of investment, of which 45% was targeted at infrastructure development. The Auto Industry Revitalization Plan implemented in March 2009 included specific measures to spark consumer demand for automobiles, including:
1.Establishment of eight development goals for the industry from 2009 to 2011 to ensure domestic growth of automobile production and sales
2.Reduction of half of sales tax for 1.6 liter or smaller cars
3.Implementation of policies to boost auto sales in the countryside including subsidy for new minibus or light truck sales for rural residents
All indicators point to the likelihood that China will exceed its 8% GDP growth target in 2009. Taken in the context of a longer time horizon, it is also apparent that in the past three decades, the major Asian growth economies of China and India are in fact returning towards their historic share of world GDP. The net result of these developments has been a significant redistribution of the relative strength of the global automotive markets.
In fact, China has surpassed the US in automotive sales for each of the first 6 months of 2009, selling 6.1 million vehicles over this period compared with 4.8 million new vehicles in the US. In fact, since 2003 China’s vehicle market has more than doubled in size from 4.56 million units to 9.67 million units (in 2008). Of this total, 61%, or 5.91 million units, represent passenger vehicles (extract the buses, trucks and other commercial vehicles). The China Association of Automobile Manufacturers forecasts sales for 2009 will top 12 million vehicles. Given recent developments, China will easily surpass the US market in sales for the overall calendar year 2009.
Looking forward, Global Insight has forecasted that the Asian markets represent the largest growth potential in the global auto industry…with a combined 4.7% compound annual growth rate over the next 10 years (compared with 2.9% in NAFTA). Within Asia, 54% of that growth is expected to come from China. As a result of these developments, the global automotive industry must fundamentally rethink its structure in terms of regional allocation of capital investment and capacity.
Global automotive companies have been forced to radically and often involuntarily rethink their global footprint. For example, General Motors is in the process of completely unwinding its European operations with the sale of its Opel, Vauxhall and Saab brands. In their North American operations, GM is in the process of selling its Hummer and Saturn brands, and terminating the Oldsmobile and Pontiac brands. At the same time, GM has continued to invest in expanding its capacity in the rapidly growing China market.
Similarly, Ford has sold its Land Rover and Jaguar brands to Tata Automotive, and is in the process of selling the Volvo brand while .
Perhaps the most impressive example of this trend is seen with Volkswagen AG. Historically the market share leader in China, the world's third largest automaker recently announced that it sold a record 652,222 vehicles in China and Hong Kong in the first half of 2009, up 22.7% year on year. For Volkswagen, thismakes China its biggest auto market worldwide for the first time
. VW has achieved these results by bringing their most advanced vehicle and powertrain technology to the China market, having recently launched their 1.4 - 2.0L TSI engine family. With additional plans to introduce their DSG gearbox, VW is poised to take full advantage of the growth in sales of compact cars. VW will continue to bolster their strength in the market this year, with plans to introduce the all-new Volkswagen Golf, along with plans to start manufacturing two new SUV models in its plants in eastern Nanjing and western Chengdu. In May, Volkswagen formed a partnership with China's BYD Co. to jointly develop hybrid and electric vehicles powered by lithium-ion batteries, becoming BYD's first industrial partner.
Clearly, the global center of gravity of automotive strength has shifted east. Those manufacturers who have anticipated this trend and are providing market-relevant products will continue to reap the benefits as the China market continues its inexorable expansion.
In the next article in this series, I will describe the trend towards "Acquisition of Foreign Assets and Key Development Competencies by Chinese Companies".
About the author:
Bill Russo is a Senior Advisor with Booz & Company as well as the Founder and President of Synergistics Limited. He lives in Beijing and has more than 20 years of experience in the automotive industry, most recently serving as Vice President of Chrysler's business in North East Asia.
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