Today, China is the number two automotive market in the world, with production of 7.3 million vehicles in 2006 and over 45 automakers competing for a percentage of the market share. Production has been historically targeted at the domestic market, where sales of passenger cars are growing at over 30 percent annually. However, with a higher level of technology being introduced, Japanese suppliers are gaining share, and domestic Chinese companies are expanding their own brands and producing ever more sophisticated vehicles. This expansion is seen as an opportunity for suppliers due to the increase in competition it creates for OEMs in the fast-growing China domestic market, particularly at the lower-priced end of the market
For many companies, success in China is a make-or break proposition. What happens in China affects manufacturers not only in China but in every region of the world. The situation is complex – China’s automotive market is not moving forward in a straight line, and new developments bring opportunities and threats alike. The automotive industry is one of several singled out as strategic by the Chinese national government, as well as several regional governments. One of the implications of this government focus is the requirement that outside automakers can only build vehicles in China in a joint venture with a domestic OEM. As a result, multinational companies dominate the market through their joint ventures with Chinese companies, led by Volkswagen, General Motors, and Hyundai.
A CHINA MARKET
So, how important is it for North American manufacturers to be successful in the emerging markets around Asia? Extremely important. This is the region in which the bulk of industry growth will occur in coming decades, and a failure to participate will hinder an OEM’s ability to continue to invest in new technologies and achieve competitive platform volumes. However, just like entering any new market, the obstacles can be somewhat overwhelming. GM is arguably the most successful western OEM in Asia-Pacific. It has achieved this success by developing a long-term regional strategy and sticking to that strategy, including making major investments for the future over the past 20-plus years.
Operating in China still requires a local partner and approval by the central government. For newcomers, approval is not a foregone conclusion. Approval of new ventures typically requires bringing something of value to the business, such as a leading technology or an R&D center. These issues are in sharp contrast to what Chinese manufacturers face when entering North America. Chinese OEMs find many automotive assets readily available for sale to anyone who wants to enter the North American market. However, at this time, many of those assets do notappear to be very attractive. Still, a lot of intellectual capital is for sale.
China’s rapidly-growing automotive market offers tremendous opportunities to domestic and foreign automakers, but because of its rapid evolution it also presents difficult challenges. Questions about everything from government policy and customer demand to oil prices and engine technology are without clear answers. Accordingly, China’s automotive market provides an excellent setting for considering the management of strategic risk – the danger of change so profound it threatens a company’s basic approach to creating and capturing value.
When looking to the future, a few significant industry shifts stand out and are sure to have an impact on the success of OEMs and suppliers in the long run. The big shift is the price of petroleum. Although petroleum prices have risen in the past, only to fall again within a few years, the situation appears different this time due to rapidly increasing demand from developing markets such as China and India and the global focus on reduction in CO2 emissions (and resultant CO2 limits or fuel efficiency legislation in key markets). As a result, we expect to see a permanent shift to smaller, lighter vehicles and alternative technology power trains and fuels. The emerging markets will also drive significant new demand for low cost vehicles such as the Tata Nano; most global OEMs will develop new low-cost platforms to compete in this new market segment, driving many material and product innovations.
Randall W. Miller is a principal with Deloitte Consulting LLP. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms and their respective subsidiaries and affiliates. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other’s acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names “Deloitte,” “Deloitte & Touche,” “Deloitte Touche Tohmatsu,” or other related names. Services are provided by the member firms or their subsidiaries or affiliates and not by the Deloitte Touche Tohmatsu Verein.
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