Automotive manufacturers and suppliers view China as the largest combination of automotive market and low-cost manufacturing and supply base to appear in decades. Companies are deluged with information about the potential opportunities in China, but typically know very little about what the Chinese think about their automotive future.

The steady influx of automotive manufacturers and suppliers over the past ten years has provided the Chinese with first hand experience of what the impact of a world-class, high-volume automotive industry can mean to a country. The Office for the Study of Automotive Transportation (OSAT) at the University of Michigan Transportation Research Institute (UMTRI) and the IBM Institute for Business Value consider this as an opportune time to explore what the Chinese themselves think about their recent automotive experience, and what they think the future will hold for this industry and their country.

Our study focuses on the opinions of 20 leaders in Chinese industry and government, as well as academic experts. We asked a wide range of questions to better understand their perspective of how the industry looks today and how they believe it will look in the future. Our questions focused on their view of the future auto market structure, how the industry will restructure, and what effect external challenges (air quality, oil supply and the transportation infrastructure) will have on the development of the industry.

The results of our interviews tell us China shares the outside world’s hope and enthusiasm for the development of its automotive market. Yet these leaders have a cautious optimism, based on their understanding of the challenges facing the industry.

China’s extraordinary market

China represents an extraordinary case of economic development in an emerging market. The number of people in the market, the number of economic reforms faced by the government, and the speed at which the country is making the transition to a full market economy all contribute to the extraordinary nature of change. As an indicator of that growth, its gross domestic product (GDP) is projected to increase more than sevenfold over the next 20 years, as shown in Figure 1. This is dramatic when compared to the amount of time other markets have taken to develop.

The automotive industry in China represents an extraordinary case of industry development. To prepare for admittance to the World Trade Organization (WTO) in 2001, China needed to open its doors to foreign investment, and that investment continues to pour in. Since 1994, foreign automakers have invested close to US$20 billion. Billions more are planned in order to increase capacity by 2010.

In the early 1980s, two joint ventures dominated the small Chinese market, Shanghai Automotive Industry Corporation (SAIC) with Volkswagen, and Beijing Jeep with American Motors Corporation (now DaimlerChrysler Corporation). These companies built vehicles from imported complete knock down (CKD) kits, and had a profitable monopoly on the Chinese market. The Chinese  government, after much courting of the American Big Three in the mid-1990s, was able to establish a joint venture between General Motors and SAIC.

During the last five years, the number of manufacturers and suppliers producing products in China has increased dramatically, with major global manufacturers establishing joint ventures with one or sometimes two or three domestic manufacturers. The number of domestic manufacturers has also increased to the point that more than 100 manufacturers are building some type of vehicle in China today.2 Most of the companies are focused in the eastern part of China. ...

The University of Michigan Transportation Research Institute (UMTRI)
Office for the Study of Automotive Transportation (OSAT)

This joint project with the IBM Institute for Business Value represents OSAT’s continued focus on key issues facing the global automotive industry. It also fulfills OSAT’s mission to describe and analyze the global automotive industry’s current developments and future directions. This report serves as an example of the informed research and analysis that OSAT provides to industry stakeholders, including manufacturers, suppliers, retailers, labor, scholars, government, the media, and the general public.

IBM® Institute for Business Value

IBM Business Consulting Services, through the IBM Institute for Business Value, develops factbased strategic insights for senior business executives around critical industry-specific and cross-industry issues. This executive brief is based on a joint research study with the University of Michigan Transportation Institute’s Office for the Study of Automotive Transportation and the extensive client engagement experience of IBM Business Consulting Services. It is part of an ongoing commitment by IBM Business Consulting Services to provide analysis and viewpoints that help companies realize business value.

Download Inside China: The Chinese View their Automotive Future

PDF format, 412KB, 32Pages.

Conclusion:

Euphoria and uncertainty form the tension our Chinese industry, government, and academic leaders describe in our study of China’s automotive future. They are optimistic about the development of China’s automotive industry, but see significant gaps and challenges for both domestic and foreign automotive companies.

The automotive industry in China shows all the signs of a market in its early stage of development:
• Too many manufacturers and poor control of quality
• An unknown and uncertain supply base in terms of quality and innovation
• Government trying to develop a market economy across all industries and sectors, not just auto, while trying to manage a soft economic landing
• A lack of collateral/ownership of property for rural workers
• A lack of transparency of information about consumers, especially credit ratings
• Low impact of local manufacturers and suppliers in new product R&D
• Inexperienced buyers in terms of understanding the new vehicle market
• No clear export strategy
• Immature joint venture relationships, with a general lack of trust between partners
• Intellectual property concerns that limit the introduction of new technology to the market.

The effects of exponential growth at the beginning of this century are impacting Chinese manufacturers, dealers, and suppliers, as well as the government, Chinese consumers, and foreign firms seeking market share.

Our study results pinpoint a number of serious challenges stemming from this rapid growth, including defaults on auto loans, uncertain relationships with joint venture partners, higher demand for oil, higher pollution levels, and severe traffic problems in the cities. The Chinese government has to determine how to manage the auto economy without harming its domestic manufacturers and suppliers or its environment.

Chinese manufacturers and suppliers (both governmentsupported and independently owned) realize their need for research and development capability and are taking steps to close the gap between themselves and their world-class competitors. They recognize the pressing challenge to develop enough product and process knowledge to compete against the foreign firms that aim to eventually become independent of their joint venture partners. As they generate their own intellectual property, these companies will make moves to protect it.

Based on price competition, the consolidation of the Chinese auto market has started. But in the end, how government pulls some of the key levers in the auto industry such as loans – as well as how it exits its role supporting Chinese manufacturers – may determine what the final number of manufacturers will be in the future.

Global manufacturers and suppliers will be hesitant to give up on the market because of its potential size, while Chinese manufacturers and suppliers race to compete against the best manufacturers and suppliers in the world.

How the industry will look in the future – both near-term and long-term – hinges on how these challenges are addressed. Such decisions will impact China’s future market structure, joint venture relationships, and its automotive infrastructure, air quality, and oil supply. We expect the Chinese automotive industry, made up of powerful competitors, to remain a dynamic force – not only in China, but in the global auto industry.

About the Authors:

Linda Ban is the Global Industrial and Automotive Leader for the IBM Institute for Business Value.

Bruce M. Belzowski is an Assistant Research Scientist at the University of Michigan Transportation Research Institute’s Office for the Study of Automotive Transportation.

Stefan Gumbrich is a Managing Consultant for the IBM Institute for Business Value.

Jimin Zhao is a Research Investigator at the University of Michigan School of Natural Resources and Environment.

Contributor
Dr. Jörg Grafe, Research Analyst, IBM Business Consulting Services

About IBM Business Consulting Services

With business experts in more than 160 countries, IBM Business Consulting Services provides clients with deep business process and industry expertise across 17 industries, using innovation to identify, create and deliver value faster. We draw on the full breadth of IBM capabilities, standing behind our advice to help clients implement solutions designed to deliver business outcomes with farreaching impact and sustainable results.

About The Office for the Study of Automotive Transportation

The Office for the Study of Automotive Transportation, a research unit of the University of Michigan Transportation Research Institute, has performed research, analysis, and communication activities focused on the automotive industry for over 25 years.

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