the future of china ’ s automobile industry

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The Future of China’s Automobile Industry

Xingmin YinChina Center for Economic StudiesFudan University

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1. Introduction The bad economy does hit all car sales. Production of passenger cars and light trucks

declined from 70.9 million units in 2007 to 68.1 million in 2008. Sales figures tell a similar story, falling from 69.5 million vehicles in 2007 to 66.3 million in 2008; the number is forecasted to sag further to 59.2 million in 2009.

The industry as a whole is facing an unprecedented combination of cyclical and structural issues.

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The outlook is now negative across the whole auto industry except for China.

All the established auto makers will need to take this opportunity, during the downturn, to rethink their strategies and ponder what they should be doing over the next 10 or 15 years.

Where can the major global auto makers find their new markets?

How does China fit the future of global auto industry?

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2.China’s Place in Global Automobile The auto industry is one of the key sectors of

Chinese economy. The industry continues to grow, registered 20

percent per year over the period 2002-2007; and 13 percent in 2008.

The China’s auto industry made over about 10 million cars, vans, tracks and buses in 2008.

Changes of the global league table over the period 2000-2007.

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The Global League Table 2007 Vehicles(‘000) Share(%) 2000 Vehicles(‘000) Share(%)1. Japan 11596 15.85 1. USA 12800 21.932. USA 10780 14.74 2. Japan 10141 17.373. China 8882 12.14 3. Germany 5527 9.494. Germany 6213 8.49 4. France 3348 5.745. Korea, Rep. 4086 5.59 5. Korea, Rep. 3115 5.346. France 3016 4.12 6. Spain 3033 5.207. Brazil 2971 4.06 7. Canada 2961 5.078. Spain 2890 3.95 8. China 2069 3.549. Canada 2578 3.52 9. Mexico 1936 3.3210.India 2307 3.15 10.UK 1814 3.11Others 17834 24.38 Others 11630 19.89Global Total 73153 100.00 Global Total 58374 100.00

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New Development in 2008 Japan was the undisputed leader in light vehicle

production in 2008, at 11 million. U.S. output dropped by 2 million to 8.5 million

(and may fall as low as 6.3 million in 2009). China edged into second place with 8.52 million

(with 10 million projected in 2009). In fourth place is Germany, with 5.8 million

vehicles, down from 6 million. Korea, Brazil, France, Spain, Mexico and

Canada accounted for the remainder of the top-10 light vehicle makers in 2008.

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China’s Share of Global Auto Production

02468

101214

2000 2001 2002 2003 2004 2005 2006 2007Vehi cl es Passenger Cars

%

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Clearly, China’s share of global auto production has been increasing since 2000.

In total, China will produce roughly 11 million vehicles in 2009, up from 10 million the year before.

Somewhere around 2010-2012, China will surpass Japan as the world’s largest auto producers.

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3. Capacity Expansion in Auto Industry A big shift in the global auto industry While global players are turning to the

emerging markets such as China for profits they can no longer realize in the United States, Europe and Japan, domestic manufacturers in China are building up their own auto industry with technology transferred by the multinationals through joint ventures.

Discussion on development strategies for homegrown auto makers in the past years.

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3.1 Homegrown Auto Makers Industry policy on JV. Currently, about 65 percent of cars made in

China are manufactured by non-Chinese companies.

But multinational auto makers also face keen competition from homegrown manufacturers in China.

Can Chinese homegrown auto makers survive in their competition with leading multinationals?

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Chinese manufacturers like Shanghai Automotive Industry Co. (SAIC), Chery automobile Co., Geely Automotive Holdings, Dongfeng Motor Group, Great Wall Motor and BYD Automobile make and sell their own independent brands. Some homegrown manufacturers have even begun exporting and established overseas plans to enter the global markets.

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Growth of Homegrown Auto ProductionGroup 2003 2004 2005 2006 2007FAW 556 587 639 394 691Beijing Automobile 262 539 559 298 454Dongfeng Motor 368 442 593 258 437Chery 101 / 186 319 428SAIC 228 309 518 207 313Hafei 200 206 225 265 231Geely / 92 150 207 217

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Group 2003 2004 2005 2006 2007Anhui Jianghuai 94 131 167 63 210Great Wall / 55 68 40 123Jiangxi Changhe 118 104 116 137 112BYD / / / 60 101Sub total 1921 2465 3121 2247 3316 % of Total 43.24 48.42 54.07 30.87 37.31Total 4444 5091 5705 7279 8889

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Very significantly, both the production of automobiles, and in the related auto-parts industry, China’s auto makers are pushing for influence both within China’s expanding domestic market and through exports, particularly through partnerships with foreign companies.

It is possible to judge that homegrown auto makers will grow up in the booming markets.

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3.2 Global Value Chain:Learning by Ex-Importing Export-oriented industrialization theory has had a significant impact on China’s automobile indusial policies, especially since China’s entry into the WTO in 2001. The Chinese automakers are getting in the world auto industry and are going to affect some automakers more than others.

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China’s Auto Ex-Imports

02468

10121416

2000 2001 2002 2003 2004 2005 2006 2007 2008

I mports Exports

USD million

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Vehicle Exports The export amount of vehicles from USD1.34

billion in 2000 to USD9.6 billion in 2008. Will China’s exports of vehicles follow the model

of Korea in the coming decade? If experience or history teach anything, it takes

10 to 15 years for a foreign auto maker from a developing country to be a serious contender in a developed market.

It is noticed that one of the biggest China-related shifts thus far is not in the production of automobiles themselves, but the exports of parts and components.

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Ex-Imports of Auto Parts

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4

6

8

10

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14

16

2000 2001 2002 2003 2004 2005 2006 2007 2008

I mports Exports

USD million

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Auto-Parts Exports This boom in Chinese parts exports, coupled with the many multinational automakers now setting up shops in China, has convinced virtually every first-tier parts supplier to open extensive operations in China. Major first tier suppliers include Bosch, Delphi, Valeo, Denso and Siemens, et.. By 2002, virtually all of the major global assemblers had established major operations in China. VW and GM led the way, the three largest Japanese assemblers and major Korean firms strove to make up for lost time.

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China’s exports of auto parts continue to increase from USD1.12 billion in 2000 to USD14.82 billion in 2008. This performance is better than that of vehicle exports.

In results, China is becoming the largest production base of global auto parts and components.

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3.3 Production Chain with Regional Diversity Geographical distribution of homegrown auto makers. A wave of large-scale industrialization has been expanded into major regions in China. Diversified production bases have been strengthened in China’s automobile industry. Five auto-production clusters spread over China: Yangtze Delta: 31%; Pearl Delta: 17.53%; Bohai Ring: 16.8%; North-East: 16%; Hubei & Chongqing: 14.72%.

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Regional Auto Production (‘000) Region 2003 2004 2005 2006 2007 %Beijing 73.3 182.2 220.9 270.2 202.8 4.23Tianjin 172.5 219.8 325.6 410.3 454.3 9.47Shangdong 38.0 50.2 87.0 106.7 151.8 3.16Shaanxi 20.1 17.2 16.1 59.1 100.4 2.09

Liaoning 33.9 37.3 16.9 89.1 148.6 3.10Jilin 350.7 337.1 299.4 401.4 576.8 12.02Heilongjiang 32.4 28.7 49.9 68.1 42.5 0.89

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Regional Auto Production (‘000) Region 2003 2004 2005 2006 2007 %Shanghai 574.3 549.9 480.9 665.6 801.5 16.71Jiangsu 84.2 89.9 141.6 146.0 114.9 2.40Zhejiang 20.1 80.8 114.2 152.1 175.4 3.66Anhui 124.8 79.6 181.6 275.7 328.9 6.86Jiangxi / 26.8 45.0 64.9 65.8 1.37

Fujian 35.7 27.9 37.0 34.4 40.0 0.83Guangdong 117.2 266.5 368.6 508.0 726.3 15.14Hainan 42.6 53.5 58.8 67.9 114.5 2.39Hubei 171.6 88.0 141.7 240.5 294.8 6.14Chongqing 120.6 157.3 153.3 263.0 411.8 8.58

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The contribution of leading auto multinationals to the homegrown auto industry, especially in Yangtze Delta and North-East region.

The unified auto and auto-parts production system will be consolidated, based on the technology diffusion from leading auto multinationals.

Advantages in diversified regional production system.

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3.4 Brief Comments on Auto-Industry Stimulus Policy The auto-sale tax reduction, with the current

10% rate to be cut to five, or even zero for one or two years;

To promote car sales in rural and remote areas, with such measures to boost sales of smaller sedans and light-duty trucks suitable for narrower roads in less-developed regions;

To subsidize vehicle purchases to replace older models, this measure would benefit fleet operators.

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4. Growth Drivers for Auto Production A growing economy is real good news for auto

production. In China, annual economic growth averaging 10

percent over the past decade has made cars affordable to more people.

Is it possible for China to keep a ballooning demand for vehicles?

Citizen’s income is quite difference among various regions due to China’s huge size and geographical diversities.

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China’s GDP per capita

0500

10001500200025003000350040004500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

GDP per capi ta

USD

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GDP per capita is a good indicator for the estimation of production and sales in terms of market demand.

China’s GDP per capita will be about USD 8,000 in 2015.

An advantage for auto production and sales in a low level of vehicle fleet in China.

Another advantage in regional difference: coastal areas vs. inland and western regions.

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Civil Vehicles in Regional UseRegion Year GDP per

capita Vehicles ’000 V/P

Passenger Cars ’000 C/P

Jiangsu 2003 2030 1317.7 1.78 483.6 0.652007 4465 3301.0 4.33 1620.3 2.13

Zhejiang 2003 2430 1358.2 2.98 521.0 1.142007 5000 3032.7 6.51 1612.1 3.46

National 2007 3100 43584 3.30 29616.5 2.24

GDP per capita: USD.

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As for 2008, it is estimated the global fleet at 619.5 million light-duty vehicles, China only accounted for 7%.

Possession ratio of vehicle to population increased from 1.24% in 2000 to 3.3% in 2007.

Possession ratio of passenger cars also increased from 0.67% to 2.4% over the same period.

As for Japan, this ratio is at 49.21%, higher than that of the US (47.52%).

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Vehicles in Use: International ComparisonCountry Year Per

capitaVehicles in fleet ’000 V/P(%)

Passenger Cars ’000 C/P(%)

China 2000 840 15761 1.24 8537 0.672007 2500 43584 3.30 29617 2.24

Japan 2000 35420 72653 57.27 62438 49.21Korea 2000 9010 12040 25.61 8084 17.20Brazil 2000 3630 28975 17.03 23242 13.66Germany 1999 25690 44874 54.66 42324 51.56USA 1999 32260 214775 77.07 132432 47.52India 1998 440 8120 0.81 5056 0.51

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Will China catch up with Brazil and Korea’s level of vehicle in society use?

If China’s GDP per capita will be as high as that of the developed economies, can more vehicles be sold out in coming years?

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5. The Future of China’s Automobile Industry Car companies are concerned about what some

of them called “the most affluent factor” to auto industry----a strong economy.

It is estimated that the Chinese market is expected to account for some 35 percent of all global auto sales growth during the next decade.

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Auto Production Growth

0100020003000400050006000700080009000

10000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Vehi cl es Passenger Cars

’000

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The auto production increased from 2.34 million in 2002 to 10 million in 2008. As for market share, China accounted for 13.41 percent of global vehicles in 2008.

It is reasonably forecasted, that the China’s auto production and sales will be around 25 million units in 2020.

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The Estimation of China’s Automobiles

2000 2007 2020GDP per capita (USD) 950 2,500 12,000Auto Production Vehicles 2070 8888.9 25000 Passenger cars 607 4997.8 18000China’s share of global (%) Vehicles 3.54 12.32 20.00 Passenger cars 1.48 8.52 18.28Global auto production Vehicles Passenger cars

5839.244098.79

7217.855630.11

12450095712

Unit: ’000.

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Markets, Markets and Markets It’s going to be much more important to see

how Chinese consumers there are thinking about or rethinking their purchases of cars and looking for the next five years or so.

What kind of cars is popular? Large and midsize cars sell well in China. This means that car manufacturers reap larger profits from bigger vehicles that sell in China.

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GM’s joint venture in China will spend $1 billion a year over the next five years to keep up with the explosive growth in China’s auto industry. GM, sold more than one million Cadillas, Buicks and other models there in 2008, a more than 150-fold increase in sales over a decade. Nissan plans to introduce three new models in China this year. Can China become the largest auto producer in the world? Some lessons can be learned from the steel production in previous years.

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The Case of Crude Steel ProductionMillion Tones

Year Global Output China Output China/Global (%)1998 777.33 115.59 14.871999 784.55 124.26 15.842000 847.67 128.50 15.162001 850.27 151.63 17.832002 903.93 182.37 20.172003 969.74 222.34 22.932004 1068.69 282.91 26.472005 1146.20 353.24 30.822006 1250.00 419.15 33.532007 1344.27 489.29 36.402008 1329.72 500.49 37.64

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China’s crude steel production increased from 116 million tones in 1998 to 500 million tones in 2008.

China accounted for 37.64 percent of global output in 2008, up from 14.87 percent in 1998.

The estimation of strong demand for autos can be drawn from the growth of per capita production rate over the past decade.

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Per capita Car Production Rate

00.20.40.60.8

11.21.4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2020Car Producti on Rati o to Popul ati on

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China’s car production rate to population increased from 0.05% in 2000 to 0.38% in 2008.

The per capita production (or sales) rate has been stable, around 3.4-4.3% for the USA in the past three decades, namely, 13 million vehicle sales annually.

What is this rate for Japan and Germany? Will China reach a similar rate with Japan’s?

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6. Conclusions China will become the largest auto producer at 12 million

vehicles in 2010. Induced by the market demand, both multinationals and

Chinese auto producers will expand their production capacities.

In 2020, the vehicle production will be at 25 million units in China, under the support from high economic growth and income-increase trends.

China’s diversified auto production system will be integrated into the global production chain, and regional production mechanism will be consolidated into national unified system, covering all multinationals and homegrown makers.

……

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Thank You!