Momentum:

DrivingforcesinChinascarmarket
AUTOMOTI VE
ADVI SORY
2007KPMGHuazhen,aSino-foreignjointventureinthePeople'sRepublicofChinaandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,
aSwisscooperative.Allrightsreserved.
1 Momentum:DrivingforcesinChinascarmarket
Contents
2 Introduction
4 Anexpandingmarket
7 Domesticstrengthening
9 Theautomotivecomponentssector
11 Thesecond-handcarmarket
12 Theexportcarmarket
13 Keychallenges
14 Conclusion
15 AboutKPMG
16 Contactus
2007KPMGHuazhen,aSino-foreignjointventureinthePeople'sRepublicofChinaandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,
aSwisscooperative.Allrightsreserved.
2 Momentum:DrivingforcesinChinascarmarket
Introduction
Andrew Thomson
Nelson Fung
Chinaspassengercarmarketcontinuestoexpandvigorously.Bothsalesand
productionrosebymorethan20percentinthefirsttenmonthsof2007,albeit
notquiteatthesamerateas2006,whenbothrosebymorethan30percent.
Theoverallstronggrowth,however,masksmuchofwhatisgoingoninahighly
dynamicmarket,themostsignificantdevelopmentbeingtheriseofdomestic
carmaking.Companiescontinuetocompetefiercelyonprice,althoughthismay
changeastheinflationarypressurescurrentlyimpactingtheeconomybecome
increasinglyapparent.
Withannualpassengercarsalesofjustunder4millionlastyear,andabove
5millionthisyear,theindustryisstillfarfrommature.Indeed,thismakesits
achievementsallthemoreremarkable.In1990,only42,000carsweremadein
China.
1
Anditwasonlyin1994thatthegovernmentdesignatedtheautomotive
industryapillarindustryofthenationaleconomy.Foreigninvestment,which
hadbeenpresentsincethelate1980s,wasfurtherencouraged,particularlyfrom
GermanysVolkswagenandthentheUSsGeneralMotors,whichresultedby
2005inoutputandsalesbeingdominatedbysomedozenorsoforeign-invested
jointventures.
Forthegovernment,theprincipalbenefitsofastrongcarindustrylieinits
overallcontributiontoeconomicdevelopment,raisingdemandforeverything
fromsteelandtemperedglasstotyresandpetroleumproducts.Theoverall
growthoftheindustry,however,hasledinparticulartotheestablishmentofa
majorcomponentsproductionnetwork.Ithasalsoenabledthedevelopmentofa
handfulofindependentdomesticcarmakers,whichhavegrownevenfasterthan
theirinternationalcounterparts.
InMarch,Cherysoldover44,568carsmorethananyothercompany
markingthefirsttimeadomesticcarmakerhastoppedthemonthlysalesleague
tablesinceChinaallowedforeigncarmakersintotheindustryinthemid-1980s.
Overall,domesticcompanieshaveincreasedtheirshareofthetotalpassenger
carmarkettomorethan25percent,upfromjustover20percentin2004.
1
KellySimsGallagher,China Shifts Gear,MITPress,Cambridge,2006,page2.
2007KPMGHuazhen,aSino-foreignjointventureinthePeople'sRepublicofChinaandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,
aSwisscooperative.Allrightsreserved.
3 Momentum:DrivingforcesinChinascarmarket
Chinesecompaniesarealsorespondingstronglytogovernmentproposalsto
developtheirowncarbrands.AllofthecountrysleadingcarmakersShanghai
AutomotiveIndustrialCorp,FirstAutoWorks,BeijingAutomotiveIndustry,
DongfengMotorGroupandGuangzhouAutomotivehavealreadyannounced
planstofollowthecountrysleadingindependentcarproducers,Cheryand
Geely,andarecreatingtheirownbrands.Despitethegovernmentswishesfor
thedomesticindustrytoconsolidate,newcarmakerscontinuetoarriveinthe
market.Itisestimatedthattheindustryhasmorethan100automanufacturers
competingwitheachother.
GermanysVolkswagenismakingastrongcomeback,afterseeingbothits
marketshareandprofitsdeclineforseveralsuccessiveyears,whiletheUSs
GeneralMotors,therecentpacemakeramongforeigncompanies,hasfoundit
toughertosustainbothsalesandprofitsoverthepasttwelvemonths.Japans
Toyota,meanwhile,ismakingrapidstridestowardsitstargetofclaiming10
percentmarketshareby2010.
Exportsarealsogrowingrapidly,withoverseassalesbeingdrivenbysalesof
domesticcarmakers,headedbyChery,tootheremergingmarketsaroundthe
world.Whiletotalexportsremainasmallproportionofoverallproduction,itisa
significantshareofoutputfromdomesticcarmakers.ThissuggeststhatChinese
brandedcarshavethepotentialtoestablishthemselvesontheroadsofmany
countriesinawaythatfewwouldhaveenvisagedjusthalfadecadeago.
Webelievethatthisautomotiveindustryupdatecontainsfreshandvaluable
insights.Asalways,wewillbedelightedtoreceivecommentsonthisresearch.
Nelson Fung Andrew Thomson
PartnerinCharge,IndustrialMarkets Partner
KPMGinChinaandHongKongSAR MemberofKPMGsGlobalAutomotive
SteeringGroup
KPMGinChinaandHongKongSAR
Acknowledgments:WewouldliketoacknowledgethevaluablecontributionmadebyAlexisZirah,
ManagerintheIndustrialMarketspracticeofKPMGinChinaandHongKongSAR,tothisindustryreport.
2007KPMGHuazhen,aSino-foreignjointventureinthePeople'sRepublicofChinaandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,
aSwisscooperative.Allrightsreserved.
45
40
35
30
25
20
15
10
5
0
2001 2002 2003 2004 2005 2006 2004 2005 2006 2007 2008 2009 2010 2011
31.1
26
21.6
14.3
17.7
8.8
11.3
7
0
500
1000
1500
2000
2500
3000

0
0
0

c
a
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3500
4000
4500
2,421
2,787
3,954
1,220
2,069
754
4 Momentum:DrivingforcesinChinascarmarket
Anexpandingmarket
Demandforpassengercarsshowsnosignofdecline.Inthefirst10monthsof
theyear,thecountrysautomakersproduced5.14millioncarsandsold5.08
millionup21.7percentand23.6percentrespectivelyoverthesameperiodof
2006,accordingtoindustryobserversSinocastChinaTransportationWatch.
2
Chinasdomesticcarmakerscontinuetogrowinprominence,withtheirtotal
sharepassing30percentinJuly2007,upfrom26percentin2006and22
percentin2004,accordingtoAutomotiveResourcesAsia.
3
Furthermore,in
March2007,CherydisplacedShanghaiGeneralMotorsatthetopofChinascar-
salesleague,selling44,568units,whileShanghaiGM,Chinastopcar-sellerin
2006,sold40,750units.
4
Chinascarproductionandsalesshownosignoflettingupoverthemedium
term.Thenumberofcarsper1,000peoplelookssettomorethandouble
betweentheendofthisyearand2011,whichmeansitwillbemorethanfour
timesthenumberitwasattheendof2004.Althoughanalystsseetheoverall
vehiclemarketslowing,thiswillonlyhappenafter2010,andeventhenitwillstill
maintaina15-20percentgrowthrate.
5
Tofeedthisgrowth,foreigncompaniesarecontinuingtoinvestinexpanding
capacity,particularlyforanevergreaterlocalisationofcomponent-manufacturing.
Mostrecently,inNovember2007,GMformedanotherjointventure,Shanghai
OnstarTelematicsCo.,withShanghaiAutomotiveIndustryCorp(SAIC)to
supplyin-vehiclesafety,securityandcommunicationsservices,suchasglobal
positioningsystemsandrelatedtechnologies,tothetwocompaniesprincipal
Chinajointventure,ShanghaiGM.Theventurewillbe40percentownedbyGM
throughitswholly-ownedsubsidiary,Onstar,with40percentheldbySAICand
20percentbyShanghaiGM.TotalinitialinvestmentwillbeUSD46million.
6
China passenger car sales, 2001-2006 Cars registered in China per 1,000 population
Source:NBS,AutomotiveResourcesAsia Source:SnapshotsInternationalLtd,EconomistIntelligenceUnit
7
2
Chinaautomotive:Chinabuiltover7mvehiclesinfirst10months,SinocastChinaTransportationWatch,14November2007.
3
ChinasCar-PriceWarsDentProfits,Wall Street Journal,18September2007;TheChinaAutomotivesReport,BusinessMonitor
International,2007.
4
The China Automotives Report,BusinessMonitorInternational,2007.
5
ChinasAutoSalesGrowthtoSlowDownBy2012,theautochannel.com,14November2007.
6
GM,SAIC,ShanghaiGMformOnStarjv,AFXAsia,29November2007.
7
AutoUpdateEIU,2007.
2007KPMGHuazhen,aSino-foreignjointventureinthePeople'sRepublicofChinaandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,
aSwisscooperative.Allrightsreserved.
5 Momentum:DrivingforcesinChinascarmarket
Markettrends
Toyotaperformedparticularlywellinthefirsttenmonthsof2007,selling
380,000unitsofitsCamry,up68percentoverthesameperiodof2006.This
gavethecompanytheconfidencetoraiseitstargetfor2008from500,000cars
to700,000.
8
CompetitionatthehighendofChinascarsalesleaguenowlooks
settochangefromarivalrybetweenGMandVolkswagentoafour-wayrace
betweenaGerman,US,JapaneseandChinesequartet.
Hondamayalsobepartofthatrace.Itcurrentlyhasamarketshareofaround
8percent,andsalesgrowthofsome32percentinthefirstthreequartersof
2007.GMsgrowthrateslowedin2007,recordingjust17percentinthefirst
ninemonthsoftheyear,
9
comparedwith32percentfor2006
10
and35percentin
2005.
11
Salesgrowthisnotbeingdrivenbydemandalone.Toclaimmarketshare,almost
everycompanyhascutprices,especiallyatthelowerendofthemarket.GMhas
beenamongthemostaggressive,slashingthepriceofitsChevroletSailby27
percentandstartingtoofferinterest-freefinancingforsomeofitsmodels.Geely,
withcutsofupto16percent,andSouthKoreasHyundai,withcutsofupto13
percent,havealsobeenveryactiveinmakingpricereductions.Volkswagenhas
reducedthepriceofitsPassatbyupto7percent.
12
Volkswagenismakingasignificantrecovery.Afterseeingmarketshareforits
twojointventuresonewithShanghaiAutomotiveIndustryCorpandthe
otherwithChangchun-basedFirstAutoWorksdropfromahighofaround50
percenttothelowteens,itsmarketshareincreasedonepercentagepointto18
percentonthebackofa25percentincreaseinsalesinthefirsthalfof2007.
13
Thecompanyisaimingtorespondtolow-costdomesticcompetitorsby
marketingarangeofcostattractivemodelsthroughitsSkodasubsidiary.Skoda
wentintoproductionearlierthisyearatShanghaiVolkswagen.However,this
remainsasmallpartofVWsChinaoutput,atjustover4,000carsinOctober
2007.
14
8
Toyotarevsupsalestarget50pc,South China Morning Post,20November2007.
9
GMtoopenlabforgreencars,China Daily,30October2007.
10
GM,Ford:ChinaSalesUpSharplyin2006,AssociatedPress,8January2007.
11
RecordChinasalescheeralimpingGM,International Herald Tribune,5January2006.
12
ChinasCar-PriceWarsDentProfits,Wall Street Journal,18September2007.
13
GreatleapforwardforVWinChina,Financial Times,29August2007.
14
SkodaChinasalesofOctaviasreach4,111inOctober,AFXAsia,19November2007.
2007KPMGHuazhen,aSino-foreignjointventureinthePeople'sRepublicofChinaandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,
aSwisscooperative.Allrightsreserved.
6 Momentum:DrivingforcesinChinascarmarket
Inthefirsthalfoftheyear,profitsatChinasleadingautomotivecompanies
rose66percenttoRMB109billiondespitepricecuts,accordingtotheChina
AssociationofAutomobileManufacturers.
15
Cheryledtheway,withariseof211
percent,followedbyGuangzhouAuto,whichhasjointventureswithToyotaand
Honda,withariseof150percent.VolkswagensChinaprofitsarereportedtobe
recoveringafterthecompanyembarkedonacampaignaimedatreducingcosts
by40percentinfouryears.
16
OneexceptiontothegeneraltrendwasGeely,whichreportedthatitsfirsthalf
netincomewasdown32percent,afallitattributedtoincreasedcompetition.
17
AnotherwasToyota,oneofthefewcompaniesnottocutpricesonitscars,
whichhasseenitsworldwideprofitsriseonthebackofincreasedChinasales.
18
Hondaistheoneothermajorcompanythathasavoidedpricecuts.
China passenger car sales, January-April 2007, brand share, %
Other,11%
Volkswagen,17%
Mazda,2%
Changan,2%
BYDAuto,2%
Kia,2%
Ford,3%
GM,10%
Haima,3%
Suzuki,3%
Geely,4%
Chery,8%
FAWXiali,4%
Peugeot-Citroen,4%
Toyota,8%
Nissan,5%
Hyundai,5% Honda,7%
Source:AutomotiveResourcesAsia
19
15
Autoindustryprofitrises65.79%despitepricecuts,China Daily,14August2007.
16
GreatleapforwardforVWinChina,Financial Times,29August2007.
17
ChinasCar-PriceWarsDentProfits,Wall Street Journal,18September2007.
18
ToyotaMayReportHigherProfitasChinaSalesRise,Bloomberg,6November2007.
19
China Automotive Report Executive Summary,JDPowerandAssociates/AutomotiveResearchAsia,May2007,page7.
2007KPMGHuazhen,aSino-foreignjointventureinthePeople'sRepublicofChinaandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,
aSwisscooperative.Allrightsreserved.
7 Momentum:DrivingforcesinChinascarmarket
Domesticstrengthening
Onetrendwhichlooksunlikelytoreverseisthegrowingstrengthofdomestic
carmanufacturers.WiththeChinesegovernmentdrawinguppoliciesaimed
atencouragingdomesticcompaniestodeveloptheirownbrands,eitherby
themselvesoraspartoftheirjointventureswithforeigncompanies,almost
allofChinasleadingcarmakersannouncedambitiousschemestofollowthis
strategy.
20
GuangzhouAutomobileIndustryGroup,whichoperatesjointventureswithboth
HondaandToyota,announcedinNovember2007thatitplannedtospendRMB
6billion(aboutUSD905million)onaresearchanddevelopmentcentreand
productionfacilityatPanyu,justsouthofGuangzhou,tostartmakingitsown
cars.
21
Thecompanysaiditsgoalwastocommenceproductionby2010.The
plantwillhaveaplannedannualcapacityof200,000cars.GuangzhouAutoand
HondahadearlierintheyearsaidtheywouldinvestJPY30billion(aboutUSD
245million)tobuildaresearchanddevelopmentcentretojointlydevelopanew
brandofcarsforChina.
22
ShanghaiAutomotiveIndustryCorp(SAIC)hadpreviouslyannouncedabond
issuetoraiseinvestmentforanewfactorywithanannualcapacityof270,000
carsand320,000enginestobedevelopedunderitsownbrandseparatefrom
itsjointventureswithGMandVolkswagen.InMarch,SAICbegansellingits
Roewe750series,acarbasedondesignsboughtfromBritainsMGRoverwhen
theUKcompanywentintoliquidation.NanjingMGMotor,partoftheNanjing
AutomobileGroup,alsobeganproducingitsfirstMGmodelsafterbuyingthe
brandfromtheUKsbankruptRoverin2005.Thecompanysaysproductionwill
besoldbothoverseasandonthedomesticmarket.
Anumberofotherdomesticcompanieshaveambitiousgrowthplans.For
example:
z FAWGroupCorp,aChinapartnerofVolkswagenAGandToyota,announced
planstospendRMB13billionovereightyearstodevelopcarsunderitsown
brand.
z DongfengMotor,whichhascar-makingjointventureswithNissanMotor,
HondaandPeugeotCitroen,isreportedtohaveplanstoinvestRMB7.6billion
inarangeofself-brandedcars.
z GreatWallMotor,Chinaslargestmakerofsportsutilityvehicles,isinvesting
RMB2.9billiontodevelopitsfirstself-brandedpassengercar.Thecompany
aimstobeinproductionthisyear,andhasalreadyannouncedatargetof
200,000carsalesby2009.
23
20
HondatoCreateBrandforChinaMarket,Asian Wall Street Journal,19July2007.
21
ChinasGuangzhouAutolaunches$916mlnown-brandplan,Reuters News,17November2007.
22
HondatoCreateBrandforChinaMarket,Asian Wall Street Journal,19July2007.
23
GreatWallgearsupforown-brandcar,South China Morning Post,22August2007.
2007KPMGHuazhen,aSino-foreignjointventureinthePeople'sRepublicofChinaandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,
aSwisscooperative.Allrightsreserved.
8 Momentum:DrivingforcesinChinascarmarket
Consolidationofthedomesticindustry,longforecast,ishappeningtoalimited
extent.Forexample,SAICandNanjingAutomobileCorpareindiscussionsabout
mergingtheirassets.However,newsmallcompaniesarealsobeingsetupby
businesseseagertoclaimastakeinChinasfast-growingcarmarket.Typicalof
thenewcomersisBYDAutomobile,asubsidiaryofaShenzhen-basedbattery
maker,whichmovedintotheautomotiveindustryafterbuyingasmallstate-
ownedcarmakerinnorthernChina.Itnowproducesasmallfour-doorpassenger
car,whichitsellsforjustunderUSD8,000.Despitesellingfewerthan60,000
carsinthefirstsevenmonthsof2007,ithasannounceditsambitiontoproduce
13millionvehiclesby2025morethanGM,theworldsbiggestcarmaker,
sellscurrently.
24
24
ChinasautostartupstargetToyota,Asia Times,6November2007.
2007KPMGHuazhen,aSino-foreignjointventureinthePeople'sRepublicofChinaandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,
aSwisscooperative.Allrightsreserved.
9 Momentum:DrivingforcesinChinascarmarket
Theautomotivecomponentssector
Chinasautomotivecomponentsindustryisalsogrowingstrongly,andeven
outpacingtheoutputofvehicles.Between2001and2005,its6,300orso
companieshadacompoundaveragegrowthrateofjustover30percent,leading
totheproductionofanestimatedUSD56billionworthofpartsin2006.Sales
couldgrowtoUSD161billionby2010,accordingtoonerecentmarketstudy.
25
Foreigncompanieshaveestablishedamajorpresence,includingfillingmorethan
halftheranksofthecountrystop100autocomponentsbusinesses.
26
Domestic
companieswithafewnotableexceptions,suchasHangzhou-basedWanxiang
Group(seepage10)continuetostrugglewithqualityandtechnologyissues.
Despitegovernmenteffortstoraisestandards,includingestablishingaChina
CompulsoryCertificationSysteminDecember2006,coveringkeyautomotive
components,thedomesticindustryhasfocusedonincreasinglow-endcapacity
ratherthanraisingstandards,withlowinvestmentinresearchanddevelopment
beingakeyreasonforthisweakness.Accordingtoareportpublishedby
just-auto.com,mostChinesecompaniesdevotelessthan2percentoftheir
annualbudgettoR&D,comparedtoaglobalnormof5-10percent.
InJuly2006,averagetariffsonimportsofcomponentswerecutby25percent,
inlinewithundertakingsmadeinChinasWorldTradeOrganisationaccession
terms.This,combinedwiththewidespreadpresenceofforeigncomponent
makers,shouldencouragelocalcompaniestoraisetheirstandards.Thegrowth
inexportsbydomesticcarmanufacturersshouldalsohelp,especiallyasthey
starttotargetdevelopedcountrymarketswithstrictersafetystandards.
Furtherstimulusshouldcomefromtheaftermarket,particularlyasasecond-
handmarketforms.TheaftermarketisforecasttoreachUSD5.2billionin2008,
upfromUSD3.2billionin2004.
25
25
Evalueserve,A Study on Investment in the Automobile Components Market in China,5January2007.
26
Chinasautopartsindustrygrowingupfast,China Economic Net,24November2006.
2007KPMGHuazhen,aSino-foreignjointventureinthePeople'sRepublicofChinaandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,
aSwisscooperative.Allrightsreserved.
10 Momentum:DrivingforcesinChinascarmarket
WanxiangGroup
WanxiangGroup,headquarteredintheeasterncityofHangzhou,established
itselfasChinaslargestprivateautomotivecomponentsmanufacturer,firstby
focusingonrealisingadominantshareofthedomesticmarketforitsprincipal
product,universaljoints,andthenthroughanaggressiveprogrammeof
acquisitionsoverseastomakeitselfaglobalcompany.
Inthe1980sand1990s,Wanxiangsmainemphasiswasonincreasingquality
andloweringitscosts.Intheprocess,itacquiredamarketshareofsome
70percentforuniversaljoints,andstartedsupplyingpartstoChinasleading
automotivejointventures,includingGMandFord.Butitwasinitiatingits
overseaspurchaseswithitsmaingoalbeingacquiringtechnology.In1998,
forexample,itboughtUSautocomponentsmakerSchillerforUSD19million,
andfollowedthiswiththeacquisitionsofUniversalAutomotivesIndustry(2001)
andRockfordPowertrain(2003),amongahostofothers.
27
WithrevenuesofUSD3.3billionin2006,thecompanyisnowamongthe
globaleliteofautocomponentsmakers,andislookingtofurtherstrengthenits
positionwithmoreacquisitions.InApril2007,itacquiredFordssteeringshaft
manufacturingdivision,andhasbeenindiscussionstobuypartsofDelphi,the
formercomponentsarmofGM,thoughnoagreementshadbeenreachedat
thetimeofwritingthisreport.
28
27
Dragons at Your Door,HarvardBusinessSchoolPress,2007,pages44-45.
28
HiddenGems:Wanxaing,Fiducia,November2007.
2007KPMGHuazhen,aSino-foreignjointventureinthePeople'sRepublicofChinaandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,
aSwisscooperative.Allrightsreserved.
11 Momentum:DrivingforcesinChinascarmarket
Thesecond-handcarmarket
DespitetheyouthofChinascarmarket,second-handsalesaregrowingeven
fasterthannewsalesup34percentin2006,to1.8millionunits.
29
With
theusedcarmarketsettokeepgrowingatanevenhigherratethanthenew
carmarket,automotive-relatedinternetbusinesseshavebecomeatargetof
investment.AccordingtoHongKongsSouthChinaMorningPost,venturecapital
firmshaveinvestedaroundUSD60millioninonlinecarsalesbusinesses,with
thebiggestsingleinvestmentsbeingUSD25millionfromaGoldmanSachs-led
groupintoChinacar.com.ThiswasfollowedbyaUSD10millioninvestmentby
NipponVentureCapitalCorpandDollCapitalManagementinbitauto.com
29
Thegovernmenthasforecastthattotalsecondhandcarsaleswouldreach5.3
millionunitsin2008,andin2005releasedregulationsaimedatensuringthe
developmentofanorderlymarket.
30
Thenumberofretailerspermitted,however,
remainsseverelyrestricted:inFebruary2007,forexample,Beijinghadjusttwo
used-cardealers,makingitunlikelythatthegovernmentstargetwouldbemet.
29
29
Autoleadsonlineused-carsaleMainlandpioneernavigatesroughroadinayoungmarket,South China Morning Post,27February2007.
30
Chinassecondhandcarmarketfaceshugepotential,Xinhua News Agency,22November2005.
2007KPMGHuazhen,aSino-foreignjointventureinthePeople'sRepublicofChinaandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,
aSwisscooperative.Allrightsreserved.
12 Momentum:DrivingforcesinChinascarmarket
Theexportcarmarket
Chinastotalvehicleexports,dominatedbyChinesedevelopedmodels,doubled
in2006to340,000unitsandareexpectedtoriseto500,000unitsin2007.
Passengercarsaccountedforaroundonequarterofthistotal,or90,000units,
lastyear.
31
CheryclaimstobeChinasbiggestsinglecarexporter,withoverseassalesof
morethan100,000units.Itsellsitscarsmainlyindevelopingcountrymarkets
inotherpartsofAsia,EasternEurope,theMiddleEastandCentralandSouth
America.Hondaexported24,000ofitsJazzmodelfromitsGuangzhoujoint
venture,HondaMotor(China).Itstargetfor2007wastoliftthistotalto43,000,
accordingtothecompany.
32
In2007DaimlerChryslersChryslerdivisionsignedanagreementwithChery
tohavetheChinesecompanyassemblesmallcarsforexportundertheDodge
brand.SalestoLatinAmericacouldstartasearlyas2008,withexportstothe
UnitedStatespossiblyfollowingbytheendof2009.
33
Thebiggestchallengefacingexportsofdomesticallydevelopedcarsissafety.
Inrecentyearsseveralmanufacturershaveperformedpoorlyinsafetytestsby
Europeanautomotiveassociations,suchasADACinGermany.
34
31
Chinadoublesautoexportsin2006,Xinhua New Agency,1January2007.
32
HondawillboostJazzexportsfromChinatoEurope,Automotive News Europe,April2007.
33
HondatoCreateBrandforChinaMarket,Asian Wall Street Journal,19July2007;CheryAssemblyDealMakesChrysleraModelin
ExportingFromChina,Wall Street Journal,5July2007.
34
AnotherChinesecarflunksGermancrashtest,Reuters,22June2007.
2007KPMGHuazhen,aSino-foreignjointventureinthePeople'sRepublicofChinaandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,
aSwisscooperative.Allrightsreserved.
13 Momentum:DrivingforcesinChinascarmarket
Keychallenges
WhiletheoverallgrowthanddevelopmentofChinascarindustrylooksassured
eventhegovernmentscurrentroundofmacroeconomictighteningisunlikely
todentgrowthinpassengercarsales,accordingtomostobservers
35
the
industrysmajorplayersfacesomeseverechallenges.
Pricingpressureisthemostimmediateofthese,withtheriseofCheryand
GeelyinparticularforcingmostoftheSino-foreignjointventurestocutpriceson
theirmodels.Giventhenumberofcompaniesalreadyinvolvedinproduction,and
theplansforcontinuedexpansionofcapacitybyalmosteveryoneofthem,price
cutsandloworzerointerestfinancingpackageswillremainakeyelementofthe
industry,ascompaniesfighttoclaimmarketshare.Itishardtoenvisageareturn
tothelevelsofprofitabilityenjoyedbyVolkswageninthe1990sandGMmore
recently.
Increasingthequalityofdomesticcomponentproductionisanothermajor
challenge,asnotedearlierinthisreport.Anypushtoraisestandardscouldbe
hinderedtosomedegreebytheemergenceofindependentdomesticcarmakers
lookingtochallengethegiantinternationalincumbentsonprice.Theexport
sectorcouldalsobehinderedifthequalityofcomponentsisnotliftedsufficiently
tomeetthesafetyandenvironmentalrequirementsofoverseasmarkets,
particularlyindevelopedcountries.
Forforeigncompanies,thegovernmentseffortstoencouragethedevelopment
ofnationalbrandscouldalsoproveamajorchallenge,especiallyifitraises
questionsoverthecommitmentoftheirpartnerstotheirjointventures.The
governmentshowsnosignofconsideringallowingforeigncompaniestoincrease
theirholdingsabovethecurrent50percentlimit.
Perhapsthebiggestsinglequestionmarkovertheindustrysfuturewillbehow
attitudestowardsenvironmentalprotectionevolve.Theindustrygrewthrough
the1990sandearly2000swithlittleconsiderationoftheimpactthatbringing
millionsofcarsontothecountrysroadswouldhaveontheenvironment.There
aresigns,however,thatthegovernmentmaymovetowardsembracingamore
sustainableviewofeconomicdevelopment.Combinedwithrisingpollutionlevels
andconcernsoverChinasincreasingrelianceonoilimports,thiscouldresultat
somepointinofficialsreconsideringthekindsofcarsmadeandusedinChina.
35
SeeforexampleGoldmanSachs,Chinaautomobiles:2008outlookremainsstable,Global Investment Research,30November2007.
2007KPMGHuazhen,aSino-foreignjointventureinthePeople'sRepublicofChinaandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,
aSwisscooperative.Allrightsreserved.
14 Momentum:DrivingforcesinChinascarmarket
Conclusion
NorbertMeyring
Chinacontinuestobehometotheworldsmostdynamiccarindustrynot
justintermsofgrowth,butalso,andmoresignificantly,inthepaceofstructural
change.
Inboththeshortandthemediumterm,themostimportantdevelopmentsare
likelytobethechangesinmarketsharebetweenthevariousmanufacturers,in
particularwhethertheindependentdomesticmanufacturers,CheryandGeely,
canmaintaintheirrapidgrowth,andthenwhetherbrandsdevelopedbythelarge
state-ownedcompaniescanemulatetheirsuccess.
TheglobalmanufacturerswillnotconcedetheChinamarketwithoutafight.As
Volkswagenhasdemonstrated,itispossibleforacompanytorecoverrapidlyifit
canrethinkitsstrategyandoverhaulitsoperations.Elsewhere,GMiscontinuing
toinvesttobuildonitssuccessofthelasthalfdecade,andJapanstwomarket
leaders,ToyotaandHonda,bothlookwell-positionedtomaintainthemomentum
theyhavedevelopedfromtheirfactories,particularlythoseinthesoutherncityof
Guangzhou.
Theevenbiggerstoryforthelong-term,however,looksasifitmightturnout
tobeChinasmovementtowardsembracingcleanercartechnology.WanGang,
appointedtheheadoftheMinistryofScienceandTechnologyinApril2007,has
madeitclearthatdevelopinganewgenerationofcleancarsisnowapriority
forthecountrysautomotiveindustry.FuelCellVehicles(FCVs)withzero
emissionsareoneoftheimportanttechnologiesforthefuturedevelopmentof
theautomobileindustryinChinaGangsaidinakeynotespeechmadeinearly
November.
36
WithcleanairbecomingapriorityforChina,andespeciallyitscapital,Beijing,in
therun-uptothe2008Olympics,perhapsthemostintriguingdevelopmentthe
countrysautomotiveindustrycouldwitnessoverthenextdecadeisadecisive
switchawayfromtheroleofoil-basedinternalcombustiontopowerthetensof
millionsofcarsthatwillappearonthecountrysroads.
Norbert Meyring
HeadofIndustrialMarkets
Shanghai
KPMGinChinaandHongKongSAR
36
Cleanenergycars:roadfordevelopmenthasChinesecharacteristics,Peoples Daily Online,20November2007.
2007KPMGHuazhen,aSino-foreignjointventureinthePeople'sRepublicofChinaandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,
aSwisscooperative.Allrightsreserved.
15 Momentum:DrivingforcesinChinascarmarket
AboutKPMG
KPMGisaglobalnetworkofprofessionalfirmsproviding
Audit,TaxandAdvisoryservices.Weoperatein145
countriesandhavemorethan123,000professionals
workinginmemberfirmsaroundtheworld.
KPMG in China and Hong Kong SAR
In1992,KPMGwasthefirstinternationalaccountingfirmtobegrantedajoint
venturelicenceinChina,andourHongKongoperationshavebeenestablished
forover60years.ThisearlycommitmenttotheChinamarket,togetherwithour
unwaveringfocusonquality,hasbeenthefoundationforaccumulatedindustry
experiencethatisdifficulttorival.
Withourexpandingnumberofofficesandmorethan7,000professionals,our
singlemanagementstructureacrossChinaandHongKongSARallowsefficient
andrapidallocationofresourceswhereveryouarelocated.Wehavethelargest
auditmarketshare,bymarketcapitalisation,ofthetop100HongKonglisted
companies.
37
Industrial Markets
KPMGisorganisedbyindustrylinesofbusinessacrossourofficestoprovide
in-depthindustryknowledgeandprofessionalshighlyexperiencedintheirsector.
Wearecommittedtoprovidingqualityservicestoourclients.OurIndustrial
Marketslineofbusinesshasaglobalnetworkcomprisingthemajorpractices
aroundtheworld.Thisnetworkgivesustheabilitytoprovideconsistentservices
toourclients,sharebestpracticeandprovidethoughtleadership,whilealways
maintainingastrongknowledgeoflocalissuesandmarkets.
KPMGs Automotive Team
KPMGsautomotiveteamdrawsonawealthofindustryspecificknowledge
andexperiencegainedfromworkingwithclientsacrosstheglobeinallmajor
markets.Weareabletoprovideclientstheconvenienceofsingularapproach
toperformanceassessmentandevaluationthatincorporatesseveraldiscrete
areasofexpertise,matchingclientsowninternalstructures.Weunderstandthe
dynamicsoftheindustry,whothekeystakeholdersare,includingimplications
ofthechallengingdealershiptoOEMrelationship,whatdrivesthemandhow
theseissuesneedtobeaddressedforeffectiveperformanceevaluation.KPMG
memberfirmsdonotprovidegenericassistance,butratherprovidespecific,
tailoredsupportandguidancethatreflectsindividualmarketrealities,industry
evolutionandever-changingcustomerpreferences.
37
Bloomberg,KPMGAnalysis31July2006.
2007KPMGHuazhen,aSino-foreignjointventureinthePeople'sRepublicofChinaandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,
aSwisscooperative.Allrightsreserved.
16 Momentum:DrivingforcesinChinascarmarket
Contactus
KPMGinChinaandHongKongSAR
Nelson Fung
PartnerinCharge
IndustrialMarkets
KPMGinChinaandHongKongSAR
Tel:+86(21)22122801
e-Mail:nelson.fung@kpmg.com.cn
Norbert Meyring
HeadofIndustrialMarkets,Shanghai
Tel:+86(21)22122707
e-Mail:norbert.meyring@kpmg.com.cn
Melvin Guen
HeadofIndustrialMarkets,Beijing
Tel:+86(10)85087019
e-Mail:melvin.guen@kpmg.com.cn
Ronald Sze
HeadofIndustrialMarkets,Guangzhou
ShenzhenandMacau
Tel:+86(755)25471063
e-Mail:ronald.sze@kpmg.com.cn
Andrew Thomson
Partner
MemberofKPMGsGlobalAutomotive
SteeringGroup
KPMGinChinaandHongKongSAR
Tel:+86(21)22122877
e-Mail:andrew.thomson@kpmg.com.cn
Paul Brough
PartnerinCharge
FinancialAdvisoryServices
KPMGinChinaandHongKongSAR
Tel:+85231219800
e-Mail:paul.brough@kpmg.com.hk
Stephen Lee
PartnerinCharge
RiskAdvisoryServices
KPMGinChinaandHongKongSAR
Tel:+85228267267
e-Mail:stephen.lee@kpmg.com.hk
Honson To
HeadofTransactionServices,Shanghai
Tel:+86(21)22122708
e-Mail:honson.to@kpmg.com.cn
John Lee
HeadofTax,Shanghai
Tel:+86(21)22123402
e-Mail:john.lee@kpmg.com.cn
Thomas Stanley
HeadofCommercialDueDiligence
Unit
KPMGinChinaandHongKongSAR
Tel:+86(21)22123884
e-Mail:thomas.stanley@kpmg.com.cn
2007KPMGHuazhen,aSino-foreignjointventureinthePeople'sRepublicofChinaandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,
aSwisscooperative.Allrightsreserved.
Theinformationcontainedhereinisofageneralnatureandisnotintendedtoaddressthe
circumstancesofanyparticularindividualorentity.Althoughweendeavourtoprovideaccurate
andtimelyinformation,therecanbenoguaranteethatsuchinformationisaccurateasofthedate
itisreceivedorthatitwillcontinuetobeaccurateinthefuture.Nooneshouldactuponsuch
informationwithoutappropriateprofessionaladviceafterathoroughexaminationoftheparticular
situation.
2007KPMGHuazhen,aSino-foreignjoint
ventureinthePeoplesRepublicofChina
andamemberfirmoftheKPMGnetwork
ofindependentmemberfirmsaffiliatedwith
KPMGInternational,aSwisscooperative.
Allrightsreserved.PrintedinthePeoples
RepublicofChina.
KPMGandtheKPMGlogoareregistered
trademarksofKPMGInternational,aSwiss
cooperative.
Publicationdate:December2007
www.kpmg.com.cn
www.kpmg.com.hk
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