China's car craze

AS CHINA'S AUTOMOTIVE INDUSTRY CONTINUES TO GROW, NEW CHALLENGES AWAIT BOTH DOMESTIC AND FOREIGN CARMARKETS.

The importance of China's automotive market is undisputed. It is one of the growth pillars of China's economy, even though domestic companies only partially contribute to its success. At the same time, the market is just as important for the dominant international automotive companies. The sales numbers of German carmaker Audi impressively prove this point: from January to September this year, Audi has sold more cars in China than in the US.

Key growth drivers

The massive potential of China's domestic car market becomes clear when looking at the number of car owners: only seven Chinese out of 1,000 own a car, a quota that the US reached in 1915. Yet by 2014, total car ownership in China is estimated to rank fourth in the world after the US, Japan and Germany with a quota of more than 50 owners per 1,000 Chinese.

Rising income levels and the emergence of a new middle class of potential car buyers make further market growth a safe bet. In addition, China holds structural advantages that put it ahead of other developing economies: its favourable geographic location in the heart of Asia will guarantee strong demand for the next decades. The momentum of China's economy supports growth in one of its key industries, the automotive market. The country's strongest comparative advantages (low labour costs, comprehensive infrastructure and a smooth-running supply chain system) will further help channelling this growth into the right areas.

According to Xu Heyi, chairman of the Beijing Auto Industry Holding, these areas of future growth should aim to tackle the dominance of international auto companies. Two major fields of development are strategic alliances between domestic carmakers and the emergence of car hubs, where the majority of all auto-related manufacturing, export, financing and R&D activities are concentrated. The third one is consolidation. With many international car joint ventures holding a prominent spot in China, the market is fiercely competitive. Even though Chinese automakers saw their total profits grow 66 percent in the first half of 2007, smaller manufacturers will disappear, leaving bigger rivals such as Chery or Brilliance with room for growth and market share.

The industry is up for a rocky ride

Hand in hand with the challenge of consolidation come other "growing pains" for China's automotive industry. Two major challenges are the provision of energy for the rising number of cars and the ecological consequences resulting from pollution caused by exhaust fumes. The Chinese government is trying to tackle these challenges by promoting energy-saving and eco-friendly vehicles as the 11th Five-Year Plan puts a strong focus on sustainable development of key industry sectors. The imbalanced traffic distribution ?between the congested areas around Beijing or Shanghai on the one hand and the empty expressways in the West on the other ?will prove to be another problem.

There are also headaches on the moneymaking side of things. In certain sectors of the car industry, especially the small and compact classes, sales figures are not increasing as much as expected, forcing companies to correct their annual production targets. A Citigroup analyst said that "the 2007 car market has disappointed the majority of car assemblers in China". The main reasons are high raw material costs and price wars in the extremely competitive market. As a result, the market picture looks contradictory: despite a constant and overall strong growth, manufacturers' margins are falling.

Successful foreigner

One example that shows how foreign carmakers can profit from China's car market is PSA Peugeot Citroen. The French automotive company has lived through the early pains of operating in China, adjusted its strategy to fit the market conditions and is now not only reaping profits but also sees China as a major market for its future growth. The 1996 joint venture with Dongfeng Motors, DPCA (Dongfeng Peugeot Citroen Automobiles) initially worked below capacity, because the market developed slower than expected and the product didn't appeal to consumers. In addition, DPCA imported most components from Europe. The switch of their sourcing strategy to local suppliers proved to be the right decision and by lowering production cost DCPA has increased profitability and competitiveness.

The Chinese and their cars

Chinese buyers are different. The average car customer in China uses word of mouth and the internet as main information sources before purchase. Sales methods that are normaly used to create brand awareness and brand loyalty such as advertising campaigns or car magazines rank far behind. Trade shows are the only chance for automotive companies to leave a brand imprint in their customers' heads, giving events like the Shanghai or Beijing Auto Shows their prime position. Many buyers are now able to afford a car for the first time in their lives. Therefore it is not surprising that this purchase serves as a status symbol making luxury car sellers' profits go through the roof. Last year, high-end carmaker Rolls-Royce sold more of their vehicles in China than anywhere else in the world. The Chinese also show another trait unfamiliar to international car sellers: 90% of buyers still prefer to pay in cash - even though many of them have access to loan models provided by financing departments of international carmakers.

But not only the buying behaviour of the Chinese is unusual. A popular phenomenon amongst car owners in China is the emergence of so-called auto clubs. These organised driving trips can go on for as long as two weeks and solely serve one purpose ?driving as entertainment.

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