South China Morning Post, January 21, 2015
The old automotive industry model – a way to provide mobility for middle-class consumers – no longer fits the China context, creating opportunities for innovation.
Bloomberg News, January 22, 2015
(Bloomberg) — Toyota Motor Corp., which fended off Volkswagen AG to remain the world’s top automaker in 2014, may lose the sales crown as early as this year as it falls behind in China, the world’s biggest auto market.
Toyota is predicting its global deliveries will decline 1 percent in 2015 to 10.15 million vehicles, or just 10,000 units more than what Volkswagen sold worldwide last year. A new factory the German company is opening this year in Changsha, China, will add capacity for another 300,000 vehicles annually.
As Volkswagen and General Motors Co. add factories to bolster their already-dominant position in China, Toyota President Akio Toyoda’s strategy of foregoing new car plants until at least next year could result in the first shakeup in auto-sales leadership since 2011. Toyota ranks sixth among global automakers in China and sells less than one-third as many vehicles as its two main competitors in China.
“The difference is that Volkswagen has a jet engine strapped to its back called ’China’,” said Bill Russo, Shanghai-based managing director at Gao Feng Advisory Co. “Toyota, unfortunately, is in a position of weakness when it comes to the China market. It would be almost impossible to hold on to a number one position without being in the lead in China, and Toyota’s not even in that league.”
Worldwide sales for Toyota, including at its Hino Motors Ltd. and Daihatsu Motor Co. units, climbed 3 percent to 10.23 million vehicles in 2014, according to a company statement. Volkswagen last week reported a 4.2 percent gain to 10.14 million vehicles, that included its two heavy-truck units. GM followed with sales of 9.92 million units, up 2.1 percent. Volkswagen and GM haven’t announced projections for this year.
Toyota, which hasn’t built an assembly plant in China since 2012 and faces a self-imposed moratorium on new factories until next year, will fall behind even further as Volkswagen and GM step up their expansion plans.
GM has announced plans to add five new plants in China by 2018 even though President Dan Ammann said the market is “maturing rapidly.”
Volkswagen expects to raise its China plant capacity to more than 4 million vehicles by 2018 from 3.1 million at end 2013, according to the company. Mainland China and Hong Kong accounted for a record 3.67 million deliveries at Volkswagen group last year, up 12.4 percent and extending the country’s lead as the German manufacturer’s largest single market.
By comparison, Toyota missed its sales projection for 1.1 million units in China in 2014, even as the Corolla and the Levin compact cars helped boost sales 13 percent to 1.03 million units. The company kept its China sales target unchanged for this year.
Even though Toyota may cede the sales leadership, it still outearns Volkswagen. Analysts estimate Toyota earned a profit of 1.96 trillion yen ($16.7 billion) last calendar year, compared with 10.7 billion euros ($12.4 billion) at Volkswagen.
“Their focus is not No. 1,” said Peggy Furusaka, a Tokyo-based auto-credit analyst at Moody’s Investors Service. “Toyota is more concerned about keeping profitability than chasing numbers. So for coming years, I wouldn’t be surprised to see Toyota selling fewer cars than Volkswagen.”
Toyota’s also-ran status in China is compounded by threats by its dealers to drop out of its network, citing poor sales and a lack of profit.
As many as 10 percent of dealers for one of Toyota’s China ventures could abandon the brand, according to the China Automobile Dealers Association. Among the 523 distributors in the FAW-Toyota Motor Sales Co. group, 95 percent are losing money, with some dealers stopping sales or shutting down altogether because of the losses, the state-backed dealer’s group said.
Vehicle sales growth slowed last year in China in tandem with the nation’s weakest economic growth since 1990. Deliveries are forecast to gain 8 percent to about 21.3 million passenger vehicles this year, according to the state-backed China Association of Automobile Manufacturers.
“As long as China is growing rapidly, Toyota will need to build new factories there,” said Yoshiaki Kawano, an analyst with IHS Automotive in Tokyo. “They are probably reserving some energy for growth in the longer term, as they are trying to improve the efficiency at their existing plants.”
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Business Insider, January 15, 2015
Echoing Musk’s explanation, Tesla communications chief Ricardo Reyes told Business Insider that “misperceptions about the ease of charging Model S were the main reason for the dip” in Chinese sales.
“To clear up those misperceptions, we are explaining the ease and convenience of charging and continue expanding the charging network in the country,” he said in an email.
While Reyes said that “overall China constitutes a small percentage of our sales for now,” the stakes for Tesla’s venture into China look large. Already the world’s biggest auto market, over 22 million cars were sold there in 2013 — accounting for over 25% of the global total.
The number of charging stations is indeed increasing. Quartz reports that the Chinese government has built 19,000 charging sites across China, while Tesla has placed 23 of its Supercharger stations in 10 Chinese cities.
To ramp up that infrastructure, Musk has struck deals with telecom operator China Unicom and real estate developer Soho China to build over 700 charging stations in 70 Chinese cities, reportedly giving China the second-largest charging infrastructure after the US.
In talks with Chinese auto industry analysts, Business Insider has learned that Tesla has a host of commercial and cultural hurdles to overcome if it’s going to succeed in the Chinese auto market.
The early adopters have already bought their cars. “In any new product intro, you get a lot of buzz early, where early adopters run out and put their money down, and then you have a period where it’s not new anymore” explained analyst Bill Russo, who served as the VP of Northeast Asia for Chrysler before moving into consulting. “The numbers are always skewed — the easy sales are the ones you get early on.”
The early adopter pool is comparatively small. “For the people in China who bought the Model S, it’s not their first car,” argued analyst Jochen Siebert. “It’s their third or fourth car, the same set of people who would buy a Porsche 911 — there’s only a certain percent of people who want to buy this car.”
Early numbers may be inflated by “scalper” intermediaries. In the same way that scalpers re-sell football game tickets at a markup, Russo explained that a scalper economy persists for auto imports in China. “When you have a limited quantity available, scalpers run in an buy a quantity of cars early on, they flip them to end users or buyers,” he said. “You see high numbers in the early stage, but you’re not getting a clear run rate until the market reaches level of maturity.”
There’s still lots of electric car anxiety. Siebert says that with any electric vehicle in China, there’s the anxiety of “when and where will I charge my vehicle.” Plus it’s harder to do personal charging stations in the China. Quartz reported that 74% of urbanized Chinese live in apartments instead of detached homes and “park their cars in shared garages where parking operators have deemed charging stations a fire hazard.”
The consumption isn’t conspicuous enough. While it seems strange, Siebert say that one of the biggest complaints about the Model S is that it’s not sufficiently braggable. “When Chinese rich buy cars, they want to show off,” he said. The Model S is 56.5 inches tall, so it’s a fairly small vehicle. He said that “the car that Chinese love” is the muscular Porsche Cayenne SUV, which stands at 67.4 inches. Porsche sold 37,425 cars in China in 2013, and a full 26,666 of them were the Cayenne SUV — accounting for over 70% of sales.
Tesla needs to learn from that. “The Tesla is an advertisement, but it’s not tall enough,” Siebert said. “the showoff value is too low.” Tesla has a better shot with the Model X SUV, slated to arrive in China in 2016, he said. With those upward-opening “Falcon” doors and a 64 inch height, it looks like a stronger bid to catch the eye of China’s newly rich.
The Financial Times, January 13, 2015
by Tom Mitchell
Multinational carmakers defied slowing economic growth in China last year, increasing their lead over Chinese rivals in the world’s largest automotive market.
Sales of passenger cars, SUVs and minivans increased 9.9 per cent year-on-year to 19.7m units in 2014, the Chinese Association of Automobile Manufacturers said on Monday. That was significantly below the 16 per cent annual growth recorded in 2013, when 10 times more cars were sold in China than in India.
Overall vehicle sales, including buses and trucks, increased 6.9 per cent to 23.5m units. CAAM projected the market would grow 7 per cent this year, to more than 25m vehicles.
Chinese carmakers have blamed a broader slowdown in the world’s second-largest economy for their own poor sales performance last year. In October, the government reported its slowest quarterly economic growth figure — of 7.3 per cent — in more than five years.
Sales of Chinese passenger sedans fell more than 17 per cent last year, leaving domestic brands with a market share of just 22 per cent in the segment, compared with a 27 per cent share for German brands.
Dong Yang, CAAM secretary-general, said Chinese drivers did not appreciate the improvements made by domestic brands this year. “They improved their products and reduced their prices,” Mr Dong said. “But Chinese people care too much about [the cache of foreign] brands. I think this trend will continue in 2015.”
Dealers on the mainland for some of the world’s most best-known car companies, such as BMW, have also cited slowing economic growth in their successful negotiations for bigger rebates and more modest sales targets.
But some analysts argue that their complaints are overdone as the overall sales figures mask a large and growing discrepancy between local and foreign brands, with the latter continuing to enjoy double-digit annual sales growth.
“We’ve got a market that’s 24m units in size and is growing at 7 per cent — we should be celebrating not lamenting,” said Bill Russo, a Shanghai-based automotive analyst. “The issue is that most of the growth is captured by foreign manufacturers while local players are fighting at the bottom of the pyramid.”
“Five per cent growth anywhere else in the world is considered great,” he added. “But here we complain about anything less than double-digit growth. In a market this big, that’s crazy.”
Volkswagen reported at the weekend that its sales in China increased 12.4 per cent to 3.67m units, accounting for almost 40 per cent of its global total.
On Monday, Jaguar Land Rover of the UK said that it had recorded a 28 per cent annual surge in China, its largest market, compared with a 9 per cent increase in overall sales. Owned by India’s Tata Motors, JLR opened its first manufacturing facility in China in October as it races to catch up with VW unit Audi, BMW and Daimler’s Mercedes-Benz, which together account for about 80 per cent of premium vehicle sales in China.
The Chinese government forces overseas car companies to operate joint ventures if they want to manufacture locally. Most have linked with large state-owned auto groups, which reap a steady flow of dividends from the partnerships but have failed to develop strong brands of their own.
Dow Jones Newswires, January 12, 2015
by Colum Murphy
DETROIT–China’s auto industry faces a second straight year of weaker growth after a sharp 2014 slowdown, according to an industry association and analysts, as car makers continue to grapple with a cooling economy and rising inventories.
The China Association of Automobile Manufacturers said Monday that it expects passenger-vehicle sales to rise 8% to 21.3 million vehicles this year, compared with 9.9% growth in 2014. While that pace is stronger than current outlooks for Europe and the U.S., it still marks a sharp slowdown from a 16% gain in 2013 and even higher rates in some previous years.
Jochen Siebert, managing director of consulting firm JSC Automotive, said Western auto makers get such a large share of profits from China, slower gains “could be a slap in their face as the market begins to stall and regulators put an end to extraordinary profits in the aftermarket business.”
Consultant IHS Automotive estimates that in 2013 China contributed about 59% of net profit at Volkswagen AG, 45% at BMW AG and 37% at General Motors Co. The car makers don’t separately disclose China profits.
BMW said China accounts for between 20% and 30% of its automotive-segment earnings, which excludes finance arm earnings. Ian Robertson, the German luxury-car maker’s global sales and marketing chief, said in an interview at the Detroit auto show that he expects BMW sales in China to rise at a moderate single-digit-percentage rate this year. Mr. Robertson said growth also was shifting among car segments, for example, to smaller luxury cars from larger models.
Volvo Car Corp. Chief Executive Håkan Samuelsson said it is important not to “over exaggerate” the effects of China’s slowdown. “It’s going to be tougher,” he said. “But there is still solid growth,” he added.
Mr. Samuelsson said growth in China’s premium-car market in 2015 of between 5% and 10% would be “more realistic.” Volvo expects its growth would outperform, but wouldn’t be as high as when its sales rose about 35% in 2014.
Analysts expect China’s slowing growth will weigh on auto sales over the course of the year. China’s gross domestic product is widely expected to rise 7.3% in 2014, the weakest since 1990, and further deceleration is likely, said economists.
“Sales growth of sedans has almost stalled in recent months because buyers of sedans are very vulnerable to the economic situation,” said Yale Zhang, managing director of consulting firm Automotive Foresight. In 2014, China’s sedan sales rose only 3% from a year earlier to 12.4 million cars.
Dealers including Xie Zongwei agree. “People are asking for greater discounts. I feel it’s getting more difficult to sell cars,” said Mr. Xie, who sells Chevrolet, Hyundai and Geely vehicles in Hebei province.
The China auto association offers a somewhat brighter outlook for commercial vehicles, which are more dependent on the property market. Overall, the group expects total sales of passenger and commercial vehicles to rise 7% to 25.13 million this year, compared with 6.9% last year.
The industry group’s estimates are largely in line with those of analysts. Business Monitor International, a unit of information-services firm Fitch Group, expects growth in China’s passenger-car sales to slow to 7% this year. LMC Automotive forecasts a 9% rise for the passenger-car market and IHS Automotive forecasts an 8% rise.
In addition to the economic deceleration, demand for cars is taking a hit from the increasing number of cities placing restrictions on car sales to tackle their worsening air-pollution and traffic problems.
In December, the affluent southern city of Shenzhen joined other urban centers in curbing car purchases. The city now caps the number of new cars at 100,000 vehicles a year, less than half of an estimated 250,000 new vehicles sold in 2014.
Cities that might follow suit this year include Chengdu, Suzhou, Nanjing and Xian, said Ways Consulting Co., a Guangzhou-based consulting firm focused on the Chinese automotive industry. Each of the cities has had more than 100 autos per kilometer on the road, said the consultancy, adding that the four cities sold more than 1.2 million new cars in the first 10 months of 2014.
The association’s figures track vehicles shipped to dealers rather than sold to consumers, and rising inventories in dealer lots suggest more cars are going unsold.
Dealers for some foreign car brands, including BMW, have complained about what they called too-high sales targets and have demanded financial support from car makers to tide them through the slowdown.
Johan de Nysschen, president of General Motors’ Cadillac unit, said dealers for the brand in China hadn’t asked for such payments. “[But] we should anticipate it. Dealers for all franchises have taken note of this development,” he said.
The latest data from the China Automobile Dealers Association show that stockpiles at China’s more than 22,000 dealerships jumped to 55 days in November, up from 44 days in October and the highest level since June 2012.
Bill Russo, managing director of consulting firm Gao Feng Advisory, advised against car companies putting all of their eggs in the China basket. But he said there weren’t too many options. “If you’re a global auto maker, where else can you go for growth other than China?”
Rose Yu and Lilian Lin contributed to this article.
Write to Rose Yu at firstname.lastname@example.org
Ward’s Auto, January 5, 2015
Chinese automaker Geely will sell about 3,000 units online in China in 2014, five years after launching Internet sales on the country’s leading e-commerce site.
“The impact of Internet firms has been a major success for the company,” Geely spokesman Ashley Sutcliffe says.
Consumers have embraced e-commerce in China, the world’s most networked country. They are willing to buy just about anything online, including cars, and thus a new distribution model is being created.
But don’t count traditional dealerships out. They still play a crucial role.
“E-commerce in the automotive market is taking off,” says Paul Hu, chief marketing officer for Greater China and ASEAN at Volkswagen Group China. “In my personal opinion, online sales in the total car market in China will account for 10% in the near future.”
Shanghai Volkswagen, one of VW’s joint ventures in China, sells cars online in China though a handful of sites. Customers place orders online, but pick up the vehicle at a dealership.
“We do believe that there is some disruption to come to the distribution model, but it is not imminent,” says Kyle Dickie, CEO of Sewells Group, a dealership best-practices consultancy. “In China, there is an unusually high level of trust still placed in the sales consultant. In other words, consumers still want to interact face to face.”
Smartphones are the disruptive agent. By the end of 2014 China was to have more than 500 million smartphone users, says Wang Xiangrong, an official with China’s State Internet Information Office.
Those phones are kept busy buying stuff. Beijing-based iResearch predicts 2014 online retail sales in China will surge 45.8% to RMB2.76 trillion ($444 billion).
The explosion of online commerce in China is aided by e-commerce giants such as Alibaba, Tencent and Baidu. All are playing a role in changing the vehicle-distribution model in China.
Alibaba owns Tmall, the country’s leading e-commerce site. Formerly called Taobao, it is the site where Geely launched Internet sales. Last year, Alibaba partnered with another Chinese automaker, SAIC, to create an Internet-enabled car.
Though consumers can buy a Geely car online, dealers still close the deal. “Consumers can pay a deposit or pay for cars outright online, (but) the official sale will be handled by the nearest dealer,” says Sutcliffe.
That allows the dealer to sell additional products to the buyer and also gives the customer a point of contact for aftersales service, he says. Geely has some 800 dealerships in China.
Demise of Dealerships From Ride Sharing?
Online sales aren’t what will cut dealers out of the sales loop, argues Bill Russo, managing director at consultancy Gao Feng in Shanghai. Business-to-consumer connected-transportation applications might, however. These basically are ride-sharing applications but in China taxi drivers are used.
“Empowered with technology, consumers of mobility services are likely to make choices other than what the automakers and their dealers are offering today,” says Russo.
China’s Internet giants are deeply involved in mobility services.
Alibaba is an investor in Kuaidi Dache, a taxi application that sometimes tops 6 million daily orders. Tencent offers the taxi app Didi Dache, which claims more than 100 million registered users and says it processes more than 5.2 million orders daily.
The Baidu search engine has 500 million monthly mobile users and offers Baidu Maps and Total View, which uses satellites to show actual locations. It is a Chinese version of Google Maps’ Street View; Google is blocked in China.
The U.S. ride-sharing service Uber has just entered the China market and will use Baidu’s maps and Street View.
Internet-savvy young Chinese increasingly are becoming accustomed to using such services, says Russo. They “are increasingly likely to opt out of traditional car-ownership hassles,” he says.
Geely is one automaker that is playing both sides. It owns London Taxi, a famous brand in the U.K. A few months ago it introduced a fleet of the vehicles in Shanghai.
The iconic taxis – which in Shanghai are gold, rather than black – are larger than regular taxis and equipped to accommodate wheelchair users or others with special needs, says Sutcliffe. Right now they can only be summoned using a phone.
“There are plans for an app,” Sutcliffe adds.
Gao Feng Insights Paper, January 2015
As we know, China’s economy has been growing dramatically for more than two decades. China is now the world’s second largest economy. Recently, we see rising concerns over the impact of a deceleration in overall economic growth, especially on the automotive sector.
China’s economic growth is likely to continue over the next decade, driven by a mix of continued (albeit more selective) fixed-asset investment and growth in consumption. Continued investment in infrastructure to support a more than 60% urbanized population is anticipated. Household consumption levels will rise as a result of the growth in the population of middle-class wage earners and overall rising incomes. A broad transformation is expected to continue and will present an environment that is characterized by a long term and sustained shift towards a middle-income, consumption-based economy. This trend would lead to a profoundly different economic landscape.
We believe discontinuities in the political, social and economic landscape have the potential to reshape China dramatically in the next decade. While the outlook is positive, there will likely be discontinuities – some upward and some downward – along the way. We believe that the key to sustainable success for businesses in China will depend on their ability to anticipate those trends and challenges that are in the “blind spots” today – but which can create disruptive threats or discontinuous opportunities for those who are able to respond rapidly. In essence, an “early warning system” is needed which leverages unique insights that can be brought to bear on the question of how the market, the regulatory system, and business models may develop over the next decade in China.
In this analysis, we will apply such a thought process to anticipate plausible scenarios for the China auto industry in 2025.
Click here to view the full paper:
Building the Internet if Vehicles and Related Smart Car Technologies in China
Date: Tuesday, January 13, 2015
Time: 10AM EST, 11PM China
Venue: Conference Call
Click here to register (sponsored by Coleman Research Group)
China is the world’s largest auto market and also has highest number of internet and smart phone users which will likely make it an innovator and incubator of smart car technologies. China’s urban transportation challenges, the high rate of adoption of connected mobile devices, combined with the rapid and aggressive introduction of alternative mobility and vehicle ownership concepts will ultimately compress the time needed to commercialize smart, connected car technologies and services. Investors, automakers and dealers are optimistic that these developments will dramatically revolutionize the Chinese auto market. As a result, OEMs are investing rapidly in the marketplace to gain first mover advantage in the most promising auto market in the world.
ABOUT OUR EXPERT:
Bill Russo is Managing Director and Automotive Practice Leader with Gao Feng Advisory Company, Ltd a China-based consultancy. He has more than 25 years of experience in the industry. Prior to this, he was VP of Chrysler Northeast Asia, where he successfully negotiated and secured government approval for six vehicle programs with three different Asian partners. In this time period, he launched a regional holding company as well as two distribution companies and oversaw the industrialization of the first Chrysler and Dodge-branded vehicles in Asia. He holds a U.S. patent for his innovative efforts towards reducing automotive new product development cycle time and is a published author and opinion leader whose viewpoints have appeared throughout several media outlets.
SHANGHAI—An executive at Warren Buffett -backed BYD Co. defended its business prospects after shares in the Chinese electric-car maker fell as much as 47% on Thursday.
In a conference call late Thursday, company secretary Qian Li said BYD’s operations were normal despite the share plunge and sought to dispel what he called rumors about the company. BYD’s Hong Kong-traded shares regained some ground later Thursday and finished at 25.05 Hong Kong dollars (US$3.23), down 29%.
Mr. Li described rumors circulating in the market about BYD—including suggestions that its founder and chairman had been arrested—as “ridiculous” and urged investors to ignore them.
He also dismissed talk of BYD having large exposure to the troubled Russia market, describing the company’s investment in that country as “very small.”
BYD also produces mobile-phone components and solar panels.
Asked whether the price movement could be related to a selloff in shares by Mr. Buffett’s Berkshire Hathaway investment vehicle, Mr. Li said BYD had been in recent contact with Mr. Buffett but there was no sign that Mr. Buffett was considering a sale. He added BYD didn’t reach Mr. Buffett on Thursday due to the time difference between China and the U.S.
Berkshire Hathaway owns a roughly 9% stake in BYD, according to previous company filings, including about one-quarter of its Hong Kong-traded shares. In the Chinese city of Shenzhen, BYD’s shares fell about 10% on Thursday, the daily limit.
In October, BYD reported a third-quarter profit drop of 26% and said it expects this year’s profit to fall by up to 22%. Auto-sales growth in China has slowed in recent months amid a broader drop in China’s economic momentum.
Overall in the first 11 months of 2014, BYD has sold 384,977 vehicles, down from 458,042 vehicles sold in the same period the year before—a 16% drop, according to data from research firm IHS Automotive.
While the company frequently touts its line of electric vehicles and plug-in hybrids—vehicles that can run on both gasoline and electricity—it relies heavily on sales of traditional gasoline engine cars for the lion’s share of its automotive revenue.
Bill Russo, managing director of consulting firm Gao Feng Advisory, said BYD, like many other Chinese car brands, need to create a brand that appeals to Chinese consumers. “It has to go beyond just being a cheap car,” he said.
Mr. Li said BYD faces “hot competition” and decreasing margins in the traditional car market in China but said it was transforming into a manufacturer of new-energy vehicles.
China has a long-stated goal of reducing its dependency on imported oil by promoting new-energy vehicles, including passenger cars and buses. China wants half a million such vehicles on the road by next year and 10 times that by the end of the decade.
But in the first nine months of this year, fewer than 40,000 electric vehicles were sold in China, according to data from the government-backed China Association of Automobile Manufacturers. Around three quarters of these were passenger cars. By comparison, around 14.2 million conventional passenger cars were sold in the period.
IHS Automotive researcher Namrita Chow said the high cost of replacing batteries, lack of adequate charging infrastructure and range anxiety—where buyers worry about how far they can travel on a single charge—are all obstacles in the path to high sales growth rates.
She said that BYD had doubled sales of its pure electric e6 car to 2,203 vehicles in the first 10 months of this year compared with the same period last year. Sales for the hybrid Qin had so far reached just over 11,000 vehicles in its first year on sale.
Mr. Li dismissed talk that the Chinese government could be reducing its support of new-energy vehicles, including buses, saying BYD continued to see good order flow for them. “We’re confident on the future of electric buses,” Mr. Li said.
A nearly 50% drop in oil prices over the past six months has pressured green stocks in a number of areas.
“With the oil price down, the global outlook for electric vehicles looks very different from just a couple of months ago,” said Jochen Siebert, a Shanghai-based managing director at JSC Automotive Consulting. “BYD’s electric and hybrid car business will likely be impacted,” he added.
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