China’s thriving SUV-only automaker looks to global growth

ASSOCIATED PRESS  / Feb 22, 2017, 03:06 AM

By JOE McDONALD AP Business Writer

In this photo, taken, Feb. 19, 2017, a worker assembles a Haval SUV H3 model at the Great Wall Motors assembly plant in Baoding in north China’s Hebei province. Great Wall Motors became China’s most profitable automaker by making almost nothing but low-priced SUVs. Now it wants to expand into global markets. (Photo by ANDY WONG/AP)

BAODING, China (AP) — Wei Jianjun is the chief matchmaker in China’s love affair with the SUV.

A decade ago, the chairman of Great Wall Motors Ltd. saw opportunity as the bulky vehicles began shedding their image in China as a farm tool. Wei cut back on making sedans and poured resources into its fledgling line of Havals.

That gamble paid off as SUVs caught on with drivers who saw them as the safest ride on bumpy, chaotic streets. By 2013, with demand surging, Great Wall had become China’s most profitable automaker and Wei was a billionaire.

Now, Wei wants to make the Haval a global brand. It’s an ambitious goal that requires advances in safety and features for a company known until now mainly for low prices. Great Wall sells Havals in Australia, Italy and Russia, but exports were less than 5 percent of last year’s output of just under 1.1 million units.

“By 2020, we hope Haval can become the world’s biggest specialty SUV brand,” Wei said at a reception at Great Wall headquarters in this city southwest of Beijing to celebrate sales passing the 1 million mark.

That “globalization strategy” includes working toward meeting American safety standards, Wei said. But he gave no indication when Haval might export to the United States or major European markets such as Germany.

Great Wall is part of a cadre of small but ambitious independent Chinese automakers that grew in the shadow of state-owned giants such as Shanghai Automotive Industries Corp., which assembles vehicles for General Motors Co. and Volkswagen AG.

Without foreign joint-venture partners, the independents created their own brands and started exporting to Africa and Latin America.

Geely Holding Ltd., which owns Sweden’s Volvo Cars, plans to start U.S. and European sales of its new Lynk & Co. brand in 2019. BYD Auto, the world’s biggest-selling electric car maker, supplies battery-powered buses and taxis in the United States and Europe. Great Wall opened a European assembly plant in Bulgaria in 2012. It has similar facilities with local partners in Russia, Indonesia, Iran, Egypt and Ecuador.

SUVs have an outsized role in China, where their popularity has helped offset sagging demand for sedans and other vehicles.

Sales of domestic brand SUVs soared 58 percent last year to 5.3 million units out of total sales of 24.4 million in the world’s biggest auto market. They are growing fastest in the lowest price ranges, dominated by Haval and Chinese rivals. That has helped Chinese brands to claw back market share they were losing to global competitors.

The top seller was Haval’s flagship H6, starting at 89,000 yuan ($12,900), which has become China’s most popular vehicle to date. H6 sales surged 55 percent last year to 580,000 units while the overall market grew 15 percent.

“They are definitely one of the most successful car companies in China,” said Yale Zhang, managing director of Automotive Foresight, a research firm.

“This company has some very special strengths,” Zhang said. “Of course, it also has weaknesses, because their products are focused on one model. But they are correcting that. They have tried very hard to cultivate another star product.”

Great Wall’s 2016 profit rose 31 percent to 10.5 billion yuan ($1.5 billion) on revenue of 98.6 billion yuan ($14.4 billion). Wei, 52, ranked No. 36 on the year’s Hurun List of China’s richest entrepreneurs, with a fortune estimated at $5.9 billion.

Begun in the 1980s as a collective that repaired and modified vehicles, Great Wall was bleeding cash when Wei, then 26, left his father’s business making industrial machinery and signed a deal in 1990 to take it over and share profits with the collective’s members.

The company launched a sedan in 1993. Its popular Deer brand pickup trucks were its first hit, in the late ’90s.

Its CEO, Wang Fengying, is a former saleswoman who worked her way up the ranks, becoming the first woman to lead an automaker a decade before GM Chairman and CEO Mary Barra.

Wei has a reputation for military-style discipline.

“He wants a quick decision and a thorough execution,” Zhang said. “This style is very different from large automotive companies, which can be a huge bureaucracy. This company definitely doesn’t have that weakness.”

Most of Great Wall’s 60,000 employees work at its Baoding factory complex, a 13-square-kilometer (5-square-mile) mini-city of assembly lines and workshops in long, pale yellow two- and three-story buildings.

A test track that wraps around the complex is banked to allow drivers to push vehicles to over 200 kph (125 mph).

“It’s an orderly, organized, very disciplined operation,” said Bill Russo, managing director of research firm Gao Feng Advisory. “You think, this isn’t China; this is what I would expect to see in Switzerland or Germany.”

Wei has emphasized product quality, in one case hiring Korean auto industry veterans to show Great Wall how to make better body panels, according to Russo, a former Chrysler executive. That has paid off by raising Haval’s image from entry-level to a mass-market brand that can charge higher prices.

“They have cracked that glass ceiling,” said Russo. “Their quality level is better than the basic Chinese car companies.”

Still, Great Wall’s market is increasingly crowded as Chinese rivals roll out dozens of new SUVs. Global brands including VW and GM are preparing to invade Haval’s segment with their own low-cost models.

Competitive pressures have reached a “deep red level,” Wei said.

The company is responding by trying to move up-market.

Haval opened a Shanghai design studio in 2013 and a Technology Center in Baoding, housed in a sleek glass tower with reflecting pools and a 23-story lobby. It includes engineering workshops, a wind tunnel and a low-pressure chamber that can mimic operating conditions up to 5,000 meters (16,500 feet) in altitude.

In November, Great Wall unveiled a premium brand, Wey, an alternate spelling of Wei’s name. It has yet to say how it will attract buyers to models expected to be priced above 200,000 yuan ($29,000).

Haval has struggled to lure drivers to its higher-priced models, such as its top-of-the-line H9, a seven-seater starting at 210,000 yuan ($30,600), that sold just 11,500 units last year. The H8, another full-size model, sold only 7,500 units.

In November, the company rolled out an updated H6, designed by a 50-member team led by Pierre Leclercq, a Belgian-born BMW veteran.

“The H6 is an extremely important product for us,” said Leclercq, the company’s senior vice president for design.

The company’s next rising star is the H2, a four-seat compact SUV that sold 197,000 units last year. But it starts at 87,000 yuan ($12,700), a step down in price instead of toward a higher market segment.

Great Wall also faces pressure from Chinese government rules that require improved fuel efficiency by 2020. That will hurt brands such as Haval that lack smaller models to improve the average of their product lineup.

In response, Great Wall has developed an electric car, the C30 EV, a compact sedan it says can go 200 kilometers (120 miles) on one charge. The company has yet to say when it might go on sale.

Trump Attacks BMW and Mercedes, but Auto Industry Is a Complex Target

The New York Times, January 16, 2017

A BMW at the New York International Auto Show in 2016. After praising German manufacturing prowess in an interview with Bild, President-elect Donald J. Trump threatened to impose a 35 percent tariff on every car that BMW imported to the United States.

BEIJING — In his latest criticism of what he sees as unfair trade, Donald J. Trump has taken aim at German cars. Why, the president-elect asked a German newspaper, do so many well-heeled drivers in New York drive a Mercedes-Benz, while Germans buy so few Chevrolets?

Mr. Trump’s question could set the stage for action by his incoming administration against the likes of Mercedes-Benz and BMW, which he criticized for its plans to build a new plant in Mexico. But the president-elect’s musing shows an incomplete understanding of how globalized the auto industry has become since Ronald Reagan went after Toyota and Honda in the 1980s.

That Mercedes-Benz in New York, for example, may have been made in Tuscaloosa, Ala., depending on the model. BMW has a plant in South Carolina that exports 70 percent of the vehicles made there, it says. And Germans might not buy many Chevrolets, which are no longer sold in Germany, but they buy plenty of Opels, which, like Chevy, is owned by General Motors.

Mr. Trump has criticized other companies and industries for moving production out of the United States at the expense of American jobs, such as appliance makers and pharmaceutical companies. But the vehicle industry in general — and particularly foreign automakers, his new target — illustrate how difficult it can be to parse American from international when criticizing global trade.

BMW and Mercedes-Benz — as well as the Japanese carmakers Honda, Nissan and Toyota — employ thousands of factory workers in Alabama, South Carolina, Texas and other states. G.M. gets more than a quarter of its auto-related sales outside North America, while Ford gets a third. Chrysler was bought by Fiat of Italy. Cars of all types increasingly have Chinese parts.

Nevertheless, Mr. Trump has been making a series of ever-broader demands that the auto industry manufacture in the United States to sell in the United States.

The president-elect’s latest comments came on Sunday in excerpts from an interview with the German tabloid newspaper Bild. After praising German manufacturing prowess, Mr. Trump threatened to impose a 35 percent tariff — he called it a “tax” — on every car that BMW imported to the United States. BMW should build the factory in the United States, Mr. Trump said, where it would benefit from his plans to slash corporate taxes.

Car exports are the lifeblood of the German economy, and the United States is one of the most important markets. New trade barriers would be a serious threat to German growth and could sour relations with one of the United States’ most important allies.

“We take his comments seriously,” Matthias Wissmann, president of the German Association of the Auto Industry, said in a statement. “Restrictions in the Nafta zone would put a real damper on the economy.”

In a post on Twitter on Sunday, Mr. Trump laid out his expectations for the auto industry: “Car companies and others, if they want to do business in our country, have to start making things here again. WIN!”

The main question lies in what Mr. Trump and his trade advisers decide to do once in office, auto industry officials and trade experts said. Measures to force manufacturers to shift assembly to United States factories and to use more American-made parts could drive up prices for American car buyers and make American vehicles less competitive in world markets.

“The people who lose are the core Trump supporters, who end up buying more expensive products,” said Bill Russo, a former chief executive of Chrysler China who is now the managing director for the automotive industry at Gao Feng Advisory Company, a Chinese consulting firm.

The German carmakers are hoping that, once Mr. Trump takes office, they will be able to convince him that tariffs on vehicle imports would hurt the American economy and get him to modify his views.

“We should seek a dialogue with Trump,” Clemens Fuest, president of the Ifo Institute, a research organization in Munich, said in an email. But Mr. Fuest also expressed concern that differences over trade could escalate.

“There is a danger that his policy fails and that he subsequently starts looking for scapegoats,” Mr. Fuest said. “One such scapegoat could be the German economy.”

In some respects, Mr. Trump has a point. The United States has been more open to imports than other large automotive markets, with the result that cars shipped in from abroad represent a considerably larger share of the American market than of markets elsewhere.

European governments have effectively limited imports by putting pressure on vehicle manufacturers not to close high-cost factories or to lay off workers. The Chinese government requires foreign automakers to partner with local manufacturers and sometimes requires them to transfer technology to Chinese companies.

Still, tailoring measures against the auto industry to create jobs in the United States could be difficult. For example, BMW’s Mexico plant would produce 3 Series sedans, which are currently made only in Germany and China. Most likely, the plant in Mexico would take jobs from the factories in Germany and China and create demand for components imported from the United States.

BMW is “very much at home in the U.S.A.,” Glenn Schmidt, a BMW spokesman, said in an email. Mercedes-Benz declined to comment.

The BMW factory site in San Luis Potosí, Mexico, is already swarming with construction workers rushing to make a 2019 deadline to begin production. There is little chance BMW will change its plans and move the assembly lines to the United States.

Mr. Trump’s comments hark back to the 1980s, when the Reagan administration criticized Japan for what it called unfair trade policies in the auto business. That compelled the Japanese government to set annual limits on the number of cars shipped to the United States.

Although President George Bush allowed Japan to drop the limits soon after taking office in 1989, the fights of the 1980s taught the global industry a valuable lesson: Made in America can be a good thing. Japanese and European automakers built assembly plants in the United States, taking the edge off political battles while creating tens of thousands of jobs in the country. Building plants in the United States helped in other areas as well, such as improving the foreign automakers’ logistics and moderating the impact from turbulence in currency markets.

BMW’s largest factory anywhere in the world is in Spartanburg, S.C. It employs nearly 9,000 people and exports 70 percent of the vehicles it makes, BMW says. Daimler makes Mercedes-Benz S.U.V.s and C-Class cars in Tuscaloosa, Ala., and it is building a new factory in Charleston, S.C., to manufacture Sprinter vans, creating more than 1,000 jobs.

Daimler, which also builds Freightliner trucks in the United States, has 22 factories or research and development centers in the United States that employ 22,000 people.

Even Volkswagen has not given up on the United States despite an emissions scandal that has led to $20 billion in civil settlements and criminal penalties. The carmaker, which has long produced cars in Mexico, is expanding a factory in Chattanooga, Tenn., to manufacture a new full-size S.U.V.

G.M. and Ford, meanwhile, saw big opportunities in places like China, where rapid economic development meant more people could afford cars.

A tough stance on autos from Mr. Trump may not have the same impact as that of President Reagan. Since the 1980s, automakers have made fewer of their own parts, buying them instead from hundreds of parts suppliers based all over the globe. That means an American car assembled in the United States could still have large chunks that are manufactured abroad.

Chinese manufacturers dominate the market for replacement parts in the United States, often undercutting prices for parts from the automakers by half or more. Tariffs on Chinese parts would end up being paid by Americans who took their cars in for repairs.

“U.S. consumers are paying a good price for their aftermarket parts,” because of Chinese providers, said Yale Zhang, the managing director of Automotive Foresight, a Shanghai-based consulting firm.

Global automakers’ assembly plants have been rapidly shifting orders from parts factories in the Midwest to plants in China in the last few years. But that trend could stop or reverse if Mr. Trump imposes sizable tariffs on those imports, Mr. Zhang said.

For any move Mr. Trump makes, the devil is in the details. Options include tariffs on imported cars and possibly car parts. He could also prompt a rewrite of the American tax code so that imports — but not exports — are taxed, a move known as border adjustment.

The architect of the Reagan administration’s restrictions on Japanese car imports and of a Reagan-era law that temporarily reduced taxes on exporters was Robert E. Lighthizer. Mr. Lighthizer was deputy United States trade representative at the time. He is now Mr. Trump’s choice to become the United States’ top trade negotiator.

China turns to second-hand cars to rev up consumption

The Financial Times, May 31, 2016

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As China revs up its shift to a consumption-led growth model, policymakers are trying to get more mileage out of a sputtering part of the economy: the used car market.

In most developed economies, sales of second-hand cars outnumber those of new vehicles by about two to one but the opposite is true in China, the world’s largest market for new vehicles.

“The majority of the vehicles in China are still owned by the first owner; secondary-owned vehicles are the minority,” says Bill Russo, a Shanghai-based consultant. “That is unlike any other country.”

To help stimulate the nascent market, Beijing recently introduced a policy that allows old cars from big cities to be resold in smaller ones, a move that will take full effect at the end of May. Previously, to protect local businesses, government regulations prevented cars being sold across provincial borders.

This will “open the pipeline”, according to Mr Russo. “Cars [in China] may be born in upper-tier regions but they tend to retire in lower-tier regions,” he said.

Though huge, China’s car market is in its infancy. Until 1984 it remained technically illegal for individuals to own a car and low personal wealth meant sales did not take off until the mid-2000s.

The country’s transition into a “new normal” of annual economic growth below 7 per cent following years of double-digit rises is potentially painful for carmakers accustomed to breakneck demand for new models. For used-car sales, however, newly thrifty consumers and a growing number of ageing vehicles are a promising combination.

China turns to second-hand cars to rev up consumption - FT.com Safari, Today at 11.57.42 AM

Rising supply, combined with government support and moves by manufacturers to encourage car-owners to upgrade sooner, promises to see the second-hand market grow at more than double the speed of that for new cars, according to Alex Klose, founder of JZWcars.com, a used car website.

The entrepreneur, Volvo’s former chief executive for China, set up his company in 2014 with the aim of becoming a trusted platform for a nascent market. “One thing holding people back from buying a used car is not knowing whether they can trust it,” he says.

Mr Klose is not alone in seeing the potential for second-hand cars. A flock of online platforms and technology start-ups have recently entered the sector.

“Everyone thinks that the space for growth in second-hand cars is very big — they think the sector is a very big cake,” says Li He, founder of Limiku.com, a used-car financing platform.

The government sees the used-car market as a way to boost consumption among those with lower incomes.

Mr Li, a tech industry veteran, believes online platforms are helping to improve the supply chain — a job he says big distributors are failing to do.

“The vast majority [of major distributors] have a second-hand car department but in reality they don’t have standards for the whole supply chain, including pricing and evaluation,” he says.

Big carmakers are now encouraging their dealerships to stop dragging their feet, however, as they seek a new source or profit for dealers.

Over-dependence on a single stream of revenue has sparked tensions between manufacturers and dealers in the past, when distributors asked for compensation for their losses during slow sales periods.

As dealerships look to evolve their business models, there is one set of people who are watching with trepidation: the original used-car salesmen.

Dong Wei has been selling used cars from his shoebox office at Beijing’s oldest and largest “old car market” since the 1990s.

“Before they [big dealerships] didn’t bother with second-hand cars, because the profits for new cars were so high,” he says. “Now they are starting to change their model.”

Mr Dong is nervous that disruption in the sector means the glory days for small-time salesmen are over.

“Before, the market would be full of people,” he says waving a hand at the unattended rows of shiny cars roasting in the heat. “These days, people prefer to go online.”

Click here to read this article at FT.com

CCTV News: Bill Russo Discusses China’s Auto Market and New Energy Vehicles

China Central Television China 24 Program,, April 25, 2016

 

China 24 04-26-2016 03:15 - CCTV News - CCTV.com English Safari, Today at 10.38.42 AM

 

A link to Bill Russo’s appearance on CCTV’s China 24 program.  Topics discussed included New Energy Vehicles, China’s auto market outlook, and vehicle exports.  Beijing Auto Show story begins at 8:25, and Mr. Russo’s appearance starts at 11:42.

Click here to watch the program at CCTV.com

 

 

Survival of the hugest: Chinese consumers seek safety in SUVs

AFP Newswires, April 25, 2016

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Maserati Levante sport-utility vehicles are offloaded in Hangzhou, eastern China’s Zhejiang province ©- (AFP/File)

Chinese drivers are rushing to buy sport-utility vehicles in an “arms race” for safety on the country’s hair-raising roads, analysts say, as SUV sales hit the gas despite a slowing economy.

SUV purchases in the world’s number one car market surged more than 50 percent in the first quarter of 2016 from a year earlier, while sedan sales fell 9.3 percent, according to industry data.

“The primary reason is a fairly primitive one,” says Robin Zhu, auto analyst at Sanford C. Bernstein in Hong Kong. “It’s about survival.

“It’s about people’s desire to feel safe on the roads. Because [SUVs] are bigger, and in low-speed collisions, from a consumer psychology point of view, you’d rather be the one in the SUV.”

Another 50 models new to the Chinese market will go into production in the country this year, according to consultancy IHS Automotive, many of them to be showcased at the Beijing Auto Show opening Monday.

China’s roads have a reputation for danger, with footage of horrific traffic accidents from the country’s ubiquitous surveillance cameras broadcast daily on television.

The World Health Organization estimates that more than a quarter of a million people are killed on the country’s roads every year — over four times official government statistics.

Death rates remain comparatively high because of inadequate rescue systems and poor treatment, according to a study by Chinese researchers published last year in medical journal The Lancet.

A businessman in an SUV in Beijing, who asked not to be named, told AFP he chose it “because it makes me feel safe when I drive”.

Bill Russo, automotive chief of advisory Gao Feng in Shanghai, said the appeal of an SUV comes from a feeling of “command” and the perception “you can deal with anything the road throws at you”.

Rising road rage on China’s congested streets has also made SUVs more popular, said Zhu. Traffic police handled more than 17 million cases of driver aggression last year, according to public security ministry statistics.

“There’s a bit of an arms race going on,” he explained.

– ‘Sedans on stilts’ –

Analysts say that while consumers in the US and other countries may be drawn by the image of SUVs going off-road in rough conditions, in China most of them are based on ordinary cars.

“The so-called SUVs today are sedans on stilts,” said Zhu.

More Chinese buyers have turned to SUVs as their fuel economy has improved and a drop in oil prices have made the vehicles more affordable to run.

The most popular models are “small, car-based crossover types”, said Russo, noting that “the vast majority” have engines smaller than 2.0 litres.

“They’re economical SUVs, they’re not big, gas-consuming environmentally unfriendly vehicles,” he said.

Chinese buyers are content with small engines in large bodies, said Michael Dunne, CEO and strategist at Dunne Automotive in Hong Kong.

Ten years ago educated urbanites preferred sedans because larger vehicles were associated with rural people and construction workers, he said. But in the last two years, SUVs have become “fashionable”.

“They’re not that interested in acceleration, passing, speed. They’re more interested in the look,” said Dunne.

But the boom may not last, executives warn. “Even if now the SUV is popular, in the future there will probably be a change,” said Toyota China head Hiroji Onishi, suggesting that minivans could see their appeal widen.

At the same time, while higher margins in the SUV segment have made the vehicles a driver of profits for foreign automakers, increasingly popular cheaper local models have made significant inroads in claiming market share.

Chinese companies such as Great Wall, Changan and Wuling have become national brands, Russo said, and in March six of the 10 top-selling SUVs were from Chinese firms.

According to association data, Chinese carmakers accounted for 60 percent of SUV sales in the first two months of the year, compared to only 20 percent of sedans.

The best-selling SUV in China, the Haval H6, costs from 88,000 yuan ($13,600) according to the company’s website. The best-selling foreign-brand SUV, the Volkswagen Tiguan, go for 200,000 yuan and up on major car sales portal Autohome.

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Carmakers seek inside edge in China

The Financial Times, April 24, 2016

 

Carmakers seek inside edge in China — FT Safari, Today at 8.56.04 AM

 

Carmakers are gearing up for a year of intense competition in China as the world’s largest auto market by sales faces both slowing growth and changing tastes in the form of electric cars and sports utility vehicles.

This time last year, global executives were bracing for a potential slowdown and a “new normal” of moderate sales growth to match a slowing mainland economy.

Fears became reality when the stock market rout last summer in China sent consumer sentiment into a nosedive. Sales dropped year on year from June to August, before a tax cut for small-engine vehicles in October propped up sales to finish 2015 with a growth rate of 4.7 per cent year-on-year.

After a bumpy run, global carmakers at the biennial Beijing International Automotive Exhibition, which opens on Monday, are keen to prove they are well positioned in China’s rapidly maturing market.

Shifting consumption patterns have made SUVs one of the country’s most promising growth segments, with sales surging by more than 50 per cent in the first quarter of 2016 compared with the same period last year, in contrast to sedan sales which declined 1 per cent.

That mirrors the growing popularity of gas-guzzling SUVs elsewhere in the world as fuel costs have followed the price of oil lower.

The shift has helped established a beachhead for local automakers, according to Bill Russo, a Shanghai-based consultant.

“For sedans, multinationals had the advantage but for utility vehicles seven out of the top 10 models are Chinese brands” thanks to their lower costs, he says. The trend is here to stay, he adds: “Utility is like a drug — once you have it, you’re hooked”.

The move has put pressure on foreign brands as local carmakers have also improved their quality significantly in recent years, according to analysts.

“Multinationals are in a dilemma over whether to cut costs to compete,” says Yale Zhang, a Shanghai-based consultant.

Domestic automakers are looking to expand on their newly privileged position. IHS Automotive predicts production of 50 new SUV models to be launched in China this year and says that 78 per cent of these will be domestic brands.

Global automakers are already revving up efforts to regain ground by bringing their most successful top-end models from home. Ford, for instance, will use the Beijing Expo to launch its F-150 Raptor in China, a popular pick-up truck in the US, as part of efforts to “inspire a generation of off-road enthusiasts,” says John Lawler, chief executive of Ford Motor China.

But bigger is not the only way carmakers hope to do better in the Chinese market: electric cars also remain a priority for any auto brand looking to get ahead.

While they are still only a small segment of the overall market, greater numbers of “new energy vehicles” are a strategic goal for Beijing even if the demand is not yet there.

The government is aiming for yearly sales to top 3m units by 2025, after growth of nearly 300 per cent in 2015 to 330,000.

Li Keqiang, China’s premier, said in February that the government would step up support for the electric vehicle industry by shifting funds away from subsidies for production to rewarding companies that come up with new technologies and hit sales targets.

“Everyone is under pressure to show their latest NEV [new energy vehicle] models” at the Beijing Expo, says Janet Lewis of Macquarie. But margins will remain low for electric vehicles for a few years to come, she adds. “Right now, selling NEVs is not a profitable proposition.”

A survey from McKinsey suggests that electric vehicles are gaining traction, helped by government policies that make it easier to get a licence plate for electric vehicles in China’s largest cities.

As in the SUV segment, foreign leaders still face local competition. LeEco, a Chinese tech company, became the latest to enter the space, last week announcing a new all-electric concept car christened LeSEE.

“These [technology] companies are almost on par with Silicon Valley,” says Clemens Wasner at EFS, a consultancy. “In a western country their entry into the market would not be economically viable, but in China it might be.”

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Automakers Expanding in China May Soon Face Weakening Demand

The New York Times, March 28, 2016

by Keith Bradsher

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A Cadillac exhibited under water with goldfish in Guangzhou, China. Automakers have pinned their hopes on China, but its economy is cooling. CreditZhong Zhi/Getty Images 

 

SHANGHAI — The new $1.3 billion Cadillac factory on the outskirts of Shanghai is a shrine to modern manufacturing, the kind of facility that automakers all over the world dream of building but can seldom afford.

Hundreds of robots bend, arch and twist to assemble the body of Cadillac’s new flagship CT6. Lasers seal the car’s lightweight aluminum exterior using techniques that the carmaker, General Motors, has only just introduced in the United States. Yardlong, bright yellow robots like mechanical Alaskan huskies tow five-foot-tall carts of auto parts to the assembly line.

“It’s more along the lines of aircraft technology than traditional, spot-welded steel bodies,” said Paul Buetow, G.M.’s head of manufacturing in China, as he strode along the assembly line.

The factory is part of an aggressive expansion by automakers in China, the world’s largest market for new cars and the industry’s brightest hope for the last 15 years. But the country’s economy is now cooling, which could leave carmakers with too many factories and not enough buyers.

G.M. will open a second, $1 billion factory in Wuhan next year. G.M.’s main rival in the Chinese market, Volkswagen, plans to open large assembly plants next year alongside its existing factories in the cities of Foshan, Ningbo and Yizheng and build one in Qingdao by 2018. Hyundai plans to complete a factory south of Beijing by October and another in Chongqing next year, while Chinese automakers like Great Wall and Changan are aggressively adding capacity.

The research firm Sanford Bernstein estimates that auto manufacturing capacity in China will rise 22 percent over the next two years, bringing it to 28.8 million cars, minivans and sport utility vehicles annually. That is almost equal to the American and European markets combined, and greater than even the most optimistic forecasts: that sales in China will reach about 25 million next year.

Automakers are expanding at a time when China’s economic growth has slowed to its lowest level in more than a quarter-century. China is closing coal mines across the country and plans to shutter steel mills. Exports are falling. Many Chinese cities are dotted with empty apartment buildings. Worried about pollution and traffic jams, China’s wealthiest metropolises have begun limiting the number of new cars that may be registered.

On the surface, auto sales in China seem strong. More Chinese families can afford cars and are flocking to showrooms. Sales of cars, minivans and sport utility vehicles jumped 8 percent last year from 2014.

The buyers are not just China’s college-educated, white-collar elite, but also the beneficiaries of the country’s roughly eightfold growth in blue-collar wages in the last dozen years. Zhou Genkou, a burly truck driver, recently waited in a Volkswagen dealership to pay $12,300 for a new white Santana sedan. He explained that he could not tolerate life without a car.

“It’s so that we don’t have to walk,” he said.

But there are signs that China’s yearslong auto boom is easing.

After car sales fell three months in a row, the Chinese government decided last September to halve the sales tax on cars with engines of 1.6 liters or less, to 5 percent through the end of 2016. The main beneficiaries have been domestic Chinese automakers, mostly affiliated with municipal or provincial governments, that churn out cheap subcompacts with small engines.

A similar tax reduction produced strong sales in 2009 and 2010. But it mainly encouraged consumers to buy sooner. When the tax cut expired, sales essentially leveled off for the next two years.

With the current tax reduction scheduled to end, “2017 will be a very difficult year for the auto industry, probably no growth,” said Yale Zhang, the managing director of Automotive Foresight, a Shanghai consulting firm.

Multinationals are focusing more on higher-profit segments that are growing without help from such incentives. But they are also finishing up a factory-building spree that started three years ago, when the economy was healthier.

“We see China moving to a pace of what I would call moderate growth,” said Matthew Tsien, the G.M. executive vice president who oversees the company’s China business.

Volkswagen forecasts that China’s auto market will grow slightly faster than the overall economy this year and slightly slower than the overall economy for the rest of the decade. G.M. is forecasting that the market will grow a little less than 5 percent a year through the end of the decade, the equivalent of adding the entire auto market of Japan, or five Australias.

Both automakers are planning to meet much of that growth with factories they have already commissioned or will soon finish. But if the economy weakens significantly, the industry could get stuck with a large amount of excess capacity.

“Are manufacturers going to keep the rose-colored glasses or get real? Most of the multinationals are going to get real and slow down the new capacity,” said Bill Russo, former chief executive of Chrysler China and now a consultant. “I’m not sure about the local manufacturers. They have a ‘Field of Dreams’ and ‘build it and they will come’ mentality.”

Chinese auto industry leaders shrug off such concerns. “They see the small-car market as having a lot of potential,” said Cui Dongshu, the secretary general of the China Passenger Car Association.

The Chinese economy needs continued strength in the auto market. The government wants to shift to a new, more sustainable model for growth based on consumer spending.

Since 2009, China has depended heavily on a loan-fed surge in construction of ever more highways, rail lines, factories and other investments. But that has produced a mountain of debt, particularly at state-owned enterprises.

Strong auto sales helped China attain a little-noticed milestone in recent months. Overall retail sales of consumer goods in China surpassed such sales in the United States, according to official data.

If sales do slow sharply, the question is whether multinationals and domestic automakers will try to start exporting more from their Chinese factories. The facilities are among the most advanced in the world, not least because they are also the newest.

G.M. and other automakers could in theory try to export more cars to the United States, which is also a relatively healthy market. One potential obstacle, however, is that China’s surplus capacity is mainly in subcompact cars, for which Americans have little appetite.

G.M. is already preparing to start shipping a new car-based sport utility vehicle, the Buick Envision, from China to the United States, from a factory in northeastern China. The arrival of the Envision, which is being built only in China, Buick’s biggest market by far, will be the mass market debut of Chinese-built cars in Big Three showrooms in the United States.

The preferences of Chinese consumers tend to be different from those of American buyers. Chinese customers, for example, are highly prone to complain if fabrics and other materials in a car’s interior do not smell quite right, according to surveys by J. D. Power & Associates. Many in the auto industry have said they will be watching how American buyers respond to Chinese-built Envisions.

“So will we,” said Mr. Buetow of G.M.

GM, Ford China Car Sales Decline in February

The Wall Street Journal, March 7, 2016

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Many car makers posted declining sales in China in February. Above, a SAIC-GM-Wuling Automobile manufacturing plant in Qingdao, Shandong Province. Photo: European Pressphoto Agency

By Christina Rogers

General Motors Co. and Ford Motor Co. both posted steep sales declines in China last month on a year-over-year basis, part of a wider slowdown attributed in part to a drop-off around the Lunar New Year holiday.

Sales for both U.S. car makers fell 9% in February, the companies said, following a string of monthly gains driven by new government subsidies introduced late last year to stimulate demand for fuel-efficient cars.

China’s auto market has bounced back from a slump in the summer of 2015 due to the incentives, which can be applied to 70% of cars sold in the country. But the recent sales declines raise a potential red flag, signaling the world’s largest new-car market could be permanently cooling amid the country’s slowing economic growth.

Through the first two months of 2016, GM and Ford sales rose 11% and 18%, respectively, the companies said. Analysts typically look at January and February sales together to account for the disruption caused by the New Year holiday. The China Association of Automobile Manufacturers will report official February new-vehicle sales in China for all car makers later this month.

Other auto makers also posted declines in February, including Hyundai Motor Co. and Mazda Motor Corp. Sales for SAIC Corp., China’s largest domestic auto maker, dropped 7%, dented by declines reported by joint-venture partners GM and Volkswagen AG , both market leaders in the country.

China car-sales reached a new high in 2015, rising 7.3% from a year earlier to 24.6 million. But the growth rate was slower than the double-digit gains recorded in 2013 and 2014.

The China auto makers’ association projects passenger-car sales in 2016 will expand 7.8% to 22.76 million. Car makers have rushed to build factories and boost production in China, hoping to tap surging demand for new cars created by a rising middle class and rapid urbanization in what is considered one of the industry’s most profitable markets outside the U.S.

January was a particularly strong month for auto makers in China, with sales up 9.3% from a year earlier, as buyers snapped up new-cars before the holiday. Travel tends to be heavy around the holiday, contributing to a decline in showroom traffic last month.

“It’s like a vacuum effect in February,” said Nigel Griffiths, chief automotive economist for researcher IHS Automotive. March results will be the real test to see whether demand created by the government stimulus is starting to fizzle, Mr. Nigel said.

IHS Automotive has issued a cautious forecast for new-car sales in China this year, with growth likely to benefit only certain auto makers. Demand is also starting to shift to local brands with a number of global auto makers posting weaker sales of late.

Ford has 4% of the market in China and recently completed a $5 billion expansion to build new factories and add models. The Dearborn, Mich., auto maker also plans to spend another $1.8 billion on research and development there. GM, Ford’s crosstown rival and among the largest sellers in China, is also trying to increase market share with new models and an expanded lineup of Cadillac luxury vehicles.

“It is a very densely crowded market,” particularly on factory capacity, that can dent sales and profits across auto makers, said Bill Russo, a managing partner with consultants Gao Feng Advisory.

Government tax incentives are helping to prop up new-car demand in China this year but the subsidies only last through December, analysts say.

China’s secret weapon: used car salesmen

The Financial Times, March 1, 2016
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You have probably read, in the Financial Times and elsewhere, that China is the world’s largest car market.

It is not. It is the world’s largest new car market, with sales of 21.1m units last year compared with 17.4m in the US. When used cars are included, the US auto market swells to more than 40m units, against less than 30m total passenger car sales in China.

In value terms, the gap between the two markets is even larger. In 2014, the overall value of US car sales was almost $1.2tn, more than twice as large as China’s $470bn.

This is not surprising, considering that two-thirds of cars on Chinese roads are less than five years old and 80 per cent of all buyers are first-time drivers. The latter fact explains why crossing an intersection in China can be a harrowing experience for pedestrians.

Put another way, an industry that most Americans, Europeans and Japanese have grown up with and now take for granted does not yet even exist in China. Dismiss a shady character as a “used car salesman” and most Chinese people will not understand the reference.

As Chinese leaders gather at their annual parliamentary session later this week, it is worth bearing in mind that they are doing so in a country where one cannot very easily buy a used car.

That fact should reassure Chinese politicians and multinational executives worried about the pace of growth in the world’s second-largest economy, which will be a topic of much discussion at the National People’s Congress.

Government officials insist that the rising “new economy” will balance out the declining “old economy”, allowing the country to grow at an average rate of 6.5 per cent through 2020. The creation of entirely new industries will further support growth.

The inevitable rise of what will soon be the world’s largest used car market is one such example. While its emergence will initially cannibalise some new car sales — primarily those of cheap domestic brands — the potential for growth is huge. In most developed auto markets, there are at least two used car sales for every one new car sale. In China the ratio is inverted, with roughly three new car transactions for every used car sold.

Another new industry whose time should come soon is China’s private jet sector, which is a fraction of the size of its US counterpart.

But the development of business aviation has been constrained in China by the military’s grip on airspace and many of the smaller airports best suited for private jets. Similarly, a giant new used car market will not spring up by itself. Complicated financial reforms will need to be hammered out in order to facilitate its development.

As Janet Lewis at Macquarie Securities in Hong Kong points out, while regulations governing the sale of used cars vary from province to province, in general dealers must act as brokers between sellers and buyers. That is because value added tax would be incurred if they took temporary ownership of vehicles, putting further strain on already tight cash flows.

When such wrinkles are finally ironed out, the inevitable surge in Chinese used car sales will also benefit car manufacturers now contending with a “new normal” of falling margins in what has historically been their most lucrative market.

In developed economies, ancillary activities including maintenance, trade-ins and used car sales have helped dealers sustain profits as new car margins are squeezed. But in China dealers have too often been, as industry consultant Bill Russo puts it, “dogs who just want to be fed”, solely reliant on buoyant new car demand.

When the going got tougher over recent years, dealers demanded ever bigger discounts and one-off subsidies from their manufacturer suppliers. By contrast, in the boom years after the global financial crisis, China was one of the few countries where to own a car dealership was to collect a lazy economic rent. The pickings were so easy that in at least one recent high-profile corruption case, a senior official’s son was gifted a stake in a Toyota dealership.

The emergence of a proper Chinese used car market will help everyone from the ruling Communist party by boosting economic growth, to the world’s largest multinational carmakers by boosting dealer profits. Who knew that used car salesmen could be such an asset to society?

tom.mitchell@ft.com

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