China’s automotive industry has entered a new phase where new car sales growth decelerates, while the car population expands and the average car age increases. This brings enormous opportunities for expansion of the independent aftermarket.
In this paper, we examine the complexity of China’s independent aftermarket including the distribution channel and service shops. We also examine the key success factors, market dynamics and emerging marketing channels in the independent aftermarket. We will highlight the implications of these developments for key players along the value chain.
Title: China’s Auto Industry in the Age of Disruption – The Birth of the “Automobility” Business Model
For global automakers and their suppliers, China represents the greatest opportunity for growth in the 21st century. Since 2009, China has been the world’s largest market by volume, and surpassed 28 million units in annual car sales in 2016. Over the coming decades, we believe that China will remain the key battleground for dominance of the global auto industry. However, this battle will not be waged using the conventional automotive technologies which have been refined over the past century. We believe several driving forces, which are particularly evident China, have the potential to disrupt the status quo of the automotive industry:
The unique context of China’s urban transportation challenge, the high penetrationrate of mobile internet, combined with the rapid and aggressive introduction of alternative mobility and ownership concepts, are compressing the time needed to commercialize smart, connected car technology and related services.
The automotive value chain is being disruptedby non-traditional players as they enter and compete to deliver mobility solutions. Disruptive new entrants are utilizing big data to draw insights about customers’ mobility patterns in order to address their “pain points” and offer new solutions for their mobility needs. Such mobility needs are increasingly being met through on-demand and shared services versus individual ownership.
It is the confluence of these forces, along with rapid innovation to address “pain points” associated with mobility in the China context, are positioning China as the catalyst to drive the transformation of the business model and technological underpinnings of the global auto industry. In this course, we highlight the major disruptions that lie in the path to success in China’s automotive industry, including:
The rapid rise of on-demand mobility and the digital mobility ecosystem
The link between hardware innovation and the economics of the digital ecosystem
The explosive growth of aftermarket services and the emergence of the Independent Aftermarket (IAM) and online-to-offline (O2O) channel
Bill Russo delivered a keynote address at the Intertraffic’s 2017 China conference at Shanghai’s New International Exposition Center. The topic was “China’s Auto Industry in the Age of Disruption: The Birth of the Automobility Business Model”.
China’s automotive industry is entering a period where discontinuities and disruptions are likely to change the competitive landscape – and this represents an opportune time to guide the development in alignment with China’s overall industrial development. With the issuance in April 2017 of the Automotive Industry Mid to Long Term Development Plan, the Ministry for Industry and Information Technology (MIIT) provides “guiding principles” for the development of China’s auto industry for next decade.
Bill Russo was a guest on CGTN’s China 24 program to discuss these developments. His interview appears at the 28th minute of the program.
Most auto executives have reasons to feel at ease after hitting the one-million annual sales mark in China, an exclusive club that includes General Motors Co. and Volkswagen AG. For Great Wall Motor Co.’s Wei Jianjun, the feat stoked fears that the SUV maker may be doomed.
That’s because history is littered with companies that grew big but eventually failed because their products became a commodity and lacked the star power to create clamor among customers, according to the chairman of the manufacturer that has kept a 14-year streak as China’s top SUV seller.
“Moving up is testimony of a company’s strength; if you can’t, you’ll disappear the way Nokia did after Apple muscled in on their turf,” Wei said during a recent interview in Hong Kong, as he recalled how the iPhone maker upended the mobile-phone industry and eventually toppled the erstwhile Finnish leader.
Wei’s paranoia signals the maturing of the world’s largest auto market, where an increasingly sophisticated middle class is no longer satisfied with cheap, me-too products. China’s more successful homegrown automakers, also including Zhejiang Geely Holding Group Co. — the owner of Volvo Cars — and BYD Co., have embarked on efforts to burnish their nameplates in the belief that with more than 100 brands competing for buyers, the fight will be won by those who look beyond price competition to create income streams from products with higher profit margins.
For Great Wall’s Wei, it turns out, the effort also involves adopting the English name “Jack Wey” and creating the premium nameplate “WEY.” Sales of the brand’s first model that has features such as a warning system for lane changes are set to begin at the Shanghai auto show this week, and another three models will be added this year, Wei said.
Wei, a native of Baoding born in 1964, has built Great Wall into China’s top seller of SUVs without leaning on any foreign partners, and by offering consumers spacious models at cheaper prices than sedans such as Volkswagen’s Passat and GM’s Buick. That strategy helped boost deliveries to a record 1.07 million units last year, outpacing industrywide growth.
At 26 — and after several factory jobs — Wei took over a small car-modification business and turned it into a van maker. He later shifted focus to pickup trucks after witnessing their popularity in Thailand. Small business owners and farmers turned Great Wall’s Deer into China’s most popular pickup brand by 1998. And in 2002, he rolled out the first Haval SUV model. The popular Haval H6 accounted for more than half of the company’s deliveries last year.
The idea for going upscale came just over four years ago when branding guru Al Ries, chairman of the Atlanta-based market-strategy firm Ries & Ries that counts Microsoft Corp. and Ford Motor Co. among its clients, advised Wei to create a separate brand. “Jack Wey” would help foreigners get around the difficulty of pronouncing Wei’s name in Chinese, Wei was told.
“A new idea requires a new brand name. To keep a company competitive in the future requires a constant launch of new concepts,” said Ries. “The future belongs to multiple brand companies, not single-brand companies.”
As Chinese consumers shift their tastes away from sedans, demand for roomier SUVs is surging, with such vehicles accounting for 37 percent of the total sales last year, up from 5.7 percent a decade ago. Still, the introduction of WEY comes at a time when new models are flooding the market. PSA Group to Hyundai Motor Co. are boosting their lineup in the segment. Geely, owned by billionaire Li Shufu, will start selling the first SUV model under its new upscale Lynk & Co. from the fourth quarter, using the same platform adopted by affiliate Volvo Cars.
“We added WEY brand to prepare for the SUV market to enter the price competition era,” said Wei, who has a net worth of $5.3 billion, according to the Bloomberg Billionaires Index. “Sales of WEY brand cars will bring us higher profit margins and with the rising sales volume, it will make bigger contribution to Great Wall’s bottom line.”
Shares of Great Wall fell 2.2 percent to HK$8.91 as of 3:19 p.m. in Hong Kong. The benchmark Hang Seng Index declined 1.1 percent.
WEY carries features usually found in more-expensive foreign models, such as a cruise control that maintains a safe distance from the car ahead. The marque targets buyers who patronize brands such as Kate Spade, Calvin Klein and DKNY, according to Wei.
Wei estimates the new brand will have a gross profit margin of about 27 percent. Great Wall is more profitable than some of its peers including General Motors and Volkswagen.
“Even successful mass-market players like Hyundai have struggled to add brands above their mainstream brand,” said Bill Russo, managing director of Gao Feng Advisory Co. and a former head of Fiat Chrysler Automobiles NV’s Chrysler unit in China. “In the age of hardware commoditization, he will need a key feature to attract upscale consumers or a unique selling proposition. The odds are against him, but he’s beaten the odds so far.”
Great Wall is targeting to sell 56,000 units of WEY brand vehicles this year, competing with Toyota Motor Corp.’s RAV-4, Honda Motor Co.’s CRV and Volkswagen’s Tiguan SUVs. The first model will be priced in the 150,000 yuan to 200,000 yuan ($22,000 to $29,000) range, according to Wei. That would put the vehicle in the same bracket as Great Wall’s H8 and H9 models.
Wei, who rues the fact that his company didn’t change its strategy quickly enough to focus only on SUVs, isn’t satisfied with being leader in the segment just at home. Great Wall is in the process of selecting a site in the U.S. to assemble Haval vehicles after reviewing an earlier plan for Mexico. Wei wants Haval to surpass Jeep and Land Rover becoming the world’s biggest SUV brand by 2020 and Haval H6 to become the global No. 1 by then.
“By counting on a strong domestic market, we will develop our global business and build our brands into global ones,” Wei said. “It’s a huge challenge and a golden opportunity as well.”
Consumer demand, availability of batteries are some of the manufacturers’ concern
Trefor Moss and Mike Colias
SHANGHAI—The world’s top auto makers are gearing up to build electric cars in China, despite concerns about market demand and the potential their technology could be compromised in a market with weak safeguards for intellectual property.
Companies including VolkswagenAG , General Motors Co. and Toyota MotorCorp. set out plans for electric-car production in China at this week’s Auto Shanghai vehicle expo, bowing to pressure from Beijing.
China is the world’s largest market for electric vehicles, or EVs, and auto makers who don’t set up production here could find themselves shut out of it.
Even so, some admit privately to being anxious about opaque regulations governing battery production and technology transfer, and misgivings about near-term demand for battery-powered cars.
GM, for example, confirmed it would build a Buick version of the plug-in hybrid Chevrolet Volt in China with its local partner, SAIC Motor. But Mark Reuss, GM’s product-development chief, sounded less than bullish when asked if there was genuine demand for EVs in China.
“I think there could be,” Mr. Reuss said.
Ultimately, the indispensability of China’s auto market meant it was “manifest destiny” that foreign auto makers would agree to set up electric-car plants in China sooner or later, said Bill Russo, Shanghai-based managing director at consultancy Gao Feng Advisory.
TeslaInc., which didn’t attend Auto Shanghai, is now almost alone in having not yet lined up to confirm plans to manufacture electric cars in China. Even Toyota, which previously rejected the EV technology in favor of hybrids and fuel-cell vehicles, said it would ramp up EV development.
An estimated 350,000 EVs were sold here last year, roughly half the global total. Most analysts expect the market to grow especially quickly as China moves to reduce air pollution from gas-powered vehicles and offers incentives for consumers to buy EVs.
Auto makers are unsure about demand, however, fueling concerns that they may need to offer big discounts to move inventory. Automotive Foresight, a Shanghai-based research company, estimates 650,000 to 2 million electric and plug-in hybrid vehicles will be sold in China in 2020, out of an estimated 26 million car sales over all that year.
At the auto show, Toyota’s senior managing officer, Hiroji Onishi, told reporters he felt “skepticism [about] whether the consumers would still want to buy EVs” once subsidies disappear, which is expected to occur about 2020.
Industry caution isn’t Beijing’s concern, however. Starting next year auto makers expect they will be required to locally produce a specific number of electric or plug-in hybrid vehicles proportionate to their total output, according to foreign car firms involved in ongoing negotiations with the government.
Building cars locally makes it far easier to generate sales, since China slaps a 25% tariff on imported cars. But, profits from locally built cars must be shared with a Chinese joint venture partner.
Last month the European Chamber of Commerce in Beijing attacked Chinese industrial policies, questioning a new EV manufacturing law that calls for foreign auto makers to demonstrate their green-car technology before they can build them in China.
The law could just be a ploy to get foreign car makers to reveal technology secrets to their local Chinese partners, the chamber warned. China’s industry and information technology minister Miao Wei rejected that interpretation, and assured foreign manufacturers last month that they would not be compelled to hand over intellectual property.
Volkswagen China Chief Executive Jochem Heizmann said he was sufficiently reassured by Mr. Miao’s remarks to push ahead with an EV “offensive” involving the local production of eight plug-in hybrid or pure electric models, including a mass-market vehicle set to enter production next year through a new joint venture with Anhui Jianghuai AutomobileCo. Mr. Heizmann said Volkswagen aims to sell 1.5 million green cars in China by 2025.
GM’s target is more modest, at 500,000 by 2025. Even so, GM’s commitment now contrasts with the reluctance voiced by then-chief executive Dan Akerson back in 2011. Mr. Akerson said “technology risks” meant GM would hold back from building the then-new Volt in China, even if it meant missing out on government incentives.
Batteries are among the technology risks that some auto makers say still remain in China. Chinese regulations require that EVs built here use batteries made in China, but as yet no foreign maker of EV batteries has received certification.
Earlier this month Ford MotorCo. said it, too, would start building EVs in China. The company aims to use batteries produced by PanasonicCorp. , said Trevor Worthington, Ford’s vice president for product development in Asia. He dismissed concerns expressed privately by some auto makers that China might shut out foreign battery makers, saying that would contravene World Trade Organization rules.
SHANGHAI- Unable to afford a car, Shanghai university student Long Yi endured an expensive taxi commute across his vast city until he started using one of the car-sharing schemes quickly gaining momentum in China.
Essentially an Internet Age twist on car rentals, car-sharing is attracting Chinese millennials who increasingly demand mobility but shun the burden of auto ownership.
Long, 20, drives himself to school for around 50 yuan ($7) using EVCARD, a service launched by state-owned automaker SAIC Motor that has compact electric vehicles sprinkled around the city, slashing his travel time and costing one-quarter the taxi fare.
“It is cheaper and more convenient and very flexible. I’ll choose EVCARD as my primary mode of transport almost every time,” said Long.
After years of skyrocketing China sales, the global auto industry is contemplating slower growth as it convenes this week for the Shanghai Auto Show, putting alternative sales channels like car-sharing in focus.
Long-established in Western countries, such services only began appearing in China in the past two years, but are part of an ongoing Chinese personal-mobility revolution.
Already bike-sharing businesses have exploded across China, flooding major cities with bicycles that are unlocked by GPS using an app, can be left anywhere and have become critical to countless commutes.
Similarly, drivers typically use a smartphone app to find and unlock shared cars, later parking them anywhere or at set locations.
Dozens of Chinese and foreign companies have now either launched or invested in car-sharing operations, with some making purpose-built cars.
Germany-based consultancy Roland Berger forecasts annual market growth of at least 45 percent.
“That is a significant growth opportunity (for manufacturers). There are only a few hundred thousand cars now, but it’s growing and it’s growing very quickly,” said Johan Karlberg, a Shanghai-based partner with Roland Berger.
– Driving new sales –
German giant Daimler launched a car-sharing service last year that has since expanded to seven cities, gaining more than 250,000 registered users, the company said.
Jochem Heizmann, China CEO for Volkswagen, the country’s top car brand, told reporters in Shanghai VW would partner with Chinese car-sharing operator Shouqi in multiple cities, partly to boost electric-vehicle sales.
“You have to see the development of such fleets as sales channels,” he stressed.
Lynk & Co — a new unit of Chinese automaker Geely, which owns Volvo — unveiled in Shanghai two SUVs with built-in touch-screen sharing software developed with Microsoft and Sweden’s Ericsson.
“Communities”, such as companies or residential developments, can jointly purchase vehicles to share, or owners can share their car for a fee with other drivers who join Lynk & Co’s network, said Alain Visser, the company’s senior vice president.
“It becomes an interesting concept because sharing can reduce the cost of ownership,” he told AFP.
Lynk & Co also is partnering with TripAdvisor and Tujia — China’s Airbnb — on a proposed system combining shared accommodation and cars.
“Instead of entering the (car-sharing) market once it becomes big, we want to make it big,” Visser said.
Bill Russo, head of Shanghai-based auto consultancy Gao Feng, said such services will guide auto manufacturing in future.
“You may build them to entertain people in the backseat, or to provide more connectivity so people can be productive. We’ll see this segment influence specifications,” he said.
China’s central government and many local authorities are keen to reduce congestion and air pollution and have dangled various incentives for car-sharing, such as eased licensing requirements and guaranteed parking.
Further supporting car-sharing’s potential, countless Chinese face significant car-ownership hurdles, including cost, scarce parking and limits on car use in several major cities.
By 2020, China will have just 195 million cars for 355 million licensed drivers, Roland Berger estimates.
“Many middle-class families that can afford a second car are opting not to. It’s a real hassle,” said Karlberg.
High start-up costs and other hurdles in the fledgling car-share industry mean no one is making money yet, analysts say.
But they expect the growing numbers of industry entrants soon to consolidate into a solid few able to run sustainable businesses, perhaps in partnership with government.
Bill Russo, managing director at Gao Feng Advisory, discusses Ford introducing pickup trucks in China and the outlook for the Chinese auto market. He speaks to Bloomberg’s David Ingles on “Bloomberg Markets.”
The U.S. auto maker plans to build the Mondeo Energi plug-in hybrid and a new all-electric SUV in China
Ford Motor will start manufacturing electric vehicles in China next year. PHOTO: ANDREY RUDAKOV/BLOOMBERG NEWS
By TREFOR MOSS
SHANGHAI— Ford MotorCo.F -0.35% said Thursday that it would start building electric cars in China to tap into a state-sponsored boom in green-energy vehicles.
In doing so, the Detroit-based company signaled that it had swallowed industry concerns about bringing proprietary electric-car technology to China, despite misgivings among foreign auto makers about intellectual-property protection in the world’s largest auto market.
“It’s manifest destiny” for foreign car makers to get past those fears and start building electric cars in China, said Bill Russo, managing director of Gao Feng Advisory, a Shanghai consulting firm.
Mass uptake of electric vehicles is set to happen in China first, he said, “and none of those companies can afford not to be relevant to the future of their industry.”
Ford’s local joint venture Changan Ford Automobile Co. will start building the Mondeo Energi plug-in hybrid vehicle in China next year, with a new all-electric sport-utility vehicle set to follow within five years, the company said in a statement.
Electric powertrains will be manufactured locally by 2020, and by 2025 all of Changan Ford’s vehicles will come in electrified versions, it said.
“The time is right for Ford to expand our EV lineup and investments in China,” said Chief Executive Mark Fields.
China is already the world’s largest market for electric vehicles, with over half a million electric or hybrid cars sold there last year, according to the China Association of Automobile Manufacturers.
The government is encouraging their uptake by heavily subsidizing electric cars through payments to manufacturers, which are then able to sell EVs more cheaply. It is also far easier to obtain a license plate for an EV than for a traditional gasoline car in congested cities like Beijing and Shanghai.
Local authorities have also set ambitious targets for electrifying bus and taxi fleets over the next few years, and for the rollout of EV charging facilities.
There could be as many as 32 million new energy vehicles in China by 2025, according to Gao Feng Advisory—a total that is likely to be a substantial share of the global fleet, with uptake of EVs in the U.S. and Europe happening more slowly.
Yet while most gasoline cars sold in China are built by foreign auto makers operating through local joint ventures, almost all of the electric cars sold in China last year were made by Chinese companies operating without foreign input.
Silicon Valley electric-car maker TeslaInc. was the one notable exception: Without disclosing how many cars it had sold, the company said in a March 1 filing that its 2016 revenue topped $1 billion in China for the first time last year, leading auto-industry analysts to estimate China sales of around 11,000 imported vehicles. Chinese tech company Tencent HoldingsLtd. last week revealed it had taken a 5% stake in Tesla.
But Tesla, like most other foreign auto makers, has so far held back from building EVs in China. Beijing had sought to spur EV manufacturing by telling auto makers that a certain proportion of the cars they build in China would have to be electric in the near future, although officials have recently signaled that those moves may be delayed amid complaints from the industry and from foreign governments.
Imported cars incur a 25% tariff, making them less competitive, and so auto makers naturally want to build in China, said Michael Dunne of Hong Kong-based Dunne Automotive. But they have been holding out for some relaxation of China’s strict joint-venture rules before committing to large-scale EV manufacturing in China, he said.
Foreign car makers and the Chinese authorities have been “sitting around the poker table”, said Mr. Dunne.
It’s the foreign car makers who appear to have blinked.
In March, Buick, a unit of General MotorsCo. , announced plans to start building plug-in hybrid and electric vehicles in China. Last year, GM said it wanted to have 10 new energy vehicles in China by 2020, though it has yet to reveal any plans to start manufacturing its highest-profile EV, the Chevrolet Bolt, in the country.
China’s biggest SUV maker is reconsidering its plan to build an auto plant in Mexico that would have made its best-selling vehicles for the U.S. market, joining a growing list of global automakers reviewing investment plans after tax threats by President Donald Trump.
Great Wall Motor Co., led by billionaire Chairman Wei Jianjun, may choose the U.S. instead for its first North American plant, General Manager Wang Fengying said in an interview. The company has a research center in Los Angeles and will accelerate preparations to develop U.S.-certified versions of its Haval SUVs for sale by 2020, Wang said.
“Your decisions should always adapt to the dynamic changes,” said Wang, a delegate at this week’s National People’s Congress in Beijing. There used to be many carmakers building plants in Mexico but Trump’s changes have affected their decision making, Wang said.
Trump has promised to renegotiate the North American Free Trade Agreement and criticized auto companies including General Motors Co. and Toyota Motor Corp. for shifting production south of the border. Under threats of punitive import duties, Ford Motor Co. and Japanese auto-parts maker Nisshinbo Holdings Inc. said they’ll scrap or reconsider new plants in Mexico.
Great Wall, based in Baoding, Hebei province, is one of several Chinese automakers hoping to break into the U.S. with their own brands. Guangzhou Automobile Group Co. plans to start exporting its Trumpchi models to the U.S. from next year, while Warren Buffett-backed BYD Co. and Volvo Cars owner Zhejiang Geely Holding Group Co. have also declared American ambitions.
“Building in the U.S. is a hedge against a potential future trade barrier with Mexico,” said Bill Russo, managing director of Gao Feng Advisory Co. and a former head of Fiat Chrysler Automobiles NV’s Chrysler unit in China. “It would add cost to producing the vehicles but it reduces the potential tax risk.”
For more than 20 years, China has asked foreign carmakers wanting to set up manufacturing plants in its country to do so through joint ventures with domestic auto companies, a move that allowed many Chinese manufacturers to gain technology and eventually set up their own brands. Local marques like Geely, Trumpchi and Haval now account for almost half the Chinese market.
The Chinese carmakers are trying to reverse the tide and sell their own models to Europe and the U.S., just as the Republican-led House of Representatives is considering implementing a border-adjustment tax on companies’ imports but not their exports.
The proposals by Trump and lawmakers would raise the average cost of a car in the U.S. by about $3,300 and could even cost American jobs because carmakers source parts from around the world, Munich-based consultant Roland Berger GmbH. said in a presentation on March 8. The price increases would lead to about $34.6 billion in higher costs to consumers, assuming U.S. sales at the 17.5 million level recorded in 2016, the Center for Automotive Research said in a report Thursday.
In China, Great Wall is enjoying a sales surge as Chinese drivers embrace SUVs, despite government efforts to curb fuel consumption and emissions. The company’s domestic sales rose 26 percent last year to 1.1 million units, putting it ahead of Japan’s Mitsubishi Motors Corp. in global vehicle production. Abroad, though, it’s had less success, selling only 17,379 units last year, mainly in countries such as Russia, South Africa, Bulgaria and Australia.
The company is exploring opportunities in developed markets and wants to make the Haval brand global by 2020, said Wang. The company markets its SUVs in China as offering good value for money and prints ads with the title “See. Drive. Believe.” While overseas it also uses pictures of its vehicles driving in the off-road Dakar rally competition.
More than four out of every five vehicles Great Wall sells is an SUV and the company is under pressure at home as China tries to clean up the choking air in its biggest cities. The government has proposed rules that would require automakers to improve fuel economy and produce a higher proportion of so-called new-energy vehicles such as battery-powered cars. Wang said Great Wall plans to invest at least 60 billion yuan ($8.7 billion) in developing new-energy vehicles by 2025, without giving details on how the investment would be funded.