STRATEGRY RESEARCH OF AN INDEPENDENT CHINESE CARMAKER
--- CASE TDUDY OF CHERY AUTOMOBILE CO.Ltd.
J.ZHAO S1474316
E-MAIL: SOPHIA_ZJ@YAHOO.COM.CN
SUPERVISORS:
MR.Florian A. A. Becker-Ritterspach MR.Henk Ritsema
RIJKSUNIVERSITEIT GRONINGEN
FACULTY OF MANAGEMENT &ORGANIZATION
MSC.IB&M LANDLEVEN 5 9747ADGRONINGEN
Abstract
From a Chinese’s view, this paper focuses on how Chinese independent carmakers could compete with foreigners, and takes a research that related to the development of Chinese independent car brand, analysis the macro environment, and industry-level environment, as well as strategy position, then looks into their growth opportunity in local market. So the main goal of the report is to find what factors influence the Chery Automobile Co., Ltd. – a Chinese independent carmaker’s growth in Chinese local market.
According to the analysis, Chery’s independent way of development creates unique advantages in lower price segments. And at least, it seems that its growth will continue during the period of high-speed increase. And there are some recommendations are made as follows:
Keeping the current way of independent research and development.
Concentrating on the sedan market in order to build long-term unique advantages.
It is very important to use organization’s resources efficiently. Due to the internal weaknesses and some environmental limitations, how to reduce the risk and cost is the main challenge.
Table of content
Chapter 1. Introduction ...4
1.1 Background ...4
1.2 Research problem...5
Chapter 2. Literature review ...7
Industry competition ...7
Internal capability ...8
3.1 Sub-questions ...14
3.2 Research Framework...14
Chapter 4. Research methodology ...17
Chapter 5. Macro-environment analysis ...18
5.1 Policy ...18
5.2 Economy ...21
5.3 Environment...24
5.4 Technology...25
Conclusion of macro-environment...27
Chapter 6. Industry analysis (5 forces) ...28
6.1 Intensity of Rivalry ...28
6.2 Buyer Power...36
6.3 Supplier Power...40
6.4 Entry Barriers for New Competitors ...47
6.5 Substitute’s threat ...52
Conclusion of industry analysis ...54
Chapter 7. Market segments and position ...56
7.1 The segments of sedan car market in China...56
7.2 Local governments’ limitation of low exhaust quantity car and the encouragement of central government...60
Summary of strategic position ...63
Case study of Chery ...64
Summary of internal analysis of Chery...74
Chapter9. Conclusion and recommendation ...78
Answers to research questions ...78
9.2 The conclusion of research problem ...81
9.3 Recommendations ...83
9.4 Delimitation ...85
Chapter 1. Introduction
1.1 Background
While global sales would stagnant over the next five years, the world’s biggest carmakers are jockeying for a share of one of the buoyant national market. China’s domestic car sales, which are growing at more than 10 percent annually, will be possible account for 15 percent of global growth over the next five years (Paul Gao, 2002).
The foreign direct investment brought by the multinational companies is playing the leading role in the Chinese automobile industry, especially in the passenger car sector.
The enormous potential of the Chinese market as well as the reforms brought about with China’s WTO membership do provide opportunity. However, for automotive firms in the Chinese automobile industry, the road to success will be full of challenges.
Chery Automobile Co., Ltd. was founded in 1997 in Wuhu City, P.R.China. In just 7 years, Chery has achieved many unlikely breakthroughs and become the fastest growing independent automaker in China.
Chery is committed to developing world-class automobiles via cooperation with top engineering firms such as Lotus Engineering of the U.K, and Mitsubishi Automobile Engineering of Japan, and leading auto designing firms such as Bertone and Pininfarina of Italy.
In order to improve its quality, Chery adopts DURR Paint Systems in its paint shop in 2004. In 2005, Chery starts producing China’s first high-performance Euro IV engines in cooperation with AVL List of Austria. In addition, in J.D.Power 2004 China Initial Quality Study, Chery QQ finishes NO.1 in compact car segment.
With an ambition to become a global player, Chery has so far launched its products in 29 countries. For the time being, Chery is developing a new line-up of products aiming at auto markets in the U.S and EU. In 2005, a strategic partnership is formed between Chery and Vesionary Vehicles of the USA for launching Chery products in North America in 2007.
As a Chinese carmaker, it’s really difficult to compete with foreign carmakers;
especially they are later comers in Chinese automobile industry. From a Chinese’s view, this paper wants to know how Chinese independent carmakers could compete with foreigners, and to take a research that related to the development of Chinese independent car brand, analysis the macro environment, and industry-level environment, as well as strategy position, then look into their growth opportunity in local market.
1.2 Research problem
As the paper mentioned above, the main aim of the research is to get an insight into Chinese car market and give suggestions for the Chinese independent carmakers to develop their market share. So it is logical to know the main factor that will influence the market share in the Chinese car market.
The main research problem can be formulated as:
What factors influence the Chery Automobile Co., Ltd. – a Chinese independent carmaker’s growth in Chinese local market?
The main concept of the research problem is the Chinese independent carmaker and the concept of growth.
The first one, Chinese independent carmakers mean the car manufactories that are established and controlled by Chinese and have their own brand names without using
The second one, the growth, means the increase of market share, which is a vital indicator for companies’ survive and development, especially in their short-term plan.
Chapter 2. Literature review
This report is a strategy research. I mainly adopt some strategy literatures as well as books. Also, it is refers to Chinese car-market, so I’ll try to get more Chinese original books and data in such area.
Literatures of theories Macro-environment
The organization cannot directly control the macro-environmental segments and elements. Successful organizations will gather information required to understand each segment and its implications for selecting and implementing of the appropriate strategies. Although organizations were differently affected and could not control the economy, they were challenged to understand the effect of this decline in the economy on their current and future strategies.
One of the two most popular techniques when considering macro environmental factors is the PESTEL analysis. Johnson and Scholes (2002) stress that the macro environment consists of broad environmental factors that impact to a greater of lesser extent on almost all organization. The PESTEL (and similar) frameworks can help this discussion since they look at the way in which future trend in the political, economic, social, technological, environmental and legal environments might impact on organizations. It is important to identify these issues and particularly those that are likely to have a differentially large impact on a specific organization.
Industry competition
The previous theories underline the importance of analyzing and understanding the external environment in which an organization is operating, but successful strategies are also dependent on the organization having the internal strategic capability to achieve competitive success (G. Johnson & K. Scholes, 2002). Porter’s Five Forces Model (1980] helps the organization to identify competitive forces in the industry to
competition and other threats.
Internal capability
The previous theories underline the importance of analyzing and understanding the external environment in which an organization is operating, but successful strategies are also dependent on the organization having the internal strategic capability to achieve competitive success (Johnson & Scholes, 2002: 145).
Individual organizations possess at least some resources and capabilities that other organizations do not – or at least not in the same combination. Resources are the source of capabilities, some of which lead to the development of an organization’s core competences (Peteraf, 1993: 18, and Brush & Artz, 1999: 223). Analyzing the strategic capability of an organization is clearly important in terms of understanding whether the resources and competencies fit the environment in which the organization is operating.
Strategic development directions
The following exhibit shows what kinds of directions a company will have when:
Exhibit: model of strategic development directions
Existing products New products Existing
market
A. Protect /build
Consolidation
Market penetration
B. Product development
On existing competences
With new competences
Beyond current expectations New market C. Market development
New segments
New territories
New users
With new competences
Beyond current expectations
D. Diversification
On existing competences
With new competences
Beyond current expectations
Source: Johnson & Scholes, 2002, exploring corporate strategy, P362
In this paper, the model of strategic development directions will be used to analyze Chery’s development plan.
Illustration below shows some of the macro-environmental influences, which might affect organizations. Then, this research would be elaborated through this logical line, from environment, industry to strategy group.
Source: Exploring Corporate Strategy, Johnson and Scholes, 2002
Literatures of Chinese automotive industry
Chinese automotive industry is not a new topic, and many researchers have looked into it.
Market competition and market potential
Especially in recent years, China’s rapid economic growth provides a stable market for automobile industry, and also enhances effective demand (Maning Song,2004).
Zeng Guang and Peng Wei (2003) also indicate that due to the increased income per capita, the increased purchasing power of individuals formed a huge market potential for passenger cars. More than 50% of vehicles were sold to private individuals in 2002. During the past 10 years, the percentage of private ownership has increased
The macro-environment Industry (or sector) Strategic groups (Markets)
The Organization
At the same time, Lin Gan (2002) mentioned that competition for market shares in the car market become stronger among 148 automakers with 4593 models under sale.
Private passenger car consumption is up. Many new models were introduced in 2002 and more than 10 new passenger car models were introduced in 2002, Zeng & Peng (2003) think it provided consumers with more alternatives and met market demands.
However, it seems that the market potential may become an opportunity for domestic automobile manufacturers only if they have the capability to dominate the domestic market (Maning Song, 2004). The author also stresses that automotive industry faces some challenges, and Chinese automotive industry have to respond appropriately and quickly to such challenges. As Eric Harwit (2001) mentioned, domestic manufacturers must improve their products to face a higher degree of foreign competition.
All issues mentioned above imply that China should develop the technological capability of automotive industry, and prepare for the increased competitiveness.
Technological capability and innovative vigor are the vital factors in this competition.
Factors influencing car-purchase
For most people, a car purchase is a major decision, and brand reputation and reliability are important factors determining choice（Zhang Wuchang, 2000）.
As both cost and price structure of automobiles become more and more transparent to the public, it’s more likely for customers to become more critical about prices. On the other hand, intense competition strengthened by market exploitation and technology innovation has diluted profit for the industry as a whole. (Maning Song, 2004)
Energy and environment problem
In China, automobile industry is an industry with high-energy consumption.
Firstly, the passenger car is one of the main fuel-consumption and pollution contributors in China. Transportation, which accounts for 27% of total global energy consumption, is one of the major contributors to air pollution problems at the local, regional and global levels. Even in china, in terms of fuel economy, domestically developed cars consume 10-30% more of energy than those products made by foreign technologies and designs (Life DAILY, Feb.6, 2001).
Secondly, the old production equipment and production process of Chinese auto industry are two possible reasons of low efficiency of energy consumption. The Chinese passenger car manufacturing industry is equipped mainly with equipment and facilities made in the 1970s or 1980s. By 1999 all leading passenger car manufacturers built joint ventures. Some leading passenger carmakers such as FAW-VW, Shenlong, Shanghai GM and SVW have been equipped with some key imported equipment and facilities made in the 1990s, but the principal part of their equipment and facilities date from the 1980s. Ronping Mu (2001) point out that Robots and flexible production lines have been introduced to the Chinese passenger car manufacturing industry, but not yet widely adopted.
Another issue is that the main obstacles to manufacturing more fuel-efficient cars are the weak R&D, capacity within industrial enterprises, underdeveloped marketing networks, and a low rate of technology dissemination. Lin Gan (2002) emphasizes that technological change plays a central role in emissions reduction and vehicle energy efficiency improvement. New automobile technology development and innovation will become a major driving force in China’s transportation sector development.
The problem of R&D
The auto industry has been at the heart of the twentieth century business structure. It is a sector with high outlays on R&D. (Zhang Wuchang, 2000)
For Chinese local automotive industry, it has been insufficient invested in for a long time. Meanwhile, Ronping Mu (2001) stresses that Chinese automotive industry invests much less than world leading automobile manufacturers in R&D and technical development as well as in R&D personnel.
Car components industry
When talk about Chinese Component makers, Muning Song (2004) demonstrates that they are most in small size, less competitive, and located extremely separately across the country. Compared with foreign independent suppliers who have entered or are going to enter China, Chinese component companies are less competitive and have a very long way to catch up.
Local Advantages of Chinese automotive industry
The Chinese automotive industry has potential competitive advantage to some extent.
Due to much lower labor costs in China than in developed countries, Ronping Mu (2001) thinks that the Chinese automobile industry enjoys a big comparative advantage in labor costs and it has an increasingly growing and relatively large domestic market. Also, automotive industry helps employment (Maning Song, 2004)
There are still some other advantages of local automotive companies. Just as Maning Song emphasizes those Chinese domestic companies have more intimate understanding of local knowledge and are more familiar with the procedure of doing business and preferences of customer. Moreover, Chinese domestic companies can communicate comparably easily with customers and deliver products and services at a lower cost. Therefore they can accomplish some business activities more efficiently and get access to customer more conveniently.
Suggestions for local automotive firms
Maning Song also mentioned that unlike developed countries, China is lack of capacity to satisfy the fast growing demand and small economy scale also adds cost.
Therefore, automotive industry should enhance production capability through technology improvement and efficient operation. China automotive industry should also pay attention to domestic competition with import products where in quality other than price is the key driver.
After the survey of Chinese independent carmakers, Lufeng (2004) declared that independent development is the key for Chinese carmakers to compete with foreign companies. In his research, he mentioned that auto industry is an industry with high denseness of capital, technology and labor. China has a market with huge potential and some unique characteristics, for example, the low labor cost. Some people believe that China should join the global market with comparative advantages, and make China become the production base of world. However, the researcher emphasized that the advantage coming from labor cost is not only determined by the cost of unit labor, but also the output from the labor cost, which will be influenced a lot by management and technology. Therefore, in order to build global advantage, Chinese auto industry should not give up the activities of developing its technology and management by independent research and development. Once Chinese auto industry can develop its capability of independent research and development, it can exert the potential advantage of cost and market scale, and combine the advantage with technology and management to compete with western companies.
Chapter 3. Research questions and research framework 3.1 Sub-questions
In order to answer the main problem, it would split into some sub-questions that are more specific and concentrate on different strategic elements.
For this research, I’d like to look into the macro environment at first, which influence the Chinese market as well as carmakers most. Then I will analysis the situation of competition in Chinese car marking industry, which influence the carmaker’s growth directly. After that, I should look into the carmaker itself to get its choice of strategy, and then I could know the strategy position.
So the sub-questions are:
How does the macro environment influence the carmakers in China? (PEST framework)
How about the competition conditions of Chinese car making industry?
(Five-forces model)
What strategy position has Chery in Chinese car market? (Strategic position on market segments)
How about the internal capacities of Chery?
What could Chery’s future development be?
3.2 Research Framework
For the first sub-question, PESTEL-framework would be used to analysis the external environment. PESTEL framework, which categorizes environmental influences into six main types: political, economic, social, technological, environmental and legal.
It is particularly important that PESTEL is used to look at the future impact of environmental factors, which may be different from their past impact. Also, environmental forces that will be especially important for automobile company, as it may be concerned with the state policy, labor cost, and component tax, etc.
Then, as we know, inherent within the notion of strategy is the issue of competitiveness. In business, this is about gaining advantage over competitors. The five forces framework helps identify the sources of competition, usually focusing their attention on direct competitive rivals, and helps identify the sources of competition in an industry or sector. So the second sub-question would analysis by the threat of entry, the threat of substitutes, and the power of buyers and suppliers. Then we could distinguish what the key are forces in the competitive environment, or what the underlying forces are in the macro-environment that are driving competitive forces, and what their strengths and weaknesses in relation to the key forces at work, etc.
Furthermore, the third question is concerned with the bases of strategic choice at the business-level. It is the focus of what business-level strategy is about: how to compete effectively in a market; and it is the core issue of how value is realized in a business;
and the key question is extend to which it is possible to achieve bases of competitive advantage which are sustainable. So, this sub-question could be answered by the analysis of which strategy the company should choose: price-based strategies, differentiation strategies, or focus strategies.
The factors in the macro-environment, industry and market environment or strategy that might impact on the automobile company are discussed above should be helpful.
However, there is usually a need to understand in a more detailed way how this collection of environmental and strategy factors might influence strategic success or failure. This can be done by SWOT analysis, also as a small summary.
The answer of sub-question be combined to analysis the present settings of Chinese automobile market environment, social circumstance, sources of competition, as well as strategy position, then we could use these data and do further research, including the increase of market share in order to answer the main research question: the factors
This research can be summarized as the following framework:
SWOT Environmental assessment
External environmental trends Industry analysis
Market analysis
Opportunities and threats
Internal Assessment
Critical resources and competencies Strategic development
Strengths and weaknesses
Factors influencing Chery growth
Recommendation of future development
Chapter 4. Research methodology
This report will be a research with explanatory and descriptive characters, which aim to understand and describe a phenomenon not yet well developed. And the method of processing and analyzing case and data is qualitative and quantitative.
Due to the limitation of time and resource, all the data and case study are based on secondary data resource. And the case studies concentrate on one outstanding example of Chinese independent carmaker, Chery.
The part of analysis in this report will be follow the structure as:
Firstly, the data of macro-environment will be analyzed mainly in a quantitative way.
And then the factors that can influence Chinese carmakers will be concluded.
Secondly, the information and data of Chinese automobile industry will also be analyzed mainly in a quantitative way. And then we can conclude whether the industry conditions are favorable or unfavorable for Chinese independent carmaker, Chery.
Thirdly, all the data of different segments of Chinese sedan car market will be analyzed, and the position of Chery will be concluded.
Then, internal analysis of Chery will be based on both quantitative and qualitative ways in order to see the conditions of Chery’s competences and resources.
After that, a qualitative analysis will measure the strategic development plan of Chery.
Finally, conclusions will be made based on the SWOT model.
Chapter 5. Macro-environment analysis
According to PESTEL framework, we can at least find some very important factors from the macro-level, which influence Chinese automobile industry and market so much.
5.1 Policy
Because the automobile industry plays such an important role in country’ economy, usually, governments would like to protect the local automobile industry in their countries. In China, the government also plays a vital role influencing the industry so much.
Policy of introducing foreign technology and domestic components
In 1980s, Chinese government made a policy of developing automobile industry, and the main principle of the policy is ‘start on high level, mass quantity, and professionalization’. Due to the significant gap between the poor capability of Chinese auto industry in 1980s and the high ambition of Chinese government, building joint venture and introducing foreign technology became the easy decision.
But the policy did not emphasis on the ability of research and development of new technology and product, and took it for granted that the foreign technology are always better than Chinese, so that many firm gave up easily their independent research and development competence when they introduced foreign technology and built joint ventures.
Another policy is that the government required a certain percentage of the car’s components that must be produced by Chinese firms. So many firms paid so much attention to how to produce components. But the ability of producing domestic components does not equal to the technology and competence of researching and developing new products. The content and nature of independently researching and developing a whole car are quite different from producing domestic components. Due
to the policy of domestic components, fewer resources were put into researching and developing whole car independently. And then, Chinese automobile lost their opportunity of independent research and development ability, and relies more and more on foreign companies
Policy of tariff, quota, distribution and finance service
The tariff, quota, distribution and finance service influence on both foreign companies, and Chinese local companies. For example, in 2001, as a revenge of Japan banning on importing three farming products from China, China imposed 100% extra tariff on Japanese automobile, cell-phone and air-conditioner, the result was that Japanese heavy truck was defeated in Chinese market. Due to the high tariff, the price of imported cars is very high.
However, after WTO, the government has to change a lot. Those changes would reduce the barriers of international competition and really frighten Chinese local companies. The current price of the same kind of car in international market is only 1/3 of the price of Chinese car in Chinese market. Although there will be tax rate of 25% after China entering WTO, the price of imported cars may still be cheaper than Chinese cars. The impact is that Chinese carmakers also have to reduce the price in the future. More and more Chinese companies begin to find strong multinational partners and reorganize in order to survive in the coming competition. In 1995, when China and USA got an agreement about WTO, the decrease of stock market of automobile industry in China showed the worry that reducing tariff will cause the price competition.
Table1- main points of Chinese automobile policy before and after joining WTO
Before After
Import Tariff on vehicles
70%-80% 25% by 2006
Import Tariff on components
15%-50% 10% by 2006
Import Quotas Annual quota Quota increased 15%
per year, phased out by 2006
Local content 40% in first year of production; 60%
and 80% in 2nd year and 3rd years
No limitation Auto Financing Foreign non-bank financial institutions
prohibited from providing financing
Foreign non-bank financial institutions permitted in selected cities prior to gradual national rollout
Another factor influencing automobile industry is the preferential tax rate. At the end of 2001, government published a new policy of consumption tax of cars: 47 types of cars with environment conversation technology will be collected less consumption tax of 30%. In 2002, government also gave the preferential tax rate to other 38 types of cars. According to the notice of reducing the consumption tax of cars with low pollution, published by the Ministry of Finance and the National Tax Bureau in 2000, the cars based on the Europe standard with low pollution level can be collected less consumption tax of 30%.
However, even after WTO, government still can influence the market in order to reduce the impact of decreasing tariff, although it seems that after WTO, the price of imported cars can reduce a lot due to the lower tariff, no quarto and no import licence.
In fact Chinese government now raises the requirements to import automobiles sale dealers, such as capital, technology and service. Consequently, the cost of dealers raise and then the price even keep the same. In short term, foreign import automobiles wouldn’t have visible advantage of price.
From April 2004, Chinese government made a series of new policies including controlling the investment. Those policies reduced the debt and credit and investment, and then influenced the automobile industry. The cars’ sales began to decrease during the same period.
5.2 Economy
The relationship between Chinese economy and Chinese automobile industry
The Chinese economic increase is a big surprise for the world. The increase rate of GDP in 2004 is 9.7%, and in 2005 it would be about 8.1%. The high increase rate drives the automobile industry in China, while the automobile industry will also contribute to the national economy.
The value of Chinese automobile industry is only 3 ％ of the total GDP, and according to the development plan of Chinese government, it should be 5 ％ of the GDP in 2010. Now the industry production capacity is 2.4million per year, which include 1.63 million cars. Every car can contribute 30，000 RMB(3000euro) to government. And the automobile industry can contribute to the employment of seven related industries.
Table: The analysis of total assets and sales of automobile industry and the GDP of China (unite: billion RMB)
Total assets of
automobile industry Sales GDP
1999 450 277 8207
2000 487 330 8947
2001 527 412 9732
2002 598 566 10517
2003 792 821 11731
2004 920 888 12857
Sources: Chinese automobile industry year book 2004
According to the table of analysis, there is a relationship between the Chinese economy and automobile industry。The increase of total assets of industry and sales are lower than the increase of GDP.
In 2002, 10% of the total industry increase in China should attribute to the automobile industry, and the Chinese automobile industry helped the total industry increase 1.1%.
Compared with 2002, the contribution of Chinese automobile industry is higher. In 2003, 17% of the total industry increase in China should attribute to the automobile industry, and the Chinese automobile industry helped the total industry increase 1.7%.
And the car consumption becomes a new force to drive the consumption in China. So it is obvious that the automobile industry will become more and more important and the government would pay more attention to it. Some policies of limiting car consumption will disappear or become more flexible.
The consumption of car in China
With the development of income level in China, the of residents’ consumption custom also began to change. The current trend of the consumption change is that the demands of enjoyment and development is becoming more important for people instead of the demands of standard survive, and the change of structure of consumption custom emphasizes more on the quality of life. Chinese’ consumption concentrates on the following fields: accommodation, cars, communication, education, traveling, and health care. The GDP per head in 2003 is 1090 dollars, and it is 2000 dollars in east China. In Shanghai, it is 5627dollars，and in Beijing, it is 3819 dollars. Then, in the east part of China, especially Beijing, Shanghai, and Guangzhou, and other more developed cities, the consumption of cars is entering the process of increase (Chinese automobile industry year book 2004).
However, the increasing traffic jams in cities, the cost of parking, etc., also begin to
increase, and insurance also increased because of the bad traffic condition. The increasing daily cost of cars influences lots of people who want to buy car.
The finance service of car consumption in China
In the world car market, 70% of the sales volume is purchased by credit loan. In North American, 85% of cars are purchased by credit loan; even in India, 60% of cars are purchased by credit loan. In China, no more than 15% of cars are bought by credit loan (Chinese automobile industry year book 2004). Compared with the market growth, the financial service in Chinese automobile industry has a big potential space.
So some big Chinese banks begin to introduce new financial service for car consumption. For example, People's Bank of China published a new plan for developing the financial service of car consumption; China Merchants Bank introduced a new financial service of car. Moreover, in 2003 the Agriculture bank of China increased the credit loan 20 billion RMB (2 billion euro) for car purchasing, Industrial and Commercial Bank of China increased 8 billion RMB credit loan, the China Bank increased 6 billion RMB, and China Construction Bank would like to emphasis its 10 billion RMB credit loan on car market (the report of Chinese auto industry economy in 2003).
However, Chinese banks and insurance companies are still immature, and from April in 2003, in order to reduce the risks, they had to deal with the problem of bad credit loan that negatively influenced the consumption of cars among young people (the report of Chinese auto industry economy in 2003).
The labor cost in China
Additionally, as a developing country, the income per person in China reached at just 1000 US dollars per year, it means a low labor cost will continue for a long-time.
5.3 Environment
The environment influences mainly list as following:
The lack of energy – high economy growth need more support from energy. However, the fuel price increased all over the world. Since 1998, the price of base oil has increased a lot. The policy of cheap energy in China and the poor efficiency of using energy (low outcome compared with high energy consumed) caused to the lack of energy in China. In China, the consumption of car’ fuel is very extravagant. The average consumption of fuel per one hundred kilometres in China is higher than that in Europe and Japan. In 2003, the consumption of base oil in China is 2520 million tons, and the imported primarily oil is 91 million tons. Therefore, 36% of the primarily oil in China relied on foreign import. China becomes the second oil consumption country, while USA is the first one. The oil consumed by automobile in China is more than 70 million tons and holds more than 30% of the consumption of oil (Chinese automobile industry year book 2004).
Consequently, the government published a new compelling standard of car’s fuel consumption, and a national plan of saving energy in middle and long term. The fuel tax and the increasing fuel price increase the cost. Moreover, government published a new policy that the cars fuel consumption should reduce 15% in 2010 than that in 2003. This policy shows that some kinds of high fuel-consumption cars may be washed out (Chinese automobile industry year book 2004).
Environment protection and waste disposal – While there is huge economy growth in China, Chinese government is facing more serious environment problems. In order to protect environment, Chinese government plans to reach the EU automobile exhaust standard. But for most Chinese companies, now they can only reach the standard of EU Ⅱ, and their waste exhaust disposal technology draggles 10 years than that of Europe companies.
5.4 Technology
The current automobile industry in China relies so much on foreign technology, and some important materials and equipments also need to be imported. Although some foreign companies built joint ventures in China and the Chinese partners control the share, to some extent, the technologies transferred to China is out of date and the innovation power of new technology and purchasing is still controlled by foreign companies.
Now the industry production capability generally closes to or equals to the level in developed countries. For the automobile industry in China, due to the foreign strong companies’ FDI in China, production equipments and production process are in the high level of the world. The neckline limiting development of Chinese auto industry is not the production, but the R&D, which is the core competence of automobile industry in the world. However, the competence of research and development cannot be got easily, it needs long term practical experience and requires high investment.
The normal investment in every new product in foreign automobile companies is 1000 to 2000 million dollars, which requires 3 – 4 million sales volume to recover the cost of R&D. The lowest requirement of production is 0.4-0.6 million cars, and 1-2 million components for foreign companies. As a developing country, the investment in technology of Chinese automobile industry is low. As an indicator, the average investment in R&D of Chinese companies is only 1.45% of sales revenue, but for majority of foreign companies, the rate of investment in R&D to sales is 5%-10%
(Chinese automobile industry year book 2004).
In general, the technology level in China has increased after the opening policy and reforming published by Chinese government. China introduced lots of technologies, especially the production technique, and China is also becoming “the world plant”.
Conclusion of macro-environment
As a conclusion, from the Marco-level, these important factors will influence Chinese automobile industry and the market rule as following:
Firstly, Chinese government controlled automobile industry for a long time. High tariff, quota, and other limitations of industry built high entry barriers and keep the whole industry maintaining high profit. However, as a result of WTO, the old policy protection became weaker than before, more foreign companies will enter Chinese market, then it would cause more intensive competition. Although the government could implement some control power (as the policy of distributor), the automobile industry will intend to be more market-driven.
Secondly, the economy growth is so fast that it would lead to stronger car consumption demands. And the automobile industry also plays a very important role in Chinese economic growth. The low financial service level e in Chinese car market is another factor limiting car consumption. However, labor cost in China is a strong point that can build cost advantage.
Thirdly, environment condition and lack of energy give influence on the cars demands.
The two problems would affect either the technology or the market of the automobile industry.
Finally, technology is one of the main weaknesses for Chinese companies, and the majority Chinese automobile firms are losing their opportunity of developing independent research and development competencies.
Chapter 6. Industry analysis (5 forces)
6.1 Intensity of Rivalry Market growth
In a high growth market, companies focus more on maintaining growth rather than fighting off competitors. Slower industry growth for firms seeking expansion may lead to greater competition for market share. The Chinese cars market has increased continually for years, and is becoming a new target market for many multinational companies.
Table: the sales volume of cars in China from 1993 to 2003
1992 1993 1994 1995 1996 1997
Sales Volume (Thousand unites)
162.7 229.7 250.3 325.5 403.3 482
1998 1999 2000 2001 2002 2003
Sales Volume (Thousand unites)
507.1 565.4 621.1 704 1120 1990
Source: the Chinese statistical bureau 2004
However, in 2004, the increase speed of cars sales slowed down. The cars sales volume is 2320 unites in 2004, the increase rate is 65% compared with that in 2003, but the increase rate of sales volume in 2003 compared with that in 2002, is only 13.5%. The first time when the increase rate slowed down was in May 2004.
According to the report for analyzing and forecasting Chinese automobile industry, since 2002 China personal purchasing cars has increased quickly, the proportion of personal purchasing cars is more than 60% market share. And the report also shows that due to the limitation factors such as increased fuel price, the city traffic capacity, etc., the China auto market year demand rate would increase 10%~15% from 2004 to 2010 year; until 2010, China automobile demand will achieve 8.8 million to 12 million unites (Chinese automobile industry year book 2004).
From the angle of the auto consumption structure, although the cars increase rate is
high in China, the proportion of sedan cars is low, in 2002, it only accounted for 33.6% in the auto market, and in 2003 it increased to 45%. Compared with 70% of that in developed countries, the proportion of sedan cars in China is still low.
Moreover, in China, the middle-income level is about 4000 dollars per year, and the population with middle-income is about 100 million. Those people are the latent customers, which means the market growth potential is very strong (Chinese automobile industry year book 2004).
Fixed cost
Firms with high “ fixed costs” relative to added value may be under enormous pressure to operate at full capacity to break even despite the fact that the absolute proportion of fixed costs is low. Lower utilization will quickly lead to losses. The nature of automobile industry is a high capital industry, the requirement of investment in research and development, building firms, and purchasing and building equipments and production line is very high (Lu Feng, 2004).
Compared with the automobile industries in developed countries, Chinese automobile industry has a large numbers of firms with small scale. In China, there are 118 firms;
the number of firms is quite large but the total production volume (in 2001) was even less than one big top multinational company. The number of firms with yearly
production volume was only 21.
Table the production volume of top 15 multinational companies in 1999
Rank 1 2 3 4 5
Company GM Ford Toyota Daimler Chrysler VW Production volume
(in unites)
8235065 6664234 5495618 4822609 4786211
Rank 6 7 8 9 10
Company Fiat_Iveco PSA Nissan Honda Renault Production volume 2623753 2515309 2456578 2425001 2345354
Rank 11 12 13 14 15
Company Hyundai Mitsubishi Suzuki BMW Mazda Production volume
(in unites)
1969974 1555345 1520965 1147420 967312
Source: the report of the development of automobile industry in the world in 1999, the research center of Chinese automobile technology, May 2000.
It is clear that all the production volumes of top 5 companies were more than 4 million per year. However, in 1999, the total production volume in China is only 1.87 million.
Table: the production volume of top Chinese firms in 1999
Rank 1 2 3 4 5 6 7
Company Shanghai- VW
Dongfeng FAW Changan Tianjin
Automobile
Changhe Hafei
Production volume
230946 unites
205394 unites
191616 unites
171012 unites
128786 unites 90076 unites
86017 unites
Rank 8 9 10 11 12 13 14
Company FAW-VW Liuzhou Weiqi
Yuejin Futian FAW-Jinbei Changan -Suzuki
Qingling
Production volume
82302 unites
80518 unites
71446 unites
64455 unites
62935 unites 44181 unites
40871 unites
Rank 15 16 17 18 19 20 21
Company Jianghuai Jiangling Shanghai -GM
Beijing Jeep
Beijing
Light-Automobile
Beijing Qimo
Guangzhou -Hongda Production
volume
34917 unites
25485 unites
23290 unites
21164 unites
19275 unites 15000 unites
10008 unites
Source: the Chinese automobile industry in 2000, the research center of Chinese automobile technology
Even in 2004, the total cars production volume of the main 27 Chinese companies was only 2 million.
Due to the low production scale, the fixed cost per car is high, so it is difficult to build economies of scale in Chinese automobile industry, and then the price of Chinese
carmakers’ production is higher than that in developed countries. Even for the top Chinese carmakers, the cost is 20-30% higher than that of western companies. In China, although people begin to notice the importance of life quality, the income level is still lower compared with that in developed countries, and the price of cars is a very important factor influencing customers’ decisions. So it is clear that the high cost and price is a key issue limiting the market demands.
Over-capacity
In industries where technology and economies of scale requires that capacity must be added to large increments, capacity additions can chronically disrupt the balance between supply and demand. Productivity of world automobile industry is already over capacity about 400 million units (according to automobile industry analysis of 2004 by KPMG). In 2004, the stock of cars was about 0.4 million unites in China; but most of the cars in stock were some old styles or made by smaller firms. The cars made by some big famous companies such as Guangzhou-Honda or Shanghai-VW is still popular and welcome in market.
Is the over-capacity in China really serious? It is wise to analyze two issues, the current productivity of Chinese automobile industry, and the market demands.
The first one is clear. According to the report of Chinese automobile industry 2003, the production volume of sedan cars is 2.03 million unites: in 2005, the productivity of sedan cars would increase to 2.5 million. It seems that the capacity will tend to exceed the demands in the short term. According to the report for analyzing and forecasting Chinese automobile industry, in the future, Chinese automobile industry will be10-20% over capacity.
However, the market demands is another vital factor to judge whether the trend of over-capacity would be so serious that it will limit the industry growth. As mentioned
the latent customers. The key is how to release the potential demands. There are some factors impacting the market demands: the cars price, the traffic conditions,
environment policy, and the daily cost, tax, and so on.
The high price is one important reason why lots of Chinese people cannot buy a car.
As mentioned in the part of fixed cost, even compared with the price in developed countries, the price in Chinese auto market is much higher. Chinese auto market should take not only the people living in big cities and some developed areas, but also the people in middle and small cities or towns into account. In recent years, there are more new cities and towns’ areas in China. In 2001, the population in cities increased to 481 million. If every hundred people has one car, the market demands would be 4.8 million unites. However, the high price is an important barrier for the people living in the small and middle cities or towns.
Another example is the limitation of traffic condition. Shanghai, the most developed city in China, has 130 million residents, 5 million families. If every family has one car, there will be 5 million cars in the city. If every car needs 10 square meters to park, 500 million cars will take 50 square kilometers. The traffic of city will get into paralysis.
Additionally, the high cost of using cars, the poor service system, and the poor policy of credit loan will also inhibit the market development.
Generally, the short-term over-capacity is true. But more important issue is the limitations of market demands and finding out how to release the market potential. So it is unnecessary to over-estimate the ‘over-capacity’ trouble of Chinese automobile industry.
Customer binding factors
Product differentiation (performance, uniqueness, etc.) and brand differentiation are
that buyers have preferences and loyalties to particular sellers, which stem from past advertising, customer service, product differences, or simply being first into the industry. In Chinese auto market, customers’ behavior depends on different price segments. In the middle and low segments, lots of people usually follow such stages of decision-making: price – engine- quality. But it is still true that strong brands as VW, GM, etc. have stronger reputation, compared with local brands. But the most important factor of decision-making is the real experience of using a car, not only a strong brand name. While, in the top segment people are attracted more by the brands differentiation according to their different demands.
Switching cost is the nonrecurring cost a buyer incurs by switching from one supplier to another. The cost includes retraining, new equipment, time invested in, etc.
However, for the cars users, the switching cost is not so high to inhibit them from choosing different cars.
Numerous or equally balanced rivals versus domination
In markets where many players are active, those companies may believe that they can gain market space more or less unnoticed. When an industry is highly concentrated or dominated by a few firms, the leader or leaders can impose discipline upon other smaller players.
In china, there are lots of players in the auto market. According to the report of Chinese automobile industry 2003, there are 27 companies producing cars. However, only several strong companies share the market.
Chart: the market share of top 10 carmakers in China in 2003
FAW-VW 16%
Shanghai-VW 24%
Tianjin 9%
others 17%
Changan 6%
Shanghai-Gm Shenlong 7%
6%
Guangzhou- Honda
5%
Cher y 4%
Fengshen 3%
Qiya 3%
Source: Chinese automobile industry year book 2003
Generally, the players’ structure in Chinese car market is instable. Although Shanghai-VW and FAW-VW hold 40% market share, there is no very strong companies that can control the market. In fact, the market share of two VW joint ventures decreased from 35% in 2003 to 18% in 2004.
Exit barriers
Exit barriers are economic, strategic, and emotional factors that keep companies competing in a market even though they may be earning low or even negative returns on investment.
In Chinese car market, the high investment, the strategic relationship with local government and companies with government background raise the exit barriers to a high level.
Summary of Intensity of Rivalry
The Chinese car market grows quickly, which could give an attractive strategic space to carmakers. The high exit barriers will also hold back new players. But after China joint WTO, the old policy limitation would gradually disappear or become more and more flexible, stronger western players in market, the high fixed industry cost, and lower brand loyalty than that in western countries, will make the market competition more intensive.
However, a key point is whether the Chinese market could continually growth in the future. The answer depends on whether the potential demands could be released or not.
For most Chinese car users, the price and daily cost (fuel, maintaining, government tax, etc) are the main factors that influence their decision-making. So if the cost of buying and using cars could decrease to a level that more people could afford or accept, over capacity of production in short term will not be a real trouble for Chinese automobile industry.
6.2 Buyer Power
A buyer group is powerful under the same circumstances. For examples, buyers that are sure that they can always find alternative suppliers may play one company against another, buyer’s switching costs are low, buyer has full information about demand, actual market prices and even supplier costs, or the product represents a significant fraction of buyer’s costs, this reflects price-sensitivity, etc.
In this part, the buyers’ power in Chinese car market will be analyzed.
Buying standard undifferentiated products
When buyers are sure that they can always find alternative suppliers, they may play one company against another. Therefore they will have strong bargaining power.
In fact, in Chinese sedan market, there are enough products for customers to choose.
In 2003, factories introduced more than 30 new products into the market. And in different market segments, customers can always find the similar products from different firms.
Table: the cars with different exhaust quantity and price in 2003 Exhaust quantity
≥2.0L 1.8～2.0L 1.0～1.6L ≤1.0L Price
≥ 20 thousands euro
8-20 thousands euro
≤ 8 thousands euro
Number of the types of cars
11 12 22 16
Source: Chinese automobile industry year book 2004
According to the figure in the table above, it is clear that in the middle and low price-capacity segments, there are more types of products, and then customers have more choice.
However, in the middle to high segments (exhaust quantity ≥2.0L, 1.8～2.0L), less products exist. Moreover, the brands differentiation impacts more on customers. Take Dongfang Zhizi that belongs to high price and capacity segment, as an example, the new product introduced by Chery, which has 2.4 L exhaust quantity but only 16.6 thousands euro. Compared with Audi A6, which has four kinds of products with price from 30-60 thousands euro and sales volume of 53108 in 2003, the sales volume of Dongfang Zhizi is only 7307. Low price strategy shows much less advantage in the middle to high segments. One important reason is that there is strong brands differentiation in such segment.
And some strong companies in this segment have more brands differentiation, and customers focus more on the reputation of different brands and has much less price sensitivity.
Generally speaking, in Chinese sedan car market, the buyers’ power differentiates in different segments. In middle to low price segments, customers have more power of bargaining than in the high segment.
Buyers switching costs
As the report mentioned in the part of intensity of rivalry, for the users of cars, the switching cost is not too high to choose different cars.
Buyer concentration or large buyer volume relative to seller sales
If a given buyer purchases a large portion of sales, the importance of the buyer’s business to the results will increase. If heavy fixed costs characterize the industry, large volume buyers are particularly potent forces.
In 2003, private customers bought 80% of sedan cars in China. The bargaining power of private customers is not so high that can influence much on the car producers.
Buyer’s information on supplier’s position
When the buyer has full information about demands, actual market prices, and even supplier costs, the buyer usually has greater bargaining leverage compared with when information is poor.
In Chinese market, now it is very easy to check the demands, stock level, and the cars prices of different firms. For example, in four biggest websites of China, sina.com, sohu.com, 163.com, and China.com, people can always easily check the cars prices.
Also there are other professional cars websites in China to provide clear information.
The product represents a significant fraction of buyer’s costs
This reflects price-sensitivity. When the product sold by the industry is a small fraction of the buyer’s costs, buyers are usually less price sensitive.
Nowadays, most Chinese families with normal income still cannot buy a car. The main cars owners are the high-income families. According to the survey by Chinese statistical bureau 2003, 50.8% of the families with yearly income more than 1000 thousands RMB (10 thousands euro) have private cars. And less than 5% families with income below 55 thousands RMB (5.5 thousands euro) have private cars.
The phenomenon mentioned above shows the relationship between the car consumption and income level. The families with high income are less price-sensitive, as the cars do not hold so big proportions of their income and cost. However, the number of high-income families is just a small part of population. Therefore, for most people in China, sedan cars are still a big cost.
Summary of buyer power
In Chinese car market, the buyer’s power in general is higher after WTO. More choices of products and brands, more information about price and market demands, and more private users, increase buyers’ power a lot.
6.3 Supplier Power
A supplier group is powerful if the following applies:
z The supplier group’s products are differentiated or it has to pay switching costs z The absence of substitute input - Even large and powerful suppliers can be
controlled if they have to compete with substitutes.
z Supplier’s industry is more concentrated than the one it sells to - Suppliers selling to more fragmented buyers will usually be able to exert considerable influence on price, quality and terms.
z The industry is not a key - When suppliers sell to a number of industries, and a particular industry does not represent a significant percentage of sales, suppliers are more prone to exert power.
z The percentage of total purchases is small - When the product sold by the supplier is a small fraction of industry costs, suppliers are more prone to exert power.
z The importance of the product to the industry’s business is high - The supplier’s power increases if the input is important to the success of the buyer’s
manufacturing process and/or product quality.
z Threat of suppliers’ forward integration - If suppliers are either only partly integrated or pose a significant obstacle to forward integration, they are in a position to demand bargaining concessions.
Introduction of Chinese automobile component industry
Generally speaking, there are two different ways of developing car-components industry. The first way is based on the market competition. The components firms are more independent when parallel with entire vehicle factories, and carmakers contact with component suppliers directly. The second way is based on the cooperation. This method is a part of lean manufacturing system. The benefit is related between each factory and the components firms and carmakers are integrated in a vertical industry chain. The entire vehicle factory is on the top of pyramid, and it instructs designing and manufacturing in first level factories (most are large-scale enterprises), and then
the first level factories subcontract to the multitudinous second level factories (most are medium enterprises), and more small businesses are in third level, which accepts the orders form first two levels. The US is the representative of first way as well as many European enterprises also belong to this kind. While, the second way takes Japan as the representative, and South Korea's components industrial system is also approximate to the Japanese model.
Since 1990s, the world automobile component industry has been in change, which can be characterized as:
1. The relationship between component firms and car-making firms changed. The trend of component firms separating from car –making companies becomes more and more clear. The car-making companies reduce the rate of components made in house as well as keep their core competences. Component firms need to do some work as product development and assembly of some parts of cars. Outsourcing reduces the components cost of car-making companies.
2. The global purchasing system is developing quickly. Car-making companies tend to purchase components in global market, and then the competition of component industry is more intensive. Therefore, the competition will result in the reform of component industry, and some huge groups may appear.
3.The trend of modularization, systematization, and digital technology. New technologies enable suppliers to provide more kinds of products to carmakers. Some big car-making companies begin to purchase components from several strong suppliers. The concentration of purchasing may raise suppliers’ bargaining power.
The traditional Chinese car-component industry is more similar to the Japan system.
In 1953, government built 86 component firms according to the demands of car making industry. T majority of main suppliers were designed to match car-making
firms. The result of the system is that the Chinese car component industry relies much on the car-making firms.
In the western countries, the investment in component firms is generally balanced with the investment in car-making firms. The investment in component firms is more than 40% of the total investment in automobile industry, and some time it is 60-70%.
Whilst, the investment in component firms in China is only 20-30% of the Chinese automobile industry.
Compared with the investment in component firms, the return seems quite good. The total domestic production of vehicle components in China was USD 16.8 billion in 2001, USD 1.6 billion of which was exported; total domestic sales of vehicle components in 2001 was USD 17.8 billion, with USD 2.6 billion coming from imports. (McKinsey, “China's Automobile Market" 2001) In 2003, there are more than 2000 automobile component suppliers in China (Chinese automobile industry year book 2004). Therefore, it is a very decentralized market.
The value of the aftermarket for components parts grew from USD 0.66 billion in 1994 to USD 2.54 billion in 2002. The market is forecasted to grow to USD 3.04 billion in 2004. With continued growth of the vehicle industry and the eventual ageing of vehicles already on the road, the aftermarket for component parts is expected to continue to grow at a strong rate. The majority of the aftermarket for component parts is made up of mechanical parts, accounting for 56percent in 2002; electrical and electronic components accounted for 23 percent and 22 percent, respectively. The 'engine and drive' category accounted for the largest aftermarket segment with 25 percent of the total market value in 2002; other key segments are 'controls and dials' and 'in-car entertainment', with 11 percent and 10 percent of total market value, respectively. (China contact " Automobile parts and aftermarket in China" 2002) Table Market share of component parts after market, 2002
Mechanical parts Electrical parts Electronic parts
Engine and drive 25% Batteries 7 % Controls and dials 11 % Exhaust and
emissions
8% Ignition systems 7 % In-car
entertainment
10 % Filters 7 % Lighting 4 % Security systems 1 % Brakes and
assemblies
6 % Others 4 %
Others 9 %
Total 56% 23% 22%
Source: China contact " Automobile parts and aftermarket in China" 2002
According to the information mentioned above, it seems that the component firms in Chinese automobile industry goes very well. The reason may be that Chinese carmakers usually followed such a process –developing firms assembling imported components, and then developing the component factories. The result is that the importance of the investment in component firms was reduced. However, due to the advantage of low cost in China, especially the labor cost, and the huge demand of car components, the return of the low investment in component industry is good. The disadvantage is that the low investment caused the poor technology and low cap economy of scale.
As part of the agreement to China's accession to the WTO, import tariffs on vehicle components will be reduced progressively from an average 23 percent pre-WTO to an average 10 percent in 2006; import quotas will be increased by 15 percent annually and phased out by 2006. Currently, the Chinese government is increasing the
proportions of imported component parts within the quota as a way of controlling the number of completed vehicles imported onto the market.
After 2006, canceling the quota and reducing tariff will give carmakers more purchasing freedom in global market. According to the analysis of Chinese Automobile Association, the average cost of Chinese made components is more expensive than those in global market. Only 10% tariff will reduce the cost of
