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Risk of blind spots in the fast lane
By Andrew Thomson |
July 9, 2012, Monday
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Print Edition
Print Edition
THE world's automakers are engaged in a headlong rush to expand in China. With over 90 brands and 475 car models present in the Chinese market, competition is fierce. Strong drivers for this market include continued urbanization, developing consumer tastes and aspirations, the government's ambitious plans for new energy vehicles and rising levels of disposable income. Chinese manufacturers are also looking to expand their overseas operations via joint ventures and alliances.
In a recent KPMG global automotive survey of more than 200 senior industry executives, respondents were asked to identify those automakers most likely to gain global market share by 2016. Nine out of the top 20 manufacturers named were Chinese - including Geely, SAIC and Chery. Their vehicles are starting to become more technologically competitive.
The fast lane beckons for some. However, there are challenges for the sector, which if not addressed, could put the brakes on the speed of growth and development for both the domestic and foreign auto manufacturers in China.
Overcapacity
Overcapacity and excess production remain key issues. More than half of KPMG's survey respondents said they believe that China's automotive market will be the most overbuilt in the BRIC (Brazil, Russia, India and China) markets in 2016. In fact, China is now reaching a critical juncture, with overcapacity emerging as one of the greatest development risks it faces.
At the end of 2011, China was already estimated to have six million units of unutilized capacity. That roughly equates to twice the size of the current car market in Germany, and we estimate the figure will rise to over nine million units by the end of 2016.
This may be up to 35 percent more manufacturing capacity than the Chinese market can actually absorb. Rising inventories could subsequently put pressure on prices and profitability. This dynamic represents a significant challenge for the automotive industry. Automakers should take it seriously as they formulate capacity expansion and manufacturing set-up plans.
However, it is important to note that overcapacity is not necessarily an industry-wide problem.
Considerable diversity
Volkswagen and General Motors, as well as luxury carmakers including BMW and Mercedes-Benz, are in a much better position to expand production levels and have considerable room for growth. Furthermore, the urgency of the issue varies across different vehicle segments. Whilst growth in sales of small cars may be slowing, the market for SUVs and vehicles in the luxury and premium segments has been and will likely remain robust. This suggests considerable diversity in the market.
Based on an analysis of annual sales rankings and the development of original equipment manufacturing (OEM) capabilities in China, overcapacity can be seen as a complex matter. "Ineffective" capacity may well be too high, while "effective" capacity may be just sufficient, or even underdeveloped.
It is evident that for the OEMs producing top-selling models, demand is high and extra production is needed to meet market requirements. In this case, insufficient capacity may well be a development bottleneck. Conversely, the ineffective capacity of the hundreds of mid- or small-scale automakers crowding the market contributes disproportionately to the overall manufacturing overcapacity problem.
A significant structural change in the industry will be required for this situation to change, and that will require commitment and action from many stakeholders - including the central and provincial governments and the automakers themselves.
The good news, however, is that car penetration rates are still very low in China, with estimates varying from around 55-65 cars per 1,000 people, compared with more than 850 per thousand in the US and approximately 450 per thousand in Japan.
Additionally, increased cooperation between Chinese automakers and their joint venture partners will be critical. Given the recently announced changes in investment policy in China, foreign OEMs will become increasingly reliant on their joint venture partners for market access and development. Meanwhile, Chinese OEMs have bigger aspirations to develop overseas. By coming closer together, Chinese and foreign OEMs can pursue their mutual strategic interests.
Our survey also revealed that 75 percent of respondents said they believe that mature and emerging markets are converging. This will mean that the opportunities and the challenges will become the same for both over time. OEMs from mature markets will therefore have a wealth of new opportunities, but they can also expect fierce competition from players in the BRIC countries for traditional and new technologies in their domestic markets.
Many Chinese carmakers are also making concerted efforts to adjust their strategies and improve quality. Chinese brands may continue expanding over the next few years. One striking statistic in our survey is that 74 percent of respondents see customer service excellence as the key to successful car retailing. This is an area where there remains significant room for development in China.
In a recent KPMG global automotive survey of more than 200 senior industry executives, respondents were asked to identify those automakers most likely to gain global market share by 2016. Nine out of the top 20 manufacturers named were Chinese - including Geely, SAIC and Chery. Their vehicles are starting to become more technologically competitive.
The fast lane beckons for some. However, there are challenges for the sector, which if not addressed, could put the brakes on the speed of growth and development for both the domestic and foreign auto manufacturers in China.
Overcapacity
Overcapacity and excess production remain key issues. More than half of KPMG's survey respondents said they believe that China's automotive market will be the most overbuilt in the BRIC (Brazil, Russia, India and China) markets in 2016. In fact, China is now reaching a critical juncture, with overcapacity emerging as one of the greatest development risks it faces.
At the end of 2011, China was already estimated to have six million units of unutilized capacity. That roughly equates to twice the size of the current car market in Germany, and we estimate the figure will rise to over nine million units by the end of 2016.
This may be up to 35 percent more manufacturing capacity than the Chinese market can actually absorb. Rising inventories could subsequently put pressure on prices and profitability. This dynamic represents a significant challenge for the automotive industry. Automakers should take it seriously as they formulate capacity expansion and manufacturing set-up plans.
However, it is important to note that overcapacity is not necessarily an industry-wide problem.
Considerable diversity
Volkswagen and General Motors, as well as luxury carmakers including BMW and Mercedes-Benz, are in a much better position to expand production levels and have considerable room for growth. Furthermore, the urgency of the issue varies across different vehicle segments. Whilst growth in sales of small cars may be slowing, the market for SUVs and vehicles in the luxury and premium segments has been and will likely remain robust. This suggests considerable diversity in the market.
Based on an analysis of annual sales rankings and the development of original equipment manufacturing (OEM) capabilities in China, overcapacity can be seen as a complex matter. "Ineffective" capacity may well be too high, while "effective" capacity may be just sufficient, or even underdeveloped.
It is evident that for the OEMs producing top-selling models, demand is high and extra production is needed to meet market requirements. In this case, insufficient capacity may well be a development bottleneck. Conversely, the ineffective capacity of the hundreds of mid- or small-scale automakers crowding the market contributes disproportionately to the overall manufacturing overcapacity problem.
A significant structural change in the industry will be required for this situation to change, and that will require commitment and action from many stakeholders - including the central and provincial governments and the automakers themselves.
The good news, however, is that car penetration rates are still very low in China, with estimates varying from around 55-65 cars per 1,000 people, compared with more than 850 per thousand in the US and approximately 450 per thousand in Japan.
Additionally, increased cooperation between Chinese automakers and their joint venture partners will be critical. Given the recently announced changes in investment policy in China, foreign OEMs will become increasingly reliant on their joint venture partners for market access and development. Meanwhile, Chinese OEMs have bigger aspirations to develop overseas. By coming closer together, Chinese and foreign OEMs can pursue their mutual strategic interests.
Our survey also revealed that 75 percent of respondents said they believe that mature and emerging markets are converging. This will mean that the opportunities and the challenges will become the same for both over time. OEMs from mature markets will therefore have a wealth of new opportunities, but they can also expect fierce competition from players in the BRIC countries for traditional and new technologies in their domestic markets.
Many Chinese carmakers are also making concerted efforts to adjust their strategies and improve quality. Chinese brands may continue expanding over the next few years. One striking statistic in our survey is that 74 percent of respondents see customer service excellence as the key to successful car retailing. This is an area where there remains significant room for development in China.
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