Case Study Chinas Automotive Industry

Published Date: 02 Nov 2017

An automobile or car is a passenger vehicle that usually has four wheels and is moved on land by an engine. A truck is a motor vehicle that is designed to carry heavy loads.

The origin of the automobile cannot be attributed to one person, but its history can be traced back to technological developments in Europe. However, it was in the United States where pioneering automakers like Ransom Olds and Henry Ford began mass-producing cars and made the automobile a major transportation mode.

Today, the automobile is the most important way of personal transportation for millions of people around the world, especially in developed countries where people mostly depend on their cars and trucks to travel to and from work, to run errands, to transport goods, to visit friends and relatives, and to travel. The increased number of automobiles that are produced and sold has made the automobile industry a global giant.

Automobiles are sold all over the world. In many years it has being Germany, Japan and the United States that has dominated the global market share, but this has changed. There is a progressive and sustained increase in customer’s purchase of inexpensive automobiles globally. In the last past years, there has been global economic crisis and therefore people are getting more aware in purchase of automobiles. People are looking out for more features with lower affordable price. These factors have paved way for automotive industries of many developing

countries to compete on different factors ranging from price to technology.

Chinese market is known and famous all over the world for ‘‘less’’ price of its products. China’s success in the automotive industry is because of its cheap availability of labor and technology. Autoworkers get paid around $240 a month. This works out to about $1.50 an hour, compared to $30 an hour in Germany and $5 an hour in Poland. In the United States some workers get $65 an hour when their pensions, health insurance and other benefits are factored in. There are no independent unions in China. There are strong government pressures for workers to stay in line. Its research and development costs are minimal because designs are borrowed or copied from foreign firms.

HISTORY

The history of the Chinese automobile industry is quiet interesting. The first truck in China was made by Zhang Xueliang in 1931 called Ming sheng. Yang hucheng, general from China, patronized Chinese inventor Tang Zhonming to manufacture an automobile which is coal fuelled. The first milestone in the Chinese automobile industry took place with the First Automobile Works, which was the first modern automobile factory in China. China produced its first 2 ½ ton truck (NJ130), which was based on Russian GAZ-51 in Nanjing. The truck was named Yuejin (meaning ‘‘leap forward’’) by China’s first Ministry of Industrial Machinery. In the late 1950s and 60s several automobile factories were set-up in different places in China like Nanjing automobile (Group) Corporation in Nanjing, Shanghai Automotive Industry Corporation in Shanghai,China National Heavy Duty Truck Group in Jinan, and Beijing Automotive Industry Holding Corporation in Beijing. Later Second Automobile Works or Dongfeng Motor Corporation was founded.

In the 1980s, foreign automakers were allowed to form joint ventures with state-owned Chinese partners with foreign ownership limited to 50 percent. The goal of the government was to develop a car industry quickly; learning from the foreign companies how to make cars while maintaining control of the car industry. Volkswagen and General Motors were the first to arrive on the scene. Every one made out well in part because competition was strictly controlled.

In 1983, American Motors Corporation (AMC, later acquired by Chrysler Corporation) signed a 20-year contract to produce their Jeep-model vehicles in Beijing. The following year, Germany’s Volkswagen signed a 25-year contract to make passenger cars in Shanghai, and France’s Peugeot agreed to another passenger car project to make vehicles in the prosperous southern city of Guangzhou. As a result there were three big joint ventures and three small joint ventures:

1) Beijing Automotive Industry had a joint venture with Hyundai Motor and Daimler Chrysler producing Jeep Cherokee

Automobile production by year

Year

Production (in million units)

1992

1.0

1999

1.2

2000

2.07

2001

2.33

2002

3.25

2003

4.44

2004

5.07

2005

5.71

2006

7.28

2007

8.88

2008

9.35

2009

13.832) Ghauagzou Automobile Industry Group had partnership with Peugeot for producing Peugeot 504 range of cars. However in 1990s it was replaced by Honda for producing Accord and Fit with huge success. And in 2006, it started to manufacture Toyota Camry, with huge success also. Making Guangdong province is now the center of car manufacturing for Japanese brands like Toyota, Nissan e.t.c

3) Tianjin Automotive Industry made its partnership with Daihatsu for producing Daihatsu Charade range of cars.

After 1990s several automobile enterprises entered Chinese Automobile Industry as it was profitable to produce vehicles in China as the cost of producing a vehicle in China was less. Some originated from old Chinese defense companies Changhe and Hafei while others from the old state owned companies like BYD auto, Brilliance China Auto, Chery Automobile, and Changfeng Automobile. Some private Companies were also formed like Geely Automobile and Great Wall Motors.

MARKET STRUCTURE

Chinese automobile Industry has a market structure of perfect competition. However the entry and exit in the industry is controlled and regulated by the Chinese government. Additionally impressive is the number of car builders in China. More than 80 Chinese companies are producing cars at the moment. There is a huge amount of competitors which need to form a organization so that they can be successful not only in China but in the whole world. Up to now the majority of these companies are quite unknown abroad and so the Shanghai Automotive Industries Corporation (SAIC) and Nanjing Automobile decided to develop standards in design, the production process and the sales management of these companies in order to raise the export rate of Chinese cars.

GOVERNMENT REGULATIONS

 

China’s automobile industry is regulated by several governmental departments. The National Development and Reform Commission is the major one. Other departments perform their rights within their respective responsibilities.

 

1. National Development and Reform Commission ("NDRC")

 

The NDRC makes and amends car industry development policies of China every few years. The establishment of new sino-foreign joint ventures in automobile manufacturing requires approval by the NDRC. It is also in charge of administration of manufacture of new energy automobiles, external marks of automobile products and recalls of detective automobile products.

 

2. Ministry of Commerce ("MOFCOM")

 

The MOFCOM is mainly in charge of administration of car brands sales and license of import of automotive products.

 

3. State Administration for Industry & Commerce ("SAIC")

 

The SAIC is in charge of registration of car management enterprises, check and ratifying of business scope of car sales enterprises, supervision of car brands sales and examination and approval of recordals of brand car management enterprises.

 

4. General Administration of Quality Supervision, Inspection and Quarantine ("AQSIQ")

 

The AQSIQ implements checks and investigation on defective automobile products, organization and administration of recalls of defective automobile products, and inspection of imported automobiles. It basically policies the standards which are drafted and set by industry bodies.

 

Furthermore, the Ministry of Industry and Information Technology ("MITT") is responsible for national administration of automotive fuel consumption; the General Administration of Customs ("Customs") is in charge of administration of recalls of detective imported automobile products. The mandatory certification of automobile products is administrated by the Certification and Accreditation Administration ("CAA").

 

Conclusions

 

Clearly, China’s car industry is open to foreign investment. However, the Chinese government restricts foreign investment on entire car manufacturing in a way, in order to protect domestic car brands. These restrictions can be circumvented, and it appears that component manufacturing remains relatively unregulated to a large extent. [i] 

LEADING BUSINESSES IN THE INDUSTRY

In order of the sales report the leading businesses in the Chinese automobile industry are:-

1) BYD (Build your dreams)

BYD officially entered the automobile industry in 2003 with the purchase of Tsinchuan Automobile Company Limited (Now BYD automobile limited) and then started the development of national self-brand automobiles. It has five major industrial bases in China.BYD now has a has world class capabilities in whole car manufacturing, mould R&D.In short BYD is the most innovative Chinese Brand in Chinese Automobile Industry with 100% growth rate in 5 years and sold over 448000 vehicles in 2009,a year to year increase of 162%.

2) Chana Automobile Company Ltd.

Born in 1862, Changan was a pioneer of China’s modern industry. To date, Changan has a history of over a century. It’s one of the first-class enterprises of Chinese auto industry. With solid production strength, Changan has four major production bases in Chongqing, Hebei, Jiangsu, and Jiangxi Province across China, including 11 complete vehicle plants and 2 engine plants, with the annual yearly capacity of 1.5 million vehicles and 1.5 million engines. Changan also has six production bases in Asia, America, Africa and Europe. A three-country-five-place researching and developing pattern is formed in China, Italy and Japan, including a series engine platform ranging from 0.8L to 2.5L. The automobile product list covers both passenger cars and commercial vehicles. Our automobile brand sale is among the top 20 around the world and top 4 in Chinese automobile industry. In 2009, the brand value of Changan was RMB 21.619 billion Yuan.

3) Beijing Automobile Works (BAW)

Beijing automobile works is one of the pioneers of Chinese Automobile Industry; it is the origin and epitome of the automobile industry development in Beijing. BAW has been manufacturing light off-road vehicles and trucks for 40 years. It is headquartered in Chaoyang District of Beijing and has an accumulated productive capacity of 1 million vehicles. It is fixed supplier for military purpose vehicles in China. [1] 

4) Dongfeng Motor Corporation

Founded in 1969, Dongfeng Motor Corporation (hereafter referred to as DFM), formerly named Second Automobile Works Co., is one of the 3 giant auto makers in China. Its main businesses include passenger vehicles, commercial vehicles, engine, auto parts & components, and equipment. Through over 40 years of development, a set of R&D and manufacturing facilities have been established as well as an extensive distribution and after-sales network, which unfolds a business display of footed in Hubei while radiating the whole nation. DFM has gained an annual output of 1,137,000 vehicles, a sales income of ï¿¥164,800,000,000, 12.94% market shares and 121,000 registered employees. The company ranks 20th in TOP 500 of domestic enterprises and 5th in TOP 500 of domestic manufacturers respectively

5) First Automotive Group Corporation

FAW Group is a global leader in the vehicle manufacturing industry with a 50-year history of innovation. Founded in 1953, FAW employs 133,000 people around the world and sells products in over 70 countries. FAW is a diversified maker of quality light, medium, and heavy-duty trucks, automobiles, municipal buses and luxury tourist coaches, custom bus chassis, and mini-vehicles with total sales in excess of 7 million vehicles worldwide. FAW maintains the lead market position within China while continuing to expand into new international markets, executing a carefully planned strategy to build a comprehensive global organization. FAW has 28 wholly owned subsidiaries and controlling interest in 18 partially owned subsidiaries. Among these are FAW Jiefang Truck Co. Ltd. and FAW Bus and Coach Co. Ltd., which are wholly owned subsidiaries; FAW Car Co. Ltd., Tianjin FAW Xiali Automobile Co. Ltd., and Changchun FAW Sihuan Automobile Co. Ltd., whose shares are traded on the stock exchange, and FAW-Volkswagen Automobile Co. Ltd. and Tianjin FAW Toyota Motor Co. Ltd., both of which are Sino-foreign joint ventures. FAW's state-of-the-art government-certified engineering development and test center, China's largest and most extensive automotive R&D facility, is the country's leader in automobile and commercial vehicle research. It stands alone in China in possessing both cold and semi-tropical weather vehicle testing facilities. The company's total assets are valued at 109.85 billion Yuan (US $14.27 billion).

6) Chery Automobile Company Ltd.

Chery Automobile Co., Ltd. was founded in 1997 by five of Anhui’s local state owned investment companies with an initial capitalization of RMB 3.2 billion. Chery Automobile Company ranked 1st in export of Car for 5th consecutive year.

7) Shanghai Automotive Industry Corporation

As one of the top 3 automotive corporations in China, Shanghai Automotive Industry Corporation (Group) ("SAIC" for short) is mainly engaged in manufacturing, sales, research and development, and investment in passenger cars, commercial vehicles and components, as well as related services trade and financial business. Besides, SAIC holds 78.94% of the equity of SAIC Motor Co., Ltd. and 60.10% of HUAYU Automotive Systems Holdings Co., Ltd. ("HUAYU Auto" for short), an independent listed company engaged in auto components supply business. In 2008, SAIC once again topped the Chinese automotive groups for a sales volume of over 1.826 million units of vehicles, of which 1,118,000 units are passenger cars and 708,000 units commercial vehicles. In 2009, the company also entered the Fortune Global 500 list for its consolidated revenue of $24.88 billion (2008), ranking 359.

8) Anhui Jianghuai Automobile Company Ltd.

Anhui Jianghuai Automobile Co., Ltd. also known as JAC is an automobile manufacturer based in Hefei, Anhui Province, China. The company was founded on 30 September 1999. The company was previously known as Hefei Jianghuai Automobile Factory, which was founded in 1964. Its sales reached 320,000 units in 2009, including 12,100 units sold overseas. The JAC's flagship model is JAC Refine [2], an MPV based on Hyundai Starex.

9) Geely Automobile

Geely Automobile is a Chinese automaker and is with BYD, Chery, and Great Wall, one of the four largest independent private automobile manufacturers in the People's Republic of China. The parent company is Geely Holding Group which began manufacturing in 1986 in Taizhou in Zhejiang province. Geely launched its auto manufacturing business in 1997. In 2005, Geely Automobile Holdings Limited was listed on the Hong Kong Stock Exchange.

Geely is now headquartered in Hangzhou, Zhejiang, and operates six car assembly and power-train manufacturing plants in China that are located in Lanzhou (Gansu province), Linhai (Zhejiang province), Luqiao (Zhejiang province), Ningbo (Zhejiang province) and Shanghai These facilities enable a production capacity of approximately 300,000 cars per year.

In 2009, Geely Holding Group announced that it was close to an agreement to acquire Volvo Cars from Ford Motor Company. Geely signed a deal with Ford to acquire Volvo Cars for $1.8 billion on March 28, 2010 and closed the deal on August 2, 2010.

10) Brilliance China Automotive Holding Ltd.

Brilliance China Automotive Holdings Limited is a publicly owned, Chinese investment holding company making automobiles, automotive components and minibuses. Based in Liaoning province and listed on the Frankfurt and Hong Kong stock exchanges, it, as of 2009, was the eighth-largest automaker in China.

ESTIMATED SIZE OF THE INDUSTRY IN UNITS/DOLLARS

PRODUCTS SOLD

China’s automobile industry sees a promising future after years of development. In 1998, China produced 1.56 million automobiles, accounting for only one sixth of General Motor’s annual output and one third of Toyota’s yearly production. After less than one decade of development, China has emerged into the world’s fastest-growing major auto market, with an average annual growth of more than 22.2% from 1998 to 2006.In 2006; it overtook Japan as the world’s second largest auto consumer after the U.S., with auto sales rising 25.1% year-on-year to 7.2 million units. Meanwhile, it surpassed Germany to become the third largest auto maker after the U.S. and Japan, with automobile production climbing 27.6% year-on-year to 7.3 million units. In 2007, automobile production and sales jumped over 20%, despite soaring raw material prices, indicating continued robust growth in the world’s second largest auto market. Automobile production amounted to 8.88 million in 2007, with an increase of 22.02% over 2006. This figure closely approaches the target of 9 million units set in the eleventh 5-year (2006-2010) plan for the automobile industry by China’s National Development & Reform Commission, the nation’s top economic planner. Auto sales totaled 8.79 million, representing a growth of 21.84% year-on-year. Figure 2.1.1 shows China’s automobile production and sales between 2001 and 2007.

TRENDS IN SUPPLY AND DEMAND OVER RECENT YEARS

EXPORT AND GROWTH IN THE INDUSTRY AND ECONOMIC RISKS

WHO ARE THE MAJOR BUSINESSES

WHERE ARE THEY LOCATED

WHAT IS THEIR MARKET SHARE

MACRO-ECONOMIC FACTORS

Among the world’s most powerful economies China ranks second with a GDP of U.S $ 4.4 trillion along with this it has the world’s largest population that helps the country to be most. As compared to developed economies, emerging economies in general present an optimistic outlook. China's macroeconomic fundamentals contain many favourable factors such as the increase of domestic demand incurred by economic restructuring, a strong growth trend of retails as well as the expansion of capital markets.

"A 10-percent growth rate cannot be explained as economic overheating given Chinese macroeconomic fundamentals," Goldman Sachs China economist Helen Qiao said.

Goldman Sachs listed five factors backing China's sustainable development.

First, domestic demand has become a major driving force. Secondly, internal and external demand tends to be stable. Thirdly, China has less reliance on exports to the United States, Europe and Asia's developed regions, while the rest of the world relies more on China's exports.Fourthly, a tightening financial context has helped increase the credibility of Chinese policymakers' control on the macroeconomic policies.

Finally, China's "12th five-year plan" has specified key role of domestic demand, and China will lay stress on both consumption and investment influential economies of world

National income/ national income per capita China has emerged as bigger power and with economic soundness it is heading for achieving number one position in the world.

Gross domestic product grew at an annualized rate of just 0.4 per cent, the government said Monday, far below the annualized 4.4 per cent expansion in the first quarter and adding to evidence the global recovery is facing strong headwinds.

The figures emphasize China surfacing as an economic power that is altering everything from the global balance of military and financial power to how cars are designed. It is already the biggest exporter, auto buyer and steel producer, and its global influence is expanding.

Interest rate

China's expansion, running at more than three times the pace of growth in the US, may add fuel to arguments that the second-largest economy can withstand a stronger yuan. China raised interest rates recently for the first time since the global crisis, affirming policymakers' confidence in the recovery and concern at price pressures.

Although China's economy grew 9.6 per cent in the third quarter of 2010 its inflation accelerated to the fastest pace in almost two years, adding weight to calls for the engine of the global recovery to let its currency appreciate more rapidly. Consumer prices jumped 3.6 per cent in September from a year earlier, so China has to be careful about inflation as it would negatively affect huge segment of population.

When China awakes, Napoleon said to have warned, "The world will tremble."

China was devastated by floods, famines, rebellions, civil strife and finally communist dictatorship. It’s all more of a shock, then, that the sleeping dragon has now awoken with a vengeance. They have productive human capital therefore China has overtaken Japan as the world’s second largest economy.

China’s economy is huge and progressing rapidly in the last 30 years. It has grown averagely 8% p.a. in terms of GDP. Its economy has progressed more than 10 times during this period. China and India were the only two countries that were hit the minimum and came up quickly from the recent global meltdown. Hence it proves that Chinese industries are not very sensitive to economic fluctuation.

The economists believe that substantial appreciation in the yuan would result in huge unemployment and start social disorder.

However there are still inequalities in the income of Chinese people and this income gap has increased in recent times. The inflation is soaring and unemployment rate is also rising marginally.

CONCLUSIONS