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Auto sector key driver of domestic consumptio

by Lei Xing

 

Senior auto executives and economists gathered in Beijing on October 27 to discuss “China’s Opportunities under a Changing Global Environment,” a seminar organized by auto.sina.com.cn. The following are highlights of the seminar. – Editor

 

Auto sector to become key driver of domestic consumption

“China’s economic growth will eventually depend on domestic consumption and the auto industry should be encouraged to become its most important driver,” said Yao Jingyuan, chief economist of the State Statistics Bureau.

According to Yao, China’s GDP growth so far has depended heavily on investment – one of the three major drivers of China’s economy. In the first three quarters of this year, investment alone accounted for 7.3 percentage points of China’s 7.7 percent GDP growth. Consumption and export, the other demand forces, each contributed 4 and -3.6 percentage points, respectively.

“The worst period is behind us and China will no doubt maintain its economic growth. The challenge, however, is to adjust this imbalance in the drivers of the economy,” said Yao

 

China‘s auto industry development to remain sustainable

Although China’s automobile market this year has been buoyed by the timely introduction of stimulus policies, Gu Xianghua, deputy secretary-general of China Association of Automobile Manufacturers (CAAM) believes that the industry will remain on a relatively fast and sustainable growth path for quite some time.

Four reasons, according to Gu, support this prognosis. First is a fundamental demand. China’s automobile ownership per 1,000 people stands at only 38, about one-third the level of developed countries. Second, China’s per-capita GDP will surpass $3,000 this year, which is a threshold for mass consumption of automobiles. Third, many consumers in 2nd and 3rd tier cities have only begun to purchase automobiles. And fourth, China’s rapid urbanization and highway construction will drive and support the development of the auto industry.

Gu indicated that the industrial output value of China’s auto industry accounted for about 2.2 percent of the GDP last year. This proportion is expected to further increase this year.

 

Green and quality small cars offer great opportunities

“Green and quality low-displacement cars have unprecedented development opportunities,” said Wei Jianjun, chairman of Hong Kong-listed Great Wall Motor Co., Ltd. “It is both a pragmatic choice, given the unpredictable future of electric vehicles, and a strategic opportunity for China’s independent brands to compete and catch up with the rest of the world.”

Wei predicts that under the back drop of China’s huge population and low per-capita resource allocation and income, small, green and fuel-efficient cars will eventually become mainstream choices. By 2012, according to Wei, sales of 1.5L and lower cars in China are expected to reach nine million units, accounting for approximately 60 percent of the passenger vehicle market.

“In our newest products, we have reduced engine weight by 20 percent and thus fuel consumption 16 percent, which has improved overall efficiency and power of our vehicles,” said Wei.


China’s 12th Five-Year Plan to specify carbon emission reduction targets

China’s 12th Five-Year Plan (2011-2015) for the development of the national economy, which is being drafted, will specify carbon emission reduction goals, predicted Fan Gang, director and economist of the National Economic Research Institute.

Fan listed four major post-crisis trends that will impact the global economic landscape: clean energy technology, changing balance of global consumption and savings, returning to a non-finance-focused economy and the rise of emerging markets as key global consumer markets.

Like CAAM’s Gu, Fan also believes that China’s automobile consumption will continue to grow stably in the foreseeable future, as many rural household have just reached a threshold where they are starting to purchase automobiles. The fact that 70 percent of China’s population remain as the so-called “migrant workers” also creates huge potential for the automobile market.

 

BAIC to establish new energy vehicle company

Beijing Automotive Industry (Holding) Corp. (BAIC), China’s fifth largest automaker by sales volume, will unveil a new subsidiary, the BAIC New Energy Vehicle Co., Ltd., in early November, revealed BAIC chairman Xu Heyi.

A joint venture battery and electric motor company with an unnamed Chinese partner will also be unveiled.

Xu indicated that the development of new energy vehicles will be a key focus in BAIC’s near-term planning. “We plan to achieve industrialization of our new energy vehicles within the next three years, with an annual output target of 30,000-50,000 units and sales revenue accounting for 5-10 percent of BAIC’s total revenues.”

BAIC has already provided Beijing with 1,000 hybrid buses made by its subsidiary Beiqi-Foton, and expects to double that number to 2,000 next year. It is also working with the municipal government on providing 2,000 pure electric sanitation vehicles next year and possibly hybrid taxis in the future.

Xu said Beiqi-Foto’s joint venture with Daimler would be approved by the government soon. The company also plans to develop independent-branded SUVs and small cars with its Beijing Automotive Works (BAW) subsidiary and its manufacturing facility in Zhuzhou, Hunan Province, respectively.

 

Around 20 percent growth expected for 5-8 years

Yu Hongjiang, vice president of FAW-Mazda Motor Sales Co., Ltd. (FMMS), does not think that the market has grown rapidly this year in an absolute sense.

“If we combine 2008 and 2009 and average the growth rates, we see that it is only around 20 percent, which is about the same as the average growth rate from 2001-2007,” said Yu. “So if we ignore the factor that many consumers delayed their purchase decision until this year because of the financial crisis and the purchase tax policy, the current market growth is at best normal.”

Although the reduced sales tax did not cover FMMS’ 2.0L and 2.5L Mazda 6, Yu still believes the release of the overall market potential has benefited his company.

“We are confident that the overall market growth will remain at around 20 percent for the next 5-8 years. This is purely because of the continued economic growth and the huge market potential supported by fundamental demand from consumers who have just reached the car-buying threshold,” said Yu.

 

Multi-brand strategy key to Geely’s growth
“Geely owes its positive market performance so far to its multi-brand strategy,” said Wang Ziliang, vice president of Geely Holding Group.

The private company founded by “auto maniac” Li Shufu and known for its cheap cars, began a transformation from a price-based strategy to a multi-brand strategy in May 2007.

The company has since launched the Emgrand, Gleagle and Englon brands, positioned respectively as fun/hip, mid-to-luxury and taxi/luxury cars. “The purpose of our strategy is to abandon price wars and aim for advanced technology, better quality and improved brand awareness,” said Wang.

To help achieve this strategy transformation, Geely has acquired UK’s Manganese Bronze for the production of the London taxicab and Australia’s DSI independent transmission producer and received a strategic investment of $250 million from Goldman Sachs.

 

Beijing-Hyundai’s product differentiation or “Lipstick” effect”

Beijing-Hyundai has become China’s fasted growing carmaker this year, with whole-year sales expected to jump nearly 90 percent over 2008.

Xiong Wei, vice president of the company attributes this success to the so-called “lipstick” effect in product differentiation.

“The ‘lipstick’ effect, termed by China’s famous economist Lang Xianping, says that during periods of financial crisis, consumer spending may decline. But for those who do spend, they would buy commodities which have high performance/price ratio instead of cheap stuff. This is exactly how we have positioned the Elantra,” said Xiong.

The company has launched two different Elantras,  Elantra and Elantra Yuedong, to cater to different customers in urban and rural areas and in coastal and western regions.

Thanks to the reduced sales tax, 1.6L and smaller cars accounted for three quarters of Beijing-Hyundai’s vehicle sales in the first nine months of the year.

 

Haima’s “refined technology platform and multi-model strategy”

Haima Automobile, which until 2006 produced the Mazda 323 and Premacy with support of Mazda technology, has since become an independent automaker.

“We are a young independent automaker and our strategy hinges on developing a refined technology platform that can turn out multiple models,” said Wu Gang, president of Haima Automobile Sales Co., Ltd.

According to Wu, Haima sticks with two principles when it comes to new product launches. First, whenever a newest generation model is launched, the previous generation model will be discontinued. Second, different versions of vehicles are made to satisfy the different needs of regional markets and customers.

Haima currently produces the Family II hatchback and sedan models and will launch a newest generation of the Premacy small MPV later this year.

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