Serving the World's Largest Emerging Automobile Market
Home > EDITORIAL > The challenges and opportunities of independent carmakers in China

The challenges and opportunities of independent carmakers in China

It has been a unique phenomenon that of all the automotive emerging markets in the world, China is the only one that has witnessed the rise, in just a few years, of numerous independent brands. Russia has gone through the wave of joint venturing, but mostly based on the few existing automobile manufacturers that grew out of the former Soviet Union. Hardly any new automobile brand has emerged. India has seen only the expansion of commercial giant Tata into passenger car manufacturing.


 


As China enters the 21st century, a host of new vehicle manufacturers have emerged with their independent brands such as Chery, Geely, Zhonghua, BYD, Maple, Lifan, Chang’an, Hafei, etc. At least half a dozen local commercial vehicle manufacturers and new investors are now poised to launch their car assembly projects: Jianghuai, Great Wall, Jiangling, Beiqi-Foton, Qingnian, Zotye, etc.


 


State-owned automakers such as Shanghai Automotive Industry (Group) Corp. (SAIC) and Nanjing Automobile Group Corp. (NAC) are actively in preparation for launching their new car models after they purchased the intellectual property rights and assets of foreign automakers, Ssangyong and MG Rover.


 


What kind of economic and financial incentives that have driven Chinese investors, whether existing automakers, motorcycle assemblers or non-automotive enterprises, to jump into the car assembly business? The exorbitant profit for mainstream joint venture carmakers made possible in the years of a highly protected and monopolized market was no doubt the irresistible lure. Car assembly, to both enterprise and local government, was nothing less than a gold mine. As return on investment declines in industries with open competition, investors naturally turn their eyes on the profitable automobile business. Even if they may not hit a gold mine, many believe they should be able to uncover a coal mine.


 


This has been the corporate mentality of commercial vehicle and motorcycle manufacturers in China. An open market and intensifying competition have reduced profit margins. As further expansion in output and sales becomes hardly possible, these enterprises are worried about financial insolvency down the road.


 


On the policy front, the government wants to support the formation of large automobile and motorcycle enterprise groups. For both commercial and motorcycle manufacturers, moving into passenger vehicle business has been a logical choice. Given the nature of State-owned enterprises and their rule of game in China, enterprise size and production scale may be more important for them than profit.


 


For China’s large, State-owned automotive groups, there is now the new concern of being politically correct. As the Communist Party and central government are calling for independent innovation and branding, these enterprises feel obliged to act and act in a rapid fashion. They may have accomplished their historical task of working with a multinational partner in automobile assembly. To get further government support and protection, they may have to bring out a viable independent brand in the shortest possible period of time. They cannot afford to fall too far behind independence leaders like Chery and Geely.


 


Among indigenous local carmakers, only Chery and Geely have exceeded annual sales of over 100,000 units and are moving beyond 200,000. The rest are still struggling with only a single car model and limited output and sales. A number of these new players are faced with the problem of production scale, dependable parts supply and adequate sales and distribution networks. As low price has been their only competitive edge in sales and marketing, they are also running the risk of expanding market shares at the expense of making enough profit to reinvest in R&D and new product development. The same problems are also seen with some joint venture carmakers that have limited vehicle models and production volume.


 


Even China’s most successful independent carmakers Chery and Geely are confronted with growing new challenges. Their early expansion in scale production was achieved through selling low-end cars with little profit margins. For further expansion and investment in new product development they have been forced to either take commercial loans or tap into domestic and international capital markets. But these can be both costly and time consuming.


 


One alternative for Chery and Geely is to move into mid-level and high-end cars in their product lines. Such a strategic move, however, instantly hits the ceiling of brand recognition in the market. Until independent brands achieve market recognition, carmakers are forced to play the price card in market competition. We have seen, for example, that Brilliance Jinbei is selling their new and well equipped Zhonghua Splendor 2.0L sedan at a price of 40 percent lower than multinational models, around ¥100,000 ($12,658) a piece.


 


Realizing the problem of market recognition of independent brands, SAIC and NAC are trying to embark on a different route: utilizing the Rover and MG brands that they have purchased in launching mid-level cars. Both manufacturers are confronted with the unknowns: acceptance of an unfamiliar and bankrupt brand by Chinese consumers and the trust of overseas consumers on a famed brand that is now assembled by a Chinese company.


 


With high hopes, numerous independent carmakers are rushing into the crowded market. They are all aware of the bright future of the world’s largest car market but are confronted with the pressure of fierce competition. Many of them, including Chery, Geely, SAIC and NAC, are pinning their hopes in exploring the overseas market in order to better utilize their production capacity and increase profit. But few of these enterprises are well prepared to face a much more complicated international market and deal with a host of legal, validation, communications, sales and marketing, aftermarket service and trade barrier issues.


 


No doubt independent Chinese automakers now enjoy a much better market environment and unprecedented opportunities to succeed. They have access to a much more mature supply base in China and rich sources of professional talents thanks to the contribution of foreign investment and multinational operations over the past 20 years. They also have easy access to international technology and human resources.


 


Moreover, these new players are to receive strong government support in the development of independent vehicle brands. Independent local brands are becoming more acceptable to Chinese consumers. The technology level of independent automobiles has significantly been upgraded. The quality of local products and aftersales service has been much improved.


 


I have no doubt that in a few years, Chery will become China’s Hyundai,” said a senior executive of a multinational supplier after a recent meeting with the 12 members of Chery’s dynamic management team. 

Leave a Reply