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Globalized China and China’s globalization

Working together with the China Passenger Car Association (CPCA), CBU organized our 18th annual international conference in Shanghai right before the opening of this year’s largest trade event, Auto Shanghai 2013. The two-day seminar featured six discussion panels on China’s policy and regulatory environment; China’s automotive landscape; technology, market size and growth potential; designed and manufactured for China and the world and challenges of globalizing Chinese brands. The event featured 20 executives as speakers from Chinese and global OEMs, suppliers and analysts. The following are highlights of the conference event. Editor

Rao Da

The “Three Warrantees” and CAFC Standards 

Automakers should prepare for the enforcement of the Regulations of Responsibility for the Repair, Replacement and Return of Automobile Products (known as Sanbao or Three Warrantees) when it comes into effect starting October 1 this year, said Rao Da, director of China Passenger Car Association (CPCA) and veteran analyst of China’s auto market.

Two corresponding regulations are expected to be released before the Three Warrantees becomes effective, according to Rao. First, vehicle quality warranty period will be extended to three years instead of two years. Secondly, warranty period must be specified for 16 easily-damaged components to be listed in the Three Warrantees.

He added that OEMs would need to also release compensation ratios in time for vehicle returns and replacements.

“Companies also need to train their dealers in case of wrong vehicle failure diagnosis,” said Rao, “because customers will have the right to replace or return a vehicle that cannot be fixed after five attempts in repair.”

Rao also warned that automakers may encounter much bigger losses if they made a false statement on the fuel consumption level of their vehicles.

The purpose of the Three Warrantees, Rao said, is to increase the responsibility of automakers and dealers and ensure better aftersales service for consumers.

The new energy and small-displacement vehicles will be favored through China’s Passenger Vehicle Corporate Average Fuel Consumption Calculation Standards (CAFC Standards), Rao noted in his presentation.

Automakers are required to reduce the CAFC value to 6.9L/100 km by 2015 and 5.0L/100 km in 2020.

“This means an annual reduction of 0.21L/100 km during 2012-2015 and 0.38L/100 km during 2015-2020,” said Rao, “which means increasingly more difficult to achieve as the standard goes up.”

The new standards therefore highly favor new energy and small-displacement vehicles without which OEMs would find it hard to comply with the increasingly stricter CAFC standards. The CAFC value of battery electric, fuel cell and plug-in hybrid electric vehicles whose drive range under battery mode reaches or surpasses 50 km in overall operating conditions is zero and is entitled to multiply by a factor of five in determining the enterprise’s calculating base. And if the actual CAFC value of a vehicle (excluding battery electric, fuel cell and plug-in vehicles) in overall operating conditions is equal to or lower than 2.8L/100 km, such a vehicle is entitled to multiply by a factor of three in determining the enterprise’s calculating base.

Rao believes that CAFC Standards will force some automakers, especially the ones that produce large-displacement passenger vehicles, to accelerate in the R&D of small-size as well as the hybrid-powered passenger vehicles. In this regard, Rao pointed out, Chinese brands will face more pressure as foreign brands have more A0-class cars made at their joint ventures. 

Future growth to be driven by urbanization and segmentation  

China’s urbanization would be a leading driver of China’s auto market growth in the next decade, said Frank Wang, Asia Pacific president of Delphi Electronics & Safety.

“China’s urbanization will lead to 200 million more middle-class citizens in the next few years, a great force for automobile consumption,” he said, adding that these new middle-class people would mostly be seen in China’s tier-2 and tier-3 cities.

Frank Wang

Wang also pointed out that China’s future GDP growth may go from being investment-driven to consumption-driven, another important driver for auto market growth. According to Wang, consumption will make up 40 percent of China’s GDP by 2020.

China’s auto market will see greater growth in the premium car segment, according to Wang’s presentation. “By 2020 the premium and midsize cars is expected to register a 15 percent growth, higher than the 10 percent of the industry average.” 

Xiang Dongping

China’s hundreds of prefecture-level cities have solid growth potential in the future, said Xiang Dongping, executive direct of sales at Shanghai-Volkswagen.

“China has 343 prefecture-level and more than 2,000 county-level cities, which are still at a low level of vehicle parc,” said Xiang.

Shanghai-Volkswagen has divided the Chinese cities into five tiers based on regional consumer need differentiation.

In tier-1 cities such as Beijing and Shanghai, the first-time buyer market is growing strong, but is not at the level of the used car market, said Xiang, adding the company has placed its focus on used car segment in tier-1 cities.

“I think demand in the tier-2 and 3 cities will be a major driver of China’s auto market in the next five years, and Shanghai-Volkswagen plans to make its sales network cover all of them,” noted Xiang.

Shanghai-Volkswagen also tailors different marketing tactics in different regions. In tier-1 cities, marketing is carried out via the Internet, including trendy twitter-like platforms and instant messaging. In smaller cities, marketing is done mostly via radio. 

According to Rao Da’s prediction, China’s vehicle sales in 2013 will increase by 3 million units, but the government may likely release policies to restrict growing sales due to worsening problems of pollution and traffic congestions in a growing number of cities.

“The current traffic control measures are not effective because they fail to address the two major problems: increasing vehicle parc and high driving frequency,” said Rao. “Raising fuel tax will have an instant effect in reducing traffic jam because it can effectively lower vehicle driving frequency.”

Rao believes that China’s annual vehicle sales growth may hit zero once the country’s vehicle parc reaches 230 million units. 

A globalized China through multinational localization 

Visteon’s sales proceeds in Asia Pacific have taken up over 70 percent of the company’s global gain, said Tim Leuliette, president and CEO of Visteon Corp., and the bulk of Asia Pacific sales come from China.

Tim Leuliette

Visteon has set up eight manufacturing facilities in China close to leading OEMs, he said. Yanfeng-Visteon, Visteon’s joint venture with Shanghai-based Yanfeng, a Chinese seating and interior trim supplier, is already exporting products to the European and American markets, he added. Visteon has been localizing both design and production in China for the Chinese market.

Localization has been the focus in the 29-years of development of Shanghai-Volkswagen, the country’s most successful JV. Shanghai-Volkswagen recently became the first automaker to launch its 9 millionth car, said Xiang Dongping. Beijing-Hyundai’s rapid growth in the past 10 years should be attributed to its localization development and marketing practice in China, according to company executive vice president Li Feng. Beijing-Hyundai sold 860,000 vehicles in 2012, ranking fourth in China. The company plans to set up a new plant soon as the existing three plants will not meet market demand. 

Li Feng

Ford Motor is expected to deliver over 32 million vehicles in the China market by 2020 working together with partner Chang’an Group, said Alvin Liu, vice president of OGC and government affairs of Ford Asia Pacific & Africa.

By 2015, Ford plans to bring 15 new vehicle models to China. It expects to double its passenger vehicle capacity to over a million units and double its dealerships to 680 stores.

Alvin Liu

With aggressive product planning and marketing, Ford China has made tremendous progress in expanding sales in China over the past few years. It set a sales record in March of 81,000 vehicles, a 65 percent increase from last year. First quarter 2013 sales reached 186,596 units, up 54 percent year-on-year. 

Talking about the recent successful launch of the Ford Kuga and EcoSport SUVs, a senior Ford China executive said, “These vehicles have been in development based on Chinese consumer demands in the past 3-4 years.” 

Chinese OEMs’ tough road to globalization

Chinese OEMs have been struggling in trying to enter overseas markets as they have to face multiple requirements involving product quality, local regulations, carbon emission tax and insurance, according to Zhang Gengshen, assistant of president, Great Wall Motor International Corp.

Zhang Gengshen

“We have entered the European market,” Zhang said, “the challenge is still huge in the long run.”  

Chinese OEMs are facing rising protectionism in their export destinations, said Yuan Mingxue, president of Chang’an International Corp. He said market entry standards have been raised in a number of countries. “For instance, Russia introduced a car scrapping tax in 2012 and the Republic of South Africa has also begun levying a carbon emission tax.”

Yuan Mingxue

In 2011 Brazil hiked taxes on imported foreign vehicles to help the local industry. According to Yuan, the hike was a reaction to the rapid growth of car imports from China.

To enhance their product competitiveness, some Chinese OEMs have resorted to establishing overseas R&D centers. Chang’an has set up R&D centers in Europe, North America and Japan in order to boost product development capacity, said Yuan. 

Great Wall Motor has come to realize the importance of service quality and image of local dealerships. The company did a survey in South Africa and found out that one key factor to attract local customers is full-function car dealership stores with unified and consistent company image.

“In the future we are focusing on two things in our overseas markets: one is to increase sales network coverage and the other is to improve single store service quality,” said Zhang. Great Wall aims to export 140,000 units in 2013, an increase of 46 percent over last year.

Chinese OEMs should diversify their export product lineup and find out the best product to fit into their export destination, suggested Jones Zhong, editor of CBU’s Chinese online publication, Zhongguo Qiche Yaowen (www.cbuauto.com.cn).

“In addition to exporting sedans, China-made pickup trucks and small SUVs are almost invincible around the world because of their attractive cost-performance ratio,” he said.

Chery Auto, China’s export leader and a leading Chinese brand, exported 186,000 units of vehicles and auto parts to 16 countries and regions in 2012, said chairman Yin Tongyue.

Yin Tongyue

According to Yin, Brazil and Russia are China’s main export destinations, accounting for 33 percent of total Chinese passenger vehicle exports.

In the past Chery’s export products were targeting the low-end markets, which were less profitable. Chery has decided to move up to the higher-end segments, said Yin.

Chery is learning from its failure over the past years in multiple branding and launching numerous vehicle products to the negligence of quality and banding image building. Learning from its past mistakes, Chery has decided to model after Ford in an effort to establish a new “One Chery” strategy.

After years of trials and errors, Yin and his team realized that there is no short cut in automobile design, engineering and production. Its investment in Qoros Auto, a 50:50 JV with Israel Corp., is a major effort in building a new development and management system of a modern automobile enterprise. Qoros Auto plans to enter the European market after it launches its first Qoros 3 Sedan in China later this year. 

Would China make a globally competitive car?

The must-have capabilities of Chinese OEMs to develop world-class products include innovation, R&D, cycle plans, product structures and key processes, according to Max Warburton, senior analyst of Bernstein Research.

Warburton and his team conducted a teardown analysis of two of the leading Chinese models, the Geely EC7 and Great Wall H5 SUV.

Max Warburton

While recognizing noticeable achievements in engineering and manufacturing of both vehicles, Warburton pointed out the major gaps of Chinese makes before they become international competitive.

In particular, cross-brand platform structure, vehicle line structure and centralized engineering are essential for Chinese brands to consider, Warburton said.

Key processes include new product introduction, vehicle launch, advanced quality management and supplier integration processes. Key steps of new product introduction include concept design, detail design, development, test and validation, and then product launch, according to Warburton.

Test and validation should involve performance test, emissions test, homologation testing, NVH test and track test, said Warburton. The Chinese OEMs also should enhance supporting capabilities in component engineering, systems engineering, performance engineering, NVH, cost management, and supplier management, he suggested.

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