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Roland_Berger_cover_final_outline.pdf 9/26/2006 2:08:29 PM Paper size: 210mm x 270mm Driven Are China’s car manufacturers ready to compete in the US and Europe? C M Y CM MY CY CMY K An Economist Intelligence Unit briefing paper Sponsored by Roland Berger Strategy Consultants Driven Are China’s car manufacturers ready to compete in the US and Europe? Contents 3 Preface 4 Executive summary 6 Introduction 7 China’s carmakers: state of play 11 How will China’s carmakers compete? 21 The push and the pull to go international 23 The road ahead: up and down 26 Conclusion © The Economist Intelligence Unit 2006 1 Driven Are China’s car manufacturers ready to compete in the US and Europe? © 2006 Economist Intelligence Unit. All rights reserved. All information in this report is verified to the best of the author’s and the publisher’s ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Economist Intelligence Unit. 2 © The Economist Intelligence Unit 2006 Driven Are China’s car manufacturers ready to compete in the US and Europe? Preface Driven: Are China’s car manufacturers ready to compete in the US and Europe? is a briefing paper by the Economist Intelligence Unit and sponsored by Roland Berger Strategy Consultants (RBSC). The report is based on interviews in May and June 2006 with car manufacturers and suppliers, consultants, and Chinese and joint-venture carmakers, as well as analyses of China’s standing in the global automotive industry. The findings and views expressed in this report are those of the Economist Intelligence Unit alone and do not necessarly reflect those of the sponsor. The Economist Intelligence Unit’s editorial team conducted the interviews, wrote and edited the report. The co-authors of the report are Katherine Peavy Sima and Graeme Maxton. The project manager and editor was Bina Jang. Our sincere thanks are due to the interviewees for their time and insights. We would also like to thank Vivian Zheng, Wim van Acker, Christian Paul and John Shen at RBSC for their contribution to the research. © The Economist Intelligence Unit 2006 3 Driven Are China’s car manufacturers ready to compete in the US and Europe? Executive summary China’s car manufacturers may not have taken the threat to domestic producers in North America world by storm yet, but will they soon be competing and Europe. The research adds that developing a successfully in the US and Europe markets? The fully integrated automotive manufacturing Chinese automotive industry has the political and enterprise will take longer than Chinese industry financial support of its government, which is executives and government officials think. encouraging automakers to develop a made-in-China • China’s automotive industry is in the vehicle and take it international. The government “intermediate” stage of development. At this wants the industry to contribute strongly to the point, China is considered an “intermediate” economy by 2010, and envisages a robust increase in country in terms of production, with a low vehicle exports from 2005 onwards that would percentage of vehicle ownership, says translate conservatively to about US$1.2bn in export autopolis, an auto industry strategy sales. China also wants China-made vehicles to hold consultancy. Autopolis charted the automotive 10% of worldwide automotive trade by 2020-35. industry by country based on the number of Quick to spot an opportunity, European and vehicles produced relative to population, and American auto dealers have begun to promote found that to succeed in the automotive China’s cheap cars in the US and European business a country needed a population of at markets, much to the alarm of US and European least 50m, a GDP of at least US$500bn and a automakers, many of which are already fending off production output of at least 2m units a year. inexpensive imports from Eastern Europe or South China makes the grade by those measures, but Korea. But is it possible for China’s carmakers to this is only because of the production volumes take on their muscular Western, Japanese and of foreign-owned firms. To succeed, China needs South Korean rivals in the highly competitive and domestic firms to produce at least 2m units per highly regulated markets of the US and Europe? year, and to have a band of independent mass- No—not yet, say automotive industry analysts, market automakers that own their technology. manufacturers, suppliers and consultants interviewed • China’s cars will initially enter the US and for Driven: Are China’s car manufacturers ready to Europe on low prices, but they will be compete in the US and Europe?, a briefing paper by the hamstrung by poor quality and safety Economist Intelligence Unit (EIU) sponsored by standards. Industry experts believe that Roland Berger Strategy Consultants (RBSC). China’s carmakers will initially enter the US The EIU report puts this opinion in perspective. and Europe markets with a price play in all Among the findings: segments—offering a low-cost car of doubtful • China belongs to the “autarkic” group of quality just to get a foot in the door. Western countries, according to one analysis. This group, consumers are used to this strategy through which includes Malaysia, Iran, India and China, their previous dealings with Japanese and has under-developed automotive sectors that are South Korean carmakers. But price alone will striving to become fully integrated. The analysis not be sufficient, and China’s cars will maintains that it will take around 10-15 years for a increasingly have to compete on brand, and to Chinese auto manufacturer to become a serious radically improve quality and safety standards. 4 © The Economist Intelligence Unit 2006 Driven Are China’s car manufacturers ready to compete in the US and Europe? • China’s carmakers are likely to focus on companies like SAIC may have the courage and value and engines. China’s main domestic money to develop their own brands, some of carmakers are developing a range of vehicles, China’s carmakers are choosing a quicker in different segments, all with low prices— strategy to enter Western markets by buying often so low that international rivals cannot existing brands and using them as a base to build match them. Chinese firms are also keen to upon, as Nanjing Automobile has done with MG develop hybrid and fuel cell vehicles, and they Rover of the UK. This strategy encourages the have the backing of the government to do so. buying of distressed assets (such as MG Rover), All are working on new engine types and the especially as several Western automotive and government has a clear plan for their gradual auto-parts companies are ailing. Acquisition implementation over the next 15 years. would give China’s carmakers access not only to Building better engines will require China’s a target-company’s products, but also to its carmakers to ramp up their research and technical knowledge, technology and customer- development (R&D) abilities and technology. base. But such overtures by China’s carmakers Most have already begun to do so. Shanghai might also provoke a political backlash in the Automotive Industry Corporation (SAIC), for target companies’ countries of origin. one, has a venture in the UK with Ricardo • The Chinese government has put its political Engineering, a UK-based design and and financial might behind automotive engineering firm, where it develops engines exports. The central government wants auto and trains a number of its engineers. SAIC also exports to increase substantially from 2005, has access to a top-of-the-line development and China’s share of the global vehicle trade to centre through its venture with Volkswagen climb to 10% between 2020 and 2035. Towards and General Motors. that end, it is helping automakers with • China’s carmakers must develop a strategy to funding—for example, by giving low-interest become fully integrated automaking loans to Nanjing Automobile and SAIC to buy enterprises. Chinese companies own very little shares in the assets of MG Rover. The technology and rely mainly on reverse government is also introducing beneficial engineering. However, a few have moved away policies—for example, it will require from reverse engineering and begun to partner automakers to apply for export licences from with global design and engineering consultants. January 2007 onwards. This is intended to The intellectual property rights (IPRs) that result prevent undercutting on prices as China’s are then the property of the Chinese company. domestic automakers export their vehicles Domestic carmakers also are not shy about because of over-production at home. picking up management and technological skills • Foreign investors and dealers are putting from their European, US and Japanese joint- their money on China’s cars. The Chinese venture partners. In the short term, this will government’s support is being augmented by assist carmakers to bring a vehicle to market. But financing from foreign investors keen to in the long term, the reliance on outside import Chinese-made cars to Western markets. assistance could delay the development of Chery’s entry into the US is being championed indigenous design and engineering expertise. by American auto dealer Malcolm Bricklin and • It is essential to build or buy a brand. While reportedly by American investor George Soros. © The Economist Intelligence Unit 2006 5 Driven Are China’s car manufacturers ready to compete in the US and Europe? Introduction sk a European or an American about a QQ Works, now known as the FAW Group, Shanghai or a Hongqi, and the chances are they Automotive Industry Corporation (SAIC) and would never have heard of these Chinese Dongfeng Motor—have been caught flat-footed by cars.