McKinsey China Auto CEO Quarterly Winning the race: China’s auto market shifts gears October 2019 Deceber 2019 McKinsey China Auto CEO Quarterly Chief editors: Paul Gao, Arthur Wang, Mingyu Guan, Editorial board: Pei Shen, Micheala Fang, Tianwen Yu, Levix Liang, Tony Zhou Authors: Bill Peng, Ting Wu, Frank Chu, Daniel Zipser, Christopher Thomas, Tony Zhou, Forest Hou, Yezhou Shi, Sonny Chen, Ondrej Burkacky, Georg Doll, Johannes Deichmann, Christian Knochenhauer, Dominik Lelievre, Pei Shen, Lihong Pan, Rong Jing Managing editors: Glenn Leibowitz, Lin Lin Project management: Yezhou Shi, Zilong Cheung, Chang Zhao, Karim Khemiri, Jiahao Chen Copyright © 2019 McKinsey & Company McKinsey China Auto CEO Quarterly Winning the race: China’s auto market shifts gears 2 McKinsey China Auto CEO Quarterly, Fall 2019 Contents Preface Winning the race: China’s auto market shifts gears 3 Market Finding the road to growth in China’s auto industry 10 insights Unleashing value in China’s slowing auto market 20 China Auto Consumer Insights Survey 2019: 33 What it takes to win CEO views The road ahead: Thoughts on the future of China's 56 auto industry with FAW Chairman Xu Liuping Insights into China's dynamic auto market: An 61 interview with Hubertus Troska, Daimler's Board Member responsible for Greater China The future Seizing the ACES opportunity in China’s 14th Five- 70 of ACES Year Plan Rethinking car software and electronics architecture 76 Designing a customer-centric experience for China’s 90 connected vehicles of the future How China will help fuel the revolution in autonomous 99 vehicles 3 Commercial Next generation sales management in China's auto 116 excellence market Billion RMB opportunity: Rethinking auto variable 101 marketing expense Crafting a successful channel strategy in China's 140 auto aftermarket Operational Never waste a crisis: How China's automotive OEMs 152 excellence and suppliers can build resilience The road to smart manufacturing in China 158 Agility and Eight steps to beat the downturn in China’s auto 172 transformation market Building an agile organization in China 178 Making digital transformations work for China's 192 automakers Closing Driving toward 2030: Ten predictions for China’s 200 thoughts auto market 4 McKinsey China Auto CEO Quarterly, Fall 2019 Preface Winning the race: China’s auto market shifts gears Paul Gao, Arthur Wang, Mingyu Guan, Bill Peng, Ting Wu, and Frank Chu Over the last decade, China's 1. Competition is spurring automotive industry has been in consolidation overdrive, growing at an average 15 Many weaker players shielded by the percent each year, and accounting for sustained and rapid growth of the 70 percent of global growth during past decades simply won’t survive this period. By 2012, China surpassed the ongoing downturn. Already, the US as the world’s largest auto the performance of automotive market. companies in China has splintered. In By 2018, however, China’s cooling the last two years, a large profitability economy put the brakes on the gap has opened between the leading auto market, pushing sales growth players and their low-end rivals. into negative territory, a trend that Consider the case of a joint venture, persisted through 2019. As China’s which just two years ago enjoyed auto market enters an entirely new annual sales of one million units. In phase of its development—which we the first half of this year, it sold fewer call the “2.0 era” —automakers are than 100,000 cars. Over the next faced with a host of new challenges few years, brands like these are likely as well opportunities. to exit the Chinese market if they do nothing to arrest their decline. Strong In this article, we highlight the five branding will be crucial. McKinsey main characteristics that define research shows that Chinese this new era, and pose a series of consumers’ automobile brand loyalty, questions automakers must answer if measured by their willingness to they hope to thrive in a time of slower buy their existing brand of car again, growth. 5 increased from 12 percent two consolidation and collaboration years ago to 31 percent this year. among rivals. BMW and Mercedes- Companies selling cars in the mid- Benz, for instance, have forged a price range (100,000-200,000 RMB) partnership focused on the next will face particular challenges, with generation of mobility. Volkswagen pressure coming from opposite ends and Ford have also teamed up to of the price spectrum. At the top, develop autonomous and electric premium brands are making their vehicles, in a further example of a cars more affordable to appeal to trend we expect to see more of in consumers seeking to trade up. At future.. the bottom, independent brands are launching increasingly appealing and 3. New automotive retail competitive vehicles in the 100,000- models are emerging plus RMB price range. The days of consumers purchasing their cars exclusively through 2. ACES investment needs dealers are numbered. For a start, are intensifying China’s dealership industry is Leading international automotive highly fragmented, with the top 100 manufacturers typically spend as dealerships groups constituting only much as 50-100 billion RMB a year 30 percent of total sales, making them on research and development (R&D). vulnerable to downturn pressure. In China’s auto 2.0 era, much of this Recently, dealers’ profit margins have money, and more, will need to be been feeling the squeeze, with 30 redirected toward the four trends percent of dealers operating at a loss re-defining not just the automobile and new dealer inventory reaching itself, but the whole experience of an average of 1.5 months. Tesla, for auto travel: Autonomous driving, example, has focused on selling Connected vehicles, Electric vehicles, cars online directly to the consumer, and Shared mobility (ACES). In China, Chinese electric start-up NIO has consumers’ acceptance level for succeeded with online-only sales, and autonomous vehicles is 80 percent, Daimler launched Mercedes me, a double that of Germany and the system that allows drivers to track and US. With the Chinese government control their vehicle. expected to double down on support for autonomous vehicles as part 4. Operational resilience is of the 14th Five-Year Plan, China back in focus is likely to be at the forefront of During the global automotive autonomous vehicle development. industry’s previous recession in The considerable costs of keeping the wake of the financial crisis, our pace with these trends is forcing research shows that the most resilient 6 McKinsey China Auto CEO Quarterly, Fall 2019 companies adjusted their costs and feedback. It is essential that reduced their breakeven point to 60 automakers invest in talent, including percent of revenue. Companies that data scientists and translators, that performed poorly had a breakeven can interpret these insights and point of 84 percent of revenue, with convert them into customer-driven negative earnings before interest product innovation. This requires and tax. Automotive companies must an overhaul of talent management achieve efficiency gains on a par with models, and a repositioning of human the most resilient global performers resources departments as drivers of if they are to survive the current organizational agility. It also requires downturn. This means rationalizing that companies continue to move their major cost items, including closer to the China market by building promotion and marketing expenses, additional innovation and research material costs, and fixed costs. It also centers in China itself. means adjusting business models In a market with decreasing tolerance to account for digital innovations, for error, only companies that embark and driving efficiency gains through upon often painful transformations organizational transformation. will succeed. It will fall to automotive company leaders to drive these 5. Innovation and agility is transitions within their organizations. paramount Before they begin, we suggest Vehicle connectivity platforms, along they address the following critical with digital devices like smartphones questions: and tablets, have made it easier 1. What can we do to put customers for companies to interact directly at the heart of our retail models, with consumers. Automakers can production, and marketing? now directly understand consumer needs and obtain precise product 2. How do we best incentivize 7 the adoption and use of new Commercial excellence, Operational technologies? Excellence, and Agility and Transformation. 3. How can we reform across talent, culture, organization, and business model to capture the opportunities created by new mobility trends? 4. How can we build agile organizations with the flexibility to adapt to rapid changes in the China market? 5. How can we build efficient decision-making mechanisms to quickly and effectively respond to crises? In this McKinsey China Auto CEO Quarterly, we will explore the five major characteristics of the new era of China's automotive market, and analyze the major choices the industry faces across five chapters: Market Insights, The Future of ACES, Paul Gao is a senior partner in McKinsey's Hong Kong office; Arthur Wang is a partner in McKinsey's Hong Kong office; Mingyu Guan is a partner in McKinsey's Shenzhen office; Bill Peng is a partner in McKinsey's Hong Kong office; Ting Wu is a partner in McKinsey's Shenzhen office; Frank Chu is a partner in McKinsey's Taipei office. Copyright © 2019 McKinsey & Company. All rights reserved. 8 McKinsey China Auto CEO Quarterly, Fall 2019 9 Market insights 10 Finding the road to growth in China’s auto industry Paul Gao, Arthur Wang, Mingyu Guan 20 Unleashing value in China’s slowing auto market Mingyu Guan, Tony Zhou, Micheala Fang 33 China Auto Consumer Insights Survey 2019: What it takes to win Mingyu Guan, Pei Shen, Daniel Zipser 10 McKinsey China Auto CEO Quarterly, Fall 2019 Finding the road to growth in China’s auto industry Paul Gao, Arthur Wang, Mingyu Guan Finding the road to growth in China's auto industry 11 After more than 30 years of rapid and continuous growth, China’s automobile market has reached a historic inflection point.