Case Study Chinese Automobile Industry

A Car can be a vehicle which could be used for passengers or for transporting goods from one place to another like a truck or pick-up. A car which carries passengers normally has four wheels and is run through engines. The past of “china’s automobiles” could be related back to improvements which could be easily measured technical development in Europe. Recently, “the automobile is the most important way of personal transportation for millions of people around the world”, particularly in countries where people rely on their cars for passenger transportation from one place to another and trucks to travel to and from work, to transport goods, and sometimes only to travel. “The increased number of automobiles that are produced and sold has made the automobile industry a global giant.”

Automobiles are sold all over the world. In many years it has being Germany, Japan and the United States that has dominated the global market share, but this has changed. There is a progressive and sustained increase in customer’s purchase of inexpensive automobiles globally. In the last past years, there has been global economic crisis and therefore people are getting more aware in purchase of automobiles. People are looking out for more features with lower affordable price. These factors have paved way for automotive industries of many developing countries to compete on different factors ranging from price to technology.

Chinese market is known and famous all over the world for ”less” price of its products. China’s automobile industry has rapidly grown in recent years; the most important reason for the growth is cheap availability of labour. “The labour in this industry receives salaries roughly $240 a month. It can also be calculated or said in another way as ‘$1.50 an hour’, related to $30 for working an hour in Germany and also related to $5 for working an hour in Poland. There are strong direction pressures for laborers to stay in line. “Its research and development costs are minimal because designs are borrowed or copied from foreign firms.” This implies that in China there are no independent workers who work on their own without any supervision which is an excellent attribute related to china’s automobile industry

The history of the Chinese automobile industry is quiet interesting. The first truck in China was made by Zhang Xueliang in 1931 called Ming sheng. Yang hucheng, general from China, patronized Chinese inventor Tang Zhonming to manufacture an automobile which is coal fuelled. The first milestone in the Chinese automobile industry took place with the First Automobile Works, which was the first modern automobile factory in China. China produced its “first 2 ½ ton truck (NJ130), which was based on Russian GAZ-51 in Nanjing. The truck was named Yuejin (meaning ”leap forward”) by China’s first Ministry of Industrial Machinery”. In the late 1950s and 60s several automobile factories were set-up in different places in China like “Nanjing automobile (Group) Corporation in Nanjing, Shanghai Automotive Industry Corporation in Shanghai,China National Heavy Duty Truck Group in Jinan, and Beijing Automotive Industry Holding Corporation in Beijing. Later Second Automobile Works or Dongfeng Motor Corporation was founded.”

In the 1980s, overseas automotive industries started collaborating and tried to establish strong relationships with Chinese partners itself. The objective of the management was to expand a car industry as soon as possible and make it a profitable. Volkswagen and General Motors were the debut teams to start with the automotive industry. The main important thing is that there were barriers to entry in such kind of industry.

In 1983, “American Motors Corporation (AMC, later acquired by Chrysler Corporation) signed a 20-year contract to produce their Jeep-model vehicles in Beijing. The following year, Germany’s Volkswagen signed a 25-year contract to make passenger cars in Shanghai, and France’s Peugeot agreed to another passenger car project to make vehicles in the prosperous southern city of Guangzhou”.

As a result there were three big joint ventures and three small joint ventures:

1) Beijing Automotive Industry had a joint venture with Hyundai Motor and Daimler Chrysler producing Jeep Cherokee

2) Ghauagzou Automobile Industry Group had partnership with Peugeot for producing Peugeot 504 range of cars. However in 1990s it was replaced by Honda for producing Accord and Fit with huge success. And then after 36 years, it began to produce cars which were a huge success specially the SE model of Toyota Camry. Making Guangdong province is now the main unit of producing cars for brands like Toyota, Nissan e.t.c

3) Tianjin Automotive Industry made its partnership with Daihatsu for producing Daihatsu Charade range of cars.

After 1990s several automobile enterprises entered Chinese Automobile Industry as it was profitable to produce vehicles in China as the cost of producing a vehicle in China was less. Some originated from old Chinese defense companies Changhe and Hafei while others from the “aged state owned companies like BYD auto, Brilliance China Auto, Chery Automobile, and Changfeng Automobile. Some private Companies were also formed like Geely Automobile and Great Wall Motors.”

Conclusion

The growth of such type of an industry varies mainly on the type of industry structure it is. Since China tries to ignore old traditions, they mostly prefer new modern technologies in making cars which are the best overall which also includes quality cars, china tries to follow or copy other countries, “knowledge must either be imported or developed by the Chinese automotive companies. This knowledge can be gained with the help of mergers and acquisition and joint ventures.”

MARKET STRUCTURE

The market structure of the Chinese automobile industry is of perfect competition. Nevertheless the Chinese government is controlling and regulates everything on the Chinese market and in China the amount of car manufactories is outstanding. Today there are more than eightieth Chinese car manufactories. The majority of these are smaller companies that are struggling and attempting to get recognized in the global market. For that reason it results in a very high competitive market. Up to now the majority of these companies are quite unknown overseas, therefore the Shanghai Automotive Industries Corporation also known as SAIC and the Nanjing Automobile decided to build normal and typical design, so the production process and the sales management of these companies will for this reason obtain an increase of the export rate of Chinese cars.

The major governmental department is the National Development and Reform Commission. But there are more than a few governmental departments that regulates the Chinese automobile industry. These minor governmental departments have their rights but they are limited.

The automobile industry development policies in China are managed and organized by The National Developments and Reform Commission, also called NDRC. The make and emends these policies, but only carry out a small number of changes every year. The Sino-foreign joint ventures were established, so that the car manufactories have to request and get authorization by NDRC. They do not only have responsibility of administration the new energy car manufactures, but also of the recalls of the cars products with detectives.

Administration of the sales of the vehicle brands and license of import of automotive products are managed and organized by The Ministry of Commerce also known as “MOFCOM”.

The registrations of vehicle management enterprises are complete by the State Administration for Industry & Commerce also known as “SAIC”. This is not only their occupation, they also have to verify and approve the business possibility of vehicles sales enterprises. And the also have to administrated the vehicles brand sales.

The General Administration of Quality Supervision, Inspection and Quarantine, also called “AQSIQ”. They are the ones who will check the recalled defective vehicles, so they can gain knowledge of what went wrong, and with this improve the products.

MITT which stands for Ministry of Industry and Information Technology also has a responsibility. What they do is to administrate the automotive fuel consumption.

Clearly, China’s car industry is open to foreign investment. However, the Chinese government restricts foreign investment on entire car manufacturing in a way, in order to protect domestic car brands. These restrictions can be circumvented, and it appears that component manufacturing remains relatively unregulated to a large extent.

There are more than a few leading business in the Chinese vehicles industry.

The first is BYD, which stands for “Build your dreams”. It was formed in 2003 by purchasing Tsinchuan Automobile Company Limited. Step by step they started to create their own vehicle brand. Today they have five main industrial bases placed in China. This Chinese automobile brand is the most innovative manufacture. Their growth rate for the last 5 years has been 100 percent and the amounts of vehicles sold in 2009 are 448000.

Second is the Chana Automobile Company Ltd. They are known as Changan, and are very recognized on the Chinese market. Their headquarter are located in Chongqing. Changan’s goal is to achieve fuel efficiency and by this also protecting the environment. The majority of the cars that are manufactured are smaller cars, but also manufacture sedans and commercial cars. So they have a wide range of automobiles to offer to their customers. Their goal is to become a world class group in a very short time.

The third is Beijing Automobile Works, also known as BAW. Their work is located in one of Chinese pioneers automobile industry. The vehicles which they offer to their customers is, light off-road cars, and also trucks. They have been in the market for almost forty years and it is a known brand. Chaoyang is the district where their headquarters are located. There are also the main distributers of vehicles to the Chinese military.

The forth is Dongfeng Motor Corporation, and they started in the year 1969. They are also known as “Second Automobile Works Co.,” in the real market place, and this is actually one of the top 3 huge automakers in this type of industry. The main focus of this was transferred for production of items like traveler vehicle, profitable vehicle, components, and equipment, which was a huge success. During the 40 years of its growth, “a set of R&D and developed services have been well-known as well as an extensive” this also includes facilities like ‘distribution and after-sales network’. It’s most important branches are situated in states like Shiyan, Xiangfan, Wuhan and Guangzhou.

The firth is the First Automotive Grouo Corporation, also known as the FAW Group. This is a leading all over the globe, this also implies that they are there in the automobile industry since 50 years. It was basically started in 1953, FAW has managed to keep 133,000 workers all over the world and is successful in selling products all over. Its total turnover around the globe is more than 7 million vehicles worldwide’, while doing this it doesn’t lose its position also it maintains the lead market position within China, and now it also has plans of expanding into a market which is controlled internationally.

6) Chery Automobile Company Ltd.

Chery automobile Company was formed as a state owned company on March 18, 1997 in Wuhu, Anhui province, China. It is one of the fastest growing companies in the Chinese automobile Industry. It is the first automobile company in China which exported its cars to other countries. Chery is aiming to become best automobile company in China but at the same time they are trying to use the European manufacturing equipment, stolen European factory designs and Japanese production techniques to make QQ minicars which are copied from Chevrolet spark , which are $1500 cheaper than the original Chevrolet spark. Both cars are so similar that their spare parts are interchangeable.

7) Shanghai Automotive Industry Corporation

Shanghai Automotive Industry Corporation also known as SAIC are the group which are mainly engaged in manufacturing, sales, research and development, and investment in passenger cars, commercial vehicles and components, as well as related services trade and financial business. Besides, SAIC holds seventy nine of the equity of SAIC Motor Co., Ltd. and 60.10% of HUAYU Automotive Systems Holdings Co. also known as HUAYU is an independent listed company engaged in auto components supply business. Therefore SAIC also has a part in Huayu Motors and is in the strong position when it comes to sale of auto parts as well as automobiles.Shanghai Automotive Industry Corporation in 2008 once again topped the Chinese automotive groups for a sales volume of over 1.826 million units of vehicles, of which 1,118,000 units are passenger cars and 708,000 unit’s commercial vehicles. The company is the first fortune 500 company from the Chinese Automobile Industry.

8) Anhui Jianghuai Automobile Company Ltd.

Anhui Jianghuai Automobile Co., Ltd. This is also known all over the world as JAC is an automobile manufacturer based in Hefei, Anhui Province; China. Anhui is best known to be the second Detroit of the world. It is the most important industrial base of China accounting for the 20% of the production of the Chinese vehicles. Anhui Jianghuai is a state owned company producing automobiles, trucks and minibuses

9) Geely Automobile

Geely automobile are one of the Established as an independent firm in 1986, Geely launched its auto manufacturing business in 1997 and is today a fully integrated independent auto firm with a complete auto eco-system from design and research and development to production, distribution and servicing. In 2005 Geely Automobile Holdings Limited was listed on the Hong Kong Stock Exchange and has the responsibility in 2009, Geely Holding Group announced that it was close to an agreement to acquire Volvo Cars from Ford Motor Company. Geely automobiles are the new owners of Volvo range of cars which they purchased from Ford in 2010

10) Brilliance China Automotive Holding Ltd.

Brilliance China Automotive Holdings Limited also known as BCA is a publicly owned Chinese investment holding company which manufactures variety of automobiles, automotive components and minibuses. Based in Liaoning province brilliance China automotive is listed in Hong Kong and Frankfurt stock exchanges as of 2009, Brilliance China Automotive holding was the eighth-largest automaker in China in the year of 2009

Conclusion

As per the statistics of the Chinese automobile Industry from January to September 2010, sales of the top ten automobile manufacturing companies are provided below in the chart

SAIC-2,647,500

Dongfeng-1,901,300

FAW-1,845,800

Chang’an-1,716,200

Beijing Auto-1,101,800

Guangzhou Auto-532,500

Chery-475,300

BYD-386,200

Brilliance-375,800

JAC-350,900

As we can see clearly SAIC is largest producer of the vehicles in China with 2,647,500 as per the statistics of September. SAIC’s production is clearly remarkable in terms of production. Second is Dongfeng which has the production of 1,901,300 vehicles. Third is FAW which has the production of 1,845,800.Then is Chang’an in the fourth position with 1,716,200.Beijing Auto is in the fifth position with 1,101,800 vehicles. And then there is Chery, which increased its production to 475,300 vehicles this year.BYD, the most innovative company in the Chinese automobile industry has a production of 386,200.And in the last position is JAC with the production of mere 350,900. From January to September, these ten companies sold 11,333,300 vehicles, accounting for 86% of total car sales which is simply outstanding.

ESTIMATED SIZE OF THE INDUSTRY IN UNITS/DOLLARS

China’s automobile Companies are looking forward to the promising future after years of development in the Chinese Automobile Industry. In the year of 1999 China had a production of approximately 1.56 million automobiles, which if compared to the production of GM (General Motors) was only one sixth of General Motor’s annual output and if compared to Toyota, is only one third of their yearly production . After the years of development of automobile Industry of China, Chinese Automobile Industry has emerged as one of the fastest growing industries of 21st century, it has an average annual growth 22.2% and is increasing from 1998 to 2006.In the year of 2006; China overtook Japan as the world’s second largest auto consumer after the United States of America with auto sales rising from 25.1% year-on-year to 7.2 million units. Meanwhile, China surpassed Germany to become the third largest auto maker after the U.S. and Japan, with automobile production climbing to 27.6% year-on-year to 7.3 million units. In 2007, the production of the automobiles increased to 20% in China even with the rising price of raw materials indicating that there is robust growth in the world’s second largest auto market. In 2007, the automobile production of China amounted to astonishing 8.88 million with an increase of nearly 22.02% when compared to 2006 production report. This figure closely approached the target of 9 million units set in the eleventh 5-year (2006-2010) plan which was set for the automobile industry by China’s National Development & Reform Commission (CNDRC) which is the nation’s top economic planner for the industrial development of the Chinese Economy.

PRODUCTS

Automobiles are depreciating and tangible, which require consistent servicing and repairing. Chinese Automobile Industry’s is a huge industry with variety of products ranging from automobile to after sales products and services which are important for automobile to run smoothly. The Chinese automobile industry supplies auto parts, car related products such as tires, rear and front view mirrors e.tc. China also has a huge secondary market for used automobiles, spare parts and other used car related items.

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TRENDS IN SUPPLY AND DEMAND OVER RECENT YEARS

When General Motors Vice chairman Bob Lutz was asked ‘Will Chinese taste for vehicles drive demand in the future his answer was “Yes, to a certain extent, because we do want to make sure that we’re successful in the world’s largest and fastest-growing automobile market – and a market which will ultimately be as big as the European market and the U.S. market combined,” Lutz says. “We all have to get used to the fact that the future of the global automobile business – I mean the center of gravity – is no longer going to be Europe or the United States; it’s going to be China. And I think that to a certain extent China is helping drive our designs today.”

Lutz says the Buick Lacrosse is a good example of a vehicle that was jointly designed to meet the needs of consumer groups in both the U.S. and China.

EXPORT AND GROWTH IN THE INDUSTRY AND ECONOMIC RISKS

When the Geely automobile made its debut at the Detroit Auto show in 2006, they got quite a bit of attention with people saying that the Chinese have arrived, recalled Charles Cheung.Beijing has identified exports as a key part of its auto strategy.

MACRO ECONOMIC FACTORS

Among the world’s most powerful economies China ranks second with a GDP of U.S $ 4.4 trillion along with this it has the world’s largest population that helps the country to be most. As compared to developed economies, emerging economies in general present an optimistic outlook. China’s macroeconomic fundamentals contain many favorable factors such as the increase of domestic demand incurred by economic restructuring, a strong growth trend of retails as well as the expansion of capital markets.

“A 10-percent growth rate cannot be explained as economic overheating given Chinese macroeconomic fundamentals,” Goldman Sachs China economist Helen Qiao said. Goldman Sachs listed five factors backing China’s sustainable development.

First, domestic demand has become a major driving force. Secondly, internal and external demand tends to be stable. Thirdly, China has less reliance on exports to the United States, Europe and Asia’s developed regions, while the rest of the world relies more on China’s exports. Fourthly, a tightening financial context has helped increase the credibility of Chinese policymakers’ control on the macroeconomic policies.

Finally, China’s “12th five-year plan” has specified key role of domestic demand, and China will lay stress on both consumption and investment influential economies of world.

National income / national income per capita China has emerged as bigger power and with economic soundness it is heading for achieving number one position in the world.

China’s Gross Domestic Product increased at an annualized rate of just 0.4 per cent, which is quite below the annualized 4.4 per cent growth in the first quarter of 2010 and counting to proof that global recovery is encountering tough headwinds.

These figures stress China emerging as an economic authority that is changing everything from the global equilibrium of military and financial supremacy to how cars are designed. It is already the major exporter, auto buyer and steel producer, and its overall authority is getting higher.

Interest rates

China’s expansion, running at more than three times the pace of growth in the US, may add fuel to arguments that the second-largest economy can withstand a stronger yuan. China raised interest rates recently for the first time since the global crisis, affirming policymakers’ confidence in the recovery and concern at price pressures.

Although China’s economy grew 9.6 per cent in the third quarter of 2010 its inflation grew at fastest pace in almost two years, adding weight to necessity for the engine of the global recovery to let its currency appreciate more rapidly. Consumer prices jumped 3.6 per cent in September from a year earlier, so China has to be careful about inflation as it would negatively affect huge segment of population.

When China awakes, Napoleon said to have warned, “The world will tremble.”

China was devastated by floods, famines, rebellions, civil strife and finally communist dictatorship. It’s all more of a shock, then, that the sleeping dragon has now awoken with a vengeance. They have productive human capital therefore China has overtaken Japan as the world’s second largest economy.

China’s economy is huge and progressing rapidly in the last 30 years. It has grown averagely 8% p.a. in terms of GDP. Its economy has progressed more than 10 times during this period. China and India were the only two countries that were hit the minimum and came up quickly from the recent global meltdown. Hence it proves that Chinese industries are not very sensitive to economic fluctuation.

The economists believe that substantial appreciation in the Yuan would result in huge unemployment and start social disorder.

However there are still inequalities in the income of Chinese people and this income gap has increased in recent times. The inflation is soaring and unemployment rate is also rising marginally.

CONCLUSION

China is one of the largest Economies of the world. The automobile industry of china is growing at an astonishing rate and it has been proven in the last decade. Even in the time of the recession in the mid 2008 China’s automobile Industry was in the strong position while in case of United States automobile Industry, it had collapsed with main companies like GM (General Motors) asking for bailout. As per the statistical data of 2009, the total passenger cars produced by China are 10,383,831 and the commercial vehicles accounts for another 3,407,163 which makes a total of 13,790,994 vehicles. In the year 2009.Chinese Automobile Industry has a growth rate of 48.3% which was 4.70% in 2008. And if we see US in 2008 they had a growth rate of -19.40 and in 2009 mere -34.3%.Comparing the growth rates we can see that US’s production growth rate has sharply fallen and China’s has increased. As a result China is replacing America to become the greatest economy in the world. China and America are two different countries with different perpectives, China likes to save and America likes to spend. But in last three years amount of sales in US have slowed down showing consumer inconfidence in the economy of America and it is opposite in China.