Even though the entire globe believes that China is the best point for automobile investment, we believe that is important to read between the lines. The Chinese automobile sector seems to have arrived at a unique inflection point. There is a crucial shift in automobile sales which differs from previous trends.
Over the past decade, the Chinese automobile market has emerged as the most preferred point of investment for global automakers driven by consistent BRIC sales.
The reason that global players opted for the Chinese market is the changing lifestyles and preferences of Chinese consumers. Chinese consumers are known for their appetite for sophisticated cars. With the increase in disposable income, trends in car selections are obviously shifting toward the premium offerings, which the foreign brands offer.
Since the local automakers are not yet equipped to manufacture high-end cars, foreign Automakers like BMW, Volkswagen and Nissan are pitching in to meet the demand. Per the PWC forecasts, China’s luxury car market is expected to surpass three million in vehicle sales by 2020.
Big Plans of US Companies
Big companies like General Motors Company (NYSE:GM), Volkswagen AG (ADR) (OTCMKTS:VLKAY), and BMW (BAMXF) have made heads-up investments in the Chinese automobile market, in the past. They plan to make further investments in anticipation of huge demand for foreign brands by Chinese consumers.
Volkswagen will be launching its luxury sedan, exclusively for the Chinese high-end car market. Other brands like Audi, Bentley, Porsche and Lamborghini are already in the market. Volkswagen’s entry is expected to be in 2015.
General Motors Company is all set to invest $14 billion in China over the next five years. It plans to open five new plants, and expects to increase sales to nearly five million vehicles per year.
BMW is set to make their mark in the Chinese luxury market with its high-end electric vehicle series.
Tesla Motors Inc. (NASDAQ:TSLA) has big expansion plans in China after conquering markets in North America and Europe.
Ford Motor Company (NYSE:F) is all set to open its Changan Ford Assembly Plant No. 3 and Changan Transmission Plant in Chongqing, China. The company expects the Chongqing Assembly Plant to increase production capacity in China by 300,000 units in the coming year.
Nissan will be producing Infiniti luxury cars with Chinese automaker Dongfeng by 2018.
The Chinese automobile sector seems to have arrived at a unique inflection point. There has been a crucial shift in automobile sales, which differs from earlier trends. The China government has deliberately decided to put a break on its overall economic growth, and to focus on the implementation of long overdue structural reforms, in the interest of the local auto market.
Sales seem to have dropped in the current year and are uneven as seen in Fig 1.2. The factors that have steered this shift are high levels of overcapacity and significant price and margin pressures.
China was never too liberal about foreign entry restrictions in the market. There is a requirement set by the government that foreign brands have to enter into partnerships with domestic companies for local production.
These forced partnerships, failed to slow foreign production. So, the Chinese government is taking stronger steps to protect its local auto industry. It recently made a strong move against global auto makers by levying fines against Audi AG and Chrysler, thus signaling it growing frustration with foreign dominance in its own market.
The fine totaled $45.8 million and though they do not have huge financial implications it is a clear signal by the Chinese government, to the foreign companies, to quit their alleged monopolistic practices. These shifting dynamics will help develop low-end car sales and thus help the local Chinese automakers, who rely heavily on their dominant share of the low-end segment.
In light of investigations by China’s National Development and Reform Commission, Audi AG, BMW and Mercedes-Benz AG all have announced price-cut on spare parts. The government also has recognized the need to address the huge build-up of inventory that hurts car dealers.
China’s new approach to retail auto sales may lead to dealers being freed from certifications specific to original equipment manufacturers thus reducing carmaker’s ability to force excess inventory on dealers. This move by the government ought to change the dealer-carmaker relationship.
(Click to enlarge)
Figure 1.1 shows the increase in auto sales from 2006 to 2014. However, the trend in the past year is highly uneven and shows a slump scenario. As such growth rates of above 20% may dip to as low as 6% in the years to come.
The Chinese are eager to extract manufacturing and engineering information and gain intellectual property. In the past decade, car sales have flourished in China and their car industry got larger but not stronger. It is clear that this problem has been well-recognized by the Chinese government.
When their domestic auto makers acquire the technical knowledge to manufacture sophisticated cars, foreign automobile investment would certainly be adversely affected. Until then foreign auto makers will be allowed to meet the demands of their consumers. So for now foreign investors will watch to see when the ball is off their court. They can make money in China until Chinese auto makers strengthen their knowledge of the sophisticated car industry.