Achilles’ Heel of China’s Auto Industry

The booming Chinese auto market can not hide the fact that most of the profits are taken by foreign companies.

China’s auto market has already become a paradise for the global auto companies. If an auto company doesn’t place China in the most important place of its development strategy, the company will be thought to be a big failure.

The increasing number of automotives made and sold in China pushed this country to the crown of world leading auto making company. However, the booming market can not cover the weak power of China’s domestic auto industry.

When the auto makers were depressed by the withering auto market in the world, China, in which 13.65 million cars were sold in one year, became the last straw for them. Toyota, Volkswagen, Nissan, Honda and Hyundai-Kia all turned their focus to China. Last year, most of the major players in the world auto industry gained 20% increase in the sale in China.

The increasing sale makes China the main profit source for the foreign auto giants.

In the first quarter of 2010, Germany-based Volkswagen earned pre-tax profit of 703 million euros, of which China’s market contributed 286 million euros. The amount was nearly 3 times as much as the one in the first quarter.

In order to earn more profits, Volkswagen decided to invest another 1.6 billion euros in China. So Volkswagen’s total investment in China reaches 6 billion euros in the next three years.

Toyota, which produces most cars in the world, suffered the loss of 4.4 billion US dollars in 2008. However, according to the report, Toyota’s two joint ventures in China earned 1 billion US dollars in that sad year.

Honda realized net profit of 3.18 billion US dollars in 2009. The net profit in China reached amazing 2.86 billion US dollars.

The foreign auto giants craving for more profits from China set up their Asia-Pacific headquarters in China. Wang Xiaoguang, researcher from the Decision Consulting Department of the Chinese Academy of Governance, describes China’s auto market pattern as follows: foreign investors contribute 40% of the capital, take 50% of the market and get 70% of the profits.

The fast expansion of the market is the most stable source of profits. The experts believe that China’s booming auto market will be continued this year. The auto output and sales volume will reach 17 million units this year. The further expansion of the market results in more profits for the foreign automakers. No changes happen to the situation that China’s domestic automakers can not hold the advanced technology of automotives.

The big-but-not-strong auto market of China triggered the worries of the experts. Xian Songzuo, chief economist of Global Finance Institute found that the foreign giants earned money from design, new material and new technology while the Chinese auto companies only play the role of manufacturer.

Look at the status quo of the hundreds of auto makers in China. Most of them are only engaged in the simple assembly. Quite a few of them can climb to the top class in the self-owned brands.

Recently, OCIA announced the statistical data about the auto output volume in the world in 2009. According to the data, China’s Changan Auto was the automaker with the biggest output volume in China with 1.4258 million units. It stood at the 13^th place in the world.

The other Chinese auto makers, such as FAW, Dongfeng Auto, Chery and BYD, all stood behind the major players of world auto industry.

Notable is the method of counting the auto output and sales volume of Chinese auto companies, which includes the self-owned brands and the joint brands. This method covers up the truth of self-owned brands’ development.

Fu Yuwu, deputy director and secretary-general of the Society of Automotive Engineers of China, said that the Chinese automakers were still far behind the foreigners in both the traditional auto field and new energy field.

“We’ve got no power in the automobile gear-box field. The gap between us and the foreign auto makers in auto electronic technology is growing bigger. In addition to the empty force in the auto lightweight technology, China is far behind the international level in the core auto-making technology,” says Fu Yuwu.

Extensive Reading:

Foreign Companies Target Low-end Auto Market

According to a report, the foreign auto companies and their joint ventures in China never get engaged in the auto market with cars pricing at lower than 70 thousand yuan (USD 1.05 thousand), sot the Chinese auto companies can stand stable in the low-end auto market and see fast development in the past 10 years, forming an important force in the Chinese auto market.

However, the good days of the Chinese automakers in the low-end market may be gone in the future. Some joint ventures have already stepped or are going to step into the low-end market. Unfortunately for the Chinese companies, the low-end auto market, which takes 30% of the whole Chinese auto market, has been another target of the foreign giants.

In some fields, especially the high-end product field, the Chinese components manufacturers are behind their foreign competitors. But they have stronger competitive power than foreigners in the field of low-end components which have comparatively lower added value. The low-end vehicles using these homemade components have unparalleled advantages in prices. The lowered tax rate and the subsidies all lead to the increasing sale of the low-end autos.

The lower profit margin of low-end autos contribute only a little to the manufacturers of assembled autos. However, the components manufacturers, no matter high-end or low-end, can enjoy a high profit margin. Therefore, the increasing sales volume of low-end autos leads to the increasing income of the low-end components manufacturers. They have bigger potential than the assembled auto manufacturers. The foreign companies also found this point after their years’ development in China.

It is not difficult to find that the Chinese auto companies and components manufacturers can take advantageous place in the low-market is due to the disengagement of foreign companies. In comparison, many high-end component-related technologies are taken by the foreigners – 78% of the patents belong to the foreigners while only 22% belong to Chinese companies. In the recent two years, the booming market needs higher frequency of launching new kinds of vehicles. This applies big stress over the components manufacturers who need to develop new products to match the rhythm of new vehicles. In the past time, the components manufacturers make too little investment into the research and development of components. They are easily influenced by the increasing raw material price. According to the international standard, the investment into components production should be 1.2 to 1.5 times of the one in the assembled auto manufacturing. In China the multiple is only 0.3. Such a small investment makes it hard for the companies to have big breakthrough in research and development.

Therefore, even though Chinese companies still have advantages in the low-end auto market, they will be greatly influenced if the foreigners are truly engaged in this field. The Chinese auto companies must get ready to deal with any challenges when their last domain is invaded by the foreigners.

Table: Some automakers’ profit structure