Simon Duval Smith investigates how Chinese OEMs are dealing with booming sales, rising labour costs, working in joint ventures and manufacturing abroad.
China is a remarkable vehicle making country; subject to dramatic fluctuations in demand and production, driven by the sheer size of the market and the quixotic buying behaviour of its rapidly growing middle class. For example, production of light vehicles jumped 51% year-on-year in January to 1.96 million vehicles, according to the China Association of Automobile Manufacturers (CAAM)’s most recent figures. Passenger vehicle production rose 54% to 1.62 million units, while production of commercial trucks and buses increased nearly 40% to 343,300 units. These increases followed an equally big sales jump. In early February, CAAM reported that deliveries of passenger vehicles rose 49% to 1.73 million units with total sales, including light vehicles, trucks and buses growing 46% to two million vehicles (all for January).
China has unique ‘blips’ in its demand curves; January sales and production data were distorted by the week-long Lunar New Year holidays, which were celebrated in February during 2013, meaning sales fell in that month. Even with these fluctuations, total vehicles sales in China are expected to surpass 20 million for the first time this year as China’s economy rebounds, according to the association. To put this figure into perspective, the peak year for US automotive sales was 2000, with 17.4 million vehicles.
Consolidation and government pressures
China’s auto industry is still highly fragmented and the government in Beijing has been pressing domestic car makers, especially state-owned companies, to lead the industry to consolidate. Earlier this year, it released a directive encouraging major domestic manufacturers to play a bigger role in industry consolidation.
But in practice, foreign OEMs, not state-owned Chinese companies, have become the major driving force for industry consolidation.
Volkswagen, the largest car brand in China, increased its share of the Chinese light vehicle market to 11% in 2012 from 8.9% in 2010, and during the same period, Kia raised its market share from 2.0% to 2.6%. Aside from Japanese brands, whose sales were hit hard last year by strained China-Japan relations, most foreign automakers have gained considerable market share in the past three years. As a result, global brands have expanded their combined Chinese light vehicle market share from 48.3% to 52.8% in the 2010-2012 period.
Expansion and labour cost
Foreign OEMs have also boosted their production in China by acquiring small Chinese automakers as, in order to encourage consolidation in the industry, Beijing allows foreign brands, with their joint venture (JV) partners, to build new plants by acquiring licensed local Chinese automakers.
As an example, in 2010, Volkswagen, with the support of its JV partner China FAW Group, gained approval to build a plant in Foshan, Guangdong province after acquiring a local light bus maker, Zhejiang Three Star Automobile.
In 2012, Ford, with JV partner Changchan Automobile, was allowed to build a new plant in Hangzhou after purchasing a local light truck maker, Camellia Automobile.
This growth will require more line operatives, who are becoming ever more costly; labour rates have risen, due in part to industrial action in some areas. To maintain a competitive edge, automation must increase in the region and this also means building in line flexibility to satisfy the constantly changing tastes of the increasingly well-informed customer base.