In the Hutong
Good grief, March already?
2111 hrs.
The Associated Press is reporting that we can expect China to undertake a reform of its largely state-owned auto manufacturing sector. The plan apparently calls for China to winnow the number of domestic auto manufacturers from 14 down to 10.
No, Not THAT Big 10...
The AP report refers to a Chinese "Big 10" made up of a top tier of auto makers with the capacity to make 2 million vehicles or more (Shanghai Automotive Industry Corporation (SAIC), First Automobile Works (FAW), Dongfeng Motor, and Changan Motor) and a second tier of six manufacturers with capacity of around 1 million cars per year.
The AP report refers to a Chinese "Big 10" made up of a top tier of auto makers with the capacity to make 2 million vehicles or more (Shanghai Automotive Industry Corporation (SAIC), First Automobile Works (FAW), Dongfeng Motor, and Changan Motor) and a second tier of six manufacturers with capacity of around 1 million cars per year.
First, some perspective: a million cars a year is not small, but Ford and GM will probably make around 9 million vehicles apiece this year, so "Big 10" is still relative.
Second, in an environment where the auto business is so difficult that even Toyota is starting to sweat, one might ask whether China is being a tad cautious in reforming the auto business. It would seem a tad ambitious to envision a global market with sufficient room for ten Chinese car brands.
In truth, China is being cautious about consolidating the country's auto business, and for good reasons.
Slow and Steady
The first and most important is the geographic dispersion of China's car makers, and the political challenges that implies. Unlike the U.S. car industry, which was traditionally concentrated in the state of Michigan, China's automakers are scattered around China.
Closing one - even if it is just eliminating the brand and keeping the factory - means favoring one region over another, and that is sensitive in an economy so careful with its local companies that domestic protectionism remains a major challenge to the country's development.
Edmunds Inside Line notes that if local governments want they can derail the process. Even if they do, that derailment won't be permanent - the central government will get its way, but the question will be the cost: each closure is going to demand negotiation and horse-trading among the governments, meaning more costs and delays.
Second, China does not want to undertake consolidation at the expense of market share. Foreign makes still take up over 60% of local vehicle sales by volume, and closing down too many local companies too fast will mean that foreign marks will gain ground. Given China's stated intention to create global auto marques of its own (rather than just being the factory for European, Japanese, Korean, and American brands.) Given that the ability of the remaining 10 automakers to increase capacity is limited, best to go slow.
Third, all of the industrial policy in the world does not make up for solid market performance. It is still too early to tell which automakers will be able to make the difficult shift into international markets and then be able to build that into global leadership. Picking candidates, not winners, is the wise approach now.
Upshift
Finally, there are the intertwined issues of technology and the environment. And for us here in the Hutong, this is a big one.
In the coming decade, China's auto industry is going to have to shift away from petroleum-fired internal combustion engines to something else: The country's air quality will not be able to take hundreds of millions of cars running on unleaded; simply fueling those cars would put China into a geopolitical face-off with the U.S. and Europe; and the global car manufacturers who remain after the global downturn will be producing their own low-emission or zero-emission vehicles in China.
That shift is going to mean investments so large in technologies so complex that it may force a rethinking of the entire automobile industry. The logic of a single vertically-integrated manufacturer starting with steel, plastic, and rubber and churning out cars may not hold is the industry makes its leap.
As such some companies in China's auto industry may well elect to specialize either in assembly or components, opening the door for one or more of the current players to ease their way out of making cars and into supplying China's remaining brands with motors, batteries, fuel cells, bodies, or other major components.
If that happens - and I suspect that at least in the case of second-tier brands it might - it makes more sense to allow that specialization to evolve and chivvying it with the visible hand of government, rather than making those choices now. The coming years, in fact, are likely to involve the government making the case to some manufacturers move to making parts and components.
Taking a "slow-cull" approach to reforming the industry is the wise approach for China's policy makers. The nation's auto industry will be reformed in stages rather than with the single stroke of a pen, and the speed of those reforms will depend not only on market growth and global finance, but on the demonstrated ability of China's automakers to withstand the successive waves of change they will face in the coming years.
Great point regarding geographic differences in China's auto industry as compared to that in the US. I think there is a tendency to overlook the fact that, by closing one Chinese auto manufacturer, there will inevitably be a political issue of favoritism between regions to contend with. Given the current state of China's economy, this complication will surely be magnified.
You are correct- China will need to shift away from petroleum-fired internal combustion engines to something else; Beijing's air quality is already a bit unbearable. Since so many people rely on electric-powered scooters for personal transport, I would think that the natural evolution of this mode would be the electric-powered automobile- they've taken center stage at the Geneva Motor Show this week, so why not? Clean deisel technology may also be an alternative, but as China-based auto industry expert, Bill Russo, explained, "one of the things that will limit acceptance of deisel will be the availability of clean deisel fuel. The infrastructure isn't there yet."
Informative post- I've been following this sector closely as well and its nice to see that coverage is expanding in the blogosphere.
Posted by: Aimee Barnes | March 04, 2009 at 12:04 AM
Aimee, thanks for the comments. I hardly consider myself expert in this industry, but I follow it for two reasons. First, because it will be a bellwether for the global competitiveness of Chinese heavy industry, and second because the industry is about to be hit by a series of systemic perturbations (environmental and geopolitical) and technology disruptions (starting with drivetrains but quickly moving beyond that.)
It is hard to overstate how much local protectionism is going to inhibit this process, especially in these tender times. I could do a post on that issue alone.
Russo is correct that infrastructure is one issue inhibiting clean diesel in China - in this aspect the US and China face similar challenges. Yet the Chinese government has it within its power to mandate that infrastructure into being in a very short time if it wished. SinoPec, PetroChina, and the truck makers would have to comply. But obviously the government does not wish it to be so, and the question is why?
I suspect it is because the nation's leaders are not happy with the idea of leaving themselves any more beholden than necessary to petty despots perched atop petroleum reserves. They will direct energy infrastructure investments into alternatives that are as independent as possible from foreign influence.
Thanks for the comments. I am tardy in adding your blog to my blogroll, but I'm rectifying that now.
Posted by: David | March 04, 2009 at 09:02 AM
I posted this comment on Aimee's blog regarding the diesel question above. Since this is where it was originally asked, I repost it here for your reference:
"As for Dan Wolf’s question on why the government does not wish to mandate diesel, there are a few answers: the China government would have to invest in developing the clean diesel infrastructure, and that may neither be in the current planning nor consistent with the capital investment plans of the Chinese OEMs - all of whom are invested by the government. So, a decision to move toward clean diesel would require the redirection of investment from conventional fuel towards clean diesel, and would require chinese-invested OEMs to redirect capital development dollars. It would also give European brands an “unfair” advantage over the local brands who have not yet adapted the technology.
My observations in the interview were made in the context of a question about hybrid gas engine market acceptance. My response was that from the consumer perspective, clean diesel technology offers clearly tangible benefits vs. hybrid gas technology. On the supply side, the China government would likely resist mandating a shift to clean diesel until they can figure out how to fund the technology development needed to level the playing field among the European and Chinese OEMs."
I have some additional comments I will add in a subsequent comment on the industry consolidation process you refer to above.
Bill Russo
Posted by: Bill Russo | March 10, 2009 at 01:06 AM
Regarding the pathway to industry rationalization in China, I commented on Greg Anderson's blog: http://burnurl.com/DdVjhC
And for reference, GM sold approx. 8.3M unites worldwide in 2008, and Ford approx. 6M units.
Posted by: Bill Russo | March 10, 2009 at 01:32 AM
"...until they can figure out how to fund the technology development needed to level the playing field among the European and Chinese OEMs"
I suspect, in all seriousness, that China's strategy will be to 'acquire' the technology rather than fund its development.
As an ethical question the acquisition of said technology ought to respect international law; as a remedy to environmental meltdown it ought to happen as fast as humanly possible.
Another informative and interesting analysis of something I wouldn't have otherwise considered.
Posted by: stuart | March 11, 2009 at 06:43 AM
Bill, great perspective, and thanks for correcting me on the unit sales.
I think your approach to the clean diesel issue and mine are complimentary. You point out the micro/industry specific challenges. None of this is going to happen unless the industry makes the investments in developing and commercializing the technology.
As a tyro in the auto biz, then, let me pose a few questions that would help put this into perspective.
1. The auto industry has to make investments in alternative drivetrain technologies regardless. Would the investments required by clean diesel be greater than, less than, or about the same as those for hybrid gas-electrics, plug-in hybrids, or electrics?
2. Could we not assume that if the government decided any specific technology was a national priority that automakers would get the fiscal support needed to fund its development?
3. What role do the oil companies play in this process? This is the other half of the clean-diesel question: refining, distribution, and retail. All would require investments. Are those investments prohibitive, or would the dinosaur-juice folks see clean diesel as a way of keeping them relevant in an age when we are moving away from burning stuff for our heat, light, and kinetic energy? Keep in mind these folks also wield considerable political pull.
4. Do policy makers really understand the value of clean diesel in the context of the other alternatives? I think it is safe to say Capitol Hill doesn't.
Really appreciate your thoughts.
And BTW - it's "David" not "Dan."
Cheers,
David
Posted by: David | March 11, 2009 at 10:55 AM
Bill - the link to Greg's blog in your comment actually takes us to Aimee's.
Posted by: David | March 11, 2009 at 10:56 AM
I have great respect for the chinese. Rather than blaming their communist regime, people must instead be thankful for their great spirit and their technological advances. It seems like they have their hand in a meaningful way in the world future developments in technology.
Posted by: electric bicycle | July 18, 2009 at 01:30 PM