Business environment for automotive industry in China

Business Environment For Automotive Industry in China

Cross the river by feeling the stones

Doing business in China can be tricky and contradictory to the conventional rules of the western world. Manufacturers who have pioneered in doing business in China have learned to ‘cross the river by feeling the stones’essentially translating to taking small and calculated approach while growing in a multidimensional environment. China has a highly competitive and risky business environment making it crucial for foreign companies to align their strategy and operations with basics of Chinese business ideology. However,China too has to improvise on its ideologies to meet its goals.

China is the world’s largest domestic market for automotive buying 24.6 million units of automotive vehicles in 2015. China also produced 24.3 million units in 2015 with foreign brands dominating over 62% of the market share. China imported around 1.05 million vehicles suggesting that the most of vehicles manufactured in China were consumed in China, and only 755,500 units were exported to other countries. China exported less than 1% of the global vehicle demand, essentially making China a net consumer of automotive.

Sleeping in the same bed, dreaming different dreams

The important thing to note here is that foreign brands dominated the passenger vehicle sale. GM, Ford Motors, and Volkswagen are market leaders in China and exist as a part of joint ventures with Chinese state owned enterprises such as SAIC General Motors Corporation Limited, Changan Ford Automobile Co., Ltd., Shanghai Volkswagen Automotive Co., Ltd. and FAW-Volkswagen Automotive Company Ltd. Setting up of joint ventures with domestic players is mandatory under China’s policy for foreign players to operate in core manufacturing sectors. This had been done to ensure competitive advantage and evolution of domestic manufacturing industry in China. The government had planned that the foreign players would share their intellectual property and technology with domestic firms while operating as joint ventures.But they did not make it mandatory to produce car under a new Chinese brand name. Hence, most of the state owned enterprises showcase foreign brands and have not been able to acquire technology from their foreign counterparts as it has been strictly guarded.  Hence, no Chinese domestic manufacturer has been able to compete with foreign brands which still hold the largest market share. Moreover, due to the policy supporting joint ventures almost each state has a joint venture of its own resulting in high competition for market share between state owned enterprises. It is often reported that brands manufacture dare local to the area of production i.e. no particular automobile brand dominates the domestic market. Thus, China’s dream of having a globally recognized domestic brand is still far from conceptualizing.

Black cat, white cat if cat catches mice good cat

Even though China has failed miserably in creating a global domestic brand and becoming a net exporter of automobiles, it has created one of the largest automotive market and one of the largest auto part manufacturing industry in the world. China is the third largest exporter of auto parts to U.S. after Canada and Mexico. China did not have strict policy for setting up auto part manufacturing plants hence has become a net exporter of parts original equipment manufacturers and aftermarket servicing. On the back of this development, China put forward its 13th five year plan, where it focuses on developing innovative technologies and infrastructure for new energy vehicles.In 2015, China became the largest electric vehicle market with most vehicles produced domestically. China has been promoting in house manufacturing and technology development through subsidies and tax relaxations to companies manufacturing electric vehicles, along with providing free number plate registrations to customers of these vehicles. However, most NEV’s currently produced in China are low on cost and technology and cannot meet international standards. It is reported that China inflated its sales figures for sale of electric vehicles in order to put forward its image as a pioneer in electric vehicle manufacturing. Nevertheless, China has relaxed its policies for electric vehicles and even allowed internet companies such as Baidu, Alibabaand Tencent to develop technology for electric vehicles. Some manufacturers such as Faraday Future, BYD, Next EV, Baidu, and Karma are already into the U.S. market and have begun pilot scale operations for their vehicles. The key lead for China would be obtained if these vehicles are able to successfully connect to the internet of things and future of automobile technology such as driverless cars. However it is still early to comment how successful would China be in implementing its strategy in developing a global brand for new energy vehicles. New energy vehicles have still a long way to go to replace conventional fuel driven vehicles.

The top makes policy, the bottom takes countermeasures

China might have a one party system but its powers are decentralized into its state. Thus, if the center comes up with ambitious goal sand plans the state finds loopholes around it for its own development. The demand for automotive vehicles is now shifting to tier three and four cities in China with major population living in these areas. The central government is promoting the use of electric vehicles in the country however, many cases have been reported where policies have been misused to gain advantage of subsidies and taxes. The bottom counter measures are often at odds with the central’s vision making it difficult for things to progress. The central government is taking a strict action against corruption and is devising methods to check these countermeasures. It is important for Chinese government to tackle these challenges if it wants to make its dream of leading the electric vehicle industry successful.

Look at the mayor, not the market

China’s policies have somewhat been criticized for not been able to develop a globally recognized brand and unable to curtail the dominance of foreign players in the automotive market. According to President Xi Jinping politics must be handled first and then the economy. Thus, it’s important to notice what these policies have been successful in achieving. China is the world’s largest automotive market providing jobs to more than a million people. Moreover, it has successfully generated cash flow required to innovate and develop technology for future automobiles. We must remember that being a communist society, employment and general welfare is key on China’s agenda. Roughly 70% of China’s urban population can be classified under middle class income groups. The rising purchasing power has resulted in demand for better products and domestic players improvising to meet the consumer’s requirement.The nuances caused by state governments are being looked into and China’s people are becoming smarter regarding what they want to consume.

It will be interesting to see how the government, politics and automotive industry work together to chalk out the collective goal of helping China become a respected leader in automotive manufacturing market.