Beijing, China – Passenger vehicle sales are expected to increase by 55 per cent over the next five years, according to a new report by J.D. Power and Associates.
Sales of passenger cars, SUVs and minivans are forecast to rise from 8.7 million units in 2009 to 13.55 million in 2015. The report, China Automotive 2015: The Cost of Opportunity, examines the future of China’s automotive industry and the challenges that automakers face in that market.
Larger automakers and long-established brands have recorded substantial profit in the last few years in China, especially in 2009, when government stimulus and massive bank lending translated into soaring vehicle sales and record profits for many automakers. However, the report warns that this kind of stimulus cannot continue indefinitely.
“China’s rapid growth makes the automotive market highly attractive and almost irresistible to any automaker,” said John Humphrey, senior vice-president of global automotive operations. “However, for many brands, achieving their profit aspirations in China in the coming years will be far more challenging.”
Market and structural obstacles identified in the report include:
– Hyper-competition in the Chinese market. By 2015, there will be more than 90 brands competing in the passenger vehicle market, more than any other market in the world, and more than twice the number of brands in the U.S. There will also be more than 300 models produced in China and hundreds more imported.
– The industry is ripe for consolidation, but rival provincial governments are competing to defend their regional automotive industries, including suppliers, to drive local employment and tax revenues. The competitive landscape will be little changed by 2015. The lack of consolidation, along with proliferation of product, will have adverse effects on prices and profit margins.
– Consumers outside the highly-populated “tier one” cities will become an important source of growth going forward, but targeting smaller cities on which to focus expansion efforts will be critical for automakers and will increase the complexity of resource allocation, risks and costs. There will also be a challenge in finding high-quality dealers and dealership personnel.
– While foreign automakers will still hold an advantage in engineering, manufacturing and quality by 2015, the gap with domestic automakers will be closing. Chinese automakers will assert themselves more aggressively in their relationships with their foreign joint venture partners, especially on product strategy, distribution and marketing.
Of the 13.55 million vehicles projected to be sold in 2015, approximately 57 per cent will be lower-margin subcompact and compact cars. Within these two segments alone, there will be more than 125 vehicle models for customers to choose. In comparison, only 22 per cent of passenger vehicles in the U.S. in 2015 are forecast to be subcompacts or compacts, with 57 per cent expected to be higher-margin luxury car, SUV, pickup and minivan models.
The total factory production capacity for passenger vehicles in China is expected to reach 19.6 million units by 2015, although it is expected only 66 per cent of that capacity will be used.
“The low rate of capacity utilization projected for 2015 will likely cause another dilemma for automakers in China, as factories typically need to achieve at least 80 per cent capacity utilization to cover the high amount of fixed costs,” Humphrey said. “As a result, automakers will be forced to look for ways to alleviate the financial stress these loss-producing operations cause, including options of consolidating, increasing exports, and investing in more efficient flexible-manufacturing technologies.”
There are more than 13,000 vehicle dealerships currently operating in China, with approximately one-third reporting that they are operating at either a financial break-even point or at a loss. Humphrey said that as new-vehicle prices continue to come under increased pressure, Chinese dealers will need to find new sources of revenue and profit to remain viable in the future.