One point three billion people. That's how many there are in China. So Tony Yip, managing director, QAD Asia (Wanchai, Hong Kong; www.qad.com), postulates that if just 5% of those people were in the market for an automobile, that would translate into a market of some 65 million. So if you've ever wondered why so many western companies seem so anxious to increase their so-called footprint in China, there's your answer. Well, part of the answer.
Because according to Andrew J. Cummins, executive director, Automotive Industry Action Group (AIAG; Southfield, MI: www.aiag.org), "There are high margins on cars there." He suggests that companies including GM, Toyota and Honda are making as much as $4,000 per vehicle in China. Given the present difference between the number of privately owned vehicles on the roads in China today—just over six million according to the Economist Corporate Network—and the number of people in China, there's a whole lot of opportunity to make a whole lot of money there: Daniel C. Blake, global leader, IBM Automotive Industry Business Consulting Services (Chicago; www.ibm.com), notes that there is an "emerging middle class" in China. Presently, he says, there are about 30 million in that category, with another 20 million to join them within the next five years. So no matter how you do the numbers, China is hot. In 2003, Yip notes, there were 4.44 million vehicles (not all of them cars) produced in China—which put the country in third place in terms of automotive production volume, displacing Germany.
(What's interesting to note is that while a middle class buys consumer goods other than those fitted with tires, Yip suggests, "This industry is so profitable, everyone wants a piece of the pie," and he goes on to say that there is a Chinese appliance manufacturing company that sees the opportunity in automotive as too good to pass up making an investment in. Imagine Maytag or Whirlpool getting into the car business.)
With regard to the structure of the auto industry, Cummins says there are:
Given the fact that the People's Republic of China operates an economy that can be described as a "socialist market economy," it is perhaps not surprising that the state-owned enterprises dominate the environment at present. Or not surprising that Yip suggests there will be a decrease in the number of SOEs, even as the production capacity increases in the country. It's estimated that there will be a 20% capacity growth in China within the next five years.
AIAG and IBM sponsored a study of the Chinese supply based conducted by the Economist Corporate Network. Fundamentally, the study examined the use of process and production technology, as well as the suppliers' plans for export. The survey was conducted among "the top 299 firms in the industry," both Chinese firms and Sino-foreign joint ventures.
Among some of the results:
(In case you're wondering what QAD has to do with any of this: According to the survey, of the companies that use ERP systems in China—and only about a quarter do—QAD is the number-one supplier.)
Although many people might think that the Chinese advantage is found in its low wage rates, Andrew Cummins points out, "Automotive is capital-intensive; you just can't compete on labor costs alone."
| Chinese Alignments|
Match the Western OEMs with their Chinese Partners
| Beijing |
| BMW |
|Answers: Beijing Hyundai; Jinbei BMW; Guangzhou Honda; Changan Ford; FAW Volkswagen; Dongfeng Nissan; Shanghai GM (Shanghai VW would also work, but that would leave GM out).|